The Atlanta Business Chronicle Reported recently that Atlanta has a five-year supply of building lots -- a five-year supply! I can remember when just 12 months ago, I was lucky if I could scratch together enough building lots to keep my custom home builders happy. In most cases, we had to find raw land, then get it rezoned, then get a development permit and run the roads. We would gladly spend 12-24 months in site selection, entitlements and development just to have the lots to build on.
Now the situation has changed dramatically, and there is almost no demand for finished lots with many builders sitting on months of finished inventory with no homebuyers in sight. The large builders and developers have completely stopped raw land acquisitions and lot development. I was touring the state last week with an investment group from Manhattan looking to cash in on Atlanta's down market. We visited tax assessor after tax assessor in Atlanta's metro counties and the story was the same everywhere -- residential lot development is at a hard stop.
And to further complicate the issue, banks are no longer extending credit for speculation home construction and subdivision development. They've got enough problems of their own with the development loans already on their books that are past due. You see, most acquisition and development loans are for 1 to 3 years and if you agree that we're at least a year into this mess, it's easy to see that these A&D loans are reaching maturity with no one to purchase the finished lots.
In come the bottom feeders -- two months ago the Atlanta Business Chronicle reported about a new European fund that was formed to purchase entire subdivisions at 60 cents on the dollar. Our firm has some 500 developed lots listed and the only activity we are seeing is from large private equity groups looking to pay even less - sometimes 40 cents on the dollar based on what those lots were worth a year ago.
If the recent bail outs of Citibank, Merrill Lynch and Bear Stearns are any indication, there is plenty of liquidity in the market to absorb the existing lot inventory and hold it until the market turns around. So far, most of the developers, builders and lenders are not willing to part with their inventory at cut rate prices. As more and more loans mature, the price of developed lots should move towards the 50 % discount level that most investors are seeking.
The big money players have a simple strategy. Buy low now, cover the carrying costs until the market rebounds and then sell for twice what they paid. Since land is indestructible and as long as this downturn doesn't last too long, the infrastructure in these developed subdivisions should be in decent shape when it comes time to sell. So the maintenance is not the big component of the carry, it's the property taxes (which tend to be low on vacant land) and the cost of their money.
Let's look at typical new subdivision in the metro market. On average, the time to go from vacant land to a fully developed subdivision with roads and all utilities can take one to three years depending on whether the land needs to be rezoned or if utilities need to be run to the site. That's a best-case scenario if the developer doesn't have trouble with utility, zoning, or construction moratoria. When this downturn ends, builders will snap up the existing inventory of developed lots and pay top dollar or face a delay of several years if they decide to start from scratch on a new development.
Now the answer to the question, "How to cash in on Atlanta's record number of vacant lots?" Unless you're a European bank with millions of dollars to park in a developed subdivision for the next few years, you'll probably be looking at buying smaller packages of lots and even single lots. The key is finding them in good areas that will come out of this downturn first. Try to follow the same math as the big guys -- if the lot was worth $100,000 last year, try and pick it up for between $40,000 and $60,000.
Be careful of buying one or two lots in a developed subdivision where most of the lots are vacant. It's a very bad indication of the subdivision's value if the owner will sell the lots off one at a time to anyone that comes along. The rationale is that when all of the lot owners start building, the subdivision may become a hodge-podge of different building styles and home price points. That could undermine the value of the remaining lots in the development
If there are strong architectural restrictions and a requirement to build within a certain time after the purchase, you might not have reason to worry. Also find out if HOA fees will be required while you hold the lot and if the developer will control the HOA or if the lot owners will control.
Another source of small lot groupings may be found when a landowner splits up a small tract with existing road frontage into two, three or four lots. These deals are attractive because you don't have to deal with an HOA or worry about what others are doing with their lots in "your" subdivision. But be careful to understand the specifics of these infill deals. Will the lots be served by a shared driveway? What will it take to hook up utilities to each lot? Can a building permit be pulled right now on each lot without additional infrastructure? It's best to work with an experienced real estate agent specializing in land sales and a good real estate attorney and engineer.
Now the most important question of all, "How to find bargain developed residential lots?" Well a good start is the local and national MLS services. Land is a very specialized niche within the real estate brokerage community because it is sometimes handled by residential brokers and sometimes by commercial brokers. For that reason, the inventory is split between the residential and commercial multiple listing services as well as some specialty websites.
The two largest residential services in Atlanta are the First MLS of Atlanta and the Georgia MLS. You can search the Georgia MLS online for free at AtlantaMLS.com. The First MLS does not allow the public direct access currently, but there's an easy work around. You may visit any broker member of the FMLS who offers access through their website. For instance, my firm offers free access at FitzgeraldLand.com. More than half of the individual lots and small lot groupings may be found in these two services.
On the commercial side, there are three major services that list land in the metro area: CoStar, Dorey's 1st CLS and LoopNet.com -- unfortunately, CoStar and Dorey's are only available to brokers. But the good news is that most of the better small land listings are at LoopNet.com and it's free to search.
There are also land specialty websites that are free to search and I recommend LandFlip.com, LandandFarm.com, and LandsofAmerica.com. Local newspapers also carry many broker listings alongside for sale by owner properties. You should also check your local paper -- we have a list of the websites for the local papers in Georgia on our websites at FitzgeraldLand.com under the "Other Land Sites" section.
Many sites will allow you to register for a free account and then receive email updates when new properties are added that match your criteria. I highly recommend doing this because being the first to see a property gives you a leg up and a better chance to get a deal. In 2005, I did an audit of the First MLS of Atlanta and found that 1 in 2 residential properties sold while only 1 in 5 land listings sold in the same period. What this tells me is that 80% of the land and lots listed in the FMLS are either way over priced or have major flaws such as flood plain, wetlands, rough topography, poor soil conditions, surface rock, etc.
Of the 20% that did sell, most sold relatively quickly -- so any lot or land listing older than 60 days is probably not worth looking at from an investment standpoint. If you just have to find land in a certain area, then by all means check the entire inventory in that area, but for investment, you need to only look at high probability deals and those may be found in the newest listings.
One last point is that when purchasing a developed lot, you need to confirm that a building permit may be pulled without any further improvement of the lot. The whole reason to buy developed lots in the first place is that they are much lower risk than raw land because all of the leg work "should" have been done already. All that's left to do is pull a building permit and build a home. If the lot is not ready to go, then don't buy in this market -- there's just too much inventory out there to waste your time working out issues with developed lots -- unless of course the price is too good to pass up!
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