Is the NVR Model the Way to Go?

"We've had 70 sales in the first 70 days of 2009," the president of Bradenton, Fla.-based Neal Communities says, "and we actually made money in January, the first month in five where that's happened. But remember, we only make money on closings, not sales, so the money we made in January is from houses sold in 2008."

How is it that Neal is in such good shape, actually reporting increases in both revenues and closings in 2008? (Neal will be ranked in this year's Professional Builder Giant Report on 2008 housing revenues of $65.9 million, up from $64.7 million in 2007, and closings in those years jumped from 136 to 239.) Well, you might call Neal's strategy land-heavy, but it's also debt-light. For a number of years, he's been buying land when he finds a good deal for cash, then entitling it to the maximum density he can get. But he doesn't always build to that density.

This strategy allows Neal to build to the market. Whatever product will sell best is what he builds. No one complained when he down-zoned sites to build expensive houses on big lots, when that's what people wanted to buy. And when the crash hit, Neal quickly shifted away from building country club communities with homes priced from $500,000 to well over $1 million. Instead, he is now building small, affordable detached homes as small as 947 square feet, priced at $109,900.

My point is, there's more than one way to skin a cat. By staying away from leveraged land, Neal keeps his options open. If the luxury market comes back, he may go back to building big houses for rich snowbirds. And because he owns his land free and clear, he doesn't have nervous bankers with sweaty palms.

Of course, it took a lot of good years to get Pat Neal to where he is now. "When I was young, I bought land with equity partners," he admits. "But now, I don't need them. I like to buy land when prices are low, like now."

Young builders who want to stay away from the public markets might be wise to follow Neal's game plan. When the market comes back, buy land with private equity investors, but build a war chest of your own capital. The next time the market heads south, you can use that war chest to buy land for cash at attractive prices and put yourself in Neal's position.