Most Builders Believe Now Is a Great Time to Buy Land

Recognizing the abundance of land deals available, the fact that banks are loosening their grip on distressed properties, and forecasts that show the housing market is finally on the road to recovery, most home builders believe now is a great time to be in the market for land, according to a January 2011 survey of Professional Builder readers.

More than 55 percent of survey respondents agreed with the sentiment that now is an ideal time to purchase land for housing development, while less than a quarter disagreed with the statement (see Chart 1 below).

“Long-term land investment is always a good thing,” said one builder respondent. “Timing is crucial for purchase, investment, and a fair selling profit and return on investment.” And, based on the feedback from the nearly 300 builders that responded to our survey, the timing is right for buying land.

Yet surprisingly, only about a quarter of survey respondents said they bought land in the past 12 months. Of the respondents that closed deals within the past year, the majority bought small tracts of land — in the one- to nine-acre range (Chart 2). Similarly, only about a third of builders (35.2 percent) said they’re in the market for land this year. Of those that plan to purchase land in the next 12 months, the vast majority are looking for small tracts, while just a tiny percentage plan to buy large tracts of land (Chart 4).

Among the builders that bought land during the past year, more than a third (36.3 percent) said they plan to develop or build on the land within the next 12 months, while 31.9 percent indicated that they plan to wait for the market to rebound and 14.7 percent said they plan to sell it when the market recovers (Chart 3).

In fact, more than half of builders are playing the wait-and-see game with their land — whether newly acquired or long-term assets. Fifty-three percent of respondents said they are currently sitting on undeveloped land in hopes of a market recovery in the near future (Chart 5).

Respondents are pretty much split down the middle with regard to their thoughts on making land acquisition deals right now, even if financing sources were readily available. About 36 percent of respondents said they disagreed with the statement that they’d be making more land deals if they could obtain funding, while 38.7 percent said they agreed with the statement (Chart 8).

So, what’s holding builders back? Difficulty in obtaining financing for land deals and finding buyers for new homes are among the top challenges with regard to land acquisition and development cited by respondents. Nearly half of builders (44.6 percent) said lack of home buyer demand was a top challenge, while about a third said financing was a key obstacle. Other challenges include high municipality fees, overvalued land, and the high cost of debt and equity (Chart 9).

“A lot of projects are being sold at deep discounts that are great deals if debt and equity were available,” said one builder. Another stated, “Foreclosed land is creating some opportunities, but lack of demand and the cost of financing are major barriers.”

1. To what extent do you agree or disagree with the following statement: “Now is a great time to purchase land for future housing development.”

• Strongly disagree 11.6%
• Somewhat disagree 13.3%
• Neither agree nor disagree 19.7%
• Somewhat agree 39.7%
• Strongly agree 15.7%

A majority of builder respondents (55.4 percent) agreed with the sentiment that now is a great time to purchase land for housing development, while less than a quarter disagreed with the statement. Base: 285; Professional Builder, January 2011

2. Have you acquired land in the past 12 months? If yes, how much?

• No 74.7%
• Yes (1 – 9 acres) 13.7%
• Yes (10 – 24 acres) 4.2%
• Yes (25 – 49 acres) 3.2%
• Yes (50 – 99 acres) 1.8%
• Yes (100 – 500 acres) 1.1%
• Yes (More than 500 acres) 1.3%

Just a quarter of builders said they purchased land in the past 12 months. Of the respondents that closed deals within the past year, the majority bought small tracts of land, in the one- to nine-acre range. Base: 285; Professional Builder, January 2011

3. If you purchased land within the past 12 months, what are your immediate plans for the land?

• Develop/build on it within the next year 36.3%
• Wait for the market to recover, then build 31.9%
• Wait for the market to recover, then sell 14.7%
• Re-zone the land for other uses (e.g., commercial, industrial) 4.4%
• Other 12.7%

Among the builders that bought land during the past year, more than a third (36.3 percent) said they plan to develop or build on the land within the next 12 months, while 31.9 percent indicated that they plan to wait for the market to rebound. Base: 204; Professional Builder, January 2011

