What Happens If Your Developer Sells Out?
Do you live in a subdivision with vacant lots?
If so, carefully consider what could happen.
Here’s how the development business works:
- When a developer develops lots, he incurs heavy upfront costs to acquire the land and install the infrastructure.
- Those costs must either be paid in cash or financed.
- If they’re financed, the developer must pay interest on his acquisition and development loan and may have a due date for full repayment of his loan.
- Those financing costs result in ongoing debt payments that erode any potential profit when the lots are eventually sold. (Life gets exciting when a developer owe millions of dollars on an asset that is unsalable and/or declining in value).
- The lots created by the developer must either be built upon or sold to builders to recoup development costs and, hopefully, a profit.
- In our current market, those builders have stopped building because they can’t obtain construction financing and/or they fear they cannot sell their spec homes.
- This leaves the developer facing the decision to hold onto his lots or sell them at today’s lower lot prices.
- If the developer sells his lots at a lower price point, builders who purchase them can then build lower-priced homes to meet market conditions.
- That means homeowners who previously purchased homes when times were better may end up with smaller homes or homes of lower quality built on the remaining vacant lots in their subdivision.
Another separate consideration is what may happen with incomplete common areas and other amenities (think pool, community clubhouse, etc.) if the developer sells his remaining lots to another builder who doesn’t deliver on promises to complete those amenities.
The bottom line?
It’s best to be in a proven subdivision developed by a developer possessing financial strength and a track record of delivering what they promise.
But, it can also be a good thing if a capable new developer/builder takes over a stalled subdivision and builds it out with quality homes.
That’s certainly better than looking at weedy vacant lots for years to come!
March 2nd, 2010 Posted in Inside Real Estate
Print
