Never say never when it comes to land

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At our Professional Builder Benchmark and Avid Leadership Conference this month in Phoenix, I had a conversation with Atlanta-based international developer Charles Sheron, who has maneuvered his company, The Sheron Group [1], through five housing recessions and thus qualifies as an expert on what action builders ought to take and when to take it. I asked him whether builders should even plan to develop land as long as the current oversupply of lots persists.

“It's a local question,” he said. “The first order of business is to make sure you survive this downturn. And as long as you can buy lots for less than replacement cost, with very soft terms, that's probably the way to go. But you can't count on that if the market comes back.

“The other thing is, because of the energy crisis, there are a lot of lots, in distant ex-urban locations, that may never recover their value. But if you are willing to take that gamble, in the next year or so, you can pick up some really deeply discounted lots that may pay dividends a couple of years later.”

Sheron said you may think you don't need to develop land for the next 10 years, but predicting market conditions beyond the next two or three is a dicey thing. Sheron took the gamble on distant lots in the Atlanta market in past recessions based on his assessment that “eventually, they will all come back into play, and builders will need to develop land again.” But he wasn't dealing with $4 a gallon gasoline prices then.

“The other thing I'm concerned about now,” he says, “is how municipalities will look at land that is entitled now but undeveloped or in various stages of development. How long will they wait for a builder to use that land before pulling the entitlements?

“It's really hard to address this subject generically,” Sheron cautions. “It's so local. But in Atlanta, it appears some of the public builders are already flipping over from land sellers to acquisition mode. They're buying!”

The best policy for strategic planning: Never say never. If you've had to develop land in your market in the past, you probably will need to do so again. And remember, it can take years to entitle and develop raw ground.