Comparing a cash exit to a terms exit on rural land fairly means correcting the IRR for reinvestment risk

Underwriting a single parcel with two exit paths often produces numbers that do not compare cleanly, and this is a useful case to work through carefully. Say basis is 19,400 all in on 34 acres of mixed timber and pasture with paved road frontage and power at the line. A cash exit assumption of 41,000 in about five months is a 2.11x on a five month hold, roughly 267 percent annualized on a simple basis, or north of 500 percent compounded, before accounting for the fact that capital cannot redeploy instantly and the next parcel might take two months to find. A terms exit of 54,000 with 6,000 down at 10.5 percent over 96 months runs roughly 741 a month, with total collected around 77,100. IRR on that stream against a 19,400 basis comes out in the mid 50s. So the cash deal looks like a blowout on IRR and the terms deal produces a much bigger dollar number. The catch is that IRR on the cash exit assumes reinvestment at the same rate, which is rarely realistic when an operator only finds four or five comparable parcels a year and capital sits idle between them. Modeled honestly, with proceeds earning nothing for two months and the next deal being average rather than exceptional, the gap narrows considerably. The assumption doing all the work is the premium built into the terms price relative to a cash sale. If a terms buyer in a given market would only pay a smaller premium than modeled, the whole comparison flips. Testing that premium before committing, rather than listing at the high number for months to find out, is the discipline that separates a good underwrite from a hopeful one.