Public Homebuilders

What are all the different ways a homebuilder starts building a home? Is below the correct ?

  1. The homebuilder acquires the land outright on their balance sheet --> Hires the in-house development team or finds a fee developer to develop the lots --> Construction starts once the lots are finished
  2. The homebuilder partners with a land banking partner to keep the land off the builder's balance sheet --> Hires the in-house development team or finds a fee developer to develop the lots --> Construction starts once the lots are finished
    1. In this case, is the construction financing off the builder's balance sheet, the builder's revolving credit facility, or does the land banking partner also provides a construction loan?
  3. A residential lot developer owns the land and approaches the builder for (1) future lots in bulk, (2) future lots on a rolling basis, or (3) the lots are already constructed 
 
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All of the above are correct.  Some additional color and methods described below.

  1. This was less common post-GFC as the risk of land was front of mind for all stakeholders.  However, with the increase in the cost of capital and the competitive landscape for farm and ranch land, this (the Builder taking direct balance sheet risk) is occurring with increasing frequency as a means to secure sufficient, future lot pipeline.
  2. "Land banking" is becoming increasingly popular, but comes in a lot of forms with a lot of variance.  There is no market standard as many of these arrangements are a la carte based on i) the Builder and ii) the capital partner.  If you can imagine it, it probably exists in the market in some form.  However, the most common is that the land banking capital partner is taking on all of the capital risk, but is hedging this risks with above market earnest money / non-refundable deposits from the Builder.
  3. This is the tried and true model that has always and will always exist.  But as land has become increasingly competitive, this is happening less frequently in the market.
  4. While less common, some Builders will have a captive, affiliated Development company ("DevCo").  The DevCo operates as an independent, third party company that seeks to make profit as a traditional land developer, but has a handshake agreement / understanding that the Builder has priority on finished lots.  The best, public example of this is DR Horton's relationship with Forestar.  I've seen it a handful of other times, but as mentioned previously - not common.
  5. Some Developers will defer their compensation and provide "contingent" lots to a Builder.  This is most common for start-up Builders that do not have a sufficient balance sheet to execute on a full, market take down.  The Developer in return for deferring their payment gets some sort of incentive.  Generally I've seen an escalator on the finished lot sales price and participation in the home sales price.  So by way of example, let's say the market finished lot sales price is $100,000.  Perhaps the Developer agrees to a 15% escalator and 5% of the sales price.  If the full build cycle (break ground to close sale) takes a year and the home sells for $500,000, the Developer takes home $100,000 + $15,000 + $20,000 = $135,000 for taking on that incremental risk.
  6. Sometimes - rarely - a sophisticated land Seller is willing to joint-venture for participation in the project.  Arguably that's some sort of aggregation of several of the above.  Also, this is extremely rare as it takes a sophisticated land owner who is willing to wait (years) for the project to be realized.
  7. Increasingly we are seeing a form of #1 called "pod sales."  This is where a Developer fully entitles a larger project with set phases / sections.  The Developer is responsible for major infrastructure but then sells these "pods" to Builders.  These pods are effectively raw land that are ready for horizontal construction.  This allows the the Builder to mitigate raw land / entitlement risk but secure lot positions by taking on construction risk.  The Developer's value creation is substantively through entitlements and those major infrastructure improvements such as offsite improvements and thoroughfares within the broader community.
  8. This is a bit tongue and cheek - but never discount company acquisitions.  Sometimes there are smaller builders (in terms of annual starts and closings) that have built up a substantial pipeline of future lots via option contracts.  I've seen some publics acquire these companies and subsequently significantly downsize the actual company as they were more so focused on the future lot pipeline acquisition versus the actual day to day operations of the smaller builder.

Trying to think of what else I've seen over the years.  Would have to give it some thought of other ways I've seen folks get creative.  Big picture, you're on track and I'd rank them in terms of frequency / market share #1, #3, #2.  The remaining outlined above are de minims in the grand scheme of things.

 

What do these guys get paid throughout their career trajectory? I see their titles are like "Land Acq, Land Manager" and no others. Do public homebuilders ever offer carry or profit participation to their acquisition crew and are they rolling in it and barely working any hours?

 

#1 is correct

For #2, typically the land banker (in the context of a land banker performing the infrastructure work) will not lend debt to fund construction of bricks & sticks + construction outside of the infrastructure scope. Consider the homebuilder and land banker as two separate entities/capital structures to perform the work. The homebuilder will utilitize the B/S, credit facility, construction debt, etc to fund their portion of the construction WHILE paying the land banker to perform the work via an interest rate or some other unique/atypicaly structure. 

#3 is correct although the builder will typically take down the lots for them to construct, not the residential lot developer. The lot developer will take down the land and typically manage the infrastructure construction/costs with the lots sold at 'pad ready' 

 

Does anyone have any textbooks or pdf's I could use to go deeper into the above? Would love to learn more, currently interviewing with BFR shops and a group that is aiming to deploy a land financing fund. 

 

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