Do you underwrite the lots at retail absorption or at a bulk exit with retail as the upside case?

Question

48 acres, ordinance supports 9 lots without a public road if I use the existing frontage and one easement, and the frontage is the constraint on how fast this moves. Comparable lot sales in that submarket run $58k to $66k and there were 11 of them in the last 18 months across three sellers, so my honest absorption is somewhere near three lots a year. Call it 36 months to clear nine.

Two ways to write this up.

Retail absorption. Nine lots at $60k, staged over 36 months, spread the selling costs, carry the taxes and the note on the unsold remainder, discount the whole stream back. I get something like a $148k present value profit on a $312k basis, and it's sensitive to almost everything. Push absorption to 24 months and it's $181k. Push it to 48 and my carry eats a third of it.

Bulk exit. A regional builder pays somewhere around 65 to 70 cents on the retail dollar for a finished nine lot plat, so call it $390k for the package, closed in one transaction shortly after the plat records. That's maybe $58k of profit and it happens in 14 months instead of 40. Then anything I get above the builder number by retailing is upside I didn't underwrite.

I can't decide which one is the number I should be making the buy decision on. The first is honest about value and dishonest about certainty. The second is the opposite. Which one governs your offer price?

karen_whitfield · Answer

The bulk number is the one that decides whether I'm allowed to buy it. The retail number decides whether I'm excited about it. Those are different jobs and I don't let the second one do the first one's work.

My reason is that your 36 month absorption is the assumption everything else rests on, and it's the assumption you have the least control over. Eleven sales in 18 months across three sellers is a thin sample. If two of those sellers were the same subdivision working through inventory, your real market is thinner than the count suggests. Go find out who bought those 11 lots and why. Builders buying spec sites and retail buyers looking for a place to put a house behave differently when rates move, and if your 11 are mostly the first kind, your absorption is really a function of one or two builders' appetite and it can go to zero in a quarter without warning.

The part of your write up I'd push on is the carry. On a 40 month hold you're paying taxes on the unsold remainder at whatever the assessor does after a plat records, and in a lot of counties nine separate tax parcels get assessed at something closer to lot value than to raw acreage value the year after recording. That's a real line and it's usually bigger than people pencil. Confirm how your county handles reassessment on a new plat before you fix your carry number.

$58k in 14 months on a $312k basis is a deal I'd take. $148k in 40 months that requires the market to behave is a deal I'd take at a lower price.

Do you underwrite the lots at retail absorption or at a bulk exit with retail as the upside case?

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