In an article in the Wall Street Journal from January 3rd 2017 by Chris Kirkman (yes it’s from over a month ago but this is an important and relevant trend which is intensifying as time passes), we learn that buildable lots for developers are becoming scarce. One tactic builders are reverting to is buying whole subdivisions that were abandoned during the crash and which were never fully completed. While there is a lot of remedial work to be done, it is still a better deal in many cases to fix up the existing unfinished subdivision, than to start the zoning and approval processes from scratch.
The relevance to us as real estate investors is that as buildable lots become more scarce, undoubtedly their cost increases. This reliably raises the price for finished new homes and creates comparable sales which usually push the median market prices higher.
Given the fact that interest rates are still low (historically they are very low, Trump-bump notwithstanding), and since 3.5%-down FHA loans are still widely available to homeowners buying at the price ranges we are interested in ($100K-$200K), the writing is on the wall: home prices in many cities (certainly the key cities we look at as investors), are likely to keep appreciating in the near future (possibly 1-2 years).
This points to a potential window in which to ‘stock up” on quality investment Single Family homes: with low interest rates (don’t forget to get a 30-year fixed-rate loan if you can), an upwards price trajectory (if only due to the scarcity of buildable lots), still-available low-down FHA loans and still-affordable prices in many key metropolitan areas, investors are enjoying a ‘sweet window” in which to buy, finance their purchases well, and then rent and hold.
We will be talking about this and many other points, including entity formation and asset protection, investing in real estate form one’s self-directed IRA, the types of loans available to investors, which markets stand out and why, and a whole lot of expert information. Q&As and networking are always in abundance, at our Quarterly 1-Day Expo near the San Francisco Airport on March 4th. Anyone mentioning this blog entry can attend for free – please email us at firstname.lastname@example.org to register. Just tell us in the subject line, “Read your blog,” and your information in the body of the email.
The full WSJ article is presented here:
With Lots in Short Supply, Builders Revive Abandoned Projects
Developers and investors are starting to resurrect subdivisions that were left half-finished after the housing collapse
Updated Jan. 3, 2017 6:25 p.m. ET
When real-estate fund manager Drapac Capital Partners visited the Cameron Springs subdivision in Cobb County, Ga., in 2012, the landscaping was dead and weeds had sprouted through the cracked tennis courts. Discarded tools littered empty lots where construction workers had walked off the job in the late 2000s with only a fraction of the homes completed.
Drapac saw value in those abandoned lots. It bought the 101 remaining lots in the neighborhood for a total of $375,000 and spent about $550,000 finishing half-built lots and upgrading the pool and clubhouse, betting home builders someday would return to the area.
As the nation’s supply of buildable construction lots shriveled, interest in the property picked up. Drapac received 12 bids last summer for the neighborhood, eventually selling it to national builder D.R. Horton Inc. for $6 million.
“I think they’re all panicking,” said Sebastian Drapac, chief operating officer of Drapac Capital Partners, an Australian firm that has purchased more than 25,000 lots in abandoned developments across the U.S. since 2011. “They’re trying to get lot positions wherever they can.”
The housing market’s boom and bust last decade left the U.S. with a surplus of vacant lots and half-built subdivisions many thought would never be revived. But tighter lending standards since the housing collapse last decade have made it difficult for smaller operators to develop land into buildable lots—the crucial raw material for new home construction—leaving builders to compete over a dwindling supply.
Now, builders and investors are starting to resurrect those half-finished subdivisions that were given up for dead after the collapse.
Nearly two-thirds of home builders reported a low or very low supply of available lots in their markets, according to a survey last year by the National Association of Home Builders, the highest reading since the group started tracking the issue in 1997.
Converting land into buildable lots requires developers to clear and grade the property, get approvals from local planning officials and install needed utilities such as gas and water.
Overall, the supply of vacant developed lots has decreased by more than 20% across more than 80 major U.S. markets since 2011, according to data from housing research firm Metrostudy. In markets such as Nashville, Tenn., and Charlotte, N.C., the inventory of vacant lots has declined by more than 40% over the past five years.
The shortages have pushed median single-family-home lot prices to a record high of $45,000 last year, surpassing the previous peak of $43,000 in 2006, according to census data analyzed by NAHB.
Developers and investors have been sprucing up unfinished community centers, reviving underfunded homeowners’ associations and adding amenities such as walking trails, lakes and bocce courts in an effort to revive the image of moribund developments and attract new buyers.
In some cases, they change the name of the development to shed prior stigmas.
Drapac Capital Partners replaced a sign out front of a struggling suburban Atlanta neighborhood that read “Brightwood – Established 2007.” They tweaked the name to read “Brightwood on the Lake, Est. 2016,” after clearing trees and opening up the neighborhood’s access to an adjoining pond.
Steve Brock just sold land for about 300 homes in a master-planned development called Stonoview outside of Charleston, S.C., to Lennar Corp. for $19 million. The project had been abandoned during the downturn, and Mr. Brock acquired three tracts around the property in 2013 for $7 million, and spent around $5 million over three years developing many of the lots, installing a 10-slip boat dock and drawing plans for a lighthouse and walking trails. Mr. Brock and another builder will build homes on 71 other lots in the area now worth $9.4 million, he said.
“We could sell it to them for close to retail prices, and they have the runway of land and lots immediately,” said Mr. Brock, founder and president of Brock Built. As a smaller builder and developer with a higher cost of capital, he said he could never pay as much as Lennar did for such a project and still turn a profit.
In Maricopa, Ariz., 35 miles south of Phoenix, Fulton Homes is building swimming pools and reviving parks in a project called Glennwilde that had been largely abandoned by developers for seven years.
Dennis Webb, Fulton’s vice president of operations, said prices for such deals are generally lower because of the needed improvements. And because such neighborhoods have already been laid out and approved, “We can get going pretty quickly,” Mr. Webb said. “We don’t have to wait a year and a half to develop the plans.”