Source: BIG BUILDER Magazine
Publication date: April 1, 2006

By Jamie M. Pirrello

In the spirit of keeping it simple, here are four land position dos and don'ts that may help home builders weather today's rapidly changing environment.

Leverage is two-faced. In better times, leverage is to profitability as steroids are to home-run hitting; in other times, leverage is playing with fire. “In an adjusting market, the cost to carry land sucks cash flow from the profitable sale of homes,” observes Mike Hall, CEO of Hallmark Communities in San Diego. “You have no money to grow, and if operations don't make enough after taxes to cover the land cost, you create a spiral that accelerates. You make business decisions on a strictly defensive basis, and your focus becomes how not to lose money instead of how to make money.”

Remaining disciplined gets at least some of the credit for Hallmark's management honors over the years. Hallmark doesn't borrow money to purchase land, avoiding the leverage trap. Is it a growth inhibitor? Somewhat, but Hall points to “the three recessions or downturns they have built through.” You ca...

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