Nate Nathan thinks the next three months “could be the craziest quarter in my 31-year career.” Nathan is a principal with Nathan & Associates, a Phoenix-area land broker, and the insanity to which he refers is the recent plunge in land prices that’s being exacerbated by big builders frantically dumping real estate for one last shot at tax benefits.

In Nathan’s market, investors have been snatching finished lots for 30 cents to 40 cents on the dollar. And Jeff Gault, CEO with LandCap Partners in Los Angeles, expects the deep discounting by giant builders—whom he said “gorged at the buffet table” and bought land “with a vengeance” when business was strong—to become more widespread, and possibly migrate to land owners in general. “Prices are dropping to pre-2004 levels, which is where they should have been all along. What’s happening is a good thing,” Gault says.

The wild card, of course, is government intervention into the credit markets, and what impact that will have on the pricing of real estate assets, especially if the Treasury Department takes ownership of those assets. “It’s going to all lenders and [the] government selling into the market for the next several years,” predicts Greg Vogel, CEO of the brokerage Land Advisors Organization in Scottsdale, Ariz.

But some developers and industry watchers say they are still waiting for land prices to fall to more “reasonable” levels, while others see signs that land is “stabilizing.” At least two sources expect some land, as it is resold, will get run through the entitlement process again so that smaller, more affordable homes can be built on it.

Clawing for profits

For several months, big public builders have been selling off their land holdings, and each transaction seems to top the previous one in terms of how low builders are willing to go in the prices they accept.

Centex’s liquidation, last April, of 8,500 lots for $161 million—a steep drop from the $900 million some analysts say the builder paid for that real estate—demonstrated how urgently some builders needed to get land off their books so they could write off losses against previous years’ profits. This accounting maneuver, known as a “clawback,” in Centex’s case reaped a $294 million benefit.

And so it has gone. Last week, Beazer Homes USA sold 1,303 finished and developed lots in Ohio to Fischer Homes for less than $3 million. And no builder has been more aggressive lately in disposing land than D.R. Horton. The Wall Street Journal recently reported that Horton sold a 2,000-lot subdivision in Desert Hills Springs, Calif., in which it had invested an estimated to $170 million, for $7.8 million. The San Diego Union-Tribune reported that Horton sold 4.5 acres in Escondido, Calif., for $4.4 million, versus $17.5 million it paid in 2005. And the Bellingham (Wash.) Herald reported that a local developed paid Horton $11.5 million for 72 acres and 125 finished lots that the builder bought three years earlier for $17.3 million.

“The trend is going in the wrong direction,“ observes Steve Friedman, a partner with Ernst & Young in Virginia, about the erosion in land values. “Sellers are selling for motivations other than maximizing profits.”

This has been particularly evident in overbuild markets such as Phoenix, where Vogel says land prices are down 60 percent to 80 percent from the boom. “Unfortunately, this is all appraisers have to look at now. We have seen this movie before; it played in 1990-1992,” during the housing industry’s last recession. Vogel adds that land transactions in his market, which were valued at $10 billion in 2005, could be as low a $1 billion this year.

CoStar Group, a leading source of commercial real estate information, recently posted a chart about land transactions in the Phoenix area’s two largest counties, Pinal and Maricopa. Through the first six months of 2008, there were 97 transactions of 13,867 acres for residential development that sold for $393.4 million, or $35,249 per acre. That is significantly below the $44,987 per acre average for residential land transactions during all of 2004, meaning that residential land is now selling on average for almost $10,000 less per acre now than it did four years ago.

More land sellers are likely to find themselves liquidating in markets that are flooded with unsold property. But Nathan believes this tide is about to turn because big builders that haven’t made money since 2006 won’t be able to write off land against prior profits for much longer. “We’re in the eleventh hour of land sales right now," he predicts.

Variable quality

What’s selling and whose buying vary by market. Until this spring, wealthy individuals seemed to be the primary investors, according to several sources and news reports. But over the last several months, private equity money has been flowing into the land market.

