Why the Mitchells sold the builder but kept the land platform

Century Communities acquired History Maker Homes, a Texas institution with more than 75 years of history and five generations of family leadership. Century gains the local scale it needs to compete more effectively in Dallas-Fort Worth. But the more interesting decision wasn’t Century’s.

It was the Mitchell family’s.

They sold the homebuilding business. They retained Jabez Development, their land development company, and ONM Living, their build-to-rent operation. Jabez will continue developing selected communities for Century and plans to pursue additional land opportunities together.

After five generations and approximately 25,000 homes, the Mitchell family separated the homebuilding business from the land development business. They didn’t leave residential real estate. They chose a different segment.

The competitive advantage wasn’t necessarily the house

History Maker wasn’t a struggling local builder waiting to be rescued. It was an established, sophisticated operator competing in the nation’s largest new-home market. But homebuilding economics has shifted.

National builders bring purchasing power, access to capital, mortgage incentives, inventory capacity, and the ability to absorb periods of compressed margins. A private builder must compete against those same resources, often with substantially less financial flexibility. Being a good builder does not guarantee being the most efficient owner of capital. The Mitchell family’s decision raises an uncomfortable question for every private homebuilder:

Is your competitive advantage building homes, or creating the places where homes get built?

Those are not necessarily the same business. For a family with generations of land relationships, local knowledge and development expertise, the distinction can be enormous.

A national builder can acquire a homebuilding operation and its associated production capacity.

It cannot instantly replicate decades of local relationships, entitlement experience, and understanding of where a community should exist. That knowledge has value. The Mitchells chose to keep a business built around it.

Developers develop. Builders build.

For decades, our industry has treated land development and homebuilding as if they naturally belong on the same balance sheet. Sometimes they should. But they are fundamentally different businesses.

Developers acquire and entitle land, engineer infrastructure, manage utilities, navigate municipalities and deliver finished homesites. Builders design, construct, market and sell houses while managing customers, trades, inventory and construction operations.

Each business has its own risks, capital requirements and measures of success. Land development carries entitlement, infrastructure-cost, timing and absorption risks. Homebuilding carries construction, inventory, pricing and the challenge of matching product to customers.

Combining both businesses concentrates those risks and capital demands within a single organization. Separating them does not eliminate risk. It creates an opportunity to allocate capital and responsibility to the parties best equipped to manage each. The question is not whether one company can do both. The question is whether it should have to.

Capital follows efficiency

The homebuilding industry measures almost everything. Closings. Revenue. Communities. Starts. Backlog. Gross margins. But the number that ultimately matters is the return on capital employed. 1,000 homes in a market does not automatically make a builder more profitable than 300. A builder that closes 1,000 homes while committing enormous amounts of capital to land and development may be less economically productive than one delivering fewer homes with dramatically less capital at risk.

The same applies to developers. Owning more acres is not an accomplishment if the capital required to carry them destroys the return. Every additional dollar committed to land is a dollar unavailable for another community, another market, product innovation, or business expansion. Capital trapped in the ground cannot be deployed elsewhere. Control is not ownership. Financing is not development. And transferring an asset off a balance sheet is not the same as transferring its risk.

A land-financing entity can provide capital without assuming responsibility for development costs or completion schedules. A true independent developer may assume those obligations, but only within a structure that properly compensates it for doing so. Simply moving land from one balance sheet to another does not necessarily improve the underlying economics.

Institutional capital, international builders, and financial sponsors are lining up to acquire homebuilding operations. But who will finance and develop the land beneath the next generation of American homes? And who will bear the horizontal risk? That may be a more consequential question than who buys the next private builder.

At Republic Standard Land Fund, we believe that land control, horizontal development, and vertical homebuilding do not always need to compete for the same pool of capital. Structure them appropriately, allocate risk deliberately, and allow each business to focus on what it does best. Not cheaper financing. A different operating model.

What they still have to prove

Century is betting that greater local concentration will yield purchasing efficiencies, lower overhead, and stronger operating returns. The Mitchell family is betting that its retained land development and rental operations offer attractive opportunities without owning a production homebuilder.

Both strategies have merit. Neither automatically succeeds.

Century must convert acquired volume into stronger financial performance. Jabez must manage development costs, timing, capital requirements, and demand for finished lots. The purchase economics were not disclosed, and the full allocation of risk under future development arrangements remains undisclosed. But the strategic distinction is unmistakable.

One company acquired additional homebuilding scale. The other retained the ability to help create the land supply that homebuilders require. They no longer need to own the same business to benefit from each other’s success.

The biggest transaction may be the one the Mitchells didn’t make

After 75 years, five generations, and approximately 25,000 homes, the Mitchell family had every reason to stay in the homebuilding business. Instead, they sold it and kept developing land.

Perhaps that tells us something about where they believe their competitive advantages lie. Perhaps it tells us something about the pressures facing even sophisticated private builders. And perhaps it tells us where the industry should be moving.

The future of homebuilding will not be determined solely by who builds the most homes. It will also be determined by who can produce those homes with the least capital at risk, the best operating performance, and the strongest sustainable returns. The Mitchells sold the builder and kept the land business. The rest of the industry should pay attention.

Developers develop. Builders build. Capital follows efficiency.

Source: www.housingwire.com — article syndicated from the publisher’s feed; all rights remain with the original publisher.