Toll Brothers Told Investors It's Competing Against Custom for Land
Story at a Glance:
- Toll Brothers is competing for land against smaller custom builders, often securing prime locations due to its financial strength.
- The company uses data to target underserved luxury markets, such as Brushy Creek in Austin, where demand remains amidst a broader, softer market.
- A significant portion of sales (62%) comes from move-up affluent buyers, who are less sensitive to affordability pressures.
- Design Studio upgrades and personalization options contribute approximately 25% of the home’s sales price.
- Toll Brothers plans to grow through acquisitions to fill geographic gaps in markets such as Indianapolis and Minneapolis.
On May 20, Toll Brothers executives sat down with Wall Street analysts to walk through the company’s second quarter results. In about an hour, they named custom builders as competitors, detailed the luxury buyer’s current mindset, and outlined where Toll Brothers plans to expand next.
Bidding Against Custom for Land
Toll Brothers executives described luxury land acquisition as one of the company’s competitive advantages.
“Because we are a luxury builder buying land at the corner of Main and Main, where not as many of the big public and private builders play, we often find there are fewer bidders at the table when we are pursuing deals,” Toll Brothers CEO Karl Mistry told analysts.
He said that means they're frequently working in areas where custom builders are more active, often out-bidding them.
“In many markets, we often compete for land against smaller custom builders who do not have the same financial strength or access to capital that we enjoy,” Mistry said.
Identifying White Space
Toll Brothers also pointed to its ability to identify unique opportunities within luxury markets. In the Austin metro, where conditions have softened, Mistry said the company used data to find under-served pockets such as the Brushy Creek community, noting “almost no new-home competition within this ZIP Code and school district.”
We often compete for land against smaller custom builders who do not have the same financial strength or access to capital that we enjoy.
- Toll Brothers CEO Karl Mitry
The company has since delivered homes there at around $1.5 million, with margins on such builds described as "strong."
The Luxury Buyer Right Now
Key to Toll Brothers' strategy is serving a more affluent customer base, a segment of the market executive chairman Douglas Yearley, Jr. described as more resilient than the broader market.
That resilience is most prominent in its luxury move-up buyer segment, which now represents roughly 62% of home-sales revenue.
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"Overall, our buyers are less sensitive to affordability pressures as they have benefited from years of income growth, stock market gains, and home equity appreciation," he said. "Serving this market is in our DNA."
Toll Brothers posted strong Q2 numbers, delivering 2,491 homes at an average price of just over $1 million, with orders up 7% gross, but flat on a per community basis, with conversions reportedly taking longer.
“Customers are still waiting to make a decision,” Mistry said, noting the hesitation as a confidence issue rather than a financing one. Roughly 23% of buyers paid all cash during Q2.
“We’re really happy to be flat, frankly,” Mistry said, adding that demand trends remained relatively consistent through April and into early May.
The Customization Premium
One of the clearest signals in the call centered on Toll Brothers’ Design Studio strategy, focused on personalization.
In Q2, Design Studio upgrades, structural options, and lot premiums averaged $219,000 per home, or roughly 25% of the average base sales price.
Executives said that selling their spec homes earlier in construction gives buyers enough time to personalize finishes and upgrades, which the company said is more profitable than selling a completed spec home.
“Our goal is to sell our specs as early in the construction cycle as possible,” Mistry said.
According to the company, approximately one-third of spec homes sell before framing is completed.
Executive chairman Doug Yearley said the Design Studio is important to the company financially.
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“Our Design Studios run at a 40-plus gross margin,” he said. “It’s better to throw a little more incentive early than wait for the house to get to the end, have a bigger incentive, and not have the accretion coming out of the Design Studio.”
This all goes to show how Toll Brothers and others are increasingly operating in a hybrid space, blurring the lines between spec, semi-custom and custom home building.
Where Toll Brothers Is Going Next
Toll Brothers also noted continued interest in expanding through acquisitions, particularly by buying established luxury builders in markets where the company lacks a footprint.
The latest example is Buffington Homes in northwest Arkansas, which Mistry described as “the leading builder of luxury homes in the area.” The acquisition adds roughly 1,500 lots to Toll Brothers’ pipeline, he said.
Asked about remaining geographic gaps, Mistry pointed to Indianapolis and Minneapolis as two markets where Toll Brothers still does not operate.
The company said it expects to continue pursuing similar “bolt-on” acquisitions rather than major mergers.
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About the Author
Pauline Hammerbeck
Pauline Hammerbeck is the editor of Custom Builder, the leading business media brand for custom builders and their architectural and design partners. She also serves as a senior editor for Pro Builder, where she directs products coverage and the brand's MVP Product Awards. With experience across the built environment - in architecture, real estate, retail, and design - Pauline brings a broad perspective to her work. Reach her at [email protected].