Mike Fitzgerald

The Lincoln Institute of Land Policy publishes Land Prices for 46 Metro Areas in the US with quarterly data from the 4th quarter of 1984 to the 1st quarter of 2009. The graph below shows quarterly lot values for the Atlanta metropolitan area. 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/

I got three calls today from real estate appraisers. Now that's a high number -- I usually average about one call a day but these calls were interesting in that the appraisers were not calling to verify specific sales comps from transactions that I brokered. These appraisers were calling to inquire with me to see if I knew of any comps at all for land sales in Henry, Clayton and South Fulton Counties.

Now I suspect the recent uptick in appraisal activity has to do with the 4th quarter and for that matter the year coming to an end. The problem is that the land market has been at a standstill for so long, the sales transactions of record are now too old to use in appraisals. Most appraisers don't want to use sales that occured more than 12 or 18 months ago. Some counties don't have a single transaction in this timeline and about half of the transactions that I've reviewed are not arms length sales -- they are deed in lieu transactions or transactions between related parties.

Unfortunately, those ordering these appraisals -- the banks who have foreclosed on land and subdivisions -- are quickly finding out that the only way to truly know the value of their property is to sell it. Appriasers use three approaches in valuing real estate: replacement cost, income approach and market comparables. The first approach does not apply to land since land cannot be "replaced." The second approach very rarely applies to land since most land in northern Georgia produces no income in its undeveloped state.

When no comparable transactions exist, the only way to know the value of land is to make the market by accepting offers for properties that have received reasonable market exposure. Once this starts to happen, we may start to see land trade hands again after over a year of almost no activity.

Add another acronym to the alphabet soup of programs for homeowners facing foreclosure. The Treasury Department rolled out its new HAFA program (Home Affordable Foreclosure Alternatives) on November 30th. This program is a last resort for borrowers unable to make payments, sell their property or refinance their loan. The HAFA program seeks to address many of the complaints surrounding short sales and deed in lieu of foreclosure transations.

Any agent that has worked a short sale, can attest to the difficulty and senseless time wasting involved in a short sale. The first problem is there is no accepted process to obtain a bank’s consent to a short sale prior to listing the home for sale. So homeowners and agents are forced to list the property without knowing whether or not the bank will approve the sale at the listed price. Many banks will only begin to speak with a borrower about a short sale when a written offer for the house is received.

The best way to generate an offer quickly is to list the price for an absurdly low price. The listing broker and seller use the first offer to find out what the bank would actually accept short of the loan payoff. Unfortunately, the prospective buyer and buyer’s agent unknowingly provide a valuable service for the seller but waste their own time and energy in the process since the list price on the house was never in the acceptable range for the lender.

Once the lender gives some guidance as to the price they would accept, the homeowner adjusts the list price to a more realistic number. The next offer has a much better chance, but not before the bank attempts to squeeze the real estate agents out of the deal by making him accept a lower than market commission rate as a condition of approval of the short sale agreement.

The Making Home Affordable initiative sent out an email today describing the HAFA program and the ways in which it would address the current concerns with short sales:

The HAFA program simplifies and encourages short sale and DIL (deed in lieu) options by:

• Offering eligible borrowers viable alternatives to avoid foreclosure;
• Providing a standardized process and time frames for handling viable alternatives;
• Allowing pre-approved short sale terms before a property is listed;
• Preventing servicers from attempting to reduce real estate commissions established in the listing agreement as a condition for short sale approval;
• Releasing borrowers from future liability for the debt; and
• Providing financial incentives to borrowers, servicers and investors.

Borrowers should be (or request to be) considered for a Home Affordable Modification Program (HAMP) modification and other retention programs before being considered for HAFA.

There are sample documents on the program website including a sample short sale agreement, request for approval of short sale, alternative request for approval of short sale, and deed-in-lieu of foreclosure agreement.

Take a moment to check out our improved website at http://www.FitzgeraldLand.com . We have 2 new bank foreclosed subdivisions listed. The direct links are:

http://fitzgeraldland.com/detail.php?fatherID=42&TypeID=48&ListingID=59

and

http://fitzgeraldland.com/detail.php?fatherID=42&TypeID=48&ListingID=58