Real Deals

Real Deals: Lots become scarce as discount residential land deals dry up

dbracken@newsobserver.comApril 3, 2013 

Last month, Royal Oaks Building Group and a partner acquired nearly 90 acres in Fuquay-Varina where they plan to develop a 250-home subdivision called Grays Creek.

The deal was the sort of discount transaction that homebuilders once found plentiful in the Triangle – a formerly distressed property whose value had been reset but only after a developer invested time and money getting it permitted and approved by local officials.

“That’s one of the last deals of its nature,” said Rich Van Tassel, head of Raleigh-based Royal Oaks.

The property’s history is worth examining because it helps explain the changing economics of homebuilding in the Triangle.

A Raleigh developer, WJ Properties, paid $5.2 million for the Grays Creek property in May 2007, borrowing $3.16 million from MagnetBank, a Utah-based lender, according to property records.

MagnetBank had opened a Raleigh office in 2005, and its business model was straight out of the boom years: MagnetBank focused exclusively on making commercial loans to real estate companies, builders, and small and midsize businesses. It didn’t accept deposits or offer other banking services.

This approach proved problematic when real estate values plummeted, and in January 2009 MagnetBank was shut down and taken over by the Federal Deposit Insurance Corp. The FDIC later sold the loan on the Fuquay-Varina land to an investment group led by California-based Colony Capital, which acquired a 40 percent stake in a portfolio of commercial-property loans held by defunct banks.

Colony later foreclosed on WJ Properties and took the property back at auction, paying $1.76 million in April 2011.

Royal Oaks paid $2.22 million for the land last month, or 26 percent more than Colony paid two years ago.

Van Tassel considers the price – $8,900 per lot – to be a good deal, considering that the town had already approved the project and he could begin work immediately.

Still, Royal Oaks will have to pay to bring water and sewer service to the property, and the cost per lot will ultimately be significantly more than Royal Oaks has paid in other distressed deals it has done with banks.

In Carriage Heights, another Fuquay-Varina community, Royal Oaks secured lots for $35,000 per lot in a short sale, meaning the lender agreed to sell the lots for less than the balance remaining on the loan.

Royal Oaks expects to sell the 53-foot-wide lots in Grays Creek to another builder for more than $50,000. Royal Oaks will buy the larger 70-foot-wide lots in the community for about $60,000 per lot.

Such increases in land acquisition costs for builders is a big reason why Triangle home prices, which have been slow to increase so far, are expected to eventually start climbing.

Single largest expense

The lot cost is the single largest expense of a new home, accounting for about 20 percent of the purchase price. Once builders make their way through the inventories of discount lots they acquired after the housing bust, they will be forced to look at raw land deals where the cost of acquiring, developing and permitting the property will be considerably more.

The Triangle’s inventory of lots, which includes all those ready to be built on, peaked in the first quarter of 2009 and has fallen 26 percent since, according to Metrostudy, a research firm that tracks housing trends. And the inventory that remains is being absorbed much more quickly as the housing market recovers and demand picks up.

The total supply of lots, which is based on the pace of new houses being built over the previous year, peaked in the third quarter of 2009 and has since fallen 49 percent.

“I think the biggest driver (of price) right now ... is the lot shortage,” Van Tassel said.

Bracken: 919-829-4548

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