What to do with a "free and clear" asset?

Question

I have 20 acres in the Boise Idaho area that is zoned residential. I can lease it out to a farmer or I can work toward getting the necessary improvements done so it is ready to build on. Or, I suppose another option is to sell "as-is." The property is adjacent to a neighborhood with homes worth somewhere in the 200's. I live in the Salt Lake City area which is about 4 hours away.

So my question goes out to all the wise old sages in real estate....what should I do? I have no holding cost but there is certainly an opportunity cost. I really don't need the proceeds that would come from the sell for my other projects but I can always put new money to use. Any advice is appreciated.

Rich Weese · Answer

Matt,

I have to disagree with Dion. He is trying to paint the entire country with a very wide brush. I find that completely incorrect. He is looking at it from a viewpoint in Fort Lauderdale Florida and having recently moved from the Fort Myers Florida area I would agree with him for that particular location. However, I bought a subdivision in Southwest Texas a couple years ago and I've been happy with the product I've been able to develop there and also the price point.

Six months ago I moved to the St. George, Utah area and immediately began acquiring single-family residential lots to build homes in the same general price range as you are considering. Many of our buyers are the same type buyers that would be purchasing in the Boise area. I have recently completed two homes here – one which is currently in escrow and the other was built for the Parade of homes which begins this Friday. I am in development of plans currently on an additional home which I hope to start next week and have 3 other lots to build on.

I don't know the Boise area well enough to make a strong recommendation as to whether you should develop or wait but I do know here in St. George, once the market turned, it turned very quickly. I'm currently looking for additional land here but if I bought the land today I'm probably a minimum of six months away from having manufactured lots ready to sell or build on. The market will look tremendously different by that time.

Is your land already zoned residential? Normally most of that land is zoned agricultural which doesn't cost as much in taxes. If you haven't done a development before, I would strongly suggest that you get some quotes as to what it would cost to develop the 20 acres. It may surprise you just how costly it is to get 20 acres ready as single-family lots. Maybe you could do a portion of the acreage at this time. You mentioned it is adjacent to additional residences. Does that mean the streets are all in to connect to your property? Will the city or county require you to put in additional connection streets? I'm looking at one development right now where we are connected to an existing subdivision, but just to put in the additional exterior streets and utilities that are required by the city will cost me $300,000. This cost is before I even start on my acreage. Have you done a land developmant like this ever before? This is something you don't just decide overnight, but need to prepare for.

Good luck on your decision and I'm sure either way will work out fine, but I certainly wouldn't consider Boise Idaho in the same terms as Florida. I lived in Florida for several years and saw the situation up close and personal. Rich

P.S. I should add one more thing about Florida. I did buy a large storage facility in Bonita Springs. Upon acquisition the largest tenant was WC I which was a gigantic developer throughout that area. They had basically closed almost all of their sales offices and had stored their furniture, partitions, copiers, conference rooms etc. in my storage facility. Over a period of a couple years they eventually sold or trashed most of what was stored. However, they eventually decided to restart their business, but as a meaner, leaner, company. They have begun to build homes again but are using almost all subcontractors instead of doing the work in-house. This is a sign, that even portions of Florida are progressing somewhat.

Rich Weese · Answer

Dion-very interesting info fromforecast-chart. I'm no more familiar with them than I am with Boise, and I pointed that out in my original reply. there are also many services stating values on homes in particular areas that are not very accurate- just ask folks that live and work there. There are MANY areas out there that have been reported as doing much better by various members on BP working those areas. When things turn, they turn quickly, just like the homes you talked about in Lee and Collier county. Those could be purchased in the 40's, then the fiftys, then the 60's. This was in a short 3 year period. I also purchased in that market while living in FT Myers. All areas are not created equal- never were and never will be. It doesn't take long when things begin turning. Many areas have little or NO new construction foreclosures, so that isn't a disadvantage.
      I'm still not familiar with Boise, but I do know there is no harm in laying the groundwork. Also, it is always a good idea to talk to people in that area to see if the onsite happenings are equal to what services like forecast.com are saying. Rich

