Investors pluck deals from housing crash wreckage

Chris Bagley, North County Times, Escondido, Calif.

Aug. 31--As Southern California's homebuilders stumble through the wreckage of the worst bust in their industry's history, investors are collecting the pieces in anticipation of the next boom.

Buyers are snapping up empty expanses as large as 100 acres from developers and builders in San Diego and Riverside counties who were caught wrong-footed when housing demand began to slow in 2005. The prices are typically half or less of what was initially loaned on the properties in the first half of the decade, and many are the product of bankruptcy or foreclosure.

At least one major bankruptcy left new homeowners looking out over empty dirt lots -- and on the hook for hundreds of additional dollars in monthly upkeep.

But now developers are arriving with plans to subdivide, install utilities and sell to builders. In several tracts with finished lots and completed roads, investment funds have recently bought property with the intention to sell directly to builders.

Most of the purchases amount to a bet that a rebounding economy will support a new wave of homebuyers by 2015 or so. The investors reason that job markets will be stronger, savings accounts and credit histories will have been rebuilt by then, and that a growing population will have filled up the tens of thousands of houses now sitting vacant.

"Developers are coming in, saying 'We're looking for opportunities,'" said Robert Martinez, director of research for MarketPointe Realty Advisors, a San Diego research firm that has compiled and is selling a database of hundreds of stalled developments across Southern California.

The stalled developments began selling quickly in February and March, Martinez said. As many as 240 remain in San Diego County and western Riverside County, by MarketPointe's count. Those represent developments where builders have closed sales offices in the last couple of years, leaving a total of about 15,000 homes and empty lots unsold.

A half-dozen tracts that have changed hands since late 2008 still appear destined for development as condominiums or houses.

'Long-term viability'

The tracts are in various states of completion.

In at least two stalled developments with homeowners associations, residents are hoping for quick sales and renewed construction. In the meantime, they're paying increased dues to make up for houses that were planned but never built.

Some contain a handful of model homes that back up to bulldozed hills of dirt. Developers graded land, laid water pipes and put up the structures with borrowed money just as the housing market screeched to a halt, leaving lenders to foreclose and resell.

Some are covered in dry grass, barely distinguishable from the surrounding land.

Capstone Advisors bought a tract of 64 lots just east of I-215 in Menifee and two tracts of 100 and 380 lots on the city's eastern border, said Capstone president Alex Zikakis. The Carlsbad-based company is on the verge of buying a large tract in Wildomar, he said.

"It's a belief in the long-term viability of the market," Zikakis said.

Near the real estate market's peak in 2005, however, prices and credit terms were no longer viable, most people in the industry now agree.

One tract of about 100 lots on the northern edge of Temecula's Harveston development was purchased for $23.5 million in November 2005 and resold for $3.5 million earlier this summer, according to Jim Klinge, a Carlsbad real estate agent.

Zikakis said his firm sold off most of its real estate as home prices outgrew the incomes of the people who were buying them. Like homebuyers, developers also are depended on borrowed money more than they had in the past, a potential danger sign, housing analysts have said in the months since the crash.

"We sensed that there would be a strong correction, but this has dwarfed our expectations," Zikakis said.

Boom, bust -- boom?

Dan Stephenson, who owns The Rancon Group of real estate companies in southwest Riverside County, said he's seen this sort of halted development before. Stephenson said he eyed a 600-acre Copper Canyon tract on Murrieta's hilly west side for years before buying it in 1995, in the aftermath of the savings and loan financial implosion.

Stephenson ended up paying about 10 percent of what he had offered the would-be developer, he said. Nearly 1,000 homes were built and sold in Copper Canyon between 2000 and 2004.

Stephenson expects a similar dynamic to play out in Winchester Ranch, where Capstone bought its 480 lots. Rancon and several other builders planned a total of about 6,000 houses on an expanse of three square miles.

None have been built. On Tuesday, one landowner filed for Chapter 11 bankruptcy protection. The owner's primary asset, a 47-acre property with at least $4.5 million in loans, is scheduled for foreclosure auction in mid-September, according to legal filings.

Rancon, the master developer in the project, sold more than 2,000 of the lots to builders, and ended up buying back more than half of them after the crash. In April, Rancon announced the purchase of a 100-acre tract with lots for 120 houses and nearly 500 apartments or condominiums.

Developers and economists in Southern California reason that the ocean forces new residential development to spread north and east, from North San Diego County through Temecula, Murrieta and -- eventually -- beyond. That dynamic is sure to mean profits at Winchester Ranch when the economy recovers, Stephenson said.

Unexpected neighbors

The process unfolds differently where homes are already completed. Several condominium complexes in the region are being converted to rental apartments, either permanently or temporarily.

The Lofts at Moonlight Beach, on Highway 101 in Encinitas, were on the market for more than $1 million as condominiums. But the developer converted about 20 of them to $3,000-a-month apartments earlier this summer. A group of luxury condominiums off Highway 79 in southern Temecula is being converted into apartments with below-market rents.

Newt Danford wonders whether something similar will happen in the Saint Cloud development on Mesa Drive in Oceanside, where his and 50 other townhomes back up to 10 acres of dirt, rocks, weeds and asphalt.

The streets and curbs are dusty but complete, awaiting 290 more town houses initially planned by John Laing Homes, a Newport Beach builder known and once respected for its luxurious developments.

John Laing identified buyers for most of the last 17 of the 51 townhomes earlier this summer, but the deals were scotched when the company filed for bankruptcy liquidation, Danford said. Those 17 units, the empty lots and the development's clubhouse and pool were scheduled to be auctioned on Friday in connection with the bankruptcy.

Danford said he's seen sharply dressed men and women file through the clubhouse and empty townhouses in the last couple of weeks, a potential sign that new developers will move forward with construction at some point.

In the meantime, Danford said, Saint Cloud's homeowners association has raised monthly dues from $200 to $300 to make up for homes that were never built. Teenagers and passers-by occasionally hike around the development's front wall and out into the lots.

"It's beautiful when you come in," Danford said. "The rest of it is the Sahara desert. I have friends come in ... and say, 'When are they going to start building?'"

To see more of the North County Times or to subscribe to the newspaper, go to http://www.nctimes.com. Copyright (c) 2009, North County Times, Escondido, Calif. Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.