Big builders can usually survive on lower gross and net profits than smaller builders. But small builders have some advantages of their own.
For example, small builders typically are faster and have more flexibility when making business decisions. They also have lower amounts of overhead and higher levels of local knowledge. Those traits can come in handy when attempting to find and purchase land to build on — a potentially profitable venture, but one that comes with increased risk.
Knowing how to minimize those risks and maximize efficiency can make a significant impact on a builder’s bottom line. During an education session at the 2018 International Builders’ Show, Illinois attorney Richard Guerard described several ways builders can get creative in finding and obtaining land. Some points to consider:
Cultivate a network of people who may be aware of available land now or in the future. “Don’t be shy about letting everyone know you’re looking for land,” Guerard said. “If you let enough people know, eventually you’ll get your share of business. Banks, family, friends, attorneys, accountants, engineers, land planners and municipality staff can all be a tremendous resource.”
- When just getting started, you can also try to establish a joint venture with a larger builder to leverage his or her experience and resources.
- Work out an agreement in which you could develop a subsection of a development. But be careful not to compete with the adjacent properties on price alone. You will have to design your subdivision so that you have a unique product.
- Some developments are so large the builder may end up with unused land that you can purchase — A smaller builder doesn’t need a huge tract of land to be profitable.
A top issue for most small builders is, of course, a lack of financing. “It’s challenging, but it’s gotten a lot better in recent years. Banks are starting to make more loans and investors are starting to get interested again,” Guerard said.
When working with banks, investors and sellers, there are a wide variety of payment arrangements that can be mutually beneficial. Keep in mind you don’t always have to be the highest bidder, as long as people trust you to close the deal and get the job done. Among the examples Guerard highlighted in his presentation:
- Agreeing to a lease-back arrangement, a popular option especially when buying farmland.
- Allowing the seller to set up a “1031 Exchange” enabling them to defer capital gains taxes.
- Working with the seller to pay them as the lots sell, essentially making the seller your partner or financier.
- Partnering with a group of other small builders to purchase a plot of land together.
Those with a paid, full registration to the 2018 IBS also get a complimentary one-year subscription to IBS Education on Demand. They can download full recordings and handouts of presentations such as Competing with Big Builders by Developing Your Own Lots, as well as other sessions. Visit BuildersShow.com/ondemand to learn more.
This article was originally published on the NAHB website on February 9, 2018. To view the original click here.