ModelChoice decision tree · Real estate

Real Estate Development Decision

Develop the site for housing or for offices and shops, buy it and hold it, or not buy?

Complexity: ★★★★★
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From the model’s decision tree

Best first decision: Buy & Develop Commercial

The expected value of each first option when every later decision is also made well (the tree rolled back).

First decision	Expected value
Buy & Develop Residential	$563,000
Buy & Develop Commercial	$798,000	✔ best
Buy & Hold (Sell Later)	$70,000
Don't Buy	$0

Measure	Value
Expected value of the best strategy	$798,000
Chance of a loss on the best strategy	28.0%
Best outcome on the best strategy	$2,300,000
Worst outcome on the best strategy	−$650,000

The best strategy: chance of each outcome or less

S-curve (cumulative probability) of Buy & Develop Commercial from the saved simulation.

The decision

A real estate investment firm is evaluating a 5-acre parcel of undeveloped land on the outskirts of a growing metropolitan area. The land is currently zoned agricultural but sits within the city's planned expansion corridor.

The firm must decide among four strategies, each carrying different risk and return profiles. A key uncertainty is the permitting process, which can significantly affect project timelines and costs.

Objective

Maximize expected net profit. This model illustrates how regulatory risk (permitting) interacts with market risk to shape real estate decisions.

The options

Option 1: Buy & Develop Residential: Purchase the land for $500K and invest $300K in residential development (total $800K). Permits may be approved quickly (60%), delayed with extra costs (30%, +$150K), or denied (10%). If denied, the firm can appeal ($75K) or sell.
Option 2: Buy & Develop Commercial: Purchase and invest $1.2M total in a commercial project (retail/office space). Higher upfront cost but potentially much larger returns. Commercial zoning has a 70% approval rate, 20% conditional (extra $200K), 10% denial.
Option 3: Buy & Hold: Purchase the land for $500K and hold for 3 years, betting on appreciation. Lower risk but limited upside. Land may appreciate 40%, 15%, or stay flat.
Option 4: Don't Buy: Walk away. Net payoff: $0.

The decision tree

The tree has 2 decisions, 8 chance events and 20 outcomes. The best path is open: at every decision the best choice is marked, and the expected value beside each branch counts every cash flow from the start. Open any other branch to see what follows it.

DecisionChance event+$ cash flow on the branch

Decision: Land Acquisition

Buy & Develop Residential −$800,000expected $563,000
Chance: Permits & Zoning
- 60% Approved Quicklyexpected $725,000
  Chance: Housing Market
  - 25% Hot Market +$2,200,000payoff $1,400,000
  - 50% Normal Market +$1,500,000payoff $700,000
  - 25% Cool Market +$900,000payoff $100,000
- 30% Delayed (Extra Cost) −$150,000expected $410,000
  Chance: Housing Market (Delayed)
  - 20% Hot Market +$2,100,000payoff $1,150,000
  - 50% Normal Market +$1,400,000payoff $450,000
  - 30% Cool Market +$800,000payoff −$150,000
- 10% Deniedexpected $50,000
  Decision: Permit Denied - Options
  - Appeal & Retry −$75,000expected $50,000 ✔ best
    Chance: Appeal Outcome
    50% Appeal Succeeds +$1,400,000payoff $525,000
    50% Appeal Fails +$450,000payoff −$425,000
  - Sell Land As-Is +$520,000payoff −$280,000
Buy & Develop Commercial −$1,200,000expected $798,000 ✔ best
Chance: Commercial Zoning
- 70% Approvedexpected $1,050,000
  Chance: Commercial Demand
  - 30% Strong Demand +$3,500,000payoff $2,300,000
  - 50% Moderate Demand +$2,000,000payoff $800,000
  - 20% Weak Demand +$1,000,000payoff −$200,000
- 20% Conditional Approval −$200,000expected $640,000
  Chance: Commercial Demand (Conditional)
  - 30% Strong Demand +$3,200,000payoff $1,800,000
  - 50% Moderate Demand +$1,800,000payoff $400,000
  - 20% Weak Demand +$900,000payoff −$500,000
- 10% Denied +$550,000payoff −$650,000
Buy & Hold (Sell Later) −$500,000expected $70,000
Chance: Land Appreciation (3 yr)
- 20% High Appreciation +$700,000payoff $200,000
- 50% Moderate Appreciation +$575,000payoff $75,000
- 30% Flat / Decline +$475,000payoff −$25,000
Don't Buypayoff $0

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Key assumptions

Assumption	Value	Notes
Land Purchase Price	$500,000	Included in all development options
Residential Development Budget	$800,000	Land + construction + soft costs
Commercial Development Budget	$1,200,000	Land + construction + tenant fit-out
Permit Delay Extra Cost	$150,000	Carrying costs, redesign, re-filing
Commercial Conditional Cost	$200,000	Environmental mitigation, design changes
Permit Appeal Cost	$75,000	Legal fees, revised plans
Residential Revenue (Hot)	$2,200,000	25% probability
Residential Revenue (Normal)	$1,500,000	50% probability
Commercial Revenue (Strong)	$3,500,000	30% probability
Hold Period	3 years	Land appreciation speculation

The figures are illustrative: the companies and numbers are invented for teaching.

Try it in ModelChoice

Strategy Table. Compare all development strategies with risk-return frontier
Sensitivity Analysis. How sensitive is the decision to permit approval rates?
Risk Profile. Compare commercial vs residential outcome distributions

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An illustrative example: the figures are invented for teaching. Last updated 9 October 2026.