A feasibility study is the structured analysis you run before committing to an LOI. It is not a pro forma, it is not due diligence, and it is not a broker opinion of value. It is the fast, high-conviction answer to one question: does this deal pencil at my target return given what I know today? If the answer is yes, you sign the LOI and start the real diligence. If the answer is no, you save the earnest deposit and move on.
What does a residential development feasibility study actually include?#
A serious feasibility study for a residential land deal has six components. Each one answers a specific question that can independently kill the deal.
- Market analysis: Are comparable sales supporting the exit price you need? What is the absorption rate?
- Site analysis: What can you actually build? What does the zoning, entitlement path, and lot yield look like?
- Development cost estimate: What does it actually cost to build in this submarket at this scale?
- Financing assumptions: What LTC, rate, and term can you get from a lender for this deal?
- Exit valuation: What does the project sell for or cash-flow at, based on comps?
- Investor return metrics: Does the project IRR and equity multiple clear the hurdle after the capital stack is modeled?
A feasibility study is intentionally lighter than a full pro forma. You are not sourcing 10 comps per data point. You are pulling 3 to 4 defensible inputs per line, running the model, and checking the output against your hurdle. The goal is speed and enough confidence to put earnest at risk.
How do you approach the market analysis?#
Pull four to six closed sales of comparable product in the submarket from Redfin or Zillow within the last 12 months. Match by product type (SFR, townhome, BTR), size band within 15 percent, and zip cluster. The median closed price, not the asking price, is your exit assumption.
Then pull absorption. Days on market for comparable listings gives you velocity. Divide active comparable inventory by monthly sales count to get months of supply. Anything under 3 months is a seller market; above 6 months, you need to haircut your absorption schedule.
How do you estimate development costs quickly?#
For a LOI-stage feasibility, use order-of-magnitude benchmarks by product type, then mark them to the submarket with a simple cost multiplier. Tract SFR in the Sun Belt runs $120 to $160 per SF for vertical. Lot development in an established suburb runs $30K to $55K per lot. Soft costs run 10 to 14 percent of hard cost. Carry runs 4 to 6 percent of total project cost for a standard 24-month build. Contingency at 8 to 10 percent of hard cost.
These are starting points. The moment you have a civil estimate or a GC budget, replace the benchmark. Benchmarks that are 18 months old are not benchmarks. They are noise.
What do you do when the deal does not pencil?#
First, identify which lever is the problem. Is the exit price too low (a market problem), the costs too high (a submarket or site problem), or the land price too high (a negotiation problem)? Each has a different fix.
If exit pricing is the constraint, you cannot fix it without finding a higher-value product mix. If costs are the constraint, you need a specific civil estimate or GC budget before you can quantify the gap. If land price is the constraint, run the residual land value calculation and use it as the basis for your counter.
If all three levers are against you, the deal does not pencil and no amount of optimistic modeling will change that. Write up why it does not work, file it, and move to the next parcel. The deals that turn into disasters are the ones where the sponsor modeled their way past a negative feasibility instead of walking away from it.
When does a feasibility study become a full pro forma?#
Once the LOI is signed and the earnest deposit is at risk, you need the full model. That means 6 to 10 comps per data point, a written cost estimate from a civil engineer, a term sheet from a lender, and a sensitivity analysis on the two variables that move the deal most (typically land price and revenue per unit).
The full pro forma is what goes in the IC memo, the LP deck, and the lender package. The feasibility study is what gets you to the LOI. Do not conflate them. One is for speed; the other is for defensibility.
River runs the full feasibility automatically when you submit a parcel through the development analyst. Market comps are pulled in real time, cost benchmarks are marked to the submarket, and the output includes a residual land value, a project IRR, and a go/no-go recommendation you can hand to a lender or LP.