Determining the value of land

So how can builders compete 'when the land is free?' Well, according to the Calculated Risk blog, they can't -- at least not against REOs.

And it's not like land values haven't already corrected. Since the peak of the market in 4Q 2005 through 1Q 2009, finished lots in L.A. County have fallen by well over 60%. In Riverside County they're down by 60% to 75%. In San Bernardino County, down by 55% to 70%. And in the Coachella Valley, they're down by 60% to 75%.

Even with these price drops, there's still a disconnect between what buyers are willing to pay and what sellers -- mostly banks and some builders -- are willing to accept.

Into this mix are venturing hedge funds and private equity groups. My concern is that since most of them don't know much about land development, they're tapping the same executives who bought so much of the over-priced land that has decimated the industry in the first place. Falling in love with resumes, some seem to be glossing over basic performance benchmarks (i.e., "How many of your prior land deals went BK or to foreclosure?"). Given that it's now the taxpayers picking up the bill for these mistakes, it's a fair question. While the declining market certainly has played a role, in many cases it was a simple lack of proper due diligence that was the problem.

I'll be writing about the importance of the price of land -- and buyers and sellers agreeing on terms -- for my next column in Builder & Developer magazine.