The website has a network of other sites like eLandUSA.com and a monthly classified add magazine that features many of the properties on the website.  LandandFarm.com was purchased last year by Loopnet.com.  I have been waiting for some changes to the site or business model since the purchase, but this new pricing structure is the first big move so far.

The previous pricing model charged for single ads, packages of 10, 30, and custom amounts. The other big three land listing websites (LandWatch.com, LandsofAmerica.com, and LandFlip.com) all charged a monthly fee for unlimited listings.  The advantage to LandandFarms.com’s previous pricing strategy was that better properties appeared on the website and usually only active listings were on the site.  The other three did not charge more for more listings, so their sites usually have a larger selection of properties but not necessarily more of the quality listings.  There is also no incentive for the broker to remove expired or sold listings under an unlimited pricing plan.

I anticipate the change was made at LandandFarm to convince long time advertisers to stay on board despite a terrible land market.  It will be interesting to see if Loopnet.com adopts a similar strategy for their premium listings service for commercial listings in the face of a terrible commercial real estate market.  Currently Loopnet’s premium listings are priced based on the number of premium listings a broker has on the site.

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.

I hear the same story all too often about land developers and builders who hold on until the very end trying to make payments on raw land or developed subdivisions until all their money is gone.  Land speculation and development is very different from other forms of real estate investment because there is no possibility of income until the very end of the investment cycle when the property is sold.  Unlike houses, apartments, office buildings, warehouses, or retail stores, it is next to impossible to derive lease income from land and lots.  When the market for land evaporates as it has done in the last 12-18 months in Metro Atlanta, the land owners have no way to generate cash from their holdings.  Many have tried to find work, but there aren’t many vacancies in the two industries hit hardest by the Great Recession in Atlanta:  Construction and Real Estate.  To complicate matters, the loan payments must still be paid on a regular schedule.

So what is a land owner to do in this current environment?  One option is to continue making loan payments until all resources are depleted and then turn over the property by a process known as deed-in-lieu foreclosure and file bankruptcy.  Another option is to stop making loan payments, lose the property by foreclosure and then defend a lawsuit filed by the bank for their loss on the deal.  Neither of these options seems very attractive to the land owner.  Relocating to Belize might be somewhat more attractive.

A third option is a short sale – yes these work for land too.  A short sale is when the bank agrees to release the lien on the real estate for a payment that is “short” of the amount due on the loan.  There are two types of short sales – recourse and non-recourse.  In a recourse short sale the bank does not forgive the remaining debt and may pursue the borrower to collect that debt just as if the bank foreclosed on the property.  There are two benefits to a recourse short sale: 1) the borrower won’t have a foreclosure on his record and 2) the borrower has some control over the selling price of the land.  In a foreclosure situation, the bank takes the property back in at their most current appraised amount and that’s the number they use as a basis for the deficiency lawsuit.

The non-recourse short sale is the best option for the land owner – in this arrangement, the lender and land owner work together to market and sell the property at a price they can both live with.  The borrower then agrees to pay some portion (or in some cases none) of the deficiency between the selling price and the loan balance.  The bank in turn agrees to forgive the unpaid balance and will not pursue the borrower for this amount in the future.  There are two disadvantages to the borrower however:  1) The bank will send the borrower a 1099 for the forgiven debt and the borrower may have to pay income tax and 2) the borrower may have a notation on his credit report that says that the loan was satisfied for less than the amount owed.

Despite gains in recent months, January pricing for the all-property index was still down 38.7% from January 2008 and 40.2% lower than its peak in October 2007.

Industrial properties led all sectors in price drops over the past two years, as pricing for all of 2009 was down 33.9% from 2007. Multifamily was down 31.2%, office 30.6% and retail 25.9%.

The bad news is that transaction volume is light and the authors of the report feel that until banks and the FDIC start unloading troubled assets en masse, we won’t see a new pricing paradigm take hold.  Up until now, lenders have been willing to restructure and extend debt rather than foreclose.  We saw this same strategy in the land sector in 2008 and 2009 — only now does the faucet appear to be opening for a high volume of sales in distressed land assets.  Watch the WSJ and Atlanta Business Chronicle for a major sealed bid land sale to be held by the FDIC in the coming weeks.

Here’s a snippet from the report:

According to Real Capital Analytics (RCA), values experienced a decline of nearly 40% over the 12-month span. US investment activity dropped 63% from $146 billion in 2008 to $52 billion in 2009, and down 90% from the 2007 peak of $522 billion. CB Richard Ellis Econometric Advisors (CBRE-EA) forecasts total returns will remain negative, getting “less bad” in 2010 before turning positive in 2011. Investment volumes are expected to increase in 2010, but remain below the peak levels of 2005 to 2007.

Now this means there aren’t too many deals being done in the land business right now. The main exception has been with several notable funds who have picked up a  number of developed lots over the past 2 years from some of the larger Georgia and national banks willing and capable of selling their foreclosed land and lots at whatever price the market will bring.

