Land Sale Opportunities and Challenges

PHOENIX-Land deals are out of mothballs and back at the forefront of the real estate industry—in some cases a bit too much ahead of the forefront. In Southern California, Phoenix, and other Southwestern markets, the surge is causing concern from recession-weary landowners who thought they'd cash in on the upturn but are finding home prices aren't necessarily back to where they were during the boom six years ago—leaving them wondering when to sell.

Rockspring Capital CEO Jim McAlister IV told GlobeSt.com recently that there's “a massive land play, a rush to buy and develop. . . . As far as the pathway of growth, urbanization of farm land will also continue.”

Investors and builders who acquired distressed property during the downturn have a lower basis, but many more owners bought earlier and held on for better times. Residential land prices rose an average of 13% in 2012, the first annual gain since 2005, reports Zelman and Associates. But the firm also notes that land lost a cumulative 58% of its value from 2006 to 2011.

Thus, “better times” aren't necessarily hitting pre-2007 levels, when a bevy of buildable land changed hands. Now these owners are beginning to see national home builders leapfrog over close-in sites to buy on the cheap in exurbs. Other challenged properties that are close-in or infill, such as half-finished communities, also face leapfrogging because of stigma or because they simply aren't build-ready. Getting it done and open is key.

In Los Angeles, Kraemer Land reported in GlobeSt.com that it acquired a partially completed Highland Park housing development and is working with Orange County builder South Coast Communities to complete the homes—within a 90-day window.

The bottom line is that slaying the sprawl monster is a decades-long problem, now taking on a new iteration from the housing rebound. Land costs are one of the largest components of a home's final price, and builders know that buyers will drive a few miles to exurbs for cheaper, newer homes.

The most important strategy is to be build-ready. Developers have snapped up predeveloped land with roads and infrastructure in place, so owners of raw land are moving quickly to join the wave. Home builders in an upturn are focused on speed to market. Companies like Silver Fern Management, in Phoenix, have been in overdrive, turning partially completed and raw land into developed property, according to its president, John Fortini.

Another challenge, especially in the Southwest, is that experienced resources for building homes—architects, designers, contractors, and specialty subcontractors—are relatively scarce, having been decimated by the recession that hit this region particularly hard. As a result, a lot of institutional knowledge and experience has been lost. And now that the demand for these services exceeds the supply, prices and fees have risen accordingly.

In short, the marketplace is seeking equilibrium—with some profits along the way—and landowners are in the hot seat to either capture value or see it jump to the next county.