I am not Crazy: Buy Residential Land Now
In my daily life as a real estate developer, I am often given a puzzled look when I relate to people that I am in the market for large tracks of residential real estate. On the heels of the largest housing slump in decades and one of the worse credit crisis’ in modern finance, one might agree with my detractors.
So why buy residential real estate for development? Simple. When housing was robust, developers, builders and speculators were crawling all over each other to buy land, driving prices to unsustainable levels. Bidding wars were commonplace and land prices became ludicrous. Those prices have dropped 30-50% since that peak. It is a simple, old adage, buy low; sell high. The time to buy real estate is when prices are depressed. Savvy investors will do so and hold until the recovery. With that in mind, a few precautions are necessary.
• Buy Well Located Land: Many buyers of land in the recent run up simply went too far out beyond the growth areas too far away from the urban core. With the lack of serious buyers in the market today, there is no reason not to go to the “A” location where growth was robust before the market slumped.
• Buy Land with Excellent Access to Infrastructure and Employment: If you have to drive through another town or even two others to get to the highway, generally speaking, you don’t want it. Land with easy access to highways and employment corridors wins every time.
• Make Sure Your Parcel is in a Desirable School District: This cannot be understated, families want good schools.
• Give Yourself Plenty of Holding Time: I operate under the theory that all real estate is cyclical. This down cycle will pass. In my opinion, late 2009 begins the recovery and 2010 will be a relatively healthy year. What if I am wrong? You should put yourself I a position not to care. In order to do this, you must buy at a heavily discounted price (50% or less of the previous peak value) and give yourself plenty of holding cost in your budget so that you can hold until 2011 or 2012 if need be. This is not a get rich quick strategy, patients pays off and you must make sure you put yourself in a position that allows you to be patient.
• Do Not Over Leverage: To much leverage will make it difficult to hold for longer periods of time, which may lead to making decisions that are contrary to your best interest. As interest piles up on land leveraged with 65% primary debt and a mezzanine level of 20% or more, land basis can quickly increase to a point where it is above market value. If you do not have the capital to leverage at 65% or less, get investors to make up the shortfall and give up part of the deal. Remember: “Pigs get slaughtered”.
• Do Your Due Diligence: There will be plenty of opportunities this year to buy land. Make sure the parcel you buy is the right one, do not rush into it. Make sure you have a throughough understanding of the municipal development plan, in most places known as the Comprehensive Plan. Understand zoning and guiding, where the infrastructure is, timing issues and other issues such as density of housing allowed, types of housing allowed, etc. Also make sure you understand the price range that homes can sell for. Talk to realtors in the area. Talk to builders about housing construction costs and make sure that your land plus development cost supports the price of homes in the area. More about that in upcoming issues.
Get the help of a good planning and engineering firm to help you understand the efficiency of the parcel. Get a wetland survey, an ALTA survey and environmental report. With these items, you can determine the developable acres, known as net acres (vs. gross acres). You cannot build in a wetland, lake or easement, so do not pay for it. Only buy on the ne acreage.
Finally, have patients, wait until the market is back and prices have increased substaintially. You might make a profit in two years, but you are likely to do much better waiting until the recovery is in full force.