The rest of the market activity in vacant land and lots amounts to a lot of talk.  That brings me back to the conversation I had with an equity fund out of Michigan last week.  They were considering buying a loan on a 150 lot subdivision in Fairburn.  All improvements are complete including the top coat of asphalt.  The note is non-performing and would need to be foreclosed upon and any back taxes brought current.  The cost to foreclose and clear any tax liens together with what the investors pay the bank would be their total initial investment.

Since developed lots don’t produce a revenue stream, the key to determining the investor’s ROI is to accurately predict two things:  holding time and exit price.  That’s what the fund analysts want to know when they call me.  I usually throw out some recent transactions to show worst case exit pricing and then give them a “your guess is as good as mine” on the time required to hold the property.  Most are budgeting 4-6 years right now.

The problem I’ve had recently is that I cannot even give a good exit pricing estimate because deal activity is almost non-existent and listings that I have at under $10,000 a developed lot are not getting any offers in less desirable markets.  In the better markets along the northern suburban corridors, deals are still happening albeit at a snail’s pace — but on the south, east and west sides of Atlanta, activity is at a dead stop.

So the $64,000 question is, “What are these lots worth in less desirable markets.”  I heard one pundit on cable news say that a good portion of the developed lots in the current inventory never should have been developed and will never be built on.  I wouldn’t go that far — I expect almost all of the developed lots to be built on at some point.  For some lots, the hold may be much longer than most investors are willing to wait.

Let’s assume a market will exist for lots in less desirable markets in 5-6 years.  Let’s assume the taxes are $400 per lot annually and the cost to mow the grass and maintain the detention pond is another $200 per lot annually.  Without factoring in the cost of money, inflation, etc. — the lots would cost $3,600 to hold.  Add to that the cost to foreclose and pay off back taxes and we can reasonably assume our investment in each lot would be around $5,000.  Most of the investors I speak with are looking for pro forma returns of 25% annually. 

 A six year simple return would require the lots to sell voer $12,500 each in 6 years.  In my opinion that’s a best case scenario — what if the market doesn’t return for 12 years — at that time the lots would need to sell for $20,000 to accomplish the same 25% annual simple return on investment.  When demand returns for lots in these less desirable markets, I strongly believe the lots could go for $15,000 – $20,000 each. 

There’s one major flaw with my analysis.  I’m assuming today’s investors pick up the lots for free.  Is that the only price that will get these lots moving?

In Q3, overall sales in Atlanta decreased 82% compared to the prior year. Over the last 12 months, the price per square foot for office property is down 52%, multifamily is down 9%, industrial is down 24% and retail is down 15%.

You can order full reports on Atlanta or other markets by property type at Loopnet’s website.

Residential Lot Values in Metro Atlanta

The Lincoln Land Policy data takes a different approach to surveying residential lot values than the other two major research providers in the Atlanta market.  Since lots rarely change hands in built-up areas, it is difficult to ascertain lot values from direct sales.  Instead Lincoln takes home resale prices and backs out the construction cost to arrive at the value of the underlying lot.

Metrostudy and Smartnumbers rely on actual residential lot sales to reveal lot values.  The problem with this market based approach is that it only reflects the sales of vacant lots in new subdivisions that are most frequently located in outlying areas of the Atlanta metropolitan area.

The Lincoln Land Policy data is not intended to establish market comparables for actual residential lot sales.  Instead it can be used as a gauge of the market feasibility for new housing starts at any given time.  For most of the history of the study, the residential lot “share” fluctuated within a quarter to a third of the value of the house sale price (house plus lot) as shown in the graph below.

Lot Value as a Percentage of total House Value (Lot plus House)

Even during the housing boom of the last decade, we did not see the lot share deviate from the established range.  I remember when shopping for developed lots, most tract builders would try to purchase lots at 20-25% of the finished home selling price.  We saw lots for move-up and high end homes in the 25-50% range.

The current lot share value is 5% of the home selling price.  So if the average lot is worth $8,000 and the lot share is 5%, then the average home selling price would be roughly $160,000.   It’s fairly easy to see that if the average home price declines an additional $8,000, the value of the lot will go to zero.

What does this mean for home builders?

• It becomes very difficult to compete with resale homes when the average home price is roughly equal to the new home construction cost.  The builder needs to basically get the lot for free in order to compete.
• Construction costs will need to decline by decreasing square footage and finish levels in new homes to bring the lot share back in line with historical trends.
• Builders will pass along the cheaper lot prices to the buyers through lower new home selling prices in order to stay competitive with resale homes.
• Since it is not possible to deliver new lots at $8,000 each or less, new homes can only compete with resales if the builders purchase distressed lots at depressed prices.  Most new homes in the next couple of years will be built on foreclosed lots.
• Builders must be extremely selective in determining the price to pay for lots and the location to build.

Reference:  Davis, Morris A. and Michael G. Palumbo, 2007, “The Price of Residential Land in Large US Cities,” Journal of Urban Economics, vol. 63 (1), p. 352-384; data located at Land and Property Values in the U.S., Lincoln Institute of Land Policy http://www.lincolninst.edu/resources/