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"We've used land options for decades. We think they are a very efficient use of capital," says J. Larry Sorsby, CFO of Hovnanian, in Red Bank, N.J.

Beazer, based in Atlanta, didn't return Barron's calls.

Some home builders already have walked away from land deals and taken modest losses. Miami-based Lennar (LEN) last week reported it wrote off $15.8 million in option deposits and related costs and made a "$16.5 million valuation adjustment" to the company's joint ventures, which contributed to a $5.9 million joint-venture loss in the third quarter, versus a gain of $16.8 million a year ago. Total profits in the latest quarter, ended August, fell to $206.7 million from $337.3 million a year earlier.

By using land options and development joint ventures, Lennar doesn't have to take on 100% of the risk of a project, explains Bruce Gross, the company's CFO. It also can team up with strategic partners to enter new markets or to buy large parcels of land. Many JVs were created years ago and have significant pent-up value, he adds.

Among the country's major home builders, Lennar has the largest exposure to joint ventures; $1.45 billion of equity in these ventures represents about 25% of the company's book value. That's in addition to $1.3 billion of option deposits and lines of credit outstanding, equal to an additional 23% of book.

At Standard Pacific (SPF), an Irvine, Calif.-based builder, equity in joint ventures amounts to 18% of book value. At KB Home (KBH), in Los Angeles, it represents 13% of book, and at Hovnanian, 11%.

Other companies, including MDC Holdings and D.R. Horton, have no joint-venture exposure. Standard Pacific and D.R. Horton didn't return calls. MDC and KB Home declined to comment.

While all option deals are structured differently, their intent is the same: A home builder that wants to buy land for future use but doesn't want to put the property -- or the debt needed to purchase it -- on the balance sheet, buys an option to purchase the land from its owner at a set price over an agreed-upon period.

When the land is owned by a farmer, industry experts say, the option might cost 5% of its full, agreed-upon value. When an investor group, known in the industry as a land bank, owns the property, terms typically have been much steeper, with deposits ranging from 10% to 20%. In addition, a builder subsequently might make monthly payments of 15% to 20% of the value of the land, minus the deposit -- well above the 6.5% to 9% it would cost to borrow funds in the capital markets.

Some of the largest land bankers include IHP Capital Partners, Acacia Capital and Hearthstone. Hedge funds such as Stark Investments and Farallon Capital Management reportedly have jumped into the business, as well; both declined to comment. "I've seen a lot more hedge-fund involvement over the last five years," says Dale Goldsmith, a lawyer with Armbruster & Goldsmith, a Los Angeles firm specializing in land use and entitlements.

In turning to land bankers, are home builders really using "financing that's hidden?" asks Joseph Snider, a senior credit officer at Moody's Investors Service. Moody's now rates the home builders based on numbers adjusted for option and joint-venture liabilities. While it has yet to change any debt ratings, Snider warned in a recent report that companies with significant use of options and joint ventures should increase disclosure of their terms and related liabilities or face the risk that these deals will put downward pressure on their ratings relative to companies with less complex structures.

In recent years, land options have worked wonderfully. Most have a duration of three to five years, and those acquired before 2003 are money good if exercised this year, given the enormous appreciation in land values. Writeoffs have been small to date; Zelman of Credit Suisse estimates that the home builders have written off nearly $300 million in option deposits through this year's second quarter, a small fraction of industry earnings.

The numbers could grow, however, if the price of land tanks, along with housing prices. Home builders don't disclose when their options were struck. Nor do they reveal the economics of options and joint ventures, Moody's notwithstanding. At most, companies say they review their option and joint-venture investments each quarter, writing down deals as necessary.

IF HOME BUILDERS WALK AWAY FROM LAND OPTIONS, the impact is likely to be widespread. The land owner presumably would shop the property anew, and at a reduced price, particularly if it has associated debt.

Jeff Barcy, CEO of Hearthstone, a San Francisco-based land banker with access to $4 billion of equity capital, cites a deal in which a publicly traded home builder recently walked away from an option to buy land in Florida for $60 million. The parcel recently was resold for $32 million. (For more on Florida's real-estate woes, see "The Perfect Storm.")