The 3 Types of Developers and Why the Difference Matters

Daniel Herriges shares a schema that can help people understand the world of real estate development—namely, that not all developers are alike.

There are three distinct varieties of developer, according to Herriges, each operating on a different business model. "They build different types of buildings, in different places. They use different sources of financing. Local rules and regulations affect these different groups very differently, and—importantly—their interests often do not align," writes Herriges.

So what are these three kinds of developers? Herriges lists residential developers types as follows: 1) big national homebuilders, like Lennar, Pulte, and D.R. Horton; 2) the "big urban box" developers that are smaller than the national builders but still likely to have a major influence over politics at the local and regional level; and then there are the 3) incremental infill developers. Herriges notes that there are also three types of commercial developers, but keeps the focus of this article on residential developers.

To further elucidate the differences between these three kinds of developers, Herriges digs into the business models of each type, identifying fundamental differences between each of them. But most helpfully, Herriges also devotes significant attention to the question of why these distinctions matter—the answer is immediately apparent in the lack of alignment in the interests of each of these three kinds of developers.