Ask any land appraiser in town and you’ll hear the same story. Land sales comparables are virtually non-existent over the past 18 months. That is starting to change based on my personal appointment book for Closings and word of mouth from other brokers about deals that are pending sale in the near future.
Now that we are seeing actual sales hit the books, the million dollar question is, “Will the banks cut their list prices?” The answer is probably, “Yes, but not by very much.” The reason for this has to do with the vagaries of the accounting practices banks are required to follow.
Banks tend to hold asking prices at levels equal to their book value for their assets. If a bank were to wholesale reduce prices on their assets, they would inevitably be required to reduce the book value on those same assets and tally a paper loss without actually receiving the benefits of a sale: namely cash.
Land buyers are undergoing a re-education process not seen since the FTC days some 20 years ago. The emerging consensus is that list prices are not going much lower, but the deals will got to those willing to make offers -- and lots of them.
Land and lots are a specialized subset of real estate requiring a great deal of upfront time and expense in order to understand each property before crafting an offer. Many are unwilling to put in this time and effort unless they are fairly certain the asset may be acquired on the cheap – buyers have largely relied on published list prices as the main indicator of a seller’s motivation to sell at or below current market prices. Since those list prices have remained high, we haven’t seen many shoppers.
The rise of sealed bid sales of late is a strong indicator that banks are willing to deal at market prices. These events allow banks the luxury of leaving published list prices high while encouraging buyers (with a wink and a nod) to submit lower than asking price bids for serious consideration. The downside for buyers is there’s still no guarantee the property will sell even if a large number of bidders participate.
The option of last resort for banks will be absolute auctions where the property is sold regardless of price. I like to call this the “nuclear option.” So far, most banks have been unwilling to resort to this extreme option because of the lack of control over price on their part. When you start to see a large number of absolute land auctions (and better yet ones with non-qualifying owner financing), you’ll know the land market has hit rock bottom.
However sealed bid events are bringing more land buyers back into the market and if the technique starts to yield sales activity, we may never get to the “nuclear option.” If you are serious about investing in land while prices are at record lows, you would be well served to start submitting bids on sealed bid events before this opportunity passes. Click here to register for specific land and lot offerings in the FDIC sealed bid event that closes May 12, 2010.