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To reduce the risk of a foreclosure, the lot holder may wish to provide a loan to a builder to erect a structure while maintaining ownership of the lot. The holder can require the builder to sell the lot within a fixed time period or lose its right to a predetermined builder fee. Having a disciplined budget and paying subcontractors directly can help avoid inflated liens. This method allows for fast movement and high prices but at reduced risk and cost than traditional financing. Foreclosure becomes unnecessary because subcontractors can be paid off to get ownership, giving the holder the ability to immediately sell the structure and lot.
In implementing this option, financing a model/spec building or a separate model and spec structure is recommended. In this way, the buyer pool increases because the risk of building delays after an existing home is sold is eliminated. The value of a model is that it creates a base in a subdivision for sales, and buyers get a feel for the work of the builder. The model also creates a stimulus for sales and momentum in a subdivision.
Building a model or spec building is expensive. It is necessary to keep out-of-pocket building costs as low as possible and leverage marketing of that structure as much as possible to justify the expenditures on construction.
To reduce expenses, find builders whose owners want to benefit as much from the day-to-day labor as the potential profit in the sale of the structure. A small builder may achieve the lowest price for the structure, and a real estate agent, rather than the builder, can then be used as the primary sales driver.
Money also can be saved by taking houses to the drywall stage, instead of incurring the cost to complete them. In addition, the owner can advance about half the cost of construction and have subcontractors carry the structure to close (i.e., subcontractors may be willing to get paid 40 percent or 45 percent of their invoices at close). This approach may require that models be sold relatively soon after completion, but an agreement can be made with the purchaser to show the house for a period of time after closing.
In addition, the model, although built in one subdivision, can be used to spur sales in other nearby subdivisions in which the holder owns properties through cluster marketing. Short descriptions and pictures of the property can be posted for the subdivision in which the model is located and for subdivisions in nearby locales, giving buyers a model to see what can be built on those lots. This can help sell the lots. This marketing also can be used online.
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For holders of large portfolios of distressed lots and land, there are numerous options to get rid of the properties at reasonable prices fairly quickly. Bulk selling properties or one-off sales at fire-sale prices often is unnecessary and fails to yield the appropriate return. Limited seller financing, prudent takedown relationships and subordination of lots are alternatives that must be considered when developing a land/lot sales and marketing strategy.
Optimizing the value of land and lots in the current depressed real estate market requires good planning, close coordination, good decisionmaking and disciplined tracking. Commercial mortgage brokers must be aware of the issues their clients face and be prepared to help them dispose of the assets or secure financing.
Robert Steinberg is director of TurnPoint Advisors LLC, a boutique turnaround company headquartered in Dallas. Steinberg is a
turnaround professional focused on distressed real estate, and he previously worked as managing director at CRG Partners. He has spoken nationally on distressed real estate management assets and was a special adviser to the Resolution Trust Corp. in the previous real estate recession. Steinberg is also an attorney. Reach him at email@example.com.
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