Land Acquisition Criteria
What Defines A Small Project?
If you are land developer or a land broker trying to sell land to a homebuilder, you probably are trying to find land buyers that match up with the location, price points, product type, and project size. The last item – project size – has become an interesting discussion in the infill markets where larger parcels are harder to find.
In years past, I had found that many of the larger builders needed a minimum of 75 lots in a prospective project. Then the minimum became more like 50-ish. These days I have seen major public builders buying as few as 20 lots in the markets that lack the larger tracts. That said, it seems that the acquisition of these smaller parcels depends on the revenue and entitlements.
With respect to revenue, it seems that it really translates to minimum profit. Depending on the builder, I have heard the need for a minimum of anywhere from $20 million to $30 million in revenue. Assuming these builders are targeting a 10 – 12% profit margin, the minimum profit threshold would be in the $2 – 3 million range. If the total revenue is $10 million and profit is $1 million, these builders seem to be saying that they do not wish to focus their team’s management time on a project that does not generate enough total profit. So while I have heard the revenue being one of the key criteria, I do not think I have heard anything about minimum profit. What if the revenue was $10 million but had a juicy profit margin of 25%, yielding $2.5 million in profit?
With respect to entitlements, I have found that many homebuilders will take on the entitlement process, assuming the close of escrow occurs after the entitlement approvals have been obtained. I have seen projects where revenue met the builders’ minimum threshold, but these builders did not want to manage the entitlement process unless a bigger project. It has never been clear to me what that entitlement threshold might be and it probably varies from builder to builder.
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