Over 40 years and through four incarnations of home building companies in Chicago, the Benach family learned a skill that allows them to compete against big, better-capitalized builders.

The clan can build and sell homes on close-in suburban and urban infill projects where other national and regional Chicago builders can’t or won’t.

Infill is the business model for the family’s fourth company—Lexington Homes—that Ron Benach and his son, Jeff, along with CEO Wayne Moretti and CFO Max Pizak, started in October 2006. It’s the same name of the original company the Benachs started in 1973 and sold to Westinghouse Electric in 1989.

“If the nationals want those big subdivisions in the suburbs, they can have them,” says Jeff Benach, who points out that, while land might be cheaper in the suburbs, home prices remain stagnant.

Lexington Homes, which closed 30 houses in 2012, is finding land that the big production builders don’t want: urban infill lots. And the new Lexington is willing to fit any type of project on those lots. “We’ll do single-family, multifamily, midrise, even rental if the opportunities present themselves,” Benach says.

Now that the home building market is emerging from catatonia, builders are scouring the country for land to meet the new housing demand, and they are having trouble finding good lots in the right place at the right price. This is particularly true for small to mid-size builders.

Because development of new lots all but stopped during the downturn, the pickings of finished lots where most people want to live—“A” and “B” lots—are scarce. And, chances are good if you construct houses in a major market, publicly held builders already have tied up the best lots.

While the total number of finished lots available is nowhere near as low as it was just before the recession ended, the numbers are deceptive because roughly 25 percent of them are in what Metrostudy, BUILDER’s research company, describes as “D” and “F” locations—places so undesirable that nobody wants to live there.

So what can a smaller builder with less-than-plentiful capital do?

Live on the Leftover Lots

Jim Bagley, president of City Homes in Orlando, Fla., has access to lots through private equity. His advice to builders who don’t: “If you have no capital, you have to go to the fringe markets, C markets, where your margins are lower, your velocity is lower, but you can live on it.”

That’s one strategy William H. Hoover, president of Texas-based Inland Homes, a franchisee of Inland Homebuilding Group in Tampa, Fla., was forced into when he started his franchise in San Antonio three years ago.

He knew he couldn’t compete against established builders for spots in the best communities, so he had to find good communities that they had overlooked.

“We have been forced to find the lots that others don’t want,” Hoover says. He feels that being new to the area was an advantage because he saw opportunities with a fresh eye that local builders with preconceived ideas disregarded.

Case in point was an older community forgotten by local builders. It is near good schools and a mile and a half from Costco and Target. Because it was out of favor with local builders, Hoover got lots at good prices and terms. (He declined to provide the prices he paid or the terms.) Still, it took five or six months to convince a bank to finance the deal. But the payoff came quickly when Inland started selling in June 2011, and sold 24 houses in 18 months at good profits.

Hoover’s other strategy was to find lots in good locations with problems other builders didn’t want to deal with. He found a prime community on the north side of town with some gnarly leftover lots.

“The big boys will go through a community and they will pick the easy lots and then when the lots get more challenging they tend to leave them and go on the next community because they have a next community to go to,” Hoover says.

In this community, the leftover lots needed a lot of rock excavation to make them suitable for construction. But they were cheap enough and, thanks to a good deal with a local excavation contractor, Inland made a profit despite the high costs of lot preparation. There was another side benefit as well.

“We are kind of a savior for developers with troublesome leftover lots,” Hoover says. “You have got some ugly lots, let us come and finish out your community.”

Hoover started doing business in San Antonio three years ago, so while he has successfully found leftover lots and expects to continue finding lots that way, he does not know how fruitful this strategy will be over time.

Henry Walker Homes, which builds nearly every type of dwelling from condominiums to custom in Utah and Colorado, makes a point of picking up land that the large public builders don’t know about or aren’t interested in to stay out of the “food fight” with builders over tracts.

