The lots weren’t pretty.
Filled with rocks, they’d proved nearly unbuildable, prompting previous builders to pass them over. But they were affordable and located in a prime community.
After spending nearly six months trying to convince a bank to finance the project, Texas-based Inland Homes was able to snap them up, make a deal with a rock excavation contractor, and turn around 24 houses in 18 months for a tidy profit.
Since then, the company has become “kind of a savior for developers with troublesome leftover lots,” says William H. Hoover, president of Texas-based Inland Homes. “You have got some ugly lots, let us come and finish out your community.”
Picking up land rejected by larger construction firms is just one of the strategies smaller home builders are devising to cope with the increasingly distressing land shortages that are plaguing builders across the nation. A record two in three home builders report low or very low lot supplies in their areas, and nearly 60 percent named the cost and availability of developed lots as their biggest hindrance in meeting the demand for new homes.
“It’s not like it used to be where there would be 20-acre pieces that you could put 100 home sites on and maybe put a little community park in,” says American West Homes founder Larry Canarelli. “Those pieces don’t exist now.”
As land becomes more scarce and expensive than ever before, small- and medium-sized U.S. builders have been forced to get creative about finding buildable lots. For many, that means going where larger public builders can’t—or won’t.
Specializing in infill projects
Chicago-based Lexington Homes has skirted around the lot shortage problem by pinning its business model on infill development in urban and close-in suburban communities. By building new homes on vacant or underused lots within established neighborhoods, the company is able to deliver the types of homes that buyers want in areas with in-town amenities.
Infill building has increased nationwide as builders seek “pockets of opportunity” in dilapidated buildings, small parcels of land and castoff lots other builders don’t want, says the Chicago Daily Herald. Infill building represented around 21 percent of new-home construction in metro regions from 2000 to 2009, and nearly seven in 10 builders say it’s growing in popularity. Some land-strapped cities, such as Portland, Oregon, are relying on infill development to help solve their housing crises, providing niche opportunities for smaller builders within these markets.
Infill projects usually crop up in places with high home prices and robust mass transit systems. Many of the lots are “eyesores, dumping grounds, non-income-producing assets for communities and municipalities,” says David M. Brown, a contributor for the Arizona Republic.
Lexington’s blueprint for success is to build the right product in the right place for the right price, says Lexington co-principal Jeff Benach. “We’ll do single-family, multifamily, midrise, even rental if the opportunities present themselves.”
Getting in the development business
When Michigan home builder Bob Schroeder realized local land developers weren’t keeping up with builder demand, he took advantage of their inactivity to jump into the development business. After focusing exclusively on building homes for more than a decade, his company started buying up undeveloped lots for its own use.
“Rather than wait for developers to move in front of us, it seemed like a real opportunity for us to step up,” says Schroeder, president of Mayberry Homes.
Land developers have had a hard time catching up since the recession, when low lot absorption rates prompted them to stop applying for new development permits and start shedding their land acquisitions.
“Since 2010, lot inventory has dropped 25 percent at the same time that housing starts have increased 90 percent,” says David Brown, regional senior vice president at Metrostudy, which tracks U.S. housing trends. “Development activity has grown but still has not caught up with the pace that lots are getting absorbed.”
Mayberry initially intended to supply lots only for itself, but the venture has been so successful it’s considering opening them up to other builders.
“There’s been enough opportunity out there so now we’re looking at that as a separate business,” Schroeder says. “If we have the ability to produce lots in larger quantities than Mayberry Homes wants, then we could be looking to bring in other builders to some of the developments.”
Turning to private lenders
Buildable lots aren’t just getting harder to find—they’re also difficult to finance. Community banks have put the brakes on construction lending growth over the past 12 months, forcing many builders to seek alternative avenues for funding new land acquisitions.
According to last year’s BUILDER 100 survey, financing remained a top area of concern for home builders heading into 2018. Although underwriting criteria have loosened and credit availability has grown, many smaller regional builders are having a hard time qualifying for acquisition, development, and construction (AD&C) loans from their local banks.
On the other hand, the tightening of AD&C lending has opened up a new cottage industry of private lenders offering higher-rate, short-term bridge loans for buying land. Builders can use these loans for making acquisitions and then once the land is purchased and permits are pulled, they’re often able to replace those loans with lower-rate bank loans.
“Builders put themselves in a great position when the land is owned free and clear, and when plans are drawn and permits pulled,” says Aaron Norris, vice president of the Riverside, California–based Norris Group, a private lender. “It shows some personal investment into the project and takes uncertainty out of the project from the lender perspective when a build-ready project is presented.”
With a combination of bank and private lenders, home builders can get their projects off the ground while still keeping interest rates reasonable.
Overall, the key to acquiring buildable lots in today’s market is to be ready to leap whenever opportunities pop up. That means doing more front-end planning around land acquisition. One way home builders can position themselves to snap up available lots is to establish a positive reputation with lenders and property owners in the community.
Partnering with a respected third-party builder home warranty company like PWSC, for example, sends a positive message to lenders as well as home buyers. With an insurance-backed home builder warranty program in place, small to medium-sized builders can demonstrate their commitment to quality construction. New-home builders’ warranties can also help reassure residents within established communities where infill development is occurring that the new construction will help buoy their property values rather than drag them down.
Incorporating a third-party builder’s warranty on new homes is just one part of a larger strategy many small to mid-size home builders will need to employ to keep new housing starts coming in an increasingly land-strapped market.
Following a wild 2021 in the home building and real estate markets, PWSC assembled “Five Residential Construction Trends for 2022” to kick off the new year. Now more than halfway to 2023, we thought this was a good time to revisit those predictions.