The land that’s been available, though, isn’t always in great locations or of the highest quality. Vogel says that he’s seeing more “A” and “B” sites come back onto the market. But Friedman echoes other sources when he says “quality is a relative term. Land values today in some markets is either zero of negative [because] the cost of infrastructure is greater than the cost of the finished lot.” That’s why, he adds, most buyers demand finished and entitled property, “nothing raw.”

Newland Communities, the giant developer with 42 master-plan communities across the country, has lowered prices of land by 5 percent to 10 percent “in order for our builders to move forward,” says Bob McLeod, Newland’s CEO. But McLeod notes that public builders, which have been selling land they’ve developed themselves in other places, are not selling land they are building on in Newland’s communities. The reason, he explains, is “we’re still selling homes,” whereas the land that builders are liquidating is often in fringe locations or in markets with little buyer demand. McLeod points specifically to Newland’s Fish Hawk Ranch near Tampa, Fla., as an example of a community in a sodden market that’s still selling. All told, builders in Newland’s master plans will sell around 4,000 units this year. “That’s not as high as some years, but it’s still 4,000 homes.”

As a land buyer, Newland sees “potential” for lower land prices, but, says McLeod, “we don’t think they are there yet, at least not where we want to develop.” (Indeed, the New York Times recently quoted one land broker who thinks it could take a decade before the glut of unsold land in southern Florida stabilizes.) McLeod expects better land deals to come down the pike because, he explains, “FDIC is forcing liquidity to come back into the banks,” which consequently will want to get their weaker land assets off their books.

Money talks

McLeod thinks it could take six to nine months before banks are comfortable again about lending money. That could limit land buyers to those with cash. But as land becomes more of a buyer’s market, the flush players entering the field are multiplying. Just this week, Avanti Properites Group in Winter Haven, Fla., began making available first and second mortgages up to $100 million through a non-recourse land loan program. The Journal reports that officials in southern California are trying to drum up support for a federal bill—HR 7189—that would allow local businesses and governments to purchase real estate and homes from the U.S. Treasury to keep those assets out of the hands of speculators.

“The availability of commercial financing is extremely restricted, so it either has to be a cash transaction or a seller-financed deal,” says Perry Reader, president of the Florida division of Crosland Communities, the Charlotte, N.C.-based developer and property management company. Last year, Crosland formed a partnership with the insurance provider Northwestern Mutual called the Southeastern Investment Fund, which is focusing on acquiring land for large, longer-term projects. The partners have deployed about one-third of the $225 million they’ve committed to this fund, and Reader, Southeastern’s chief investment officer, says that parcels which allow for smaller lots and multifamily development are more attractive right now to developers and future builders.

LandCap has $350 million in capital to play with, and Gault tells BUILDER that all of the homes that will be build on land his company purchases will be sold “at normal affordability levels.” And if, as he predicts, cheaper land becomes more available, “there will be plenty of opportunities to build houses for shelter—not speculation—at a reasonable rate.”

But in a volatile market, opportunities are where you find them. On Tuesday, LandCap announced the formation of a joint venture with Kennedy Wilson, a real estate investment and services firm, to acquire portfolios of homes from developers, builders and lenders, which the venture would maintain and resell through auctions conducted by Kennedy Wilson. In its release about the joint venture, LandCap estimates that lenders are now holding more than 1.5 million completed homes.

“Our strategy is constantly changing,” explains Gault about LandCap’s new direction. “At first, we thought we’d do land option contracts, but we did not anticipate the massive repricing of basic assets, so we shifted to buying those assets at wholesale, which has morphed into buying finished lots, paper lots, raw land and now homes. The market is changing at warp speed.”

John Caulfield is senior editor at BUILDER magazine. Ethan Butterfield and Alison Rice contributed reporting to this article.

Learn more about markets featured in this article: Phoenix, AZ, Los Angeles, CA, Charlotte, NC.