Most developers underwrite forward: take the asking price, add the costs, see what is left. The problem is that the asking price is the seller’s number. The most useful figure in the deal is yours — the most you can pay and still hit your target return.
Underwrite backward
Start with revenue you can support with comparables, subtract every cost that is not land, subtract the profit you require, and what remains is the ceiling on what the land is worth to you. That is your maximum land offer.
- It turns a negotiation into arithmetic.
- It tells you how much room a price cut actually buys.
- It gives your partners and lenders a number they can check.
Know it before you fall for the site
Deals are easiest to walk away from before anyone has spent money on them. Put the number in writing at the first look, and every conversation after that has a reference point.
