The Decision - First Development
Revised Financial Model
Our last post walked through our revised financial model. In running the numbers, we had a dilemma. The highest priced spec luxury home sold to date on this lake went for $1,700,000. In our latest financial model, we would have over $1.9 million in costs! The model we put together had us selling this development project for $2.3 million (a 35% increase over the highest selling home to date) to make our desired profit numbers. We asked the question, “What would you do?” Build the highest selling luxury spec home to date or start over with significantly lower expectations?
Our Decision
We decided to go for it! Worse case we would own a really nice home on the lake and somehow have to make the payments. That is said in jest, but it is an important lesson learned. Never get so far over extended that you can’t survive the black swan or worst case scenario. You can’t predict the future. If you could you would be buying lottery tickets instead. Real estate is a long term game. You have to be around for the long haul to make it rich. Here’s the thought process behind our decision:
- We could be one of a number of homes in the acceptable price range or be the lone standout at the highest price. We would rather stand out.
- The price for lots was going up and not projected to stop any time soon. We estimated that average lot prices would increase $50,000 to $100,000 over the course of our build and sell cycle.
- The price for construction was also starting to see significant escalation. This was not only in labor, but in just about all construction materials. We estimated that construction prices would increase from 10% to 20% over the course of our cycle.
- The above two items alone would increase the cost of the $1.7 million home to $1.85 to $2.0 million.
- We would heavily pre-market the home ourselves and try to sell the home prior to completion, eliminating a portion of the interest carry costs and the realty sales commission.
- Remember, this was all prior to the sub-prime meltdown mess when everything was looking rosy and the sky was the limit.
We gave our architect and contractor the go ahead after notifying our banker of our decision. Time to start building. Did we make the right decision?
