For holders of large amounts of land and lots, implementing sales
strategies that maximize value may be difficult. This is especially true
for developers of housing developments and multifamily buildings.
Property and asset managers are not equipped to deal with the
complex title and legal issues that commonly arise from distressed
properties, nor are these companies willing to make all the decisions
that may be involved in the construction of, and accompanying lending for, models on distressed lots.
Brokers should know the basic disposal alternatives available for
these clients — particularly those who hold large amounts of housing
development tracts or actual developments — and be prepared to help
them clear these assets or secure new financing.
have low risk,
sale creates risk
for the seller.”
A bulk sale occurs when a large number of lots are sold through auction or as a package. Its prime value is that it disposes of lots quickly,
and it eliminates holding costs.
Bulk sales can occur by packaging a group of properties and selling
through an agent. Real estate auctions offer another vehicle for selling
properties quickly. Traditional real estate auctions have given way to
online auctions today. Competitive bidding for online auctions usually
lasts seven to 21 days. Online auction sites also ordinarily allow for
direct bids to the owner. A seller can set terms of sale — including the
right to reject a bid, even if the reserve price is met — or set time limits
for a financed buyer to close. The auction company charges a transaction fee, typically around 2.5 percent.
The opposite extreme from a bulk-sales strategy is a one-off sales
strategy. In it, the holder sells lots, and the builder/buyer gets its own
financing after the lot is sold free and clear. This approach is useful
when significant value can be realized and there is demand for the
lots. It also may be applicable if an area could rebound in value and
the holder does not want to adopt a low-price alternative strategy. This
approach is slower but will typically yield the highest price for a lot.
A takedown sales strategy involves selling lots at pre-agreed prices
per a schedule. Ordinarily, there are performance standards as to
which lots are purchased and when.
If performance standards are not met, the contract is terminated
and the deposit is forfeited. It is a best practice to agree to a contract
for deed as to the lots to be purchased and when.
This approach can yield good prices for lots, and the speed of disposal, although slower than bulk sales, is faster than one-off sales.
Unlike bulk and one-off sales, which have low risk, the takedown
sale creates risk for the seller. With a takedown schedule, the seller
is responsible for holding costs, taxes, insurance, etc., until the lots
are sold. If the buyer terminates, a deposit must cover all losses, but
it is often difficult to negotiate a deposit large enough to cover the
potential out-of-pocket losses, let alone lost opportunity costs.
For difficult-to-sell lots, one of the best, albeit risky, alternatives is
subordinating the lot to a construction loan. With this approach, the
owner is paid for the lot at closing of the completed structure. It is
best to set a maximum loan amount on the first-position construction loan and also to get a guarantee from the buyer (who is a de
facto borrower with the lot as collateral). If the building doesn’t close
in a timely manner, the owner can pay off the construction loan to get
in first position (i.e., the owner can pay subcontractors to get a deed
in lieu of foreclosure). If foreclosure is necessary, it may be possible
to leverage relinquishment of guarantee enforcement to get a deed
in lieu or a voluntary foreclosure.
Although subordinating the lot may make it possible for a builder
to get financing, the owner may be right back in foreclosure if the
closing does not occur. Certain areas may require these extreme
measures to get any kind of movement in lot sales, however.
FINANCE LOT AND STRUCTURE
Seller financing has been a common technique for moving inventory
in this economic downturn, and real estate sales can benefit from
this approach, particularly given limited credit availability. Providing
financing for the lot purchase and construction on it can speed up
disposal of the holdings and yield an optimal price.
There is the risk that the structure will not be salable and foreclosure will be necessary. In addition, unlike the subordination strategy,
the seller must front the money to sell the lot, which creates more
risk. Even if the structure and lot sell quickly, there is always the lost
opportunity cost of that money. If the structure and lot do not sell
quickly, then foreclosure may be necessary and the seller will incur
additional delays before a sale is possible.
To reduce the risk of a foreclosure, the lot holder may wish to provide a loan to a builder to erect a structure while maintaining ownership of the lot. The holder can require the builder to sell the lot within
a fixed time period or lose its right to a predetermined builder fee.
Having a disciplined budget and paying subcontractors directly can
help avoid inflated liens. This method allows for fast movement and
high prices but at reduced risk and cost than traditional financing.
Foreclosure becomes unnecessary because subcontractors can be
paid off to get ownership, giving the holder the ability to immediately
sell the structure and lot.
In implementing this option, financing a model/spec building or
a separate model and spec structure is recommended. In this way,
the buyer pool increases because the risk of building delays after
an existing home is sold is eliminated. The value of a model is that it
creates a base in a subdivision for sales, and buyers get a feel for the
work of the builder. The model also creates a stimulus for sales and
momentum in a subdivision.
COST-SAVING STR ATEGIES
Building a model or spec building is expensive. It is necessary to
keep out-of-pocket building costs as low as possible and leverage
marketing of that structure as much as possible to justify the expenditures on construction.
To reduce expenses, find builders whose owners want to benefit
as much from the day-to-day labor as the potential profit in the sale
of the structure. A small builder may achieve the lowest price for the
structure, and a real estate agent, rather than the builder, can then
be used as the primary sales driver.
Money also can be saved by taking houses to the drywall stage,
instead of incurring the cost to complete them. In addition, the owner