07:33 AM CDT on Friday, April 17, 2009

By STEVE BROWN / The Dallas Morning News
stevebrown@dallasnews.com

The biggest homebuilding slowdown on record has left the Dallas-Fort Worth area with lots of empty lots.

VERNON BRYANT/DMN

A subdivision street sits empty in the Cattle Ranch development in Celina. Home starts have fallen off sharply in Dallas-Fort Worth, especially in the far reaches of the area. More than 90,000 D-FW home lots are ready for building.

How many? Enough to last more than five years, according to the latest estimates.

"Home starts have declined almost 67 percent while the lot supply has fallen only 2 percent," said local housing analyst Ted Wilson.

For investors, those unwanted properties offer the potential for profit.

More than 90,000 vacant home sites are sitting ready to go -- many in far suburban areas of Dallas-Fort Worth. And there's even more surplus residential land planned for housing developments that have been put on hold.

"It may take many years for those markets to work down the oversupply," said Wilson, who's with Residential Strategies Inc.

The glut of home lots and land has caused builders to take billions of dollars in financial write-offs and left some lenders holding the bag with shaky loans.

Buyers are watching to see how low lot prices will go.

"We've set up our company to take advantage of what we saw coming to the market -- a great deal of distressed assets," said Dallas businessman Larry Taylor, who just formed a partnership with an affiliate of Starwood Hotels & Resorts to buy land and lots in North Texas.

Taylor and his local partners have been in the residential development business in North Texas for more than two decades. And he knows firsthand how to profit from other folks' problems.

"We did this in the late '80s, when we bought tons of property from the FDIC and RTC [Resolution Trust Corp.]," said Taylor, who acquired the troubled real estate at bargain prices and then resold or developed it. "We did very well on that."

That's the plan this go-round, too, although "it's more of a gamble right now," Taylor said. "This time, it's the entire economy that's in trouble, not just real estate."

Preparing to pounce

Still, Taylor's new TD Star Land plans to initially invest $75 million in lots and vacant residential land in the D-FW area.

"We are probably looking at 30 deals a month," he said. "But so far, we haven't bought anything.

"We just need to make sure we buy assets at a price we can hold them for a few years until the market comes back," Taylor said. "It's an eight-year fund, so we have ample time to buy assets."

Another Dallas-based investment group, RSF Partners, has already started reselling properties from a major purchase it made last year.

"We sold some of it early at good prices," said Chris Mahowald, managing partner of RSF Partners. "We've sold lots and in a couple of cases sold land in bulk."

RSF paid Dallas-based builder Centex Corp. $161 million to acquire 8,500 lots and other properties in 11 states. The purchase included more than 1,400 lots in the Artesia subdivision in Prosper.

"There has actually been some interest from buyers, but none of it evolved into a sale," Mahowald said.

RSF made the purchase without debt.

"We have the benefit of not being under any capital pressure," he said. "Our general view is the holding period is going to elongate."

Waiting for the rebound

With lot construction at less than half the level of 2006, analysts know there will be a squeeze on supply when the building market rebounds.

"As the demand for new homes strengthens, the demand and prices of lots will quickly firm up in the high-growth areas," said David Brown, who heads the Dallas office of housing analyst MetroStudy Inc.

"Most of the investors are looking to purchase well below replacement cost, like they did in the late '80s and early '90s.

"In most instances, the prices these investors are looking to pay today will allow for holding periods of three years or longer," Brown said.

"We have seen instances in the toughest submarkets of lots selling for 50 cents on the dollar -- a $28,000 lot selling for $14,000," Wilson said. "Problem is, not many builders are willing to step up and buy" even inexpensive lots at this point.

Most lots now being sold are going to investors, he said. "Investors can often buy these lots below replacement cost, but there may an extended hold period until he can resell."

Most analysts are betting that the North Texas homebuilding market will bottom out this year and begin a slow recovery.

"These investors understand once the economy strengthens, the D-FW market will get back to the significant population growth we have seen over the past decade," Brown said.