I've been a member here for ±15 years. During that time, there's been questions on and off about land development and homebuilding that have been substantively unanswered. I thought this would be a good opportunity to give back by providing some long-form answers to questions.
As a little background, I spent the first ±10 years of my career working in commercial real estate with three firms - including public/private, owner/operator and GP, and two blue chips. I spent time in finance, property management, asset management, investments, and development during that time. I went off on my own before covid and more recently (a few years ago) made the pivot to focus my time on residential opportunities, primarily land development.
I have more recently been kicking tires on homebuilding, so have an increasing amount of insight into that side of the business as well. I expect I will break ground on a few homes here in Q4 and will increasingly look to self-develop.
Happy to answers any questions where I can. May be slow depending on the day, so give me some time to respond.
Based on the most helpful WSO content, here are some insights and advice related to land development and homebuilding:
Land Development Process:
Transitioning to Homebuilding:
Market Dynamics:
Entrepreneurial Approach:
Challenges and Risks:
If you have specific questions about land development, homebuilding, or transitioning between the two, feel free to ask!
Sources: From Real Estate Finance to Founder of Development Company - Q&A, Looking for guidance finding my path in commercial real estate, Understanding Real Estate, Q&A: Building a Real Estate Investment & Development Business, Lunch & Learn -Ins and Outs of Construction
As an intern at a top homebuilding company, what advice would you have for someone who wants to start a commercial development company in the future. What kind of job should I aim to have out of college where I would have the most applicable learning experience? Thanks for starting this thread and would appreciate your input.
It's a cliche answer, but if you want to focus on commercial development and have aspirations of starting your own firm one day, I would focus on getting your foot in the door in an analyst position at an active, private development firm for a few years. Your focus should be on learning (leveraging existing resources) and repetitions (deal volume).
The residential and commercial worlds are completely different, for various reasons. Land and homebuilding experience does not lend itself well to commercial development.
"Land and homebuilding experience does not lend itself well to commercial development."
Can you unpack this a bit? I started in CRE, got laid off, took a job for a public builder, but eager to get back to commercial side of things, specifically CRE dev.
Q1: When you go into land development, at what stage of drawings do you typically close on?
I assume you get entitlements for whatever density of land development you're looking at. Do you typically get to finished pads for the building profile? Or do you just sell at entitlements.
Q2: What do the buyers of your land developments do between when they put in an offer, and when they close? Are they looking for contingencies to permit-ready? Do they significantly modify the conditions of approvals and designs; or perhaps do you work hand-in-hand with a homebuilder from the get go?
Q3: Do you typically engage a 3rd party land-development costs firm to level all the construction cost assumptions to get to an even bidding situation?
Thanks in advance.
These are large questions and there's a to unpack here, but to get you started see below. Happy to answer more detailed follow-up questions.
Question 1 -
There is a lot more variance in the deal structures in land development than in commercial as you are typically working with a legacy land owner of a farm and ranch and thus the contract structure is more reliant on their personal preferences.
For example, you may be working with an older seller than has medical concerns and they would prefer to sell more quickly than to give the Developer the time generally necessary to entitle the project. So the Developer may have 90 days of due diligence + 30 day close in which time they need to complete basic due diligence and ensure their proposed land use is supported, and ideally get past a first round of P&Z, CC, or both. In this scenario you may be relying on a fairly simple land plan and one line designs from your engineer and consultants.
Or, you may be working with a long term land owner that is looking to begin their estate planning and they're fine with giving the Developer the time to run their process (often takes 12+ months) for a market or above market price. In this scenario perhaps you can get all the way to full design or at least 50%+.
There is no one size fits all and I've done a range. Similar to Question 2 below, this will vary depending on the operating environment. Good luck trying to get time from a land owner from 2020 - 2022. But now it is easy to get time, the question is how much time.
I personally won't close on land until I have my full due diligence completed and am confident on my proposed land use. However, there are those that will do basic due diligence (environmental, title) and close on a more speculative basis if they think the basis is good enough.
My focus is on selling finished lots to Builders. Which is also why I want to run my full process - I am taking it all the way through and want to mitigate entitlement risk as best I can.
Question 2 -
There's two primary transaction structures in land development (with some flavors in between) - paper and finished lots. The transaction structure will vary depending on a few factors, including the macro operating environment, primary market, submarket, developer, buyer, and a few other factors.
