Fitzgerald Atlanta Land Blog

Ask any land appraiser in town and you’ll hear the same story. Land sales comparables are virtually non-existent over the past 18 months. That is starting to change based on my personal appointment book for Closings and word of mouth from other brokers about deals that are pending sale in the near future.

Now that we are seeing actual sales hit the books, the million dollar question is, “Will the banks cut their list prices?” The answer is probably, “Yes, but not by very much.” The reason for this has to do with the vagaries of the accounting practices banks are required to follow.

Banks tend to hold asking prices at levels equal to their book value for their assets. If a bank were to wholesale reduce prices on their assets, they would inevitably be required to reduce the book value on those same assets and tally a paper loss without actually receiving the benefits of a sale: namely cash.

Land buyers are undergoing a re-education process not seen since the FTC days some 20 years ago. The emerging consensus is that list prices are not going much lower, but the deals will got to those willing to make offers -- and lots of them.

Land and lots are a specialized subset of real estate requiring a great deal of upfront time and expense in order to understand each property before crafting an offer. Many are unwilling to put in this time and effort unless they are fairly certain the asset may be acquired on the cheap – buyers have largely relied on published list prices as the main indicator of a seller’s motivation to sell at or below current market prices. Since those list prices have remained high, we haven’t seen many shoppers.

The rise of sealed bid sales of late is a strong indicator that banks are willing to deal at market prices. These events allow banks the luxury of leaving published list prices high while encouraging buyers (with a wink and a nod) to submit lower than asking price bids for serious consideration. The downside for buyers is there’s still no guarantee the property will sell even if a large number of bidders participate.

The option of last resort for banks will be absolute auctions where the property is sold regardless of price. I like to call this the “nuclear option.” So far, most banks have been unwilling to resort to this extreme option because of the lack of control over price on their part. When you start to see a large number of absolute land auctions (and better yet ones with non-qualifying owner financing), you’ll know the land market has hit rock bottom.

However sealed bid events are bringing more land buyers back into the market and if the technique starts to yield sales activity, we may never get to the “nuclear option.” If you are serious about investing in land while prices are at record lows, you would be well served to start submitting bids on sealed bid events before this opportunity passes. Click here to register for specific land and lot offerings in the FDIC sealed bid event that closes May 12, 2010.

NOTE:  I am not an attorney and this article merely relates different strategies I have seen friends and customers try when faced with land that is worth less than the amount borrowed against it.  Please visit our Professional Resources  page to find an attorney that knows far more about these issues than I do.  The goal of this article is to give landowners some frame of reference to engage in dialogue with their lender before the situation becomes desperate.

I hear the same story all too often about land developers and builders who hold on until the very end trying to make payments on raw land or developed subdivisions until all their money is gone.  Land speculation and development is very different from other forms of real estate investment because there is no possibility of income until the very end of the investment cycle when the property is sold.  Unlike houses, apartments, office buildings, warehouses, or retail stores, it is next to impossible to derive lease income from land and lots.  When the market for land evaporates as it has done in the last 12-18 months in Metro Atlanta, the land owners have no way to generate cash from their holdings.  Many have tried to find work, but there aren't many vacancies in the two industries hit hardest by the Great Recession in Atlanta:  Construction and Real Estate.  To complicate matters, the loan payments must still be paid on a regular schedule.

So what is a land owner to do in this current environment?  One option is to continue making loan payments until all resources are depleted and then turn over the property by a process known as deed-in-lieu foreclosure and file bankruptcy.  Another option is to stop making loan payments, lose the property by foreclosure and then defend a lawsuit filed by the bank for their loss on the deal.  Neither of these options seems very attractive to the land owner.  Relocating to Belize might be somewhat more attractive.

A third option is a short sale - yes these work for land too.  A short sale is when the bank agrees to release the lien on the real estate for a payment that is "short" of the amount due on the loan.  There are two types of short sales - recourse and non-recourse.  In a recourse short sale the bank does not forgive the remaining debt and may pursue the borrower to collect that debt just as if the bank foreclosed on the property.  There are two benefits to a recourse short sale: 1) the borrower won't have a foreclosure on his record and 2) the borrower has some control over the selling price of the land.  In a foreclosure situation, the bank takes the property back in at their most current appraised amount and that's the number they use as a basis for the deficiency lawsuit.

The non-recourse short sale is the best option for the land owner - in this arrangement, the lender and land owner work together to market and sell the property at a price they can both live with.  The borrower then agrees to pay some portion (or in some cases none) of the deficiency between the selling price and the loan balance.  The bank in turn agrees to forgive the unpaid balance and will not pursue the borrower for this amount in the future.  There are two disadvantages to the borrower however:  1) The bank will send the borrower a 1099 for the forgiven debt and the borrower may have to pay income tax and 2) the borrower may have a notation on his credit report that says that the loan was satisfied for less than the amount owed.