The three most important words in real estate are Location, Location, Location. The next four equally important words are Money, Returns, Accuracy and Speed.
Location is critical, but you need to be sure you know what the costs are, what the return to the owner is projected to be and then be able to sell the idea or concept to others, primarily lenders and investors.
Financial analysis of proposed land and home building projects his typically been accomplished using spreadsheets. While spreadsheets are flexible and adaptable to many industries, the development of complex spreadsheets requires significant expertise and time to create, are error-prone (no matter how good you think you might be) and can be very labor intensive.
An excellent solution to these problems is the use of commercially available financial analysis systems that are specifically designed for land development and residential home building projects. These systems are menu-driven, have well designed input screens that have the flexibility to describe all necessary assumptions for a deal and can then generate professional-looking reports that are especially impressive to potential lenders and investors.
What to look for in a system?
1. Can the same system be used for a "quick & dirty" analysis as well as a more detailed, complete analysis without having to re-enter the input assumptions?
2. Can the system handle simple projects as well as complicated ones having numerous lot types or home floor plans, sufficient ability to describe all possible development, construction and marketing related expenses, loans and capital/partnership structures?
3. Are there professional-looking reports that provide management with a one-page Executive Summary report as well as more detailed reports displaying monthly cashflows and a timeline of projected sales, closing and revenues? Do the reports display a loan flow schedule for all possible loans, especially displaying the repayments of these loans? And do they calculate the Equity required by various partners and then display Preferred Returns, Profit Distributions (some get very sophisticated) and Returns (IRRs). More comprehensive systems should calculate a Profit and Loss Statement and a Balance sheet and be able to roll up monthly projections into both quarterly and annual time periods.
4. Other good questions to ask the vendors:
a. Who else uses the systems and are they like your company?
b. How long have they been in business and how knowledgeable are the software developers of the land development and home building industry?
c. What type of staff supports the system, what is the availability of support personnel and how knowledgeable are they of the industry and the system?
d. How often is the system updated and what is the availability of customization if necessary?
e. What operating systems is it compatible with and is it networkable or does it function on a terminal network server?
f. What type of User Manual is provided and are there various levels of user Help messages displayed from simple input hints or reminders to detailed explanations of system logic and usage?
g. Can the same system be used by the casual user as well as the power user?
h. Is training available or even required? If a system is supposed to be "user friendly", why would one need to attend a day or more of training unless the training was part of a nationwide implementation of the system and it was advantageous for all users to get the same information at the same time. If training is required or advised, is it available using many of the web-conferencing tools currently available or is it strictly classroom-based.
i. Does the software developer market additional systems or is their viability dependent upon one system in one industry? I would get
a little nervous being dependent upon a vendor which only has one system to sell.
You can find several systems using the web-search engines and keywords such as “land development software”. Most systems have demos that can be downloaded. The best way to evaluate the system might be to have a personal guided tour using your own data.
Location is important, but so are accuracy, speed, returns and …. your money!
Question and Answers Session with Ted Stearns, President of Real Pro-Jections, Inc. Carlsbad, CA Owner of Tract-PIE
Land Development Software
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