For example, late 2020 to early 2022 was peak cycle. Developers were "entitling" projects where they secured zoning, had completed some preliminary design, but may or may not have had a preliminary plat and more than likely did not have construction plans or a final plat, i.e. the project was 6+ months from being 'shovel ready.' Yet there was so much demand from investors and builders that they were often willing to take on this incremental risk to get the deal done.
The market has been softening since 2022 and thus we're substantively moving back to a finished lot market where the Developer needs to go through the full life cycle of the development - land acquisition, entitlements, construction, and disposition.
In this environment the buyer is the Builder. In their due diligence period they're looking to make sure the details your provided are accurate and they can build their desired product on the lots they are looking to purchase. For example, they want to make sure there are no environmental issues, they have a geotechnical analysis to support their foundation specifications, zoning and land use fits their product, the developer has substantial completion from the jurisdiction, there is capacity and service for both water and sewer, the building pads are graded correctly, and more to ensure they can break ground on the vertical construction.
Question 3-
Land development is substantively civil site work at scale. Your civil engineer assists with the scope and will provide bid quantities and estimates at every stage of design from Opinion of Preliminary Costs ("OPCs") based on one line diagrams to final construction plans with full details. They may (very likely) will also assist in preparing bid documentation to ensure bidding is consistent, easy to review, and award.
Thanks a lot! Appreciate the detail on your thoughts.
>My focus is on selling finished lots to Builders. Which is also why I want to run my full process - I am taking it all the way through and want to mitigate entitlement risk as best I can
Follow up question to this point. How do you curate your product/offering to attract builders the best?
Is it just 'simple' market level comps in terms of average square footage, average lot size; copy a typical KB Home. Or do you design it different every time and sell the vision? (Maybe they're not mutually exclusive). The question arises from a fear that you can design to 20 du/ac but Lennar says we're more interested in 10 du/ac and want to go back to the City and burn 6 months.
Following.
Where is it best to get experience right out the gate? Deal side, Working with LP's for projects, working with subcontractors?
If you're explicitly interested in working in land development?
The issue with #2 / #3 is you won't get private deal side exposure, so you'll have to find another way to learn about equity, debt, limited partners, underwriting, operating agreements, and so forth which is why #1 is ideal.
it seems like it would be more difficult to get on the team with the private, local, land developer just with it being a small team if I am thinking about this correctly.
Gracias por compartir tu experiencia y por estar dispuesto a aportar. Se nota que tienes un recorrido sólido y diverso en el sector, y eso siempre es valioso, especialmente en temas como el desarrollo urbanístico y la construcción, donde muchos tenemos más preguntas que respuestas claras.
Tu enfoque hacia la autoconstrucción y el desarrollo residencial también suena muy interesante, especialmente en el contexto actual. Seguro que tu perspectiva puede ayudar a muchos que están empezando o que simplemente necesitan una visión más realista del terreno.
Not sure if you’re the guy to ask for this but any insight on homebuilding in already densely populated areas where building 20+ homes at a time isn’t really feasible? I’ve come across quite a few wealthy homebuilders in my life focusing on wealthy suburbs of NYC, Hamptons, and the Jersey Shore. The process is usually buy an undersized and/or run down house in a wealthy area, knock it down, and build a multi-million dollar home. Everyone I’ve met who has done this for a living is a blue collar guy, who stockpiled enough money to start doing their own deals, and worked their way into building multi-million dollar homes. I don’t think any of them know what IRR or NPV means but they know how to GC their own jobs and minimize building costs. They operate along the lines of if I pay $2mm for the land, spend $4mm on demolition and construction, and sell for $7.5mm+ this is probably going to work out for me.
Do you think this industry could ever become a bit more institutionalized and have a need for finance nerds like most on this forum? Or is building one house at a time too small to scale for institutional money and leave it to guys who actually know how to build things?
This isn't my focus, but I know plenty of these builders in my market so I can share some insight based on my conversations with them.
You basically hit the nail on the head. This part of the builder world is best suited for small, local operators. The extent of their financial analysis is napkin math and the balance of their time is focused on execution. Their margins are much, much higher than production industry norms. Most builders will run (historically) 20% gross / 10% net margin. The builders are you are describing are often running 50%+ net margins. They're focused on a very small segment of the market (luxury infill). In my market these are homes that can sell for $2.0M+. So the builder may walk away with $750k - $1.0M when it's all said and done - albeit it may take them 9 - 12 months to build the home and another 6 months to sell the home. But if you do 3-5 homes a year, that's a good business.
