Newly minted Trumark Homes usually has plenty of company when it comes time to bid on land, says Trumark principal Michael Maples.
"We are finding a lot more competition from everything from public builders to private funds," Maples says. "And a lot of prices are being thrown around, and who knows what they are going for."
Luckily, Trumark, a three-month-old California-based home builder, already had a contract to buy its most recent piece of land, 11 acres with room for 68 to 72 single-family detached homes, in the Lake Forest area of California's Orange County. Trumark paid $4.8 million for the parcel, less than the company had contracted to pay for the land in 2010. The owners, The Whisler Family Trust and Silver Oak Investors, dropped the price to close the deal earlier.
"We were fortunate to find a site in a constrained market where we could deliver homes at a compelling value," Maples says of the deal.
It's especially fortuitous considering stiff competition has arisen for entitled land even farther out, beyond the closer-in market Trumark is aiming for. "It has been kind of surprising that there has been so much activity out in the Inland Empire," says Maples.
It's clear that builders are out shopping again.
After letting go of options and shedding what high-cost land they could, some builders are finding themselves in need of new land to keep what's left of their home building machines going.
"We are definitely seeing a lot more land transactions and really a lot more land for sale," says John Burns, CEO of John Burns Real Estate Consulting. The land for sale falls into two categories: "either lousy land in lousy locations that is primarily going to local investors or good land in good locations where there are 20 to 30 bids and the prices are getting bid up."
"Hovnanian, D.R. Horton, Meritage, and Richmond American are bidding aggressively on land because they are out of good land in their markets," Burns says. "It's the land bidding wars all over again, but I will say the high bidder is paying $0.30 on the dollar of what somebody paid at the top of the market."
The phenomenon has been mentioned by several public builders in their quarterly conference calls. Meritage, which is counting on the sales of homes on cheaper land it's bringing online in a few months to return to profitability next year, is shopping in California, Colorado, and Florida, and has run into a lot of competition, according to CEO Steve Hilton.
"There are seven to eight public builder competitors competing for finished lots," said Hilton during a recent earnings call. "There is no question that public builders are back buying lots again. A lot of transactions have not closed yet, but I do see the land departments of our competitors being pretty active."
Toll Brothers is even looking to hire land buyers; it recently advertised for a land acquisition manager to help the company "in the identification and assessment of land purchase opportunities" for its Connecticut division.
The new land is needed to keep bringing in enough revenue to keep their companies in business. Despite cutting their employees by 70% in many cases, builders are still having trouble building enough homes to lower their SG&A costs.
"Some of them will buy land to break even [on the home sales] even if none of them will admit it, because a lot of them can build twice as many homes without having to add any more people," Burns says. "It's either that or leave the market."
While economists might suggest the answer is just to stop building until the oversupply is absorbed, for some builders that's not a viable option.
"They have overhead to recover and debt to pay and shareholders who don't want them to liquidate," says Burns.
The land that's appealing to the public builders now is not A and B location parcels or the D and F parcels they might already have sitting in their portfolio. It's the C locations that will work for low-end home buyers who make up a good portion of the market now.
"Home prices, particularly in the low end, are pretty stable right now," Burns adds.
It's likely there will be more land to choose from next year as more lots from bankruptcies hit the market. So does it make sense to wait until next year to buy?
Not necessarily, says Burns. "They are buying for a business need, not to time the market."
Teresa Burney is a senior editor for BUILDER and BIG BUILDER.
Learn more about markets featured in this article: Los Angeles, CA.