The absorption math on twelve lots is the part I keep redoing

Question

Tract is 60 acres at about $4,200 an acre, so $252k. Zoning supports 5 acre lots, twelve of them after the road takes its bite. Sold comps for 5 acre pieces within four miles are $44k to $47k. Call it $45k, so $540k gross.

Costs I have: survey and plat around $28k, roughly 2,000 feet of gravel road plus two culverts at maybe $120k, engineering and county fees $15k, commissions at 7 percent of $540k is $38k. That's $201k of cost against $288k of spread, so $87k before carry and before I'm wrong about anything.

The part I can't get comfortable with is pace. There are nine competing 5 to 10 acre listings in that market and the ones that sold averaged something like 160 days. If the market absorbs three of my lots a year, the last one closes in year four, and four years of taxes, insurance and interest on the land loan is not a small number against $87k. How are people actually underwriting absorption on something like this rather than assuming it all clears in eighteen months?

Rena Expert · Accepted Answer

Build the absorption number from the county's own record rather than from a feeling about the market. Pull every recorded sale of 3 to 10 acre parcels within your radius over the last 36 months, count them by year, and divide by the average number of competing listings standing during that period. That gives you a market absorption rate and your share of it. If twelve parcels traded a year across nine standing listings, the market is turning roughly 1.3 lots per listing per year, and you're bringing twelve new listings into a pool of nine. You have just doubled the inventory you're competing with. That's the single biggest thing your model is missing, and it's why a lot of these deals sell the first four lots fast and then stall.

If you're in one of the dozen or so non-disclosure states, the recorder won't show you prices at all, and you'll need an appraiser or MLS access to get anything usable. Deed volume still tells you pace even without price.

Run the deal as a discounted cash flow rather than a total profit number. $87k over four years on $252k plus carry is a different animal from $87k over eighteen months, and once you put interest on the land loan against it the four-year case may be close to flat. Ask your lender in writing what the release price per lot is and whether the note amortizes or accrues, because that determines whether early sales relieve your carry or just pay down principal you're still servicing.

Two levers actually change the pace. Phasing the plat so you only build road for the first six lots cuts your peak exposure and lets you re-price the second phase against real feedback. Offering seller financing widens the buyer pool considerably on rural lots, at the cost of turning your exit into a note portfolio. Whether the note terms you'd need to offer are permissible for your volume is a licensing question in several states, so check that before you build it into the model.

renee_dubois · Answer

The doubling-the-inventory point is the one that would have gotten me. It's the same thing as dumping twelve units into a submarket that leases eight a year, except with lots you can't drop rent $50 and fix it in a week.

The absorption math on twelve lots is the part I keep redoing

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