Real Deals

Land developers get squeezed as big builders' share of market grows

dbracken@newsobserver.comAugust 22, 2012 

RALEIGH

Late last week homebuilder PulteGroup paid $2.72 million for 24 lots in the Highcroft Reserve subdivision in west Cary.

The lofty purchase price – Pulte paid $113,354 a lot – is likely to bring back memories of the boom years, when homebuilders ran up the cost of dirt in a mad dash to secure as many home sites as possible.

But Pulte most certainly hasn’t lost its mind, and a closer look at the deal shows how much residential land development has changed in the past five years.

Highcroft Reserve is in an area known by developers as “sector ten,” which is considered perhaps the best market in the Triangle to sell homes priced at $350,000 and above.

Pulte is developing the property with Preston Development, a land developer that acquired the tract a decade ago. Before the housing bubble burst, Preston could have borrowed the money to develop the site itself and then sold the lots to either a handful of custom builders or a national player like Pulte.

But those days are largely gone now.

Banks today are extremely skittish about lending to land developers, in large part because builders such as Pulte will only commit to rolling options. A rolling option means a homebuilder agrees to buy a certain number of lots as it meets certain sales milestones in the community.

Such options reduce the risk for homebuilders, many of whom got caught with way too much land on their books when the market collapsed.

Pulte has a rolling option to take all of the 206 lots in Highcroft Reserve. Base prices for the homes will start in the high $200,000s, but with additional options some of the homes could approach $500,000.

“They feed into great schools, and with the development of 540 it creates a great access for people getting up to the Research Triangle Park area,” says Lawrence Lane, Pulte’s division president for the Triangle. “That part of west Cary, west of N.C. 55, we see it as the future for a lot of growth.”

The deal provides Preston with a well-financed partner easily capable of buying all the lots. The downside is that although Pulte is paying a premium for the lots, the actual structure of the deal means less profit for Preston.

“The days of having a big margin in what we’re doing has been compressed down to trying to figure out how to make the project work and see if you can stay in the process until maybe the sun will shine on us again,” says Julian “Bubba” Rawl, a partner with Preston. “It’s been sort of a tough market to drill down into a profit center on.”

In the case of Highcroft Reserve, Preston was in the fortunate position of owning a prime piece of real estate where Pulte knows it can sell high-end homes. Such partnerships have become increasingly rare in recent years as the number of lots on the ground has dwindled and large builders have decided they’re better off doing land development themselves.

“Everybody’s having to sort of self-supply,” Rawl said. “The days of let’s go build it and let a group of builders come subscribe lot positions with us, that’s getting few and far between.”

Lennar, for example, is developing a 90-acre tract adjacent to Highcroft Reserve, where it plans to build a 288-lot subdivision.

The absence of land developers such as Preston in the market is most problematic for smaller custom homebuilders, who are not in a position to finance their own land development.

Preston also owns another smaller tract near Highcroft Reserve that has room for 53 lots. The company plans to sell those lots to custom builders.

“It’s just the size that three or four guys can go in there, and it will probably be a two-and-a-half-year deal,” Rawl said.

Such opportunities could become rarer in the coming years, particularly in southwest Wake County and other areas of the Triangle where residential land is becoming scarce. Southwestern Wake, which includes Cary, Apex and Morrisville, now has less than two years of available lots at the current pace of sales, according to Metrostudy, a research firm that tracks Triangle housing trends.

That’s a pittance when you consider that it can take 18 months or longer from the time a project is announced to when houses are going up.

“It’s hard to say this, but in 12, 18 months there’s actually going to be a shortage of lots available for those kinds of builders,” Rawl said. “The corporate folks will continue to find positions.”

Bracken: 919-829-4548

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