Greg Hancock and Phoenix-market home building are practically one and the same thing. In 35 years, he's established, built up, and sold two prolific private home building operations before a pre-mature retirement in 2003. Terms of a non-compete agreement with Meritage Homes kept him on the sidelines for a couple of years. When the constraints expired in 2005, unsustainable market conditions prolonged his semi-retirement.

Photo: ISTOCKPHOTO "I was seeing an enormous run-up in '04 and '05," says Hancock. "Houses were selling for $180,000 that three years earlier were only $80,000. Investors ran up the cost of land, the cost of development, and the cost of sticks and bricks. Then it headed straight down. For the last two years, all I have been hearing about is the pain."

Still, Hancock thought, maybe the third time is a charm. But not without a unique, highly-desirable market position.

As public and private builders work diligently to right-size and generate liquidity, there is no readily apparent end to the land deals that various parties are busy negotiating, aimed at exclusive buyer groups or even floating in the general market. Investors are trolling for distressed land–often backed by private equity or institutional capital–practically salivating in anticipation of a low-ebb on prices. What remains unclear is when to pounce.

Market of Moment

But for Hancock and a growing number of operators with the business in their veins and dollars in their pocket, there's no time like the present to go after emerging "A" locations. The problem is: What and where are they? In today's market they're not necessarily within the force field of conventional submarket drivers, such as inner-ring urban locations with proximity or convenience to job centers. Instead, the strategy shift behind determining whether land is an "A" location comes when the "A" stands for affordability.

According to a report issued in late January by JP Morgan, affordability remains below historical averages. National affordability is 7 percent below its 1992 to 2004 benchmark average and 11 percent below a recent peak in 1998. The price-to-income ratio is 16 percent above its 30-year average and 33 percent above 1998 home-price trough levels. "As a result, absent of significant income growth, we believe significant price declines of 10 percent or greater in 2008 are necessary in order to begin to return to more normal affordability levels," the report from JP Morgan home building analyst Michael Rehaut says.

With that level of correction in mind, land buyers are combing through available parcels in search of what might qualify as "hot property" in a moribund market.

"The key is to find land that allows you to put a normal house on it, and to do it at a price that still brings the market down a significant notch in affordability," says Jim Bagley, president of newly established Americrest Homes based in Boca Raton, Fla. "You have to offer an extraordinarily compelling housing value where people say, 'There is no way it's going to go lower than that. I just have to buy it.'"

Bagley is scouring Florida for distressed properties upon which to build up his land portfolio. However, he's also exploring deals across the Sun Belt states. And where a builder once had to buy "C" land positions for prices cheap enough to offer affordable product, today the opportunity is moving closer to the inner metropolitan ring.

"In the 'C' locations, we see finished lots that are so dramatically less than the cost to develop that the land is virtually free," says Bagley. "Already, we are seeing some value in the 'Bs.' Eventually, there is going to be great value in the 'A' and 'Bs.' Once builders would have gone for baseline affordable [product] on those sites; now you'll be able to see a notch above that, and you are going to be able to do that a lot closer in."

Phoenix Rising

Back in Phoenix, inspired by the opportunity to acquire land at below cost-to-develop prices, Hancock has resurrected Hancock Communities, aiming at serving what he calls "the sub-affordable" level of buyer. As the only home builder buying land in the Phoenix market, he feels he can bring affordability back to the Valley in a way that entrenched builders, land investors, and banks that will add foreclosure inventory to the oversupplied market won't be able to touch.

In February, he broke ground in four Phoenix-area bedroom communities and plans to offer homes starting at 1,100 square feet for $89,900. "In today's market, it just makes sense," says Hancock. "I know these people, and they have been out of the market for five or six years."

Although he predicts that "the bloodbath is far from over," Hancock feels the time window for sub-affordable housing is very narrow, so he's striking while the iron is hot. Though he's certainly not the only land buyer in his market, he does claim to be the only builder buying land. "Everyone else is an investor," he says. "And once land is sold off to an investor, sub-affordability is history. In two years, the middle man will want to be paid, and those lots will be back to selling for $40,000."

In the meantime, Hancock is going back to the basics of the buying pyramid, yet trying to stay flexible. He has developed two pro formas for 2008. One models nine closings per month at each subdivision, and the other models 14. At that rate, he anticipates between 270 and 400 closings for the year. "The secret to sub-affordability is volume," he says. "You get your volume at the bottom of the buying pyramid."

That's not to say that Hancock has not seen success at other price points during his career, and he isn't ruling out a return to higher-priced product–provided it can stay true to his model of affordability. In his company's most recent incarnation from 1997 to 2001, home pricing ranged from $69,900 to $500,000. During that time, Hancock Communities sold over 600 units of a 4,500-square-foot home on a 15,000-square-foot lot for a mere $295,000.

"That's affordable housing," says Hancock. "The key is that there is true affordability in every price point. It's called value."

–Lisa Marquis Jackson

The A,B,Cs of Land

A channel check of builders and land sources in markets across the country reveals that in most cases, although more land deals are being floated all the time, a gap still exists between perceived value by buyer and seller.

The ability to establish comps on land value remains a sticking point because the deals that are being consummated are typically not open-market deals. Instead, most everything that closes has some unique motivation that becomes nearly impossible to factor in.

"A" Location

  • Infill site or metro inner ring
  • Highly developed commercial
  • Job corridors close by
  • Great retail, great restaurants
  • Major transportation access within four to five miles
  • Land Sale Environment: Still tough to come by. Not yet seeing these for sale below cost-to-develop

"B" Location

  • More suburban than urban
  • Developing commercial
  • Travel time required to greater community amenities, but they are generally available
  • Few office jobs
  • Land Sale Environment: These deals are appearing at plus or minus a few dollars of the cost-to-develop

"C" Location

  • Rural
  • Residents drive a long way for commercial and jobs.
  • Housing affordability, but not much else to support lifestyle
  • Land Sale Environment: There is no shortage of available C locations–it's really a matter of how much below cost-to-develop you can negotiate

Learn more about markets featured in this article: Phoenix, AZ.