Ok, now the sale makes a little bit more sense. However, he still has to finish his final approvals in May or June, which could be a bad time if this market really starts to erode and folks become gun shy.
I remember the last downturn in the early 90’s, I lost ten million dollars in profits (and a lot of my investment capital) as my buyers bailed out of land escrows one by one over a horrible 90 day period (I thought it would never end). It can happen with lightening speed and takes on phenomenal momentum when everyone decides its time to exit.
Most of those in the market today have never really experienced that kind of downturn, where the fear takes on a life of its own and drives folks to make desperate, irrational decisions. We aren’t there yet, but an old land guy like me that’s been through two previous downturns can sense it in the air…kinda like when the weather starts to change just before a tornado hits…it’s not too far off.
Back to your landlord, remember, being in escrow is a hellova lot different than closing (as we all know) and your landlord’s buyers may get squirmy and just bail out of the deal. Then your landlord will have lost momentum and will have to start all over to find another buyer, in a rapidly decaying market. (Due diligence on a land deal can take 90-180 days, depending on how complicated it is and that is a lifetime in a falling market). I sure hope he got a very large, non-refundable deposit.
Again, land entitlement (subdivision) has a long lead time (in California anyway) and if you don’t hit the market just right (selling on the way up) you can lose your rear or if you are well capitalized, you can hang on through to the next market, which could be a ways down the road, but that scenario seriously compromises your return on investment (and can oftentimes make it negative).
Buying raw land and securing entitlements used to be the best way to make money in real estate, but only for those who understood the process and carefully calculated the risks (which very few people do). I have seen a lot of folks lose their shirts in this business, including old pros like me.
There just are so many unknowns and cities and counties, not to mention the federal and state resource agencies (the environmentalists), are constantly changing the rules while you are going through the process. Oftentimes the yield you thought you could get at the beginning of the process is way less (or none at all) when you get to the end of the process.
In the old days, I typically wouldn’t even look at an entitlement deal unless I could earn at least 40% IRR (return being commensurate with risk). On my last deal, I captured a 60% compounded rate of return on my capital but was in that deal for 16 very long and scary years. Fortunately, my timing worked out because Lady Luck was on my side. I had many a sleepless night over that one though.
It’s an incredibly risky proposition to start an entitlement process at the end of a market run (where we are now) because you are buying overvalued land and trying to add value in a falling market (essentially swimming up stream). You must start the entitlement process after a market has bottomed and is on it’s way back up (again because of the long lead times) because you may get to the market too late and miss your profit window. In the land business there is a very fine line (dictated by timing, which is often dictated by luck) between being a hero and being an idiot (I know, I’ve been both).
Lastly, thanks for the great links. I can tell you are an intelligent woman with an insatiable curiosity but you temper that with having your priorities in the right place (family first). And please, don’t let your participation on this website wane, I really enjoy your insights and opinions on all the subjects you address, not just the real estate market.
