Land Developer & Home Builder Partnering up

If a land developer & home builder partners up to purchase 42 acres to build 177 homes on, based on work load for each (develop vs build homes), what profit sharing would be an fair split?

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Comments (2)

Nov 21, 2017

You almost never see the homebuilder as a financial partner in the deal. Usually they will enter a contract (Lot Purchasing Agreement or LPA) with the developer of a particular site to purchase lots at market rate. Market rate typically yields a ~10% profit margin to the builder.

The homebuilding business is a completely different game from development, as you can see by their return. They are more akin to manufacturing firms than real estate firms (I've heard anecdotally that IB industrials & RE groups will fight over homebuilder deals), and are generally public which is why they rarely take any risk on their balance sheet. The developer takes on all the entitlement, environmental, development cost, market and most importantly, financial risk in purchasing and preparing a site to build homes on. The homebuilder will have nothing at risk besides a deposit (typically 10% of the total sellout value of all the lots), and will purchase lots at a contracted pace while simultaneously selling homes, maybe buying a dozen or so at a time to limit their exposure. They will buy the lot from the developer, graded and with infrastructure and utilities and all that shit in, and throw up a house so incredibly fast it blows your mind.

The builder can walk away at any time and any other homebuilder could step into their shoes. They really don't bring much value to the deal, which is why all the upside (and downside) accrues to the developer. There are some exceptions to this - sometimes the builder will actually buy all the lots at once - but I've never seen a homebuilder actually perform horizontal development.

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Best Response
Nov 21, 2017