Friday the Wall Street Journal was reporting "How Hot Land Sales Offset A Housing Glut In Phoenix". After listing several recent large land deals in the area they said,
What’s happening in Phoenix has begun to play out across the U.S. in recent weeks. Public home builders and land developers, who dominated the market during the boom, are bloated with land and need to sell, partly to record losses to recoup taxes. Meanwhile, more nimble private builders and opportunistic investors are raising money and starting to snap up the pieces, buying parcels for as much as 60% discounts.
"It’s a great time to be looking for land in Phoenix," says John Fioramonti , senior managing director at Myers Builder Advisor, a real-estate consulting firm based in Scottsdale, Ariz. "The national builders are just in a panic to get rid of excess inventory."
The article goes on to point out that Phoenix has a history of boom and busts, and that a "buy and hold" strategy can be very profitable. However, they also continue:
Buying land in this market, of course, carries large risks. If the housing slump triggers a regional or national recession, vacant land could stay that way for the foreseeable future. That’s especially true in certain markets in Florida, where the supply of homes is about four times the national average of a 10-month supply.
What do they mean "if"? Two University of Arizona professors are stating that Arizona is probably already in a recession. Vacant land is likely to stay that way for awhile.
There’s a reason the big builders are dumping land here. It’s important to ask, "If builders don’t want , why should you?
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why would you buy an asset 1-2 yrs post asset bubble when it usually takes 5-7 yrs to get back? Can you say knife-catchers?
Now is not the time to buy,unless you have lots of money.For the average joe,and by average I mean $50,000 or less a year,it will be years.How many average joes are going to be unemployed.There are 4 kinds of jobs here.1-professional. 2-home building.3-factory(very little).4-gas stations.When #2 drops,3+4 will fill breifly,than we will see a reduction in 3+4,then what.nobody will be able to pay rent let alone a mortgage.
As a rule of thumb vacant land needs to appreciate at an 8 to 10% per year rate to be a viable investment opportunity. Remember you still have payments, taxes, liability insurance and NO rental income (unless it is farmland) while you hold it.
Tobby, I never thought of that, but you make an excellent point.
Tobby, you forget the intricacies of modern finance. Vancant land has much lower property tax than improved land. Further, you can structure your corporation to claim property tax as a deduction from interest.
Also, what insurance is needed?
Additionally large parcels of land can be used for more than homebuilding. They can be converted to commercial, retail etc.
Plus many people buy and hold for the long run, 30 to 40 years. My grandfather, an arizona builder, purchased many pieces of vacant, industrial and commercial property (to diversify) he held these for 30 years, and made a good return.
a 5-7 year holding period often means nothing, especially with the long planning and zoning process required for a change of use.
I attended the UA professors’ presentation that Twist mentions in her post. It was not a fun place to be.
Nothing like being in a room with hundreds of stressed-out real estate agents and other REIC-ers. I was very glad to get away from them.
Parcels of land that are zoned residential are not easily converted to commercial or other uses. They require rezoning which is highly political and never a sure thing. Buying and selling land for development is and always has been risky business and not for the uninitiated.
Bruce – I would agree that buying and selling land requires expertise. But the risk in the long haul is much less than the risk short-term.
It is not a categorical “bad idea”, nor is it a categorical “great idea”. It depends largely upon the parcel being bought, the price paid, the length it is willing to be held.
A piece my family owned in an industrial area is now a large shopping center. Because the held on to the parcel, and were a keystone for the 100s of acres, they got a premium.
as far as conversion from residential to commercial, the answer to this is it depends. Go to the older parts of phoenix and you will see many single family homes on busy streets converted to commercial. Also, large swaths of “residential” zoned land, can be converted to commercial without much opposition because of the lack of neighbors. Further, much of the land being purchased from builders is not currently permitted building land. This is area in the desert, with no zoning, services utilities, that is being held in reserve. It might be indicated on a master plan as residential, if that, but this can be easier to change.
inqydesu says:
December 10th, 2007 at 2:34 pm
Bruce – I would agree that buying and selling land requires expertise. But the risk in the long haul is much less than the risk short-term.
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You would be surprised at how decisions are made to purchase land among the big boys. As Twist knows my BiL is heavily involved in western land developoment. He wrote the book “boomburbs” and is currently employed by many of the large PHX and LAS land developers. One bought over $3 billion worth of land after one of his talks because he was so convinced by his presentation.
IMOHO land is still grossly overpriced in the boom markets. Remember construction cost increases only accounted for about 20-25% of the bubble increases. The rest was land which tripled and quadrupled in value over a four year period. I think land prices in the boomtowns have a way to fall.
Buying land long term makes sense if you expect growth to come to an area that is relatively sparse. Those $100 an acre parcels on which Disney World now sits were a deal back in the mid 60′s.