Time to start looking?

[Dick Seibert]

In other threads we've talked about opportunities in the housing *downturn* or *debacle* howver you want to describe it. About a year ago a friend of mine who went to Texas to cleanup after the S&L crisis, told me he was buying at 40¢ on the dollar in Florida, 10¢ for raw developed land. The question has only been the timing issue, but apparently the 40¢ on the dollar point has been set as the buy point, leaving only timing because you have to be able to wait it out to sell if you buy now. It appears that the best deals are in partially completed developments, something we are ideally suited for, almost makes me want to come out of retirement! The opportunities are going to be immense, maybe the last time in most builders' lives on this forum, most of the rich people I've known prior to the dotcom boom made their money by smart moves both before and after the '29 crash, other than the guy mentioned above who cleaned up building apartments here, liquidated his company after the tax reform law went into effect, went to Texas to make another fortune after the S&L collapse, and is now buying in Florida. I'd take a hard look at builders in distress in your own areas, you just might find a gold mine without going out of state.

As the U.S. housing slump drags into its third year, sellers will start cutting prices as much as it takes to find buyers, said Marcel Arsenault, a self-described ``vulture investor.'' Properties will be available to buyers with the financial strength to ride out the slide. Now that a price has been set, all that's left is the waiting.

John Levy, a real estate investment banker in Richmond, Virginia, said he's passed up opportunities in the past to join forces with homebuilding companies. Now he said he's planning a joint venture with a national builder to buy communities abandoned by bankrupt developers in the middle of construction.

``That's where you can buy at the biggest discount,'' Levy said. *

* http://www.bloomberg.com/apps/news?p...Jww&refer=home

[bread and roses]

he was buying at 40¢ on the dollar in Florida, 10¢ for raw developed land. The question has only been the timing issue, but apparently the 40¢ on the dollar point has been set as the buy point, leaving only timing because you have to be able to wait it out to sell if you buy now.

$.40 on what dollar? Are you counting peak of the bubble as the starting point? Last selling price? The comparison with an artificially inflated price seems less important to me than comparison with nearby properties and a look at the local job market, which is harder to quote compactly.

[David Meiland]

I don't think there's much of anything at .40 on the dollar... not here, not in Michigan, not in inland SoCal. And I don't think we'll get there either. I suppose a few well-positioned buyers might be able to pick up botched developments here and there for fire sale prices, but I certainly can't lay my hands on anything like that. What are you thinking of doing?

[Dick Seibert]

My *vulture* friend tells me he's waiting for 40¢ here, but going to Florida to get it now, read the Bloomberg article, read it twice, and see what the big guys are able to do now, there will be a lot more of it in lots of areas this coming year, there currently is no financing available over $417,000 for the average buyer.

I'm thinking of looking for a condo or few partially completed homes in distress, but what's holding me back is estimating the hold time before they can be re-sold.

[Allan Edwards]

If homebuilders are doing so bad, why can't I get a hotel room in Orlando at next month's national builders show? There are an anticipated 100,000 people expected to attend.

Actually, the majority of builders are still going strong, the poorly capitalized, poorly managed marginal weak builders are struggling. I can't find good buildable lots in the neighborhoods I build in.

If anyone wants to go to the 'burbs and buy tract home lots and houses and think they are going to flip or even buy and hold and make money, I think they are dreaming. Distressed properties are just that, distressed. You are much better off buying the cream puff properties and paying more than buying the junk.

[David Meiland]

If homebuilders are doing so bad, why can't I get a hotel room in Orlando at next month's national builders show?

Maybe there are so many builders out of work that they've got time for a trip to Florida? LOL

Wish I could go to the show myself. Too busy working to actually do anything smart to benefit the business.

[Allan Edwards]

Wish I could go to the show myself. Too busy working to actually do anything smart to benefit the business.

I've attended most (maybe 80%) of the shows since 1980, just about the smartest thing I've ever done in business. The NAHB offers a lot to contractors, both homebuilders and remodelers.

[tayriver]

My *vulture* friend tells me he's waiting for 40¢ here, but going to Florida to get it now, read the Bloomberg article, read it twice, and see what the big guys are able to do now, there will be a lot more of it in lots of areas this coming year, there currently is no financing available over $417,000 for the average buyer.

I'm thinking of looking for a condo or few partially completed homes in distress, but what's holding me back is estimating the hold time before they can be re-sold.

The wife of a close friend of mine also buys distressed, collateralized debt. Based on what I've heard, your numbers sound about right. They say things in the late 90's and early 00's weren't great, but now it's booming, esp in FL.

Anecdotally, I was in Panama City Beach in early November, and it was shockingly dead, especially for an event weekend. Major construction projects with no activity (I arrived on Thurs, and stayed through the weekend), lots of hotel vacancies, etc. I took it as symptomatic of overbuilding, which is confirmed by all these other reports we're hearing about FL.

It's way out of my league to discuss buying much more than a cardboard box, but what the heck. IIRC someone (maybe Robert Schiller?) devised a price/rent ratio for housing, similar to P/E ratio for stocks. I periodically heard it thrown around in discussions of the housing bubble a couple of years ago (high P/R ratio). Might be worth using this, or revising it for your own purposes. Similarly, if properties had a worst-case scenario of being cash-flow positive at some reasonably assumed rate of occupancy, that would also be a reasonable metric. Not that you'd have to rent them, just that you could if you were forced. Margin of safety, and all.

IMO, predictions are tough. I'd have the same reservations that you do.

[parkwest]

Isn't the price/rent ratio called the cap rate?

[Bill Robinson]

Allan, come see me, I will be at the Henkel booth.

Looking forward to seeing you.

Bill R

[tayriver]

Isn't the price/rent ratio called the cap rate?

Apparently not, but I did have to check. Here's cap rate: http://en.wikipedia.org/wiki/Cap_rate , and here's a bit on Price/rent - http://en.wikipedia.org/wiki/Real_estate_bubble - scroll down to housing ownership and rent measures. Interesting exercise - looks like there are a few good ways of measuring both market conditions, and the values of specific properties within those markets.

Anyone who knows how to paste links over text, feel free to tell me how.

Jesse

[Bob Kovacs]

I dunno....nothing selling for 0.40 on the dollar down here in GA. In fact, Pulte just added another two models to the lineup in our subdivision and is doing very well. My neighbor runs the design department for Beazer down here, and while he says things have slowed a bit, they're using that time to re-evaluate all of their product, improve efficiency, and end up with a better product. I'm not seeing all of the "doom and gloom" that Dick's writing about (of course, Dick's been pretty much "doom and gloom" about one thing or the other since I've been around here......).

[Allan Edwards]

Allan, come see me, I will be at the Henkel booth.

Looking forward to seeing you.

Bill R

I'll track you down! By the way, what/who is Henkel?

[Dick Seibert]

Bob:

Gloom and Doom! Beazer's stock is down 90% and thier corporate officers are under federal investigation!

Beazer is the only major publicly traded builder under federal investigation, triggered when the Observer ran stories about the company's business practices in Charlotte last year. Beazer admitted in October its employees violated federal housing regulations. Already late in filing third-quarter financial results from last year, Beazer said it could restate financial results as far back as 1999. An investment group has called for the CEO's ouster.*

Many financial gurus are predicting the bankruptcy filing of Pulte as well, as is evidenced by the credit default swaps:

The perceived risk of owning the bonds of some of the biggest U.S. home builders has risen since a wave of bankruptcies hit the mortgage industry that caters to homebuyers with poor credit histories. Credit default swaps have more than doubled in price since Feb. 1 for two of the four biggest builders, D.R. Horton and Pulte Homes, and for Toll Brothers, the big luxury-home builder.

Credit default swaps are financial instruments based on bonds and loans that are used to speculate on a borrower's ability to repay debt, and were created to shield bondholders from default.

Kara Homes, a New Jersey builder, was one of the first major, closely held home builders to file for Chapter 11 bankruptcy protection, in October. Such regional builders are likely to precede any of the big public companies into insolvency, said Kara's bankruptcy lawyer, David Bruck.

By 2008 or 2009, some of the larger companies will have to restructure as the housing crunch continues, he said, adding, "It's only a matter of time."

*http://www.charlotte.com/business/story/442677.html
** http://www.iht.com/articles/2007/04/...erg/bxhome.php

[Allan Edwards]

Dick

You are doom and gloom and always have been. As to Beazer or whoever, do you know how many homebuilders there are in this country? Most are still doing well, a few are always in trouble. I know many are welcoming a slow down, it's been so busy the last 7-8 years. My business has never been better. I had an offer today on a spec for 3 million$, I don't even have the house listed for sale! By the way, I turned it down.