CEO Colin Wright says the company finds lots in municipalities that have infill land to develop and are maybe anti-large builders. It also develops brownfield projects and jumps on property that banks are holding notes on.

“We pride ourselves on being really opportunistic,” Wright says.

infill Projects provide Niche

Next year, California Home Builders (CHB) will celebrate its 20th anniversary. Over those two decades, this Canoga Park, Calif.–based builder/developer has survived in the land of giant builders by its willingness to shift gears ahead of changing markets.

The company, says its owner and CEO Shawn Evenhaim, started out building custom homes. But within two years, CHB was into production home building with a focus on infill projects, which have been the foundation of its business model ever since.

Last year, CHB closed 130 multifamily units and 60 single-family homes. It recently completed two multifamily projects of 81 and 41 units, respectively, that it sold to investors who are renting them.

Evenhaim says his game plan calls for selling larger multifamily projects to investors, and selling single-family homes and smaller multifamily projects to home buyers. He projects about 60 single-family closings this year, rising to 100 single-family and 200 multifamily closings in 2014.

Nationally, infill represented approximately 21 percent of new-home construction in metropolitan regions from 2000 to 2009, according to the EPA. What makes an area more attractive for infill development? The EPA confirmed what many builders already know: that infill typically happens in areas where home prices are high.

Mass transportation also makes a difference. Metropolitan areas with more transit ridership and miles of rail transit also tend to have higher rates of infill, compared with those cities and suburbs without a big investment in mass transit.

Build Strong Relationships with Landowners

A few months ago Rob Bowman, president of Charter Homes and Neighborhoods in Lancaster, Pa., was in a heated contest to buy an attractive piece of land. So he took the owners for a tour of Charter’s self-developed, award-winning neighborhoods. They also visited Charter’s Walden Crossings Community, a successful residential town center attached to its greater Walden master plan.

The owner, impressed by Charter’s artful communities, ended up giving Charter the land contract.

“He said, ‘My father passed away and I believe he would think I’m making the right decision. Could we name one street after my dad?’” Bowman recalls. “It’s that kind of emotional satisfaction, that connection, the ability to give landowners that kind of stake in the property” that convinces them to sell their property to Charter over other buyers.

Pat Neal, president of Neal Communities

, has been a home builder in the Southwest Florida area since 1968. Arguably, he knows every large farmer or rancher from Tampa to the Everglades. It’s likely that he’s sat down at their kitchen tables passing on this message: “When you get ready to sell, give me a call.”

He knows where to track down every one of them when necessary.

“There’s one who, if I want to talk to him, I go to St. Peter and Paul the Apostles church on Saturday afternoon,” he says.

There are land tracts in Florida that Neal has been tracking for 25 years. He courted one land owner for 10 years before finally getting the deal.

Neal, who jokes that he scrupulously maintains his reputation “because I am likely to run into them at Publix” supermarket, has earned the trust of many local landowners in a large swath of the Sunshine State. At the same time, many large publicly held builders working in the same areas eroded the trust of landowners when they abandoned Southwest Florida when the recession hit.

“They have earned a reputation for being harder to deal with because they are short-term in their orientation; the private builder has to live in the community,” Neal says.

Because of what Neal calls his “asymmetrical” knowledge of land assets, the motivation of land sellers, and the planning and zoning movers and shakers in local governments, he has procured plenty of land to fuel this company’s geometric climb in home sales. Neal Communities bought 19 parcels in 2013; 2,826 home lots. Neal’s strategy is so effective that he has gathered enough lots for his own home building needs with leftover land that he plans to sell to public builders.

“I would have bought another seven, eight, or nine [parcels of undeveloped land] if I had been willing to pay as much as the national builders,” he says.

Bill Handler, president of GHO Homes in Vero Beach, Fla., has found success by using similar strategies.

“My game plans have really been to be very decisive and move quickly,” he says. Like Neal, Handler is visible in the community and easily reachable. “I think the advertising and local PR we do get me calls as well,” he says.

