By Prashant Gopal and John Gittelsohn
Bloomberg News
Construction crews are returning to the Cascades of Groveland, a gated 55-and-older community west of Orlando, Fla., almost three years after its bankrupt developer left owners of the existing 238 houses surrounded by empty lots, partially built homes and an unfinished clubhouse.
Shea Homes, a builder based in Walnut, Calif., bought the remaining 761 lots from Bank of America in June and reopened the project Aug. 25 with a new sales office, lower prices and a changed name: "Trilogy." Residents, who had taken over the guardhouse for mahjong, bingo and poker games, will get a 38,000-square-foot recreational center with indoor and outdoor pools, tennis courts and a card room.
"For the people here, the activity of construction equipment is music to their ears," said Eric Sorkin, 61, president of the homeowners association at the development, 35 miles northwest of Walt Disney World. "There's a future."
Builders are buying lots at less than half their original prices from lenders eager to move distressed construction loans off their books. Developments are being resuscitated from Florida, California, and Las Vegas to Utah and the suburbs of Washington, D.C., according to Brad Hunter, chief economist for Metrostudy, a Houston-based housing researcher.
"This is a natural progression of the cycle," Hunter said. "Projects fail, the price of the asset drops until it reaches a point where it's profitable for someone else to pick it up and remarket it. They reposition the project and then what was formerly infeasible, is feasible."
Builders, facing record low demand, are trying to boost margins and revenue by pulling unfinished projects out of mothballs. They're benefiting from cheap land and falling construction costs as they seek to adapt floor plans to today's market and lure buyers with prices that, in some neighborhoods, are little more than the cost of a foreclosed home. The 12 largest homebuilders by market value added 16,631 lots in their past two quarters, according to data compiled by Bloomberg.
The revived projects could contribute to a delay in the housing recovery by adding to the supply of available homes, according to Hunter. At the same time, builders are being cautious about flooding the market by limiting the numbers of houses they are constructing without having buyers lined up, he said. Many homebuyers also aren't interested in foreclosures, which may be damaged or in inferior locations, Hunter said.
The next few months will show whether the revived projects will inflate supply, because many builders purchased lots around the same time, and will likely market them at about the same time, said Jill Lewis, homebuilder specialist for the Land Advisors Organization, a Scottsdale, Ariz.-based land broker.
In the Phoenix metro area, 48 communities have reopened with about 40 more coming in the next year, according to Land Advisors. About 6 percent of finished lots for production are owned by banks, down from 20 percent a year ago, the company said. On average, new homes in Phoenix are going for half of what they sold for four years ago, Land Advisors said.
Picking up where another builder left off can be complicated by the passing of years. Without attention, weeds grow, swimming pools go green, government permits expire and homeowners associations turn insolvent, said Taylor Grant, founding principal of California Real Estate Receiverships in Newport Beach, Calif. Grant, who works as a court-appointed receiver for properties that have gone into default, is often asked by banks to prepare developments for sale.
Developers also are adapting projects to include smaller, more efficient designs that cost less to build, Dallape said.
"They're tailoring them to the market," saidTom Dallape, principal at the Hoffman Company, a land brokerage advisory firm in Irvine, Calif.
"The average new house used to be 3,000 square feet. Today, it's 2,100."
Publicly traded homebuilders such as D.R. Horton, Lennar, Meritage Homes, KB Home, Standard Pacific and Toll Brothers started buying about a year ago as the market seemed to be strengthening, according to Tom Reimers, president of the California division of Land Advisors Organization. They deployed cash, which they amassed during the recession by selling land and taking advantage of a change in the tax code that provided them higher refunds, said Megan McGrath, homebuilding analyst with Barclays in New York.
Many public builders can finance projects on their own. Toll Brothers, the largest U.S. luxury-home builder, spent about $340 million on new land in the first nine months of its fiscal 2010, adding 4,100 lots, its first rise since 2006. The Horsham, Pa.-based company has $1.64 billion in cash for more deals, Chief Executive Officer Douglas Yearley Jr. said.
"This is an opportunity to be investing that capital back in the market," Yearley said in an Aug. 11 interview. "We have opportunities now that we haven't had for some time."
Toll Brothers paid $23 million in February to SunTrust Banks for Hasentree, a foreclosed golf course community in Wake Forest, North Carolina, that was once appraised for $78 million, said Tom Anhut, the builder's group president in the state. Hasentree was built around an 18-hole course designed by Tom Fazio. It featured a completed community activity center, roads, about 400 acres of dedicated green space, 100 developed home sites, 218 raw sites, 18 new homes seeking buyers and 40 occupied houses at the time of the sale.
Buyers have put deposits on four new Toll Brothers homes, with listing prices starting at $669,995 since Hasentree's sales office reopened in July, Anhut said. The community's original homes sold for an average $1.5 million.
"This is really a special golf course and piece of property," Anhut said. "But there's a reason that we paid about one-third of the previous appraisal. Obviously, the market is different now."
