Highly speculative investment pays off

[nouveauRiche]

During the housing bubble, a developer bought a bunch of land to build an HOA community with nice amenities.  They did improvements and built a big clubhouse, tennis court, and swimming pools. 

At the time, banks were doing 100% financing on land.  People bought lots for $90,000 - $300,000 each and started building houses.

Then the housing bubble burst and the building stopped.  About three years ago there were bank owned lots in the development for sale for under $10K.  I bought one.  I was very greedy and thought I would hold on to the lot for a year (for long-term capital gains), double my money, and get out. 

A couple of months later, I bought another lot in a less desirable location in the same development for under $5000.  Around the same time, DH bought three lots for under $25,000 total.  He bought two of those in a self-directed IRA.

In 2015, we had some investment losses that reduced our AGI.  We were looking at doing Roth conversions on some of our IRA money.  Our accountant said we should convert any IRA investments we thought would increase drastically in value.  DH converted the self-directed IRA with the lots to a Roth IRA.  At that time, the lots were appraised for about what he paid.

The prices didn’t skyrocket in one year (or even two) as I had envisioned.  Meanwhile, we had to pay HOA fees for five lots.  The longer it took to sell the lots, the more they would cost us.  I was beginning to worry that we would be saddled with these costs for years and that the HOA costs would eat up any gains we might eventually have.  This is the speculative part.

Recently the economy in the area started improving and people are building again.  Last month, the original developer bought up all the lots in the development that were listed for sale under $30,000.  Things were starting to move finally. 

A couple of weeks ago I listed my less expensive (and less nice) lot and it sold in a few days (to a private party, not the developer).  We closed today.  After closing costs, we got about $25,000.  That’s roughly a 40% per year return over three years (where the investment is the purchase price + HOAs paid + property taxes paid).  The proceeds will go towards paying off a rental house we own.

We might have gotten more money if we had waited longer but I’m happy with what we got and happy to drop the HOA costs on that lot.  We are watching listings and sales.  We’ll probably list the other, nicer lot soon. 

Bonus:  I want to do a small bit of charitable giving out of the proceeds of this sale.  I just applied for a mileage rewards credit card and I’ll need to spend $3000 in the first 3 months.  I’ll put the charitable giving on the card.  Win-win.


tl;dr:  I got about a 40% annual return buying a vacant lot in an HOA development & selling it about 3 years later.

[PiobStache]

Great stuff; congrats!

[marty998]

You've done well. And will continue to do well as the other developments progress.

As there area fills up with houses there'll be demand for the unbuilt blocks (the ones you still own).

[stashgrower]

Well done. You're ahead!

[nouveauRiche]

Thanks everyone!

You've done well. And will continue to do well as the other developments progress.

As there area fills up with houses there'll be demand for the unbuilt blocks (the ones you still own).

We hope so.  We'll try err on the side of selling too early (hopefully rather than too late).

[paddedhat]

Interesting. Glad you were honest with yourself about the risks. I did a similar deal and took a small beating. I spent about seven years after the crash building spec. houses in a vacation home community. Just before the crash, lots peaked at roughly 40K ish, for  decent ones. I bought my first one, post crash, for $18K. Within a few years they had settled down to $10 +/-.  I always had one or two in inventory, and ended up holding one too long. I paid $10K, didn't end up using it, and sold for $9K. In the end it was a $4500 loss, for the exact reason you stated, four years of HOA fees,  a minimum commission of $1500 to the selling realtor, and all the other closing costs. Glad it worked out for you. I'm not going to weep too hard for my loss. I made a ton of cheddar working that neighborhood, but it was a lesson learned.

[nouveauRiche]

paddedhat, glad your overall gains made up for that relatively small loss. 

That's exactly the scenario I was afraid of.  That must have been why our lots were so cheap when we bought them - high carrying costs = big risks.

[paddedhat]

paddedhat, glad your overall gains made up for that relatively small loss. 

That's exactly the scenario I was afraid of.  That must have been why our lots were so cheap when we bought them - high carrying costs = big risks.

