On 600 acres in a town auspiciously called Fate, David Weekley Homes struck pay dirt.

Fate is about 40 miles east of Dallas. There, Weekley Homes, a Houston-based builder, partnered with MHI, The Drees Co., and Highland Homes to buy 1,000 lots. Fate is located within a metropolitan utility district, so some infrastructure was already in place. Plus, it's near a transportation corridor. That purchase, though, was anything but risk-free, as only 575 people lived in the town at the time. “It made Mayberry look like a metropolis,” recalls David Hale, Weekley Homes' vice president of development. Yet the neighborhood that emerged, Woodcreek, where Weekley Homes offers houses ranging from 1,300 to 2,400 square feet and from $125,000 to $234,000, was so successful at luring new buyers to the area that the builder was on the prowl this summer with two other builders to find more land there for a second community.

“We never would have considered this five years ago,” says Hale. “But we're looking at land that's farther out, in the hinterlands.” David Weekley Homes and everyone else, it would seem. Land acquisition continues to be a game of hide and seek for builders across the country.

With few exceptions, builders say they must increase their land inventories as a hedge against an approval process that in most markets is taking longer and longer to complete and land prices that keep going up. Builders that in the past would have been content controlling enough land for two to three years' worth of closings now want to extend that to five to eight years. But finding affordable land that people will move to is a challenge that often requires compromises in terms of the size of the property purchased and its distance from city centers.

Acquiring smaller parcels is still in vogue, even among larger builders such as MDC Holdings, which typically buys in 150-lot quantities, says Gary Reese, MDC's CFO, in part to maintain its debt-to-capitalization balance. Maracay Homes Arizona recently purchased 15 acres with 39 lots for an infill community in Phoenix, says vice president of land acquisition Todd Weber. “How many builders can compete for 200 lots in Northern Virginia that sell for $200,000 to $300,000 per acre?” asks Ralph Grebow, CEO of The Atlantic Group, an Iselin, N.J.–based land acquisition and development firm. “The market is being pushed downward in terms of the size of most deals.”

It's also being pushed outward, as builders seek development opportunities on the fringes of population centers and turn to sources such as Dallas-based Provident Realty Advisors, which specializes in selling super pads with infrastructure ranging from 50 to 200 acres. “Big builders want to go ‘out there,' but they won't pioneer like we do,” says Jay Hawes, Provident's project manager. Finding bargains on these frontiers, though, is no cakewalk, as investors flood into the housing market waving capital, which giant developers and builders are using to gobble up huge tracts. Lennar Corp.'s acquisition of the much-sought-after, 3,724-acre El Toro naval base in Irvine, Calif., for $650 million plus $200 million in development fees, which it financed with capital from three real estate investment funds, showed how high some builders can raise the bar for land acquisition. “Even submarkets are grossly inflated by buyers who are paying maximum prices for stuff that's a target for bigger builders,” observes Tony Possidoni, vice president of land acquisition and government relations for Oak Brook, Ill.–based Montalbano Builders' Oakwest Development Co.

Land sources haven't changed much from past years: farms, nurseries, and dairies owned by families looking to cash out in markets that are rewarding sellers extravagantly. Those sellers are savvier about their land's value, more demanding about getting their money up front, and less forgiving about takedown schedules. This shift in leverage places some builders at a disadvantage, as Arbor Custom Homes found out in early September when Centex Corp. made an unsolicited bid for land Arbor had under contract in Salem, Ore., that was $38,000 per lot higher than Arbor's $147,000 option. To finally secure that property, Arbor ultimately wound up paying $250,000 per lot, says Arbor's co-owner Wally Remmers, who adds that his company is in similar price wars on other properties in a market where an urban growth boundary limits what gets built.

Only days before Centex made its bid, Dennis Sackett, Arbor's co-owner, told The Oregonian that this boundary “has really been our friend” by keeping out national builders that felt land there was too expensive and difficult to acquire. But even Arbor is counting on 1,500 lots it controls outside of the boundary to be brought into it eventually, says Remmers. It remains to be seen whether these buffers dissolve into Maginot lines in a rampaging housing market where growth-minded builders inevitably feed off other, larger builders and developers that regularly sell excess land assets (see “Cashing In,” page 350), or acquire competitors with strong land positions. When Yardley, Pa.–based DeLuca Homes acquired The Barness Organization in August, it increased the number of undeveloped lots it controls by 36 percent, to 3,000.

QUICK-CHANGE ARTIST: The Corky McMillin Cos. has been adept at finding and developing raw land in a tight San Diego market. One such development is a 3,000-acre assemblage—which had been a former military facility called Sycamore Canyon—that the builder is transforming into a master planned community it calls Stonebridge Estates (above). To purchase a second property in Chula Vista, Calif., it calls Rolling Hills Ranch, McMillin Cos. outmaneuvered several other builders and a San Francisco–based broker by pitching its bid directly to Ford Motor Co., the land's owner. Development for both sites required the company to remove between 30 million and 40 million cubic yards of dirt.
QUICK-CHANGE ARTIST: The Corky McMillin Cos. has been adept at finding and developing raw land in a tight San Diego market. One such development is a 3,000-acre assemblage—which had been a former military facility called Sycamore Canyon—that the builder is transforming into a master planned community it calls Stonebridge Estates (above). To purchase a second property in Chula Vista, Calif., it calls Rolling Hills Ranch, McMillin Cos. outmaneuvered several other builders and a San Francisco–based broker by pitching its bid directly to Ford Motor Co., the land's owner. Development for both sites required the company to remove between 30 million and 40 million cubic yards of dirt.

What's clear, too, is that builders are adjusting their criteria for judging which deals are worth investing in. Unentitled land isn't scaring off builders as it once did, even though some companies remain allergic to it. MDC, insists Reese, buys only entitled lots “that [are] positioned so we have control over getting the building permit and the certificate of occupancy.” On the other hand, The Corky McMillin Cos., in National City, Calif., specializes in acquiring large parcels “that have some hair on them,” says Jim Hunter, vice president of planning and acquisitions, and enduring longer approval processes with the expectation that the profit margin could be as much as 10 percentage points higher than that which entitled property produces.

In one such deal, McMillin Cos. redeveloped San Diego's Naval Training Center, which Hunter says needed “quite a bit of toxic remediation,” into a mixed-use, 400-acre community with 350 homes, 1,000 hotel rooms, retail space, and 600,000 square feet of office space, plus parks and churches. At two other developments—Stonebridge Estates, a 3,000-acre assemblage in San Diego, and Rolling Hills Ranch, a 1,400-lot master planned community in Chula Vista, Calif.—McMillin Cos. removed between 30 million and 40 million cubic yards of dirt “and literally took the tops off mountains,” says Hunter, to get those properties ready for construction.

Learn more about markets featured in this article: Phoenix, AZ, San Diego, CA, Los Angeles, CA, Deltona, FL, Atlantic City, NJ.