To gather the intel, Handler taps into a network of local contacts, including landowners. He keeps in touch with engineers, real estate agents, subcontractors, former sources of land, friends of friends, and former customers.

“All of those have made calls and introductions, or got me in direct contact with landowners wanting to sell,” he says. “I have also tried to be the first call from local banks” with land to sell.

As a result, Handler currently has a two-year land supply—not a bad achievement considering he’s in Florida and his sales have been climbing.

Find a Capital Partner to Share the Costs

Of course, even the best land deal requires cash to buy, more money to develop it into lots, and even more funds to market and sell houses on it. While it’s rare for privately financed home builders—particularly small ones—to acquire cash in the quantities that public companies have, there are some partnering options.

“You better have a land capital partner because that is how the publics will win otherwise,” notes Wright of Henry Walker Homes. “They have more access to capital.”

Easier said than done, true, but not impossible.

“The capital is an ever-changing, ongoing battle,” says Wright, whose company initially was funded by costly private equity capital. “We used third-party land banks to bank land. We gave profits away to those land banks, but it helped us as we didn’t have to raise capital to develop.”

That partnership helped Henry Walker Homes build houses and make profits that made its balance sheet more desirable to banks as time went on.

“We look better as a company now,” Wright says. Plus, he adds, banks are more willing to loan money today to build homes, if not buy the land to put them on.

There also are less traditional ways for a cash-strapped builder to acquire land. St. Petersburg, Fla.–based Black Orchid Equity, for instance, recently bought 1,500 vacant home lots and 1,000 acres of other land across the southeast from Rialto Capital, Lennar’s subsidiary formed during the recession to work out distressed land assets.

Black Orchid’s managing director, Blake Whitney Thompson, is striking partnerships with home builders at favorable terms to build homes on the land. In some cases, Thompson is turning the lot titles over to the builders with the agreement that they would pay Black Orchid for the land after the home is built and sold. That direct builder ownership makes banks more comfortable with lending cash to build the house.

Deferring the payment for the lot means the builder doesn’t need to take money out of pocket to buy the land. “We are looking for builders [to partner with] that are aggressive, creditworthy, and looking for long-term relationships,” Thompson says.

Essentially, to successfully find and buy land in the currently overheated market, builders without the deep pockets to compete head-to-head with public home builders must find land they don’t want or don’t know about, cultivate relationships with land sellers, and find financial partners to help pay for it.

Consider Lexington Homes’ example by buying land where large public big builders are not. In September, Lexington Homes opened three subdivisions, two of which are in Palatine, Ill.: Lexington Hills, with 41 units; and Lexington Oaks, with 15 units.

That same month, the company also opened the second phase of single-family homes and third phase of rowhouses at its Lexington Square community. Located in the south end of Chicago’s diverse Bridgeport neighborhood, Lexington Square is a mere eight blocks from U.S. Cellular Field—home to the Chicago White Sox—and will offer 20 single-family houses ranging from 3,000 to 3,600 square feet and starting at $472,500, and 21 two-story rowhouses ranging from 2,216 to 2,507 square feet and starting at $369,000.

This year, Lexington expects to double its closings to 60 homes, and co-principal Jeff Benach says that velocity would be much higher if his company had more land. “We need to start buying land more aggressively,” he points out. At the moment, however, Lexington is narrowing its focus on purchasing smaller parcels—no more than 100 lots.

Benach says that he and his 81-year-old father have no desire to build Lexington Homes into a behemoth. “We want a nice, manageable company that’s building 200 to 300 homes a year in four to seven subdivisions,” he says.

Lexington is in good shape financially, he says, with bank relationships that allow it capitalize projects “before a shovel goes into the ground. That’s unusual for most builders these days.”

Learn more about markets featured in this article: Orlando, FL, Tampa, FL, Los Angeles, CA, Lancaster, PA.