Hat tip to Jakob for sending this in, from the WSJ:
Builder Standard Pacific Corp. disclosed this week that it entered into an arrangement that gives it the right to purchase 468 acres of raw land in northern San Diego county over the next two years, the latest indication that builders believe the California market is making a comeback.
The $150 million transaction, Standard Pacific’s biggest land deal since the market’s 2006 crash, is further evidence of the company`s strategy to bulk up on bargain priced land now as it prepares for the housing market to improve. In addition to its latest deal, Standard Pacific has committed to spend about $300 million for 4,600 lots so far this year.
The land Standard Pacific will buy currently contains active dairy farms, egg ranches and citrus groves. It plans as many as 737 homes, though it will also consider selling lots to other builders. Raw land is typically less expensive than finished lots, so while Standard Pacific has to pay for the infrastructure, it can make money selling homes or finished building lots.
“We decided to take the risk ourselves instead of sharing it with others,” said Ken Campbell, the Irvine, Calif.-based builder’s chief executive. During housing’s heyday, California was the most profitable market for many home builders in part because prices were higher than in most other regions. It not surprising that builders would be angling to get front row seat in that market, particularly in the San Diego area, where building lot supply is low.
Standard Pacific said it was approached by the original developer, New Urban West Inc., which spent seven years assembling the parcels from farmers and other owners and getting the necessary approvals to build. But after the downturn began, New Urban, like many private builders, couldn’t begin the construction phase. New Urban West wasn’t immediately available for comment.
Standard Pacific had to renegotiate with each of the 11 land owners: Had a single owner held out, the deal could have unraveled. Standard Pacific says the deal, for a site known as Harmony Grove Village, is worth the nine-months it took to negotiate the plan since the lots are already entitled.
In California, the notoriously hard entitlement process can take several years and cost millions of dollars. Standard Pacific secured the land with an option, or the right to purchase it in up to two years, when the housing market should be in better shape. Including land development, the price should be about $150 million. The company can abandon the deal for a few million dollars, Mr. Campbell said. Peter Kiesecker, Standard Pacific’s senior vice president handling large land acquisitions, said the company aims to create an old-fashioned community with front porches were residents can enjoy “horses and the Fourth of July.”
The cottage-style homes will be priced from about $350,000 to around $1 million.
Pave paradise, put up a parking lot…
Once again, they are paying far too much for the land. At 737 lots for $150MM, that’s about ~$203,527 per developed lot. I think that’s very optimistic on their part.
Am I missing something?
Yes, CA renter, you’re missing the real estate boom! If you don’t believe me, just ask David Lereah. Copies of his book are still available, for only $19.95!
It’s a near-free option for Standard Pacific. They control $150 million worth of land for the next couple years, and if the market doesn’t come back they can walk away for just “a few million.”
That’s as good a deal as buyers get with a near-zero-down FHA loan with a free walkaway option.
Hmmm a two year option. My guess is that in two years the market will be no better off than it is today…yet it might be poised for slow appreciation.
CA renter-Well, they are rather large lots. Factoring in roads and HOA ammenities and schools and the like, the lots will be around a half acre each. They clearly are planning to build high-end product here. I suspect there will be a lot more million dollar units than $350k ones.
Plus, like WC Varones said, backing out of the deal is cheap.
How about some government stepping in and just saying “sorry, no more development, fellas”? Isn’t it the government’s job to prevent runaway development????