Finished Lot Investment Strategy

A subdivision with a home selling price point of $400,000 in 2005 – would have an estimated finished lot cost of $80,000. A finished lot is defined as a “ready-to-go” lot for building operations.

In 2009, the price point for the same house has probably dropped over 20%. In some markets, the price reduction has been more severe. Let’s use 25% for discussion purposes. The sales price for the same home in the same subdivision would have to be priced at $300,000 to reach the current buyers. In fact, in many markets, the $300,000 price point is the upper threshold of homes selling. A $300,000 home would be built on a finished lot price of $60,000.

Builders have filed for bankruptcy, holding onto the land until the market turns, or is in a distressed situation because they paid too much for the land or finished lot. Also, there are not many individual buyers of a $60,000 finished lot and this will cause the project to stall and possibly be taken back by the lender.

A project taken back by the lender will need to dispose of this land asset. The land acquisition and infrastructure loan may have been reduced and purchasing lots at a significant discount may be acceptable to a lender just to remove the asset off their books.

The key would be to offer the lender a price even below what the current loan value for each finished lot. The lender would take a loss but dispose of the asset. To further illustrate the example, let’s say we would buy the lot for 30% of the current value of the finished lot of $60,000- which may even be more than the loan since developer markup finished lots significantly over the past 10 years of business. The lot could be purchased at $18,000.

When the market returns and prices start to increase, finished lots will be in demand since we know from previous housing recessions that production can’t keep up with the demand. Finished lots would be the first to sell.

Let’s say that the lot was held for 2-years at 10% per year + RE taxes and sold at the current sales price of $60,000? Your return would be? Pick a price to sell the lot and calculate when to sell --- does it make sense? Once the market returns, home selling price points will be adjusted significantly. The key is to negotiate land and/or finished lots with lenders to achieve significant reductions in prices. Real estate investment is a risk but selecting the right market, location and price point will reduce the risk.

There are significant opportunities in buying land with different uses and in all markets; residential, commercial/retail, office, apartments, and vacant land.

If you want to explore this real estate investment strategy more in-depth, please let me know.