Yes, it's a huge problem when it comes to speculating on individual empty lots. Prior to the boom, one of my competitors was a group of lawyers, and other well funded players, who created a development company. They would buy lots, then subcontract the home building to a builder. This created a health spec home inventory for them, and they were doing great. At the peak, they were making tons of cash, and got scared by the steep increases in lot prices. They got serious about building inventory, and threw a million + into buying resale lots at an average cost of $30k. Five years later, they had failed and I was carefully reviewing their inventory and paying $9-12K for property that they desperately wanted to dump. Even at that sickening point, all clues pointed to the fact that they were unaware that their inventory was being cherry picked, and that their remaining stock was dozens of troubled properties with issues like steep slopes, decrepit homes adjacent, or soil engineering reports that indicated that extremely expensive on site septic systems would be needed. They had literally paid $30K a piece for lots that will eventually surrender to the county government, for back taxes, since the are worthless.

I also did business with speculators who made money by digging owners out of self inflicted jambs. They were typically lot owners in communities, and were unable or unwilling, to continue to pay taxes and HOA fees on their empty properties. These guys would try to interject themselves into the drama immediately before the property was going to be taken for tax and HOA liens. They would offer to pay the taxes, renegotiate the HOA bills, and give the owner a small amount of cash to take title to the property. This allowed them to resell the properties at a decent discount,  while still making a buck.

Yea, I'm glad it worked for you. It's a dangerous game to play.

[nouveauRiche]

Yes, some buyers in this development eventually gave their lots to the HOA in exchange for the HOA money they owed.

I think the people who bought my lot are speculating.  Their home address is an actual house (one of the few) in the same development.

Yea, I'm glad it worked for you. It's a dangerous game to play.

Actually, this conversation is making me want to move sooner on my second lot.  I could list it for about three times what we have invested (cost + HOAs + taxes) and it would still be the second least expensive lot listed in the development.  It would give me some peace of mind to be rid of it. 

DH wants to hold his a little longer.  Getting rid of mine allows us to hedge our bets.

[Dicey]

DH wants to hold his a little longer.  Getting rid of mine allows us to hedge our bets.

Not a bad plan. Especially if your profits equal or exceed the acquisition costs of all the lots, plus room for more HOA fees on the remaining lots. Yeah, I 8 know some are yours and some are his, but it's still a nice balance point.

[nouveauRiche]

Not a bad plan. Especially if your profits equal or exceed the acquisition costs of all the lots, plus room for more HOA fees on the remaining lots. Yeah, I know some are yours and some are his, but it's still a nice balance point.

I just did some back-of-envelope math.  If we sell the second lot for a decent sum, then the proceeds from the first 2 sales will about cover all the money we've put in so far.  So yes, a nice hedge.

"Mine" and "his" are actually "ours".  It's just whose name is on the title & whose account paid for the lot.

We have some separate money (just out of convenience) but we transfer funds between accounts when needed.  The proceeds from the sale are "ours" and will go towards our FIRE goal.

[ChpBstrd]

I've heard of putting real estate in an IRA, but I've never actually seen it done. What's required? Special paperwork? Accountants and lawyers? Brokerage firm fees?

[nouveauRiche]

DH knows more about it than I do.  I just asked him & he said he called the company (U-Direct) to set it up and then sent them money.  No accountants or lawyers.

When you do transactions, you have to fill out a D.O.I. (Direction of Investment form).

When you want to buy a property, you use the same purchase agreement forms as you normally would but you have to send them to the IRA company and they sign for your IRA.  So the name on the title is your IRA, not yourself.

DH thought there was a $250 start-up fee and that otherwise the fees are transaction-based.  Depends on the IRA company.

DH also owns a rental property in an IRA.  There are a lot of rules about how that is handled.  DH cannot fix anything in the rental himself.  He has to hire someone who is then paid out of the IRA.  He uses a property manager who collects rent and then pays the IRA directly. 

"There's a bunch of info on Bigger Pockets about it."

https://www.biggerpockets.com/

I hope this helps.  If I get any more info about it, I'll post. 

DH just added:  You can't really get a regular loan in an IRA.  It's tricky & max amount is 50%.

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ETA:  Property taxes, repairs, HOA fees, insurance premiums etc. have to be paid out of the IRA money.  That can sometimes be a hassle (extra step).  And you have to make sure the funds in the IRA can cover all the costs.