Near zero chance that segment of the industry is ever institutionalized. There just isn't enough nominal cash flow to add in material cost overheads like you're suggesting. These are very hand on operators that run small project management teams. Part of the reason it is difficult to scale is human capital. If someone has the know how and some risk tolerance, it is very easy to go out and repeat what they're doing in their day to day, i.e. buy a lot with equity and then borrow construction costs for the home. Very low barrier to entry if you can grind through the execution and minimize mistakes by being hands on.
My side of the industry is more akin to manufacturing than it is homebuilding or real estate investment. It's about managing your balance sheet, recycling capital, making margin - rinse and repeat.
Are you having to deal increasingly with non-bank lenders? Either from your side as the Developer trying to get development capital or from the homebuilder side who is requiring "PSA assignment" language in their contracts?
I have heard banks won't really lend on land development projects that go higher than 50% LTC.
Yes, the regional banks have pulled back over the last several years and private lenders have stepped in, so the industry at large is increasingly dealing with non-bank lenders.
I'm not sure if I understand what you mean by PSA Assignment. If you mean assignment of the lot purchase contracts from the builders, then sure - I could see that. It's similar to assignment of rents in a commercial contract.
That is not true. But banks have certainly pulled back their lending in land and homebuilding. My feel for it is they have so many problem loans on the commercial side their focus is on working those out for now. Plus, many banks have internal policies post-GFC of land and homebuilding is very, very, very low on their list to lend on.
Why don't you hear about land development challenges as much from multifamily developers who build garden style product?
I hear how difficult LD is primarily from the home building industry but some multifamily deals appear to have similar LD requirements.
I’ll let Esque chime in, but I’ve done traditional lot development for national builders and garden style MF development for a regional developer. Sitework/development costs are just much lower on a per unit basis for MF units than lots. You’ve got a much smaller site footprint, higher density to spread costs, shared utilities, and typically less off-site improvements. I’d say with garden style MF, you might be in for land and sitework on a lower per unit basis than just the land for lots. Have to remember that cost basis for rentals has a much lower economic ceiling than for-sale product.
The best way for me to answer this question is to pose a different one: "What is difficult about land development?"
Land development consists of 90%+ civil construction - earthwork, paving, water, sewer, drainage, and franchise utilities. The primary vertical construction consists of amenities, landscaping, and hardscaping. Construction management is less complicated and more commoditized as 60%+ of your project budget will be completed by three contractors - site work, paving, and underground utilities. The production homebuilders will have employees (generally with a civil background) that manage construction as a means to save on project costs.
So let's go back to our original question - "What is difficult about land development?" Land for single family projects is very low on the 'highest and best use' and therefore you're most often working in suburban of exurban locations and converting farm or ranch land into residential communities. Very few of these tracts are 'plug and play' meaning that as the Developer you are often trying to solve for complicated issues related to earthwork, water, sewer, and/or drainage. Here's a few examples...
The bulk of the value in land development does not come from construction. Rather, it comes from the hands on problem solving that is often (almost always) required to actually fully entitle (zoning, preliminary plat, construction plans, final plat) such that the project is viable.
Commercial is completely different in this regards as often you're in an infill location and water, sewer, and drainage are sufficiently sized with capacity in the existing right of way. Your only requirement as a Developer is to ensure you connect (tap) in to these mains and meet jurisdictional requirements which are fairly simple, ex: grinder pump before into a sewer main. It's still part of the development, but it is a fraction of the overall project cost and you're not having to solve many problems to get there. It also isn't where the focus of the Developer is (or should be) because it isn't the part of the project that is likely to blow your budget - unless you're doing a major commercial development in an infill location and doing a lot of sub-surface work.
Hope this gives some insight. Happy to answer follow-up questions.
I have a similar background in lot development but probably a different market based on some of your comments. I’m in areas that might take 3-4 years from identifying a deal to fully entitling paper lots. Where do you see the risk vs reward for lot development going to next few years? I guess a market where lot development is more of a “manufacturing mindset” like TX, GA, FL, and NC minimizes risk with a shorter cycle time, but there’s also less barriers to entry for competition. Longer deal life makes it tough to do any sort of capital planning and adds more potential deal killers. Just seems like it’s tougher to justify traditional lot development margins with more risks every year. Curious your thoughts on it.
What I've learned over the last few years from networking with other developers in other markets is the operating dynamics for land development across markets varies a lot - much more than commercial. But here are some big picture thoughts that I believe apply broadly:
Big picture, I think we're going back to a more normalized operating environment. As you said, entitlements are taking longer and getting more complicated across all markets. The demand for housing is still there and will likely increase as rates come down over the next 12 - 24 months. I don't think we're going to see the level of speculation and aggressive decision making we saw a few years ago, but I think we'll return to a very healthy operating environment.
