When it comes to property pricing we typically think about the comparable approach and then dig down into details. We can also add absorption rate so we can hone in one the supply and demand that helps us dictate a probable selling price. There is also the added extra of subjective thinking since no home pricing for a listing is totally objective. However, for me as an investment specialist who works almost exclusively with builders, setting a price involves a different set of criteria. What I like about how I price is that I am dealing with mostly objective criteria which is one of the reasons I love my specialty.
Follow the Metrics: I am going to elaborate on the 4 criteria I use to establish pricing with builders or even existing sales in a later post. For this post the four are capitalization rate, cash on cash return, internal rate of return, and yearly increases in equity. This is something I can show the builder and if for instance the minimum cap rate should be 7.5% then I can show this to them on paper.
Property Management input: A key factor for any investor is cash flow and in order to convince builders that the spread sheets are real, any rent should be set by a third party that has the trust of the builders. This should not be pie in the sky that entices an investor then disappoints them, it should be based on historical data.
Quantity matters: There is one builder I have worked with for 13 years who now is independent of a partner and when I started him up again three years ago 40 homes was his typical yearly build. Next year we should hit 200 doors together for investors. This is where the time value of money comes into play with constant cash flow for him with no down cycles. It allows him to negotiate better labor and material deals that also allows him to reduce prices for the investor purchases.
That wraps up this part but in part three I will get more into the four metrics in pricing and in part four I want to talk about integration of a system that covers all parties.