Land Goes Begging

This article first appeared in the PB May 2007 issue of Pro Builder.

Giant 400 builders’ land sales revenues peaked in 2005. Sometime in 2006, still-rising revenues from undeveloped land sales crossed the plummeting revenue line for developed land and lots.

Action peaked in 2005 in one previously sleepy category of Professional Builder's Giants survey: land sales. From 2003 to 2005, selling land — both developed and undeveloped — became a profit center for many Giant builders.

Sometime in 2006, however, land changed from a prized possession to an unwanted commodity.

Many of the largest builders began to take land development and retail lot sales seriously about 2003, when housing demand picked up steam in many markets, especially with investors on the prowl for properties to flip for a fast buck.

Developing land has always been the most profitable side of the housing business, but also the riskiest. Taking raw land through entitlements can double or even triple its value. Adding that value and then selling lots at retail to other builders can be a lucrative proposition.

Big production builders began to buy more raw land than they needed for home building, with the intent to entitle and develop it fast and sell off serviced parcels to smaller builders. By segmenting a community with housing products at numerous price points, they increased the rate of inventory turn on the land, making it even more lucrative.

In 2003 and 2004, builders were more likely to hold onto land until it was entitled and developed to maximize margin by selling retail lots at a high price. By 2006, they were willing to sell it before development just to get it off their books.

However, land comes with risks. It's great as long as homes keep selling. If the merry-go-round stops, you don't want to be the one holding title to all that leveraged ground. Look at the graphs on this page and you'll see that's what happened during 2006. In 2003, 73.5 percent of land sold was developed. By the end of 2006, 55.2 percent was undeveloped. Builders are now selling more undeveloped land than serviced lots because they are ridding themselves of an unneeded commodity (raw dirt) as demand for serviced lots plummets.

“It became easy to buy land with favorable terms in the middle of last year,” says Colorado-based management consultant and PB columnist Chuck Shinn. “But sellers held their prices into the spring this year, hoping markets would come back. Now price is dropping, right along with terms, in most markets.”

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