What’s the good news today?  Listed below is part of an e-mail that I got about existing home sales from Ed Miles Main Street Home Mortgage Corporation.  It is a rebound but will it last?  New home sales data will be out this Wednesday and I’ll comment on them here.

"IF YOU BUILD IT...THEY WILL COME." And while that line from the movie Field of Dreams may have referred to a baseball field, there are some small signs that it could perhaps refer to the housing market once again before too long.

The housing market continues to show signs of stabilization, and although home prices are not about to spike higher, the decline certainly seems to have subsided. Existing Home Sales came in better than expectations, reaching their highest level in two years, as you can see in the chart below. Well, I'm not good enough to coppy the chart so here's an overview.

January = 4.49 M sales Nationally

February = 4.71M

March = 4.55M

April = 4.66M

May = 4.72M

June = 4.89M

July = 5.24M The highest level in two years!

With all the residential land deals crashing and the commercial developers selling off land and cancelling contracts, how can there be any accounting for land value these days.  I had a 125 acre farm under contract to an industrial developer in the western suburbs.  They invested about $500,000 in payments and due diligence when they decided to conserve cash and drop the project.  This may have been a good idea considering the drop in activity in the industrial market of late.  But what is the value of that land now.  Well the owner also owned an adjacent property of about the same size and of lesser quality.  He sold that property for $50,000 per acre.  I was under contract for $63,000 when the contract was dropped.  If the owner listed the property today he said it would be at $65,000 per acre.  No fire sale there.

And to look at recent farm prices, they seem anything but cheap. Here is a sample of farms for sale in DeKalb County from MGW Real Estate:

200 Acres near Shabbona for $10,500/acre

246 Acres near Sycamore for $19,000/acre

158 Acres near DeKalb for $8475/acre

190 Acres near DeKalb for $10,250/acre

Investors are snapping up farm land for future growth and an inflation hedge.  Farmers are adding to their holdings whenever possible because they know the value of the art of farming.  There is also the foreign buyer who is entering our markets and buying land to provide food for their people in the future. As someone said, they are not making any more of it so, land is a very stable investment. 

Land is always a good investment when it’s bought on a cash basis and you don’t have to pay juice on a loan to carry the land.  Also when it is well located, in the path of progress where you are sure to increase value over time. 

What’s around the corner?  A slow recover to be sure but what will the land product look like?  All the big boys have backed off land development unless they have real staying power and are not under pressure from lenders.  The future will be the absorption of thousands and thousands of fully improved lots, or land that is zoned and platted and ready to go.  Pods of finished lots will go first and as the market firms some developers will get back into the process of bringing fully improved lots to the market for others or their own account.

There are land investment funds that look to take out banks and work with troubled developers to provide the cushion they need to control the land and take it through the development process.  Avanti Property trust, Starwood Land Ventures and even operations like Ocean Atlantic are searching for the right deal.  All have large amounts of money to invest and all want tremendous returns on their capital. It is however, difficult to make these deals work because a return of 15 to 20 % is needed by these funds to risk their money.  They can’t buy land at asking prices because they have to cover the down side if all things fail.  The latest key phrase is “we have to buy at farm prices”.  That is $6,000 to $10,000 per acre.  It’s tough to get someone who had a contract with a builder for $60,000 per acre to drop their expectations.  And it’s really tough to get the Bank who lent $50,000 per acre for the developer to buy that land to write down his loan to those levels.  It is only when the Fed pressures a bank to monetize the collateral that these prices can be reached.

Many banks are finding it better to take back the assets and wait for the turn around.  Some banks are hiring the finish up experts to take a half finished piece of land and get it to the finished lot stage where the value is much higher and there is hope of selling off some assets at a decent price.

Some developers are taking advantage of specialty products offered by the more sophisticated funds.  Avanti has a product where they will take down a property and provide 90% of the money for the land and for the development on a non recourse basis.  The intent here is for the fund to make its money and the developer to stay in the game and keep his building operation going.

With the housing market firming and the people who control the land getting more realistic in their valuation of the land, things will start to move.  We’ll look at office & commercial land tomorrow

What’s next after the land value increase pushed by large residential developers. The market correction is in full force or should we say in free fall.  The signs of the end are near with home sales firming and some new housing starts.  This still is a market where values are based on what one can do on their land.  What is the impact of the land glut on current developments? 

Let’s look at developments in Antioch, IL.  A developer of entry level homes went into bankruptcy and the lenders are taking back the development.  How does the investor determine what he can pay to buy this out of bankruptcy?  There is an existing agreement with the village that binds the project to develop and maintain a clubhouse for the project but there are no homes and no income to support the clubhouse.  There are also requirements to complete the infrastructure including storm and water systems and there is an SSA (Special Service Area) that requires the development to pay a tax for each home or planned home to repay bonds issued for the sewer system put in place for the development of several projects in the area.  So it is a real conundrum as to what a new investor can pay for this land. 

Whatever the price is, it will be cheaper than the adjacent properties have paid because they have all those costs and the cost of the land paid in a good economy. So, in valuing the land,  you have to consider the adjacent developments and realize that they will write off the land profits to keep the housing costs down and keep their development company in business.  So even if the investor in the bankrupt project got the land for free, the cost to get to a finished home will be more than the existing developer because of the cost of getting the project on equal footing. 

So, the bankruptcy court has to remove some of the burdens that go with the land to help get a project moving.  And what happens to the good developer who has struggled to keep his business afloat?  He is facing some subsidized competition that is unfair.  We’ll see how this plays out through 2010.

Land Shark

This is the start of something that I’ve been trying to do for awhile; write an informative blog about the goings on in the business of land based real estate.  Since the crash started in 2007, the value of land has disappeared or so it seemed.  It started with the large national players taking huge land positions to feed their development needs.

The large developers and most residential developers in the starter home and first move up category found that about 75% of their profit on the sale of a home was from the land development and site improvements put into the farm land they purchased. The balance was in the “bricks and sticks” of the homes.  We’re talking profits here not total costs. 

Developer “X” buys a 100 acre farm for $60,000 per acre.  He can develop about 5 homes per acre and it costs about $2.00 per square foot to improve the land for these homes, or about $8,712,000 for the improvements. So, the total land costs of the development are $14,712,000.

If the average home price is $250,000 and about 25% of that total price is the land component, then the value assigned to that component is $250,000 X 25% = $62,500 per home.  Thus the total value assigned to the 500 homes in the development is $31,250,000. If you subtract the cost of land at $14,712,000 the profit for that component is $16,538,000 or a 47% profit on the land portion of the home.

This is why the land development business was such a boom and it turns out such a risk when the demand stops and there is nothing to do but give the land back to the bank.

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