Plowing it under: Part 1, the why
What to do with unproductive acreage? Plow it under – turn the soil into fallow ground, put the nutrients back into the earth.
Better to mulch it before the scavengers take everything
Among the many ways land is unique as an asset class is that its physical holding costs are zero – it need not be maintained. Every form of improved property requires some maintenance to prevent deterioration, so every form of improved property has an implicit caretaker (owner, tenant, management company) and an implicit revenue source (rents, mortgage payments).
Land does not. Land holds its value even as the tumbleweeds roll over.
No maintenance costs
Vacant improved property thus has negative holding value (and thus, potentially, negative equity); vacant land may not. (All forms of land and property have a carrying cost of real estate taxes, but that’s usually a small number for unimproved property.)
Thus, when you change the relative costs of holding vacant improved property, you can condemn it to death, as unwittingly illustrated in this little story from the Los Angeles Times:
Housing crunch becomes literal in Victorville
Crunching a pencil just won’t do it
A bank cuts its losses on a failed 16-unit project by having the homes demolished