Is it time to BUY subdivisions in your area?

Question

I posted recently about some single-family residence lots that I purchased in my new area. I think I mentioned that some of these top quality lots have dropped two prices of 15 years ago in some cases. Most of these are bank owned where the bank is very motivated to sell. In my particular area these bank owned lots are drying up if you are looking for top quality lots. It seems like those go first. Now I'm seeing quite a few foreclosed subdivisions coming up for sale where the banks are sick of them and motivated to get rid of them. I have looked at a few of these but as of yet have not pulled the trigger.

I'm posting this thread because I am getting pretty close on one subdivision. We actually have our second meeting with the bank tomorrow and if they are agreeable to our terms these lots will be purchased for peanuts. It is raw ground so you do need to have some capital to prepare the lots for construction. I'm sure all areas are not created equal but if you are in a position to take advantage of the banks motivation I think many will find this extremely rewarding.

I have found the banks not only flexible in pricing but also in the method of constructing the transaction. Most are willing to carry some financing or even allow a takedown procedure where the buyer does not have to pay all cash. Remember, right now all they have is a bare piece of ground and by allowing someone to complete a transaction with them and then put additional funds into the utilities etc. their security increases.

I wonder if other BP members are finding the same situation and working either on lots or subdivisions with banks. Rich

Joel Owens · Answer

Rich in Georgia we call them pipe farms.You have some that are raw land but most are projects where the developer went bust and couldn't sell any lots to builders. Right now except for some small areas of Georgia you can still buy a 2 to 3 year old brand new construction home that was foreclosed for less than replacement cost. This means even if a bank gave a builder the lot for free and the builder put a house on it they couldn't sell it to break even going against 2 yo 3 year old REO's. Another issue is some of the subdivisions say have 200 lots.100 were sold at the height of the market.100 were leftover with pipes and streets in with lights and nothing else. The 100 that were bought many are just holding hoping for a recovery.The rest are doing loan mods,short sales,or going into foreclosure,or builder is desperate to dump the last few homes they have. At the height of the market they sold for 250,000 and now they are 160,000. If I buy a lot to build on or for investment there is high property taxes and HOA fees even on the empty lot to carry.If the lot and HOA comes to 200 a month that is 2,400 a year I am carrying.If I am not building a house to sell the lot has to go up in value by that much every year just to break even and then lose money when I sell. Another issue is say 4 bed 2 bath homes were built in the front half and now a builder wants to put ranch single story homes in there at a lower value to sell in this market.We had a recent lawsuit in my county over just this matter.The community sued the builder as the ranch homes they had plans for would not conform to the original master plan. The homeowners said we would rather have empty lots than allow non-conforming homes to be put up that would affect the values of our subdivision. The developers say we need to build for what the demand is today but the county,city,and community say we understand you need to make money but not at the expense of our long term master plan vision.So many times they cannot come to an agreement. I can get you lots with pipes for 1,000 a piece.It's great if you hold long term but the current inventory has to be worked through in my area before people build again in mass.There are still custom builders for plots of land etc that are one offs. So I haven't bought any lots for the reasons stated.

Joel Owens · Answer

Chris the big national builders have deep pockets and many sources of revenue streams. They can allocate so much funds to sit on big blocks of failed developments and absorb the holding costs. Most small to medium investors cannot absorb those holding cost until the market recovers. Being a down cycle and interest rates being cheap I want to build cash value as much as possible before the cycle changes. If you already have a ton of cash flow going then these holds might make sense. I think land here that has lots and streets in but no homes is a prime opportunity.Have low taxes on no HOA fees like in lots being sold in 50% built subdivisions.You are also not getting flack as I mentioned above for the existing community fighting you over your building plans.

J Scott · Answer

I was going to say exactly what Rich said -- in many parts of the Atlanta metro area, if you were to give an experienced develop a subdivision worth of (even developed) lots, he still wouldn't be able to make any money because comparable resales are selling at below replacement cost. I'm working on buying some lots now, but expect that I'm going to have to hold them for several years before they will be worthwhile.

Rich Weese · Answer

I keep hearing about how bad the Atlanta area is in both of you have really substantiated that. It sounds like in your area, it is definitely a little too early to take advantage of those items. Joel – the subdivisions that I'm currently looking at our dirt only adjacent to a very successful first phase or first and second phases. When times were good, the developer would buy up adjacent land and spend all his money on land banking. He had no money to develop even if he wanted to and still doesn't. In many instances, the developer did not pay all cash for the land and has seen his land foreclosed by banks. After banks have carried the land on their books, they become much more motivated. The subdivision I'm working on right now is adjacent to lots that sold for as high as $125,000 in the boom times. My current offer is $9000 per lot, but remember this is dirt only. We are coming out of the real estate recession in my area and I've seen lots and homes go up in value just in the six months I've been here. There are no houses in this subdivision so I don't have any problem with HOH fees. The land has not been developed so that taxes are still based on agricultural land which is much lower. In these subdivisions, we set our own CC&R's. JScott – if your area follows suit to what our area is doing here, you will see some decent lots available for sale, and then the decent lots will be gone and you'll be left with crap lots to buy. That seems to be when the next stage kicks in of developers buying raw dirt subdivisions and developing their own lots. I also have several excavation companies that will do all of the off-site improvements for part cash(their hard costs) and part in finished lots. This allows for a much better return on money invested. Rich

Chris Calabrese · Answer

Regardless of when the timing is right in your market, it seems like if you're planning on building anyway, you could likely pick up some developed lots cheaper than buying raw land and developing your own. Whether either option would be profitable is a different story. I know that here in Charleston, a lot of the big national builders are buying neighborhoods that have been developed (but not necessarily built), but then again this a quickly growing area and new home sales are pretty strong.

J Scott · Answer

Atlanta is a weird place in terms of real estate. People (and the media) talk about Atlanta as if it's a homogenous market, but Atlanta is actually made up of so many different types of areas (as well as different demographics, different socio-economic pockets, different growth curves, etc) that it's very tough to generalize the current real estate market conditions. It's probably safe to say that in most of Atlanta, replacement costs are higher than resale values (so building isn't worthwhile right now), but I definitely wouldn't consider all of Atlanta bad for real estate, as long as you're flexible in your types of investment. Parts of the inner city are warzones, where years of mortgage fraud and run-down communities have decimated the real estate market and where there is little opportunity to make any money short-term. But, other parts of the city are seeing revitalization, renovation of historic homes and overall decent growth (Aaron McGinnis is a BP guy who is doing some major rebuilds in parts of downtown and has been very successful). Then, if you move to the suburbs, there are some great areas to hold rentals and some great areas to rehab/flip single family homes. In my area, commercial is starting to pick up a little bit, and multi-family seems to have bottomed out, so these might be indicative of some opportunities short-term as well. I guess my point is, when you hear about Atlanta, take everything you hear with a grain of salt. What you're hearing is almost definitely true for some parts of Atlanta, and most definitely not true for others.

Mark Updegraff · Answer

From my experience it isn't as bad here in Rochester NY, and may be more in line with what Rich is seeing. I'm sure some banks are carrying subdivisions they would love to unload as I've seen them up for auction. Since we didn't have a huge building bubble here (no population growth during the good times), we don't have a huge inventory of foreclosed new builds. I'm also seeing active subdivision development in areas. Central PA is a whole different story... good luck finding any land period. And that continues up into the southern tier, and will probably bulge a bit more when NY begins hydrofrackin' Mark in Upstate