Bankrupt Projects Are Springing Back to Life

Construction crews are returning to Cascades of Groveland, a gated 55-and-older community west of Orlando, almost three years after its bankrupt developer left residents surrounded by empty lots, partially built homes, and an unfinished clubhouse.

Shea Homes, a builder based in Walnut, Calif., bought the remaining 761 lots from Bank of America (BAC) in June and reopened the project on Aug. 25 with a new sales office, lower prices, and a new name: Trilogy. Homeowners, who had taken over the guardhouse for mah-jongg, bingo, and poker games, are looking forward to the opening of the 38,000-square-foot recreational center with indoor and outdoor pools, tennis courts, and a card room. "For the people here, the activity of construction equipment is music to their ears," says Eric Sorkin, 61, president of the homeowners association at the development 35 miles northwest of Disney World. "There's a future."

Developments are being resuscitated everywhere from California, Utah, and Las Vegas to the suburbs of Washington, D.C., according to Brad Hunter, chief economist for Metrostudy, a Houston-based housing researcher. "This is a natural progression of the cycle," Hunter says. "Projects fail; the price of the asset drops until it reaches a point where it's profitable for someone else to pick it up and re-market it."

Faced with record low demand, builders are trying to boost margins and revenue by pulling unfinished projects out of mothballs. They are buying lots at less than half their original price from lenders eager to move distressed construction loans off their books. They're also benefiting from cheap land and falling construction and labor costs as they try to lure buyers with prices that, in some neighborhoods, are little more than the cost of a foreclosed home.

The 12 largest homebuilders by market value added 16,631 lots to their control over their two most recent quarters, according to data compiled by Bloomberg. "We're buying lots for less than the cost of the improvements," says Joe Salisbury, a partner at Candlelight Homes, a homebuilder in South Jordan, Utah. "If someone offered me raw land for free next door, I wouldn't even want it because it would cost me more to build out the lots."

Picking up where another builder left off can be complicated by the passing of years. Without attention, weeds grow, swimming pools turn green, government permits expire, and homeowners associations become insolvent, says Taylor B. Grant, founding principal of California Real Estate Receiverships, a consulting firm in Newport Beach, Calif.

Yet homebuilders still see advantages to picking up these properties. In the Phoenix metro area alone, work has restarted at about 48 communities, according to Land Advisors Organization in Scottsdale, Ariz. Meritage, which builds in Texas, Nevada, Arizona, California, and Florida, has bought 100 projects with 5,400 finished lots since the first quarter of last year and has restarted work on about half of them, according to Brent Anderson, vice-president for investor relations at the Scottsdale-based company.

Toll Brothers (TOL), the largest U.S. luxury homebuilder, paid $23 million to SunTrust Bank (STI) in February for Hasentree, a foreclosed golf course community in Wake Forest, N.C., that was once appraised at $78 million, according to Tom Anhut, Toll Brothers' group president in the state. Hasentree was built around a Tom Fazio-designed 18-hole course. At the time of the sale, it had a completed activity center, roads, 100 developed home sites, 218 raw sites, 18 new homes seeking buyers, and 40 occupied houses. Since Hasentree's sales office reopened in July, buyers have put deposits on four new homes, with listing prices starting at $669,995, Anhut says. Hasentree's original homes sold for an average of $1.5 million.

It's possible that the revived projects could contribute to a delay in the U.S. housing recovery by adding to the supply of available homes, says Metrostudy's Hunter. At the same time, builders are being cautious about flooding the market by limiting the number of houses they are constructing without having buyers lined up, he says. Whether the projects will overburden the market will become clear in coming quarters, says Jill Lewis, homebuilder specialist for Land Advisors, because many builders purchased lots around the same time, and will likely get ready to market them at about the same time.

Residents of Trilogy, who have become close in the years since construction halted, are looking forward to having new neighbors, says Sorkin, the homeowners association president. The clubhouse, which Shea plans to complete in phases over the next two years, will be central Florida's best, Sorkin predicts. "It will attract many buyers," he says. "And of course, it will be a wonderful retreat for people who live here."

The bottom line: Bargain prices make it cheaper for homebuilders to acquire unfinished developments and complete them than to build from scratch.

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