Currently Reading

10 Essential Tips to Reduce Home Builder Land Risk


10 Essential Tips to Reduce Home Builder Land Risk

As the market stabilizes and builders begin to acquire land, good land acquisition risk management techniques are a must

By Chuck Shinn June 30, 2007
Land acquisition risk management_land for sale_Photo by Kenneth Allen_CC by-SA 2
To start: Keep your emotions out of the land purchasing process and use an economic model. (Photo: Kenneth Allen, CC by SA 2.0)
This article first appeared in the PB July 2007 issue of Pro Builder.

Land and its affiliated debt has always been a home builder's Achilles' heel, causing many builders to fail.

As the market stabilizes this year and builders begin to acquire land, they need to reestablish good land acquisition risk management techniques.

Among the tips:

1] Don't pay too much for the land. Keep your emotions out of the land purchasing process and use an economic model: Work backward from the base home selling price to the finished lot or raw land cost to determine what you can afford to pay for the land.

2] The earnest money deposit should be refundable, based upon the findings during the due diligence period. Once you are satisfied with the research conducted during this period, the earnest money would become non-refundable.

3] Make sure you negotiate an adequate due diligence period to allow enough time to conduct all the basic studies required to ensure the project's feasibility and profitability. Preliminary research should include:

  • Market research
  • A feasibility study
  • An environmental study
  • A political study
  • A utility study
  • A zoning and improvement study
  • A preliminary land plan


4] The final property acquisition should be subject to obtaining the appropriate zoning and entitlements. You may pay more for the land, but it is a lot better than owning the land and not getting your zoning and entitlements.

5] You should negotiate a conservative land take-down schedule that matches or is a little short of the community's projected sales velocity. If you can't sell homes at the same rate as the lot take-down, you will have to inventory land to stay in the community, which will affect your cash flow.

6] Create a consortium of builders. A group of builders can afford to buy a larger development, spread the marketing costs amongst themselves, absorb the lots faster and create a community with more energy, excitement, and vitality.

7] Instead of developing the site for one product line, consider designing the property for multiple product lines. This will increase the absorption, reduce your risk and increase your return on investment.

8] Establish a professional development team. The land development process will rely on several people: a civil engineer, an environmental engineer, a land planner, a market researcher, an architect, marketers, merchandisers, and advertising agencies.

9] The balance of premium lots and standard lots should constantly be monitored and the lot premiums adjusted to ensure there will be premium lots available throughout the development's life.

10] Sell some of the development. Sell a section of the development to another builder or zone a corner for commercial use to reduce the risk and debt service. Having a couple of builders in the community with different product lines will increase the absorption rate.

As builders return to land acquisition and development, the purchase agreement needs to be structured to minimize the risk. During the last several years of the housing boom builders forgot about the inherent risk with land acquisition. Now is the time to re-instill the discipline to mitigate the risk.


Since 1975, Chuck Shinn Jr., a consultant and industry educator with a doctorate in business management, has improved the management skills of home builders to increase their profits, quality and customer satisfaction. He can be reached at [email protected].

Related Stories

Land Planning

The Present and Future of Land Demand

Two large housing trends are expected to push up competition for land, says Greg Vogel, founder and CEO of Land Advisors Organization. The white-…


Linda Purdy on TRI Pointe's Goals and Challenges in the Colorado Market

TRI Pointe's Linda Purdy shares her perspective on acquiring land, building homes at attainable prices, and other challenges for growing the home builder's Colorado division

Land Planning

Builders Want to Build but What About the Land?

"You can’t just pour more beans in the top of the funnel and produce more coffee.” 


More in Category


Create an account

By creating an account, you agree to Pro Builder's terms of service and privacy policy.

Daily Feed Newsletter

Get Pro Builder in your inbox

Each day, Pro Builder's editors assemble the latest breaking industry news, hottest trends, and most relevant research, delivered to your inbox.

Save the stories you care about

Lorem ipsum dolor sit amet lorem ipsum dolor sit amet lorem ipsum dolor sit amet.

The bookmark icon allows you to save any story to your account to read it later
Tap it once to save, and tap it again to unsave

It looks like you’re using an ad-blocker!

Pro Builder is an advertisting supported site and we noticed you have ad-blocking enabled in your browser. There are two ways you can keep reading:

Disable your ad-blocker
Disable now
Subscribe to Pro Builder
Already a member? Sign in
Become a Member

Subscribe to Pro Builder for unlimited access

Lorem ipsum dolor sit amet, consectetur adipisicing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.