But as I said in the beginning, this is highly dependent on what market you are in. All of the above is for not if you're living in Detroit, Michigan. Land development in some ways is riding the wave and it certainly helps if you're in a market that's experiencing new jobs, population growth, and household formation. From there, it's all about selecting the right submarkets and finding the right tract to make a deal feasible.
That's probably the best I can answer broadly. But happy to answer specific follow-ups or can dive into the weeds of numbers.
I appreciate the detailed response. I generally agree on the macro trends, current cycle, and human capital. Having been at a builder during the rate uptick, I don’t think I agree that there’s going to be a huge change in demand at 5-5.5% 30-yr rates, but we’ll see. And I 100% agree on market location… just look at the executive boards and senior management of public builders. They all pull from successful markets. An ok operator who’s successful in a growing market is going to get more looks than the best operator in a stagnant market like Detroit.
I’m curious about your thoughts on typical profit margins versus risk at the deal level. Rule of thumb I’ve seen is to target 15-25% gross margin on lot entitlement and development. Forestar is single digit net margin but they focus on fully entitled deals so it’s a different risk profile. Where do you feel comfortable contracting a deal and do you see margin erosion at all during the life of the deal?
Newer developers seem to like signing a lot purchase agreement with a builder early on. I feel like that caps your revenue but leaves you exposed to cost fluctuations (or even scope change during entitlements). I don’t know that the traditional 10% builder deposit, especially if it’s payable in milestones, adequately assures performance. I’ve seen builders terminate deals and the developer left developing for free just to get out of loan guaranties. Even moving around lot prices/escalators can torpedo returns. What’s been your experience with builders terminating your deals or retrading after the end of their DD?
Fully transparency… I’m sitting out lot development in my markets right now. My partners and I have found more attractive deals in the value-add space given shorter deal lifespans and more certainly going into the deal. But again, that could just be our markets.
@Esque_ has done a really good job - thank you.
If anyone is interested in additional readings / resources, please see below:
Homebuilding Industry
D.R. Horton: Building A New Model
I appreciate you sharing your knowledge; it's not often that such a detailed experience is shared so freely. I'm interested in finding out more about your experiences with self-builds and land development!
Land development and homebuilding take time, planning, and teamwork. The key is to understand the local rules, work with the right people, and stay on budget. Start small, learn as you go, and be patient—real success comes step by step.
It's very kind of you to provide this; it's uncommon to get perspectives from someone who has experience in both residential development and CRE.
Would you be open to sharing a bit more about your career path and how you made the jump to doing your own deals?
I’m currently 21 and working at a civil consultant focused on land development projects. I’ve been trying to network with local developers and get my foot in the door on the ownership side, but I’m finding that I don’t quite have the experience yet that most are looking for.
How did you know it was the right time to go off on your own? What did your first deal look like, how did you find it, structure it, fund it? And what were some of the biggest challenges you ran into early on?
I'm going to keep details pretty light here beyond what I offered in my original post.
If you're 21 then I imagine you're right out of university working for a civil engineer? Which means I assume your background is in civil engineering?
There is no one size fits all in the industry. But getting a solid understanding of the civil construction side of the business is certainly a great way to pivot into a Project Manager role for a Builder or Developer. From there, you'll have to pick up the finance, debt, equity, and other sides of the business. You will never know it all (and I still don't now), but you'll learn enough to make the go of it to try to do something on your own and then learn as you go along. None of this is rocket science.
As far as going out on my own - let's just say one door was closing and at the same time another opened. Then a few years later the second door closed and I decided it was time to make the move.
Thank you for sharing your knowledge. It's helpful to have seasoned perspectives on homebuilding and land development from someone who has worked in both fields.
How do builders determine what they can pay for a finished lot? Is there a formula you follow that breaks out the composition of a finished home sales price, inclusive of lot price paid by builder, builder hard costs to build the home, and so forth?
Also, how much margin do you think the largest builders have on their asking price, for a tranche of homes being sold for BTR purposes? Ie can a buyer cut 10% off that without offending the builder, or would that equate to the entire margin?
Typically production builders want the cost of the lot to be 18-25% of the average sale price of the home. It will be different from market to market but that is the good rule of thumb for basic underwriting.
Semi HCOL (western) market, our land cost is more like 25-30% of home sales price.
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