In August of 2005, Florida land developer and entrepreneur extraordinaire Arthur Falcone was surfing the crest of the one of the hottest residential land markets when he sold his home building company Transeastern Homes to a joint venture of Technical Olympic USA (TOUSA) for $857 million.

As distressed builders shut down projects, such as Jessup's Reserve in Winter Springs, Fla.–which was photographed just days after builder Levitt and Sons filed for Chapter 11 bankruptcy–real estate "vultures" anticipate acquiring their land assets at bargain prices. Photo: by riku+anna At the time, the deal was touted as the largest acquisition for a private home builder in the industry's history. Within a few months, however, it became clear that the market wave was crashing into shore, turning Transeastern's expensive Florida assets into an expensive liability and leaving TOUSA's executives reeling from the implications to the company's viability.

Meanwhile, Falcone, presumably with profits from the Transeastern sale safe in his pockets, has picked up 7,000 of his lots left over from the TOUSA deal and headed back out into the surf, ready to catch the next market wave.

Industry sources say Falcone is putting together private equity funding to buy lots in Florida at distressed prices, with the plan to build a new business poised to take advantage of the eventual housing rebound.

Falcone postponed an interview to talk about his new venture, saying he wanted his funding in place before explaining his strategy to profit from the market's lows in the same way he profited from its soaring highs.

The Boca Raton-based businessman joins a growing group of so-called vultures circling crippled home building companies, waiting to pick off their best assets at bargain prices using other people's money.

Vulture Culture

Photo: by riku+anna There appears to be plenty of money available from private equity funds looking for distressed land opportunities. "The private equity guys are starting to realize that there is real opportunity in the home building sector," says Phil Whitcomb, managing director of JMP Securities. "There are funds being set up. I think they are more comfortable in the investments in the land because they have been in the commercial development [area], and they understand that better [than home building companies]."

While the investment money is lining up, land prices–in most cases–still haven't fallen low enough to be able to meet return thresholds. The bottom in the land market isn't here yet, according to Whitcomb; he expects that to hit sometime in mid-2008 or 2009. "You will start to see a lot of people in '08 start to panic," he says. "A lot of these land developers thought they could carry the land for a year, and they are going to start getting squeezed in '08."

Whitcomb thinks that, during the first quarter of next year, most potential investors will be doing due diligence, looking for assets they are interested in, and waiting for prices to fall, but that the back side of '08 will bring more activity.

Many landowners are still stunned by how swiftly the home building market disappeared and have been slow to realize just how far land values have really fallen. "These are big-name builders [in distress]," says Whitcomb. "These are guys who, two years ago, said this can't happen to them." Many will hold on as long as possible with the hope that things will turn around fast enough to pull them out of the mire. "Some people's pride gets in the way, and some people think they can engineer their way out of it," Whitcomb adds.

"Even in the last 60-90 days, the market is starting to capitulate, to become more real. It's going to be a question of making prudent investments early." – John Peshkin, Starwood Land Ventures Photo: by riku+anna Chris Ward, a former Centex executive who was charged with finding land for the company and current managing partner of a group called Magnolia Florida that has gone into the distressed property shopping business, agrees.

"It's going to take significant discounts, not on what they paid [for the land] but on what you think the real value of that land is today," Ward says. That means factoring in the costs of carrying the land for several years. "I don't think we are going to be able to start selling homes for four years," he explains.

For instance, Ward has looked at a parcel in St. Lucie County, Fla., that the owner paid $100 million for a few years ago. "When I do my numbers and look at when the market is going to come back, the land is worth no more than $20 million now," he says. "And then, with all the over-supply, even $20 million may be over-paying."

In the Florida markets where Ward is shopping, the excessive inventory of existing homes plus the depressed buying market casts an extremely long shadow on the profitability of raw land–even entitled raw land.

"You've got all this supply sitting there dead in the water right now," Ward says. "Even if you write lots down to zero–which, honest to God, there is land out there right now where the value is zero–they could give you the land for free and have only the construction costs of the home, and you still wouldn't be able to sell homes to anybody. It's scary."

Learn more about markets featured in this article: Orlando, FL.