Investment groups and home builders are starting to buy excess lots from distressed developers in the central San Joaquin Valley, leading some observers to think the real estate slump may be close to playing itself out.
The practice is textbook and happens in every real estate cycle -- the last time in the early 1990s. Developers wind up with excess lots after a booming market and want to get them off their books.
"They are a liability to a builder until they build a house on it," said Robin Kane, a real estate analyst and broker in Fresno.
Fresno builders Steve Lutton and Rick Nisbett used the same approach in the mid-1990s to expand Cambridge Homes. They capitalized on the weak market, buying excess lots from national builders such as Los Angeles-based KB Home.
Cambridge was purchased in 2002 by Miami-based builder Lennar Homes.
Fast-forward more than a decade and the same thing is happening. Often the sales are structured so that investors buy parcels at bargain prices, sit on them for a few years and then sell them back to the same developer when the market recovers -- at a profit, of course.
"On every transaction where there is a loser, there also is a winner," Kane said.
John Trotter hopes he's one of those winners, and he's gambling that his read on the market will pay off.
"We think the bottom is near," said Trotter, senior vice president of San Diego-based Capstone Advisors.
The company is financing acquisitions and buying land to hold until prices rise -- and then plans to sell it back to developers.
"We hold for three or four years and wait for a recovery," Trotter said.
Capstone has completed two deals, spending about $20 million, and is considering more. Trotter has looked at deals in the central San Joaquin Valley but hasn't completed any.
Prices of raw land in Fresno have fallen 30% to 40% over the past several years, making them more attractive to speculators. And finished lots -- those with water and sewer lines and other improvements -- also have declined in value.
Thus, builders have the choice of discounting the price to sell quickly or holding on and waiting for a turnaround.
More are choosing to sell. Two teams of small developers in Fresno are building separate projects on land near Polk and McKinley avenues in Fresno that Summerton Homes of Merced considered excess.
Summerton built about 15 houses in the first phase of its development and then let the option expire on 43 lots in the back half of the tract. David Borchardt and Zane Hammond, who sold the property to Summerton, reimbursed the Merced company for preparing the lots for construction and are developing 23 of them.
The remaining 20 parcels were sold to a joint venture between Joseph Crown Construction & Development and D.A. Dyck Inc. Three houses are sold, six are finished and three are under construction, said Joseph Crown.
Borchardt said he and Hammond could have sold all the lots but decided to retain some.
"Now is the time for someone like us to get into it," Borchardt said. "With our low overhead, we can build homes and make a modest profit."
Some veteran builders are taking advantage of the depressed market to prepare for the future.
Longtime Fresno builder John Bonadelle said he bought land near the southeast corner of Fowler and Belmont avenues in the Fancher Creek project from Dallas-based Centex Homes last year. Centex officials declined to comment.
In Sacramento, privately held Elliott Homes Inc. paid $10 million for 400 acres of excess land last month.
"Local builders wear two hats," Bonadelle said.
"We are land developers and home builders. We buy land cheap and bank it. Odds are, we'll come out ahead when we build a house on it."
Centex remains the dominant developer in Fancher Creek, but the national company has been on a selling spree. It sold 8,500 partially developed or finished lots in 27 states worth $528 million to a joint venture called Corona Land Co., for $161 million, plus $294 million in tax refunds. That deal included lots in San Luis Obispo.
Last year, Lennar Homes sold 11,000 lots in eight states for $525 million.
KB Home also is considering peddling lots. The company has sent out sales packages on 439 lots at tracts in Fresno, Madera and Merced to brokers, developers and other interested parties.
"The dynamics of the market have changed," said KB spokesman Craig LeMessurier.
Whether the lots are sold will hinge on the offering price, LeMessurier said.
"We are continuing to sell homes," he said. "We continue to sell and advertise."
But tepid sales activity and falling prices bedevil national developers such as KB.
Sales of new houses in Fresno County fell 50.6% and prices declined 9.8% in March from a year earlier, DataQuick Information Systems reported April 24.
Trotter said national builders are selling off large chunks of land, in part, because they can qualify for tax refunds based on their losses.
Financial institutions foreclosing on land will be the next big sellers of subdivisions, analysts said.
"The foreclosures are starting to happen," said Eric Segal, a real estate appraiser in Fresno. "A number of properties have been in default and gone to auction."
Kane said the risk to investors is fairly small because prices are low and the seller already has paid much of the development costs.
Meanwhile, the developers of the projects near Polk and McKinley, sensing a business opportunity, hope lower prices will lure buyers.
The tough times also allow small companies with low overhead to offer more.
Purchasers at Elizabeth Heights in Fresno can buy a house ranging from 1,536 square feet to 1,932 square feet for $199,900 to $230,500. The homes have tile entries, larger secondary bedrooms, a tankless energy-efficient water heater and lots of storage.
At Laurel Tree in Fresno, buyers can choose from six models ranging from $189,950 to $329,950. With standard features such as tile floors, maple cabinets, tankless water heaters, kitchen appliances, backyard landscaping and finished garages, the houses go way beyond what most first-time home buyers get.
"People can get all the upgrades, and I can still target hardworking, middle-class families," Crown said.