Lots of trouble

Selling vacant land becomes a struggle in down market

Ryan Sharrow
Baltimore Business Journal

The Diamond Group has cut its asking price for a 2-acre lot in the city's Morrell Park neighborhood in half. The lot has room for 20 new townhomes.

Anne Arundel County home builder William Douglas Homes has four parcels of vacant land for sale in Maryland. Four years ago, selling empty land was an afterthought for the home builder.

And most lots are sitting on the market for months, a significant difference from five years ago when land would be under contract before it listed, said NAI KLNB broker Stephen J. Ferrandi.

"Builders were very eager to acquire land for the sake of further developments and they got crazy," said Bernard Markstein, a senior economist at the National Association of Home Builders. "With the bust in housing, it has become a liability."

Vacant lots that are development-ready and empty parcels of land are the latest victims of the housing market collapse. As fewer people buy houses, home builders have become more hesitant about building properties on lots they bought during the real estate boom.

As a result, developers and builders are frantically trying to remove empty land from their books and eliminate their interest payments on the properties. It's leaving some offering hefty discounts on the lots, ranging anywhere from 10 percent to more than 50 percent.

"It's all a matter of supply and demand," said Brenda L. Desjardins, principal of New Homes Marketing Services in Annapolis, which does market research and feasibility studies for builders and developers. "There's probably equal or less supply then there was four or five years ago, but the demand is substantially less."

U.S. housing starts -- the start of construction of a house or apartment building -- fell 3.3 percent in May to their lowest level in 17 years, according to the U.S. Commerce Department. Privately owned housing starts -- all non-government projects -- set an annual pace of 975,000 units in May. Building permits also fell to an annual rate of 969,000, 36 percent lower than estimates from May 2007.

Industry experts say lot prices are directly related to home prices. So as houses continue to dip in value, empty lots are doing the same.

Economist Markstein said in markets like Washington, D.C., Miami and Arizona, weakness in real estate has caused land to slide in value by 50 percent or more. In Greater Baltimore, industry members say the market hasn't been hit as hard and the price for land has dropped between 10 percent and 25 percent.

The Diamond Group's property in Morrell Park off Washington Boulevard is going for $899,000. The Baltimore company was hoping to get $1.7 million when it listed the site four months ago.

"You would've seen four years ago a national home builder stepping up and buying the entire property," said KLNB's Ferrandi, who is representing the Diamond Group on the property.

Annapolis Junction's William Douglas Homes was one of those home builders gobbling up properties several years ago.

The builder currently has four different parcels, or 70 lots, for sale on the Eastern Shore and in Anne Arundel and Prince George's counties.

But during the boom for home builders, William Douglas wasn't in the business of parting with any of its vacant lot inventory.

That has changed.

"We typically have bought the land with the intention to develop it ourselves," said Douglas Milburn, vice president of William Douglas. The home builder put the lots on the market earlier this year, and has not yet reduced its asking price. He said the company hasn't sold enough homes to use the lots.

William Douglas constructed five homes in 2007, down from around 20 in 2005, Milburn said.

At Arnold's Baldwin Homes Inc., President Michael A. Baldwin said it's an easier time for home builders to find land to buy -- but it's still a risk. It wasn't as easy back in 2003.

"Before you just didn't have the chance," said Baldwin, adding that his business is off 50 percent from 2005. "You had to know the farmer down the street to get the lot from him."

Baldwin currently has three lots for sale at $500,000 apiece in Davidsonville. He picked them up in 2006 for $425,000 each. He has yet to reduce the price of those lots, but has trimmed down his plans on the scope of the homes.

For example, Baldwin was initially offering to build a 5,500-square-foot home on one of the lots for $1.5 million. Now he's marketing the lot as a 2,800-square-foot home for around $900,000 -- what he hopes will be a sweeter deal for a buyer looking to pay less.

"You always have somebody kicking around out there," Baldwin said. "If there's deals to be made out there, I'd be willing to look at them."

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Market Over - What Happened in 2013

Market Overview - What happened in 2013

The Residential Land Market Metropolitan Baltimore/Washington in recovery if your selling lots, not so much if all you have is un-entitled dirt. 

The residential land market in the greater Washington-Baltimore area showed signs of recovery in the spring, as national homebuilders, such as Lennar, Richmond American, and NVR, loaded up on inventory of engineered and finished lots.  The first phase of this land grab actually began in 2011, as a number of builders started purchasing defaulted subdivisions from area lenders such, as M&T and PNC.  Once all of the low hanging fruit had been acquired for pennies on the dollar, builders began to seek new opportunities from land developers and smaller homebuilders who had projects that they had shelved during the Great Recession.  Much of the builder activity we saw is 2013 resulted from the acquisition projects that had finally obtained record plat or had been previously-stalled projects.

Raw unimproved land is still proving to be difficult to sell outside of Montgomery, Howard, and Anne Arundel Counties.  Many nationals have not ramped up their land development departments to pre-recession staffing and are simply not able to handle the in-house processing of more than a handful of unentitled land projects.  In an effort to continue to feed the pipeline, the nationals and many smaller homebuilders are turning to local land development firms to do the “dirty” work for them.   However, the challenge that land development firms are experiencing is a lack of working capital.  So many of the developer-friendly community banks, such as Key Bank, Bradford Federal, Bank of Annapolis, and Carrollton Bank, have been acquired in the last several years by larger banks.  Because the larger banks have been burned by bad land loans, they are disinclined to lend to developers with the same generous approach that the smaller banks had historically adopted for their long-term, valued clients.   

Looking for new funding sources, many local developers are partnering with high-net-worth individuals or entering into joint ventures with venture capital groups.  While the new funding sources help solve the problem of a lack of working capital, the also create a new obstacle:  for assuming the risk, the sources also take a huge bite out of the developer’s profit. 

While the overall lack of funding has opened up opportunities for cash-ready investors, it also continues to suppress raw land values:  There is still a substantial number of would-be buyers forced to remain on the sidelines for lack of working capital – traditional or otherwise – thus land continues to remain unsold, which keeps prices from increasing.  

In addition to many buyers sitting out the season, lower land values on all but the best parcels have kept many potential sellers (some of whom are still wearing pre-recession beer googles) inclined to remain on the sidelines, waiting for land values to rise.  With potential land sellers continuing to hold their properties, autumn 2013 offered a palpable slowing in the land market:  With much of the existing inventory under contract and builders disinclined to purchase raw land, the land acquisition managers were unsure as to what they should buy for 2014 and beyond.

As for our land practice, we found that 2013 was a time to prepare for 2014.  All of the deals that settled this year were deals that we began in years prior.  We have continued to work with landowners who are preparing to sell by assisting them in taking their land through the subdivision process as a way to help them unlock value.  We continue to market our services to landowners considering selling their landholdings throughout Maryland.