Cost Approach

[Terrel L. Shields]

The margin is shifting because of high demand, but likewise, if lots immediately around are actually being sold monitor that too. 7% entr. margins may become 15% or more. Land values tend to inflate along with sales prices. Likewise, I have noted that to get a subdivision off to a good start, the developer may sell the first few discounted to builders with a promise that construction will begin immediately. Don't be fooled if you find 3 lots selling for $20K ea. to a local builder and lot 4 selling for $25K to a private party. After studying my local market I concluded the first year is the slowest sales, then the rush, then slowly back to a trickle. Most of my area small subs are 95% developed in 4 to 5 years. Often the last few lots sell for a premium.

In a few small out of town (rurban) subdivisions I have seen each house sell for more than the last, only to watch the first resales sell for less than the original price. Buyers are often sheep following the herd and paying the price for bolting the herd.