It’s Time to Reevaluate Your 2024 and 2025 Business Plans
Is it time to take a fresh look at your business plans for 2024 and 2025? Have you analyzed your future lot pipelines based on this year's performance? It's crucial to have someone outside of your land department review these models. We often hear phrases like “we have to feed the machine” or “we're going to gap out,” but seldom do builders consider the opposite problem: could we have too many lots in the pipeline? Have we overcommitted? Will the lots being delivered allow us to build at a price point that the market can absorb?
You might think, “I have cash, I can sit on excess lots and land until conditions improve.” While this might be true, if you examine your commitments over the next two years, you may find you have less cash to play with than you thought. Your banks might hesitate to continue providing new construction loans or fund draws as you accumulate finished lots and land. If they stop lending, can you fund construction operations with cash on hand? If you’re self-developing and not actively monitoring your curtailment schedules, these need to be reevaluated immediately—before you receive a surprise email from the bank asking for a large payment.
We often talk about cash flow for homebuilders, but what we’re really discussing is your ability to meet forward-looking commitments with the cash you have now and the cash you’ll generate from closings between now and when those commitments come due.
Sales dropped 16.5% year-on-year in May. Mortgage rates don’t seem likely to decrease significantly anytime soon, and buyers able to purchase at current prices have likely already bought. New home inventory is building up nationwide. Economic and labor market concerns could further dampen sales activity.
It’s not enjoyable, but it may be time to revisit your 2024 business plans and consider what happens if your projections are off by even 10% or more. How will that impact your ability to meet future commitments? After years of steady demand, it’s time to be honest with ourselves.
When discussing your business plans with your team, focus on key topics such as evaluating your land acquisition strategy, assessing your cash flow projections, and analyzing market absorption rates. Consider the impact of fluctuating mortgage rates on your sales pipeline and review your forward land commitments to ensure they align with your current financial position.
If you need help evaluating your current plan or if you think you may have a problem and don’t know the next steps, give us a call and we will be happy to help. Contact Us Today!