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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.  



 a

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 #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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