NVR Inc & US Land Development

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When you're approached by builders, we've seen them move from more of a pure land purchase to where they want to control the lots through options. Which do you prefer, and does it depend on the market, whether someone's coming to you with an option contract or with an outright land purchase?

We'd prefer the outright land purchase because when we are doing contracts with builders, if I did an outright land purchase, I'll come to an agreement on a front foot price, but we normally put a true up in our land contracts. If I sell a piece for $1,700 a front foot, I'm getting $85,000 for a 5- foot lot at closing, then I would normally have a 21%, 22% true up. To the extent that the builder exceeds 22% of that $85,000 lot, if the retail price is in excess of that, I get 22% of everything over the target number.

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Are there times in the market where the options are more attractive, where an asset-light home builder like NVR has an opportunity to acquire a lot more land?

Now is one of those times, and everybody's doing it; NVR is one of them. If you look at their historical performance you will realize when they contract, they do close, so you understand that they're no different, they're mitigating their risk, and if it's a bad market, they'll walk. This is how they're accustomed to buying land and they'll weather things more than a builder who is strictly doing it to mitigate their risk, when they would normally take it on their balance sheet. I am currently discussing a piece with them, which I look at differently in this model on options versus other builders because the other builders are doing it in anticipation of a downturn. Not that NVR is not, but this this is the normal business practice from them.

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We're always looking for disconfirming information; is there anything about NVR that you don't enjoy?

We've only started working with them, but during a good market they're a hard company to work with because of the way they do business. We're working on a deal with them in one of our communities and it's been a drawn out process on the land contracts. Once you get through your first one or two it's an easier process, but if you're allowing them to do takes, it has a lot more provisions in the contract than you would normally deal with. They're harder to get the first deal inked with, because as the seller, you're always wondering why all of these provisions are there. Is their intention to go forward or is this their way to weasel out of something, but that's how they do business.

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