What If Analysis
It is easy to
conduct what if or scenario analysis on any land
development component. Simply modify
any of the components
and the impact on profitability will be calculated by the
model.
There are five examples of what if analysis below. The partial views of the LDM input page below illustrate the effect of (1) builder deposits, (2) absorption, (3) seller financing and (4) real estate options on profitability and (5) how the LDM can be used to estimate land value given investor/developer profit criteria. Keep in mind that these are just five of many. What if analysis is applicable on each and every land development component, singly or in combination, whether they are "above gross profit" components or "below gross profit" components.
Price per lot, number of lots, development cost per lot and land cost are "above gross profit" components while construction duration, absorption, seller financing, builder deposits, phasing decisions, land option alternatives, interest rate and interest rate trend, and lender loan requirements are "below gross profit" components. This is whatif analysis
Basic excel functionality allows you to save unlimited project scenarios under unique and identifying filenames.
There are five examples of what if analysis below. The partial views of the LDM input page below illustrate the effect of (1) builder deposits, (2) absorption, (3) seller financing and (4) real estate options on profitability and (5) how the LDM can be used to estimate land value given investor/developer profit criteria. Keep in mind that these are just five of many. What if analysis is applicable on each and every land development component, singly or in combination, whether they are "above gross profit" components or "below gross profit" components.
Price per lot, number of lots, development cost per lot and land cost are "above gross profit" components while construction duration, absorption, seller financing, builder deposits, phasing decisions, land option alternatives, interest rate and interest rate trend, and lender loan requirements are "below gross profit" components. This is whatif analysis
Basic excel functionality allows you to save unlimited project scenarios under unique and identifying filenames.
Additionally,
the LDM comes with an accompanying file that provides for Side-By-Side
comparison of a single project under up to six component
combination scenarios (e.g. 1 phase vs 2 phase, with and without builder deposits,
with or without seller financing, with or without residual land, etc.)
or Side-By-Side comparison of up to six separate and distinct projects.a
The model was recently upgraded to include an intuitive data entry sequence by clicking on excel's 'Name Box' feature. Additionally, labeling and descriptions on the Input Page have been modified to align the model to the three stage land subdivision process.
Note
the effect on interest cost and profitabilty based on the presence or
non-presence of builder deposits. Scenario #1 has builder deposits and
Scenario #2 does not have builder deposits.
Builder Deposit - Scenario #1
Builder Deposit - Scenario #2
The
effect on interest cost, profitabilty and rate of return are
different when absorption rates vary. Scenario #1 is 1 lot per month
and Scenario #2 is 2 lots per months. (Note that the model allows for
non-whole number absorption. Absorption rate could be 1.5 lots per
month, 2.75 lots per month, 10.5 lots per month, etc.).
Absorption
Rate - Scenario #1
Absorption
Rate - Scenario #2
The
partial views of the LDM input page below illustrate the effect of
seller financing on profitability. In Scenario#1 the
seller has agreed
to finance $300,000 at an interest rate of 4
percent for a term of five years (60 months) while the
seller
does not provide owner financing in Scenario #2.
The
profit is higher in Scenario #2 because there is no interest cost for
seller financing. However the average return on equity is higher in
Scenario #1 because the developer/investor has less money in the
project. In the
case of the Scenario #2 the developer/investor has to come
up with
the $300,000 in cash because the the costs of phase one
land and
development are unaffected by the presence or non-presence of
seller
financing (e.g. the lender will loan only a certain percentage of
the
phase one land and development costs). It is easy to
see
that seller willingness to help finance a project in the form
of a
subordinated mortgage can make or break a developer's ability to take
on a project.
Seller Financing - Scenario #1
Seller Financing - Scenario #2
Note the effect on interest
cost
and profitabilty based on the presence or non-presence of real estate
options. Scenario #1 has options and Scenario #2 does not
have options.
Future Phases Optioned - Scenario #1
No Options - Scenario #2
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What If analysis can be used to isolate how much a developer or
investor can pay for raw land while meeting pre-determined profit
criteria. Additionally, appraisers can use the model to estimate or support land value.
In case #1 below, $500,000 is paid for the Phase 1 land, $576,000 is paid for the Phase 2 land and $550,000 is paid for the Phase 3 land. Under this land cost scenario the profit margin before tax is 25.88% and the average annual return of equity is 26.55% (return of equity measure based on cash in relative to the profit before tax over project duration.
In case #1 below, $500,000 is paid for the Phase 1 land, $576,000 is paid for the Phase 2 land and $550,000 is paid for the Phase 3 land. Under this land cost scenario the profit margin before tax is 25.88% and the average annual return of equity is 26.55% (return of equity measure based on cash in relative to the profit before tax over project duration.
In case #2, $640,000 is paid for the Phase 1 land, $716,000
is paid for the Phase 2 land and $690,000 is paid for the Phase 3 land.
Under this land cost scenario the profit margin before tax is 19.12%
and the average annual return of equity is 17.75%.
Other
land development components such as lot prices and development cost per
lot can be modified in the same manner to estimate what average lot
prices or average development cost per lot will meet any given profit
criteria.
Case #1
Case #2
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Land Development Model, LLC
302 West Lafayette Road
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330.441.1690
302 West Lafayette Road
Medina, OH 44256
330.441.1690