more from Splotto in response to what is bolded.
Once the home builders have purchased big blocks of land, at current market rates, they're locked in for the ride. This is how they go bankrupt.
We don't buy property until about 2 seconds before we sell it. We have a AOS in place where if we fail to settle, we lose our deposit. The exposure in minimal. Any large operation that makes a policy of buying raw land outright is destined for an early death. Of course there are some parcels that are worth the risk, but as a rule, no one in this market buys land until all permits and approvals are in place (and in our case when we are flipping it, until an ultimate buyer to flip the property to has been locked in).
Take an example of a project I worked on in Riverside County, California. Before a single home was built, the home builder bought the land for $6 million and put in another $128 million for the trunk-line sewer, freeway access road to the building site, major earth moving and planting to prevent erosion. That is $134 million before we put in a finish grade for the model home and the very first block of home sites.
A $134 million investment before any structure is built. Yet, even on an accelerated schedule, this work has to begin at least a year before the model home / sales office gets built. In this particular case it took 18 months.
Agreed. Once the project starts, you are in for the jackpot. There can be no doubt. However, you exposure is limited to that project.
Since our leverage is backed up with revenues and assets, the level of risk on the ongoing projects, let alone a single project, is usually not lethal to your business. The days of over-extension by real estate lenders have really disappeared (at least in this market).
Some home builders purchase finished lots which means the entire investment from day one.
There are 2 types of buyers for finished lots: Approved Lots and Improved Lots.
When you buy approved lots from us, you get an approved plan ready for you to build and sell. The buyers of these projects are usually medium size builders on smaller projects (less then 150 lots). The smaller the builder, the smaller the project (they are limited by what they can borrow). So these people have exposure to the entire downside since they are in for the whole project from the beginning. However, at a pace of about 1 house a week (that is about where sales are now) you can out of a 50 lot job in a year. That's a short window.
The bigger players like NVR buy improved lots from people like us. That means that we build all the improvements and deliver finished lots to them. All they do is build and sell the house. They are required to take down a certain number of units a month based on an approved pace. The nature of these deals vary but they can walk (default) from the deal and suffer the appropriate losses to invested capital. Clearly we bear most of the risk at that point but it wouldn't be fatal. The real exposure is to the buyer for the money they funded the project with to date. It is certainly not fatal.
I guess my point is this: The medium to larger players, along with the banks, have created an insulated system where downside is very limited on a per-project basis.
Splotto |
