Land Developers: Use Optimization to Make More Money on Affordable Homes

Land Developers: Use Optimization to Make More Money on Affordable Homes

Stop me if you've heard this one:

The city is growing so fast and all the jobs are here, but I can't find a house I can afford within a good commuting time...

What happens when the supply curve (home inventory prices) refuses to meet the demand curve (humans moving to city for job)? The supply side loses money.

In this case, either because the promising upstarts decide to rent instead, or because the land developer is seeing these houses stay empty for too long and slashes prices. Either way, the land developer is losing margin on building cost.

Before all the construction and the plans, when the land is empty and full of promise, there is a certain excitement at the prospect of margins related to luxury homes. And a whole development of them!

aerial view of city during daytime
Photo by chuttersnap / Unsplash

But developers should take heed at the market dynamics, and how the competing renting alternative can allow for much more disposable income for young professionals.

But when trying to monetize a plot of land, how does one reconcile taking less margin on top of building costs, when all that bad stuff still seems hypothetical? Surely one can outrun the market, even if for a little while? How does one muster up the sacrifice of the glint of the future, for something more pedestrian?

Building smaller identical houses, with smaller yards might yield less money per house. But if you are in a high demand area, the shrinkage of the house will not equal the same percentage cut to the price. If these houses are half the square footage and half the acreage, they could end up reaping more than 50% of the price of the originally planned luxury house. And a developer could have twice as many built.

landscape photography of bungalow house
Photo by Gus Ruballo / Unsplash

Furthermore, consider the time it takes for a developer to get all the money back. While waiting for luxury homes to fill up and being on the hook financially, developers can only watch as other opportunities are taken up. But the twice as many smaller homes would sell so much quicker, that the developer would be back on the investment market (with more money!) while the others are still waiting for a 25 year old to sign a $500,000 mortgage. Because they've over-supplied the "making Director money and above" market.

As far as the raw margin on each house, consider a lesson in logistics.

If your variable cost can be modulated, you can use process optimization in order to increase your margin. Usually this means time- a builder's wage for example. A developer can also optimize the layout for more efficient buiding and movement of materials. Perhaps park all the weather resistant material on one side of a fenced area and then move it around the square as the development is done.

This optimization would require coordination between the developer and the building companies, but there are more than a few project managers that are up to the task.

In this way, we can keep the economic incentive of maximizing margin, while allowing young people a better foothold in starting their adult life in new city. Because when young people can profit and rise up, the economic opportunity within the city only increases, as they increase their own value to their workplaces or start-up communities.