In this week's Digital Dirt, we address the foreclosure issue. Specifically, successes that builders and distressed-asset investors are having as they pick off abandoned subdivisions.
In a dramatic example of the power of affordability, Universal Venture Fund LLC, a company controlled by Private Equity Group LLC, purchased 116 spec homes in the Coral Lakes community in Cape Coral, Fla., from TOUSA Homes at the end of March. Hollywood, Fla.-based TOUSA is reorganizing under Chapter 11 and operates under the Engle name in Lee County.
Local real estate investor O.J. Buigas is the man behind the $13.5 million deal. He immediately slashed sale prices by roughly 40% and put the homes back on the market.
Inside the gated community, both single-family homes and townhomes were available at prices starting at $86,000. Plus, Engle pledged to warranty the homes for a year from the purchase date and include a 10-year warranty on each home's structure. The results were dramatic; nearly 50 were sold in the first weekend, and 87 were gone within a week.
In another twist on what's likely to become a trend, builders are being hired by banks to build out communities that have been foreclosed upon.
In Michigan, Howard Fingeroot, managing partner of Pinnacle Homes and the former president of Pulte Land Development Co., is leveraging his connections with banks to acquire defaulted workout projects. Pinnacle Homes has picked up four incomplete subdivisions throughout metro Detroit. Livonia Builders has also picked up several abandoned projects in the Detroit market and if building them out with smaller homes and pricing reduced more than 30 %.
E-mail me at email@example.com with any details on how foreclosure neighborhoods are being evaluated in your markets. Are they garnering interest from the distressed capital trying to work its way into the industry? How are local operators viewing the abandoned communities--as a blight on their own or as an opportunity to build more homes?
In the meantime, here is more on what's happening in the trenches:
RANCHO CORDOVA, CALIF.
An option granted in 2001 was exercised last week by Elliot Homes in a deal that garnered 400 acres of land for the builder/developer and added $10 million in cash to the dry coffers of distressed GenCorp Inc.'s subsidiary, Aerojet-General Crop.
Seven years in the making, Elliot now controls a total of 1,500 acres in the Rio del Oro development area in Rancho Cordova, Calif. GenCorp sold the initial 1,100 acres to the company in 2001. Due to environmental issues, the extra parcel of 400 acres had to be optioned to the builder at the same time and only made available following clean up.
In March, GenCorp received state agency approval to develop a total of 2,300 acres in the area, including Elliott's secured 400 acres. The approval triggered the beginning of a 60-day option period, and Elliot closed the deal on April 2.
The builder has big plans for developing the area including mixed uses and nearly 12,000 homes.
It's likely that more land sales will come from the holdings of publicly-held GenCorp. The company has been under financial stress and is feeling pressure to generate cash and accelerate its development opportunities. According to an SEC filing related to the sale, 50% of the net proceeds generated "[were] required to repay outstanding principal on the company's term loan."
In March, the company's largest shareholder, New York-based hedge fund Steel Partners II, took control of GenCorp's board of directors by claiming three seats. At the same time, Terry Hall, president and CEO since 2002, stepped down. The two companies have a long and contentious history.
GenCorp still owns about 12,000 acres in the area, approximately half of which has been earmarked for development. The company is currently working to secure the land-use permits it needs before it can develop the parcels, according to Linda Cutler, the company's spokesperson.
Considering Kimball Hill Homes' much publicized financial strains, the fact that its existing Texas communities are reportedly either mothballed or producing mediocre sales, and the recent slowdown in activity across the state, there's some confusion regarding the builder's announcement that it is opening eight new communities in four markets across the state. Experts have expressed surprise at the company's decision to expand in San Antonio,Dallas, and Houston.
MESA, ARIZ.Depsite the oversupply plaguing the Arizona housing market, home builder/developer Jeff Blanford is opening his 717-acre, 1,200-home master planned community in northeast Mesa. His strategy is to offer the right product at the right price. The goal is to get momentum going until the market eventually corrects itself.