Dion DePaoli · Answer

Here is some food for thought on your MSA regarding HPI analysis from Forecast-Chart.com:

3rd Quarter, 2011 Housing Statistics: Boise City, Idaho

Part 1: HOUSING MARKET FORECAST

12 Month Forecast:      DOWN
Forecast Accuracy:      78%

Forecast-Chart.com publishes forecasts for the trend in home prices in 380 Metropolitan Statistical Areas. The House Price Trend will be either UP or DOWN. The forecast for the trend in the Boise City housing market for the 12 months ending with the 3rd Quarter of 2012 is DOWN. The Accuracy of the Trend Forecast for Boise City is 78%. In other words, when tested against historical data, the forecasting methodology was correct 78% of the time.

Accordingly, Forecast-Chart.com estimates that the probability for falling house prices in Boise City is 78% during this period. If this Housing Market Forecast is correct, home prices will be lower in the 3rd Quarter of 2012 than they were in the 3rd Quarter of 2011. Check this page each quarter for updates to the Boise City Real Estate Market Forecast.

3 Year Forecast:          DOWN
Forecast Accuracy:      78%

The forecast for the trend in the Boise City housing market for the 3 years ending with the 3rd Quarter of 2014 is DOWN. The Accuracy of the Trend Forecast for Boise City is 78%. In other words, when tested against historical data, the forecasting methodology was correct 78% of the time. Accordingly, Forecast-Chart.com estimates that the probability for falling house prices in Boise City is 78% during this period. If this Housing Market Forecast is correct, home prices will be lower in the 3rd Quarter of 2014 than they were in the 3rd Quarter of 2011. Check this page each quarter for updates to the Boise City Real Estate Market Forecast

Just for the record contrast the median home price in Boise with the cost to build a home, which on the low side is $85 per square foot excluding the lot.  Is it worth running the risk of not getting out whole and loosing money?

Dion DePaoli · Answer

For the record, Florida is not my only market.  I trade mortgages and real property on a nationwide basis and have owned assets in 40 states both residential and commercial.  Regarding Lee and Collier counties, I traded about 250 SFR's in 2009 and 2010 which were brand new construction while that market was failing to its current somewhat flat level.  Florida is a beast of its own, but construction is still a problem for the country.

Yea, Lennar posted a good quarter.  But actually if you go look, you will see down grades in housing coming out.  The thought is it has ran its course for the moment.  Housing starts have grown at a snails pace of 3.0% and we still are NOT at levels equal to 2002, so my comment is pretty spot on.  By the way Lennar is not the largest home builder in the US Pulte and D.R Horton are the number one and two, Lennar is around number 4 and KB number 5.

One thing that has troubled new construction is the ability to purchase  new construction foreclosures.  This drives the price down pretty simple economics.  Residential new construction loans also tend to still be lagging way behind other forms of conventional finance.  Less than 25% of new construction is paid for with cash, another burden which slows new construction.

This is what killed construction to begin with.  Next up in 2012 comes the slightly more inventory derived from many of the bank vs state mortgage settlements.  Adding more inventory and pushing down prices.

Can you make money on a scattered set build out, sure one at a time.  You are also not carrying the cost of entitlements and utilities on your back plus the home.  A much easier strategy and less costly.  A wonderful example of that is look at how many vacant lots in fractured sub-divisions are by your property.  You can purchase those lots cheaper than you can develop your land.  Right?? (Yes)  In a scattered set build out scenario you are not competing with yourself as much as a contiguous community.  You do not see machinery moving and new developments breaking ground, do you?  (No).  What was developed has not cycled through yet, that is your competition.

More often than not, a bank owns it and is going to take a loss which will under cut your legs.  If we are not at 2002 levels, then where would you end up?  I say land bank for 2 years watch your inventory, its not a race to be the fist builder in your market, it is more important to be the right builder.  I enjoy the healthy debate!

Rich Weese · Answer

Matt – if you feel comfortable that you will eventually develop the property in question, I would strongly urge you to go ahead and get started with city approval. It is not a high percentage of the costs that you will incur in your total development. I'm not familiar with boys see so I can't answer how long the process will take. There is a process where you need to go step is step-by-step and that may vary depending on your individual property.

You say that the property is currently agricultural so does that mean your property taxes are very low? In Idaho, if you start your development process when will they change or zoning from agricultural to residential? That will increase your tax rate but I don't think that will happen early on. I know in my development in Texas, even though it is half developed, I'm still paying very low property taxes on the undeveloped lots. I don't really have a clue as to what your engineering will cost and I'm not sure when you need to be concerned with that in your process.

It would certainly be beneficial to go make friends with the Boise Idaho planning commission. The work that you do now will be relatively inexpensive compared to the added value you will create, in my opinion.

I'm glad you enjoyed the post that you referred to. Rich

Matt O. · Answer

Rich,

Its great to hear from a guy that is actively developing. And by the way, I loved your "I'm Rich, Rich, Rich!" post.

The zoning allows residential but is currently being used as agricultural. The property has plenty of frontage to a paved city street but not through the neighborhood mentioned. From my property all that can be seen is a row of backyards. I don't know what improvements the city would require as I've never done any development.

You mentioned how quickly you expect the market to turn in St. George, if that is also the case in Boise do you suggest I get started with city approval process so the land will be an easier sell to a builder? It seems like a much easier sell if I have all the city approvals even if I haven't started any physical improvements. How long do you think the process with the city will take? How much do you think it will cost to have engineered, etc?

Thanks so much for your help.

Matt O. · Answer

Chris,

Thanks for some facts. The previous post seemed a bit too pessimistic but I'm not a new construction guy so I really have no idea what builders are doing...
Testing the water with some builders is a great idea.

Chris Martin · Answer

Almost dead? This is just factually incorrect. Lennar, a $3B in revenue company and one of the largest homebuilders, had stable revenues last year. They had an increase in new orders of 15% year over year during the second half of 2011. The average sales price of a Lennar home was consistent with Matt's neighbor, at $244,000 in fiscal 2011 (same as 2010 and 2009). Even struggling KB Home, smaller than Lennar but still one of the largest homebuilders, had year over year (November 30, 2011 over 2010) backlog increase of 61%... and they experienced the first increase in full year net orders in two years.

But you most likely won't be working with Lennar, since I don't they operate in Idaho.

The smart local builders are back in business. Ironically Lennar's Southeast Florida segment is the fastest growing over the past two years, almost doubling in units delivered and almost quadrupling backlog.

Agreed, many perceive new home building to be slow, but recent numbers show otherwise. Matt, I'd check with 3 independent local builders and one or two national builders to guage their interest. You might be pleasantly surprised. The worst case scenario, the 'land bank' might not be a bad idea either.

Matt O. · Answer

Hey guys, thanks for the responses...

Dion-
You're right, new cons. and dev. is extremely slow. I understand it's not an ideal time to sell a property like this as there is a large number of complications with new development. Like most area of the country still, this area certainly isn't insulated from REO's. However, there's always an opportunity cost.

I like the term "land bank."

Ryan-

Houses is in area definitely aren't moving at a rapid pace. I like the line of credit idea to minimize the opportunity cost but my credit is still paying the price for past mistakes. I think it will be another 24 months before that option will be on the table.

Ryan Scritchlow · Answer

I agree with Dion, unless its really moving I would hold tight until the market picks up.  IF you have another deal or project that you could use the money for Id just go talk to a banker and get a line of credit secured by the land, if you dont use it it wont cost much if at all and if you do need it what ever project you use it for should be able to cover the costs of the money.

What to do with a "free and clear" asset?

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