Bargain-hunting investors drive increase in land sales

Sales of subdivision land are increasing in the Reno-Sparks area at least a little but no one mistakes the activity for a sign that residential developers have any significant construction planned soon.

Instead, prices are so depressed that homebuilders and investors are picking up land at bargain prices, figuring they can afford to hold it until the market recovers in several years.

Sixteen tracts of land planned for residential development sold in the region during the first half of this year, says Mark Krueger, a managing director and senior vice president of Grubb & Ellis NCG who keeps close tabs on the market.

In comparison to sales in recent years, that looks huge.

In the first half of 2009, the area saw one land sale. Four tracts sold in 2008. Two in 2007.

The driving factor has been prices as lots today are selling for as little as 10 percent of their value in 2005, and often no more than 25 percent of their price five years ago, Krueger says.

"Investors and builders who have anticipated the bottom jumped in to grab bank REOs and other distressed opportunities," he said.

Continued depressed values put pressure on other landowners, especially those who borrowed heavily during the mid-decade building boom and now struggle to repay their bankers.

Bankers who hold repossessed land, meanwhile, no longer are holding out for a price recovery and instead look to close sales at current prices, says Ron Cobb, who handles land transactions for Commercial Partners of Nevada.

A few lenders, however, continue to be strongly bullish on the prospects for northern Nevada and aren't willing to take fire-sale prices for the properties in their portfolio, he adds.

Recent buyers generally plan to be patient, says Scott Barnes, a land specialist with Colliers International in Reno.

In some instances, Barnes says, development companies are selling off less-attractive land and trading up to buy better-positioned residential properties in the market.

Given the choice, Krueger says, buyers want to purchase ready-to-build finished lots with utilities and other infrastructure in place. But the supply of finished lots is dwindling, and some buyers now are looking for well-located subdivisions that have the approval of local governments but still await utilities and streets.

Investors who buy residential land are figuring they'll hold for three to five years before selling at a profit, Barnes says, and homebuilders who have cash to buy attractive residential properties don't plan to build immediately.

Few of those lots are being converted into homes this year.

In the first half of this year, the City of Reno issued building permits for 192 single-family homes. While that's a little better than the 134 permits it issued during the first half of last year, it's still a far cry from 2005, when Reno issued well over 5,000 permits for the full year.

Barnes says some of the increase early this year may have resulted from the federal tax credit for homebuyers, which landed contracts for builders who could move quickly enough to deliver completed homes before the credit expired.

But a sustained recovery is a ways off, Krueger says.

"We've got some deeper issues here, and we've got to get the big picture settled," he says.

The big issues, he says, include:

* The need to create jobs in northern Nevada so potential buyers can afford homes.

* Work to market northern Nevada as an affordable alternative to homebuyers in California, work that's particularly important as the Bay Area housing market is stabilizing.

* Reduction of the number of foreclosures on existing residential properties, which depress prices of new and existing homes alike.

* Resumption of bank financing for home construction, allowing builders to move away from the more expensive equity financing that they're now using.