A year ago, bad land decisions hid safely under the cover of rising land prices and unsustainable home appreciation. If only the good times could last forever! Unfortunately, robust tailwinds have shifted to dicey headwinds, and bad lot takedowns are wildly conspicuous right now. In the spirit of keeping it simple, here are four land position dos and don'ts that may help home builders weather today's rapidly changing environment.
FINANCIAL FLEXIBILITY RULES Leverage is two-faced. In better times, leverage is to profitability as steroids are to home-run hitting; in other times, leverage is playing with fire. “In an adjusting market, the cost to carry land sucks cash flow from the profitable sale of homes,” observes Mike Hall, CEO of Hallmark Communities in San Diego. “You have no money to grow, and if operations don't make enough after taxes to cover the land cost, you create a spiral that accelerates. You make business decisions on a strictly defensive basis, and your focus becomes how not to lose money instead of how to make money.”
Remaining disciplined gets at least some of the credit for Hallmark's management honors over the years. Hallmark doesn't borrow money to purchase land, avoiding the leverage trap. Is it a growth inhibitor? Somewhat, but Hall points to “the three recessions or downturns they have built through.” You can't have a future if you don't survive!
EYES OPEN In San Diego, Hallmark executive vice president Tom Archbold says that “our traffic is less than half of what it was a year ago, and sales have dropped from four or five a month to two a month, at best. San Diego has an affordability problem that is not getting any better. Most of our affordable-home buyers are commuting to Riverside County and Imperial County. We are seeing some of the publics shutting down their San Diego operations, concentrating on other areas that still show sales volumes.” Sound gloomy? Maybe, but Hallmark sees a silver lining.
PARTNER POWER The Las Vegas market, on the other hand, continues to show comparative strength. “The market is being driven completely by the demand for affordable housing,” Jason Wolanzyk, CFO of Astoria Homes, comments. In Las Vegas, land is all about density. Astoria executives are wondering “how the publics are paying $900,000 an acre.” He figures that “they must be building in appreciation to their financial models, and they must be accepting lower margins.”
As an alternative, Astoria partnered with a group of home builders and Olympia Group to collectively buy at auction 2,675 acres from the Bureau of Land Management in North Las Vegas, in November 2005. “We really like the process of the consortium,” says Wolanzyk. “It provides us with a competitive advantage.” Astoria got to acquire land that otherwise may have been too pricey, and by partnering, reduced its risk and exposure.
REMEMBER WHO YOU ARE Jim Mandrin of Mandrin Homes, a home builder and developer based in Annapolis, Md., opens up every land purchase assessment with three questions: “Who are we building for?” “What are we going to build?” “For how much can we sell it?” Too many decisions spring from others' metrics and prices. What matters is the price your home buyers will pay. “There is always another land opportunity,” Mandrin asserts.
As the market stabilizes downward, builders need discipline. Appreciation no longer obscures bad land moves. Opportunities will present themselves, but the key is to have the financial flexibility to take advantage of them and to consider joint ventures. And above all, know your own market.
Jamie M. Pirrello is COO of Mandrin Homes, an Annapolis, Md.-based home builder and developer.