Cost Advantages Allow You to Pay More for Land

Posted by on May 14, 2015 in Blog | No Comments

By John Burns May 13, 2015

I learn the most when others tell me I am wrong. At a recent roundtable I moderated for 20 Washington, DC regional home building and development executives, we were discussing the challenges private builders face competing with public builders for land. The following chart shows the difficulty of buying land at a price that supports profitable home building, as lot prices (in green) began rising before new home prices in 2010 and 2011 and shot up dramatically in 2013.

I attributed the difference to a better cost of capital for publicly traded builders. The largest land owner in the room chimed in:

“I disagree. The biggest advantage is having lower construction costs. There are two builders in this room who continually pay me more for land, and it is because they have lower construction costs.”

Everyone agreed and knew which two builders he was referring to—one was publicly traded, and one was privately held. While the public builders in the room agreed they had lower costs of capital, they pointed out that corporate charged them “private capital” rates for their land holdings, effectively holding them to the same land acquisition standards as private builders. While I had heard this many times before, I never really believed it because public builders often tend to be the highest bidders. That may be because public builders tend to have lower costs, but there are plenty of private builders who are large in their local market that have the same competitive advantages …