Land-Light, Born Of Necessity, Comes Of Age As Opportunity

[Editor's Note: With this piece, The Builder's Daily welcomes Scott Finfer to our team of contributors. Scott, whom many of you may know from his days with KB Home as a senior-level land acquisition and strategy executive, has over 25 years of experience in the real estate industry, having acquired and developed over 10,000 single family residential lots across various markets and regions. Data allows Scott to create and execute market strategies, community designs, asset management plans, and development projects. We're excited to have Scott contribute – from ground level – to team TBD!]

There is a lot of talk about getting “balance sheet light” on land acquisition.

This is evident publicly through the relatively recent emergence of entities such as Forestar Development, which has a mission to serve DR Horton (and then other homebuilders).

Or, more topically, the recent spinoff of Millrose Properties, for Lennar first, and then others.

This is not a new concept.

As an unintended consequence, NVR was forced to deal with an asset-light model 30 years ago. In April 1992, as a result of the early 1990s recession, the company filed bankruptcy. In September 1993, the company emerged from bankruptcy protection and once again became a public company.

However, they were restricted in what and how they could buy, effectively forcing them to seek low-friction, balance-sheet light, and highly efficient lot takedown schedules.

It was not optional for NVR, it was survival.

But that’s the interesting part of the story.

The weakness became a super power.

No one in the country is better than NVR in creating “balance sheet light deals.” Check out NVR stock. It's highly efficient with capital and they are indeed the best in class. NVR plays a slow-and-steady long game. NVR does not have the highest profit margins in a strong housing market. When the crash came in 2008, NVR did not see its profits crash during a home building blood bath. NVR is the only major homebuilder to have made a yearly profit throughout the crisis.

To put this idea of “weakness becomes superpower” into context, consider Southwest Airlines in the early days. Circumstances forced SWA to have all flights from Dallas land in adjacent states before continuing service. All the other airlines were hub and spoke. SWA was forced to play point to point. Instead of surrendering, they grew to be extremely efficient. This created an edge. They could turn the planes faster than the competition, and they made money going from point to point. Southwest Airlines (LUV) was profitable for 47 consecutive years, from 1973 to 2019. Covid ended the winning streak. Since the deregulation of the U.S. airline industry in 1978, there have been over 160 airline bankruptcy filings. Almost every major U.S. airline, except for JetBlue and Southwest, has undergone bankruptcy proceedings in the past four decades.

Super Power indeed.

Makes you wonder what is going to happen to the land business?

The answer is simple. Tremendous opportunities await those of us willing and able to support this “new” type of transaction. If you understand the why of “asset light,” there is a long list of homebuilding companies that need help. Not everyone has a Forestar or a Millrose to lean into.

Examples of reasons and results of asset-light include eliminating carry time, lowering carry cost, and creating an ecosystem to serve the builder's operating model.

For example, it might be as simple as allowing a builder to take the land down as needed. Or asking for shovel-ready paper lots versus selling at P Plat. It takes capital to do this. So, if you are a paper lot farmer who ties up property and expects to sell the paper before – or at the same time as – closing on the land, you better get ready to change your model. The builders do not want to buy land and then have to wait 9-12 months to get construction drawings.

Those days are coming to an end.

Anyone who can create a model that starts with the homebuilder's needs, and is organized around realizing the efficiencies together will become an irreplaceable trade partner.

I know all of the lot buyers are working to be efficient. With that knowledge, we should all be positioning ourselves to provide balance sheet support, accelerate development, and exploit the opportunity. If you don’t, another company will step in and do so.

No two builders have the exact same playbook. But at the end of the day, one or two strong alliances can go a long way. So, the next time you have the chance to talk with the land acquisition executives, do not be scared to ask questions.

Such as:

How can I help you structure deals in an asset-light manner?”