Why the Heck Would You Invest in Finished Lots in This Market?

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Opportunity, perhaps.

Some call it a decade of lost ownership and others call it the biggest housing bust since the great depression – investors call it big time opportunity.

Finished lots are less costly than developing new:

Over the course of the last couple years, investors have been buying finished lots on the cheap as they hope to capitalize on a housing recovery.  Finished lots, in the simplest terms, means that the lot is ready for a house to be built and that there is water, sewer, and road access.  You’ve probably seen hundreds of these near your house.  If you live in Phoenix or Vegas where the pin popped a pretty big bubble, there may be upward of 40,000 finished lots in inventory.  At today’s prices, in many cases, it’s simply less expensive to purchase a finished lot than to buy land and develop it.

Banks want out:

Banks left holding assets from defunct builders and developers want out.  Most often than not, the bank receiver will seek out builders first then hedge funds and investors.  Thus, the same as foreclosed homes, huge below market opportunities are out there.  A local bank here in Indianapolis for example recently sold and marked down $1.5M in finished lots to $600k with special financing rates.  An investor picked it up, and optioned it off to a builder on a take down schedule.  Everyone wins – investor gets nice return for carrying the lots – builder doesn’t carry all the land and gets to spread out their takedowns.

Banks are not lending to developers like they used to:

When banks stop lending it can create opportunity.  If all the finished lot inventory in recovering markets are sold or close to it, they are simply not being replenished because there isn’t capital available to develop new ones.  Additionally, in most cases, you cannot take an undeveloped piece, add roads, sewer and water and create the building pad so it’s ready for a a house for anywhere near the cost of buying a finished lot at today’s prices.

Where to look:

Generally speaking, groups of investors haven’t necessarily been attracted to the hardest hit markets as much as the markets already on the rebound.  For the most part, you will see investors making large  scale investments in areas they think recovery will happen the fastest.  Then, we see a lot of investors do off balance sheet / option deals with large scale private and public builders – or hold the inventory.  Options are popular for builders as too much lot inventory is not considered good business when they are trying to climb back to profitability.  In fact, many builders have been trying to dump lots at pennies on the dollar in areas that will not recover soon and reinvest in areas with a brighter near term future.

A few more things to take into consideration:

It’s not like flipping a house.  You can’t add a nice kitchen, some carpeting, paint the exterior and increase value.  In most cases you will buy and hold for a year or several years.

If you have capital, or your a part of a group of investors with capital, contact a few builders and brokers about potential deals in your market.  If your holding the lots, and a builder can tie them up with an option, a nice win – win may be in order.

About Author

Mark is the broker at Indianapolis real estate boutique ICON Realty Partners, LLC. Mark consults national new home builders on large-scale land purchases and advises investors generating income through local rental properties.

4 Comments

  1. Great article, couldn’t agree more.
    Developers with some know how and some cash are making a fortune finishing lots ghat other developers couldn’t.
    Ive seen banks deal these properties, commercial and residentially zoned, at pennies on the dollar, literally.

  2. Of course banks want to dump raw land and developed lots for pennies. Not hardly any investor wants to buy them.

    In my area banks are dumping 2 to 3 year old foreclosed homes for less than what a builder could build new for if they were given the lot for FREE! Banks are shedding bad assets they see no recovery for in the short term.

    Many local and regional banks loaded up on these construction loans during the boom times as residential was faltering but commercial was still booming. Now they are left with raw land,totally empty lots developed,and fractured subdivisions with lots left.

    I agree that for a particular land investor there is money to be made although in my area I am seeing you have to hold it for years to get a return. Most land investors I know own many businesses and like the idea of owning land because they don’t have another thing to manage on a daily basis.

    Most of the other investors are focused on distressed or value add assets (leading right now is Hotels and Multifamily followed by Retail) where they can turn around within a year and make big returns or hold long term.

    With land you have to watch out for costs. In some partially finished subdivisions with HOA’s lot costs to carry can be substantial.You can have to pay 100 to 200 a month or more with dues and fees to own an empty lot. Buy 30 lots you hold for a year and you could have up to 72,000 in holding costs a year before TAXES.

    You have to make sure even though the lots are pre-piped that the soil is easy to build on.What the builder will pay for the lot (if they want it at all) will depend on the costs to go vertical.

    So I am not saying land is a bad thing.I am saying be very careful moving forward. I see much more upside in commercial land that is fractured or graded to make bigger returns.You want a great location close to a corner.Locations way off the corners are not in demand at any price as there has been a shift to more conservative growth and planning.

  3. I definitely wouldn’t buy vacant land in an established subdivision with HOA and vacant lots. That’s just bad business buying in an already failed development. Chances are you’ll be holding that lot for a long time, especially if the original builder just cut and run.

    However, there are great deals to be found on lots in great areas, especially ocean front in California, Seattle, and all over Florida, NY and NJ, where builders tore down homes thinking they would build new and couldn’t get construction loans, or they just defaulted on their land and development loans. Those lots are ready to go and they can be purchased cheap, and homes can be built cheaply on them now too.

    If you are in an area where there is not much margin between cost to build and value for a newly developed home (at least in this market) then the development game doesn’t make sense for anyone. My guess would be that’s the case. But for others who live in areas, like those mentioned above, even though there is no clear baseline for value right now, land development can be done in this market and it can be profitable where a margin exists.

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