– Landowners aren’t usually forced to move and sell when a major life event takes place during a down market, as is often seen with single-family housing.
– Land values don’t tend to inflate and then deflate due to the addition and subsequent removal of easy financing as we saw with housing leading up to and during the Great Recession.
If land values do fall, our typical “blue collar plus” buyer is unlikely to notice or care to the extent one might think. For the most part, they do not purchase a ranchette based on what other land is selling for. They purchase based on whether they can afford the monthly payments. For that reason, falling values do not necessarily lead to our buyers paying less for our properties.
If a large majority of our target buyers were to suddenly be willing to pay much less for a ranchette, our profits could get squeezed to some extent, but the fund and its investors should not.
In a typical scenario, we’ll buy a property for $1M, put $400K in improvements into it and sell for $2.8M in total. That’s a $1.4M gross profit. If our buyers were to pay an unprecedented 20% less than expected, those numbers might be as follows: $1M purchase, $400K in improvements, and a $2.24M sales price. The result would be a $840K gross profit, which is still well in the black.