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Creating Value in Any Market |
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Written by Skip Preble
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Thursday, 04 January 2007 |
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This is the first of a four-part series that will appear on these Last Word pages.
I have been in the development business for the last 27 years, and involved in training and consulting for the last decade. I have clients in all areas of the United States, most of whom are involved in land development and/or homebuilding. From listening to my clients I have come to realize that many are concerned that they were being outpaced by relative newcomers who didn’t seem to be constrained by traditional due diligence and underwriting constraints. As a result, many of the “old” disciplines seemed to no longer be relevant – particularly in light of the apparent success of these newcomers over the past 5 years.
Well, the market is no longer covering the mistakes of these companies, and the reasons for the traditional disciplines have once again become clear. The good news is that if you stick to sound development strategies, you won’t have to compete with any of these people in the future. Bad judgment, like gravity, eventually leads to an unpleasant fall.
The factors I consider critical to long-term success in land development have remained the same for as long as I have been in the industry. I consider the following factors to be timeless. They will be explained in detail throughout the remainder of this series.
- Make your money when you buy.
- Compare apples to apples when considering what project to pursue.
- When comparing projects, consider the financial yield of each project in addition to their profit.
- Have a plan. Consider the entirety of the project, but focus on the near-term.
- Focus on cash flow. The leading cause of business failure is death, and death occurs when you run out of cash.
- Consider changing and/or adapting the use of the property. Nothing creates equity like buying a pile of rocks and making diamonds out of it.
- Understand your marginal cost of capital, which in the real estate industry tends to be defined by the internal rate of return (IRR).
- Carefully consider your capital structure.
- Work on efficiency.
- Consider time-adjusted costs. The time value of money impacts not only revenues but also costs – particularly when you consider your marginal cost of capital.
I know this may be a review for many readers. However, sometimes it is good to hear that things really haven’t changed, and that the future is bright for those who really understand the dynamics of the land development industry. In the coming months I will be covering most of these topics in more detail. LDT
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Sustainable Land Development Today 