4. Do you plan to acquire land in the next 12 months? If yes, how much?

• No 64.8%
• Yes (1 – 9 acres) 19.2%
• Yes (10 – 24 acres) 4.5%
• Yes (25 – 49 acres) 5.2%
• Yes (50 – 99 acres) 2.8%
• Yes (100 – 500 acres) 1.4%
• Yes (More than 500 acres) 2.1%

Only about a third of builders (35.2 percent) said they’re in the market for land this year. Of those that plan to purchase land in the next 12 months, the vast majority are looking in the one- to nine-acre range, while just a tiny percentage plan to buy large tracts of property. Base: 287; Professional Builder, January 2011

5. Are you currently sitting on undeveloped land in hopes of a market recovery in the near future?

• Yes 52.8%
• No 47.2%

More than half of builders are playing the wait-and-see game with their land. Fifty-three percent of respondents said they are currently sitting on undeveloped land in hopes of a market recovery in the near future. Base: 284; Professional Builder, January 2011

6. How much land do you currently own?

• I don’t own land 26.2%
• 1 – 9 acres 26.9%
• 10 – 24 acres 10.1%
• 25 – 49 acres 8.1%
• 50 – 99 acres 7.7%
• 100 – 500 acres 12.2%
• More than 500 acres 8.8%

The vast majority of builder respondents (73.8 percent) currently own land, mostly small tracts of property. Just 21 percent of survey respondents own more than 100 acres. Base: 286; Professional Builder, January 2011

7. Are you currently in jeopardy of having to sell or turn over your land if the housing market does not recover in the next 24 months?

• Yes 30.0%
• No 62.1%
• Don’t know 7.9%

Nearly a third of builder respondents said they’re in jeopardy of having to sell or give up land they currently own if the market does not rebound in the next two years. Base: 280; Professional Builder, January 2011

8. To what extent do you agree or disagree with the following statement: “If I could obtain financing I would be making more land acquisition deals right now.”

• Strongly disagree 21.6%
• Somewhat disagree 14.3%
• Neither agree nor disagree 25.4%
• Somewhat agree 22.3%
• Strongly agree 16.4%

Respondents are pretty much split down the middle with regard to their thoughts on making land acquisition deals right now, even if financing sources were readily available. About 36 percent of respondents said they disagreed with the statement that they’d be making more land deals if they obtain funding, while 38.7 percent said they agreed with the statement. Base: 287; Professional Builder, January 2011

9. What are your top challenges with regard to land acquisition and development?

• Lack of home buyer demand in my area 44.6%
• Obtaining financing for land development deals 33.1%
• Obtaining financing for land acquisition deals 32.4%
• High municipality fees (e.g., impact fees) 26.8%
• Available land is overvalued 22.0%
• The cost of debt exceeds the projects’ ability to make a fair profit 17.4%
• The cost of equity exceeds the projects’ ability to provide the required return 17.4%
• Obtaining equity partners 13.6%
• Obtaining debt for vertical construction 11.8%
• Land is not ideally zoned/parceled for current market demand (e.g., lots are too large, zoned for single-family detached, etc.) 7.3%
• Lack of available land 4.9%
• Other 7.0%

Difficulty in obtaining financing for land deals and finding buyers for new homes are among the top challenges with regard to land acquisition and development cited by respondents. Nearly half of builders (44.6 percent) said lack of home buyer demand was a top challenge, while about a third said financing was a key obstacle. Base: 287; Professional Builder, January 2011

10. What types of land do you own?

• Raw undeveloped land 41.8%
• Fully developed property 39.4%
• Partially developed property 29.6%
• Scattered lots 21.3%
• Commercially-zoned land 17.4%
• Distressed/REO property 9.8%
• Other 4.8%

Nearly 42 percent of respondents said they currently own raw undeveloped land, while 39.4 percent own fully developed property and about a third own partially developed land. Base: 287; Professional Builder, January 2011