- Industry: Construction, Real Estate
- Product(s): @RISK
- Application: Real Estate Development
Wright Homes, a small real estate development and property management company, uses Palisade’s @RISK to minimize financial risk when purchasing, rehabilitating and managing affordable, single-family homes.
Palisade’s @RISK solves the problem of generating a risk-adjusted offer amount for a real estate development effort, based on the requisite analysis. It also provides visibility into making appropriate cost and risk trade-offs, which is ‘must have’ information before investing in any new properties.Jim Goebel, principal developer for Wright Homes
Real estate investment opportunities come in all shapes and sizes – from new developments that provide reliable, predictable income, to troubled properties that could have significant financial ‘potential’ if developed and managed properly. The key to success with these opportunities – particularly when dealing with dilapidated properties or Fanny Mae foreclosures – is identifying the viable financial rewards given the costs and challenges to a specific property. According to Jim Goebel, principal developer for Wright Homes, “It’s really just a numbers game.”
Wright Homes is committed to developing quality, affordable residential housing across the U.S. With this in mind, the company needed a model that would facilitate their residential property housing re-development activities while minimizing the financial risks. “We needed a system that would help us select the right properties to engage in, know what to offer on them, and do so in a way that ensured we wouldn’t expose ourselves to too much risk.” Palisade’s @RISK software gave them a solution that was both effective and profitable.
Building the Model
Wright Homes recently restored multiple properties in Des Moines, Iowa. One prospective property - the McKinley project – posed a particular challenge as there was significant uncertainty regarding the property’s expected value of redevelopment costs. The company initially did qualitative research to better understand the area, analyzing the demographics, geographical qualities, and neighborhoods. “Approximately 1 out of every 10 properties we review ‘qualifies’ and makes it past the first part of our prospecting process,” explained Goebel.
Once the McKinley project had passed this first step, the company used the @RISK tool to model a wide range of ‘factors of uncertainty’ including line item costs for redevelopment efforts, vacancy and maintenance allowances, future rental income, taxes and insurance, and assessed value or rebate programs. The resulting distributions coupled with Monte Carlo simulations provided a final output – the total cost figures for redevelopment – that helped guide Wright Homes on what to offer for the property, based on their desired return on investment.
Wright Homes plans to use the Palisade software for all future redevelopment projects. “Palisade’s @RISK solves the problem of generating a risk-adjusted offer amount for a real estate development effort, based on the requisite analysis,” said Goebel. “It also provides visibility into making appropriate cost and risk trade-offs, which is ‘must have’ information before investing in any new properties.”