'Landing' the Next Deal

In an economy where the housing market is claimed to have been one of the industries hardest hit, many US builders are not disuaded from identifying new opportunities. In July 2010 new home sales were at the slowest pace since they were first tracked in 1963. However, according to John Burns, an industry consultant, builders are snatching up land in bidding wars despite the market conditions. Or is it because of the market conditions?

Although the number of offers may be down, many land transactions are still receiving multiple offers. Most likely in part to new tax laws in their favor, many builders are surprisingly cash rich right now. Builders have spent over $90 million on land in the Phoenix area so far this year. The posh Hasentree planned golf course community in North Carolina recently sold for over $23 million. And the shopping continues from Florida to California. Such a buying spree is certainly in part attributed to the soft market and resulting "deals" on land. Additionally, land is a limited commodity, so some builders may fear missing these chances for inventory acquisition. And although not the best reason for doing most anything, the fact that everyone else is doing it holds weight in this industry too.

Builders investing in land now, when deals are to be had, makes sense from a cost avoidance perspective. As an effort to prevent or reduce price increases, costs avoidances, though often less tangible than cost savings, can have a concrete impact on profitability. Especially in a business where land is generally 20% of the cost of the final product. Of course, builders would need to build and sell houses on the bargain land to realize significant profitability. And John Burns questions whether that will be possible in 2011 or 2012. If Mr. Burn's fears are confirmed, builders may be jeopardizing future profitability on an opportunity of cost avoidance today.

Sample Test Question: Task 1-B-3

Peter is the supply manager for We Build, a large residential builder. He has been given a budget and tasked with reducing costs on raw land acquisitions. Peter begins the cost reduction process through data mining efforts including anaylyzing a variety of spend reports on land purchases. These include historical purchases by his company, as well as articles and reports available on an industry level. Following the analysis, Peter identifies several areas of cost saving opportunity for We Build, including purchasing prime foreclosed real estate directly from banks. Peter immediately begins negotiating with the banks to secure several land purchases at significant dicsounts even for the current market. Upon completion of the acquisitions, Peter reports the acquisitions and associated cost savings to his management, and to the Finance Department so that budgets can be adjusted accordingly. However, upon receiving his report, the Operations Director at We Build was not pleased with Peter's efforts. The most likely cause for the director's disapproval is:

A) The Operations Director realized Peter failed to give credit to market conditions for his cost savings success.

B) The Operations Director did not place value on the accuracy of Peter's data mining efforts.

C) The Operations Director was not contacted as an internal stakeholder prior to the negotiations with suppliers.

D) The Operations Director does not value cost avoidance as much as cost savings.