National Housing Market OutlookLand Development

Banking on the Future: Builders and Land Bankers Grow Together

Will Frank
Don Walker Headshot
danielle Nguyen photo

Will Frank

Don Walker

Danielle Nguyen

April 24, 2024
  • Optimistic homebuilders are contracting to buy land to replace the land on the homes they are currently selling and to set themselves up for future growth.
  • Investors known as land bankers are buying the land on behalf of the homebuilders and earning a fee to own the land until the builders are ready to buy each lot as needed.
  • The relationship is working very, very well because:
    • Investors are receiving a 10%+ per year yield on an investment that is much riskier than treasury investments and much lower risk than a pure equity investment.
    • Homebuilders can assure their future land supply without tying up most of their cash and have the flexibility to renegotiate the future land price if there is a significant market correction.
  • Many land bankers with multiple niches and risk/reward profiles have emerged. For example, some prefer smaller or shorter-duration deals, while others prefer larger or longer-duration deals. Some prefer suburban locations, while others prefer exurban locations.
  • Most of today’s land banking deals are structured much differently than the last cycle, with less risk and lower returns, and look more like high-yield debt investments than low-yield equity investments.

Our data shows that public homebuilders’ lot inventory has grown in recent quarters, with fewer lots owned (shown in blue below) and more lots optioned, especially with land bankers.

Land bankers are more disciplined than ever. They carefully monitor macro- and micro-economic trends and assess factors such as the builder’s financial health, entitlement and land development costs, and market conditions. Many have set up very efficient due diligence processes, often with our consulting team, which helps them respond to builder requests quickly and cost-effectively.

Both builders and land bankers see their relationship as a long-term strategy for managing capital, ensuring that both sides are compensated fairly for their efforts. 

Recent statements from builders show a strong focus on land banking in 2024 and beyond:

Lennar (March 2024): “In the first quarter, we continued to effectively work with our strategic land and land bank partners, where they purchase land on our behalf and then delivered just-in-time homesites to our homebuilding machine.” 

  • “We have now rekindled our focus on a strategic spin-off that can be cleanly focused on fortifying durable land strategy.”
  • “Spinning our own land, excess land in a taxable spin, we believe that we can create with permanent capital, vehicle that can option, develop homesites for Lennar and recycle capital into new homesites while distributing market-appropriate returns to shareholders.”

Meritage Homes (February 2024): “We still have very deep land banking relationships that we continue to cultivate, and we’ll activate them as needed. As we look into the next couple of years and expect a period of high growth, we don’t expect to finance all acquisition and development with our own capital, and we plan to leverage these relationships with our land bankers to ensure we grow responsibly.”

PulteGroup (January 2024): “Since making the decision to expand our use of land banking starting 15 months ago, we have placed approximately 25 communities, representing $1.5 billion worth of future land and development spend, into such structures.”

How land banking works

  • A large institution capital provider (land banker) agrees to buy land, often already entitled but early in development, and gets paid a fee. They make money by keeping the land until the builder buys finished lots to build homes.
    • Builders typically purchase lots on a schedule that aligns with validated market demand for the builder’s planned homes. JBREC is often the company validating that demand before the purchase.
  • The builder puts down a non-refundable deposit, usually up to 20% of the cost for the developed lots, and agrees to develop the land using funds from the land banker.
  • The land is finally sold to the builder at a price that covers the land banker’s costs and an appropriate risk-adjusted return. That return has been rising in the last few years, along with other interest rates.

Land banking helps builders manage more lots with less capital and reduces their financial risk by keeping the land off their balance sheets. Although builders pay more than they would to a traditional bank or their bondholders, land banking can improve a builder’s return on equity. It also strengthens the builder’s cash reserves, allowing them to seize other opportunities.

Land banking organizations look for safe, profitable investments. They thoroughly evaluate everything from the builder’s overall strategy to the specifics of the land and the projected profitability of the development.

  • The primary objective of a land banker is to take on a reasonable level of market risk and earn a reasonable return. Not all residential land deals fit the risk profile of land bankers, and each land banker has different risk/return requirements.
  • Projects in unproven markets or with atypical products are often better suited for a partner willing to share more risk and profit than a land banker, whose risk level is between a joint-venture partner and a traditional bank.

Land bankers and builders have become strategic partners.

Land bankers have become important allies for builders, giving them more options for better projects. This strategic partnership benefits both parties, reducing risk and the cost of capital.

Land banking will remain crucial to builders’ strategies for managing their resources more securely and sustainably. The evolution of the partnership between builders and land bankers reflects a mature, stability-focused industry.

Our experienced Consulting team stays busy providing due diligence and introductions for land bankers / builders as they deploy billions in capital annually for top builders and their “bread and butter” projects. Our Research team offers land bankers and builders the latest insights into market trends, backed by our comprehensive forecasts that span the for-sale, for-rent, and building products markets. Many of the land bankers and homebuilders first met each other at one of our semiannual conferences.

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About The Author

Will Frank
Will Frank
Senior Vice President, Consulting
Will manages and motivates a team of expert consultants to deliver outstanding analysis and recommendations for projects across the country.
Don Walker Headshot
Don Walker
Managing Principal
Don has 30+ years of experience in real estate finance and operations, including running a Top 40 homebuilder, and uses this experience to help clients make informed, strategic investment decisions in real estate. Don is passionate about build-to-rent, product and community planning, builder/developer M&A, and property and company valuations.
danielle Nguyen photo
Danielle Nguyen
Vice President of Research
Danielle manages, implements, and analyzes the housing market with a specific focus on for-sale and for-rent research. She is a research content creator who produces high-quality, insightful, and forward-looking housing research and a trusted resource (connector) for clients and those interested in JBREC’s research.

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