Recreational Land Development
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The classic formula for the successful land developer is to estimate your land cost, development cost, marketing cost, closing cost, holding cost, profit estimate and retail sales prices on the development. After this has been done, you can work this formula backwards to determine the maximum land cost you can afford to pay for the land and still make the profit you want.
Here is how it can work:
Assumptions:
- A prudent investor will want to know what the development cost will be for the development. That includes all utilities and streets. To get the cost per acre one will have to be exact on his estimates for the construction of the project, and divide those costs by the number of acres in the project.
- Marketing costs consist of sales cost and advertising cost. Sales cost will be higher than average for the area if you are considering conventional retail brokers. I will use a 10% cost on retail for this example. The advertising cost will or can be higher than average and can be as high as 30% of retail sales. For this example, I will use a cost of 10% of retail.
- Holding cost will be cost of your loan and the cost of your down payment or the total of the land cost and the development, marketing, closing and holding cost estimated for the two year holding and retail period.
- The retail value would be a multiple of the number of lots times the retail value estimate. This would be biased on the market and what it dictated for a retail lot. This would be for both size and value.
Your financial projections for this project would look like this:
| Size of the development |
|
100
acres |
| Land Cost |
$2,000/acre
|
$ 200,000.00
|
| Development Cost |
$25,000/acre
|
$2,500,000.00
|
| Marketing/Advertising |
20% of retail
|
$1,440,000.00
|
| Holding cost (2 years) (Land and Development costs) |
10%
|
$ 666,000.00
|
| Retail Value |
*360 times $20,000
|
$7,200,000.00
|
| Profit Estimate |
|
$2,394,000.00
|
(*Note: Profit should be projected at 33% of retail sales estimate. 10% of the net land area will be lost on average of the entire track for roadway dedications, etc.
However, your market might be totally different than the typical, average land development project and might look something like the following:
Let’s assume that the area development requirements would not require sewer installation and the roads would not have to be paved with asphalt, only chip and seal would be required. Let’s also assume that the retail lots would be 2.5 acres and we would have 36 lots at an average price of $27,800.00. Your cost and retail price for the lots would be totally different than the examples. Your model would look like this example:
| Size of the development |
|
100 acres
|
| Land Cost |
$193,000.00
|
(maximum you can pay for land)
|
| Development Cost |
$112,000.00
|
|
| Marketing/Advertising |
$100,000.00
|
|
| Closing Cost |
$ 20,000.00
|
|
| Holding Cost |
$ 75,000.00
|
|
| Profit Estimate |
$500,000.00
|
PROFIT est.
100% of cost of 50% of retail |
| Estimated Retail Value: |
$1,000,000.00
|
I would say that what you want for a profit is entirely up to you as a developer. The area and the area’s development requirements will dictate your marketing, development, and retail values. These costs can be developed by using a reputable marketing company and a reputable contractor for their input to get the hard cost. Holding cost can be developed from your total cost or your use of funds in a loan format. If I were the investor, I would want some value for the funds I was investing in the project. Using this formula is easy and practical once you have your facts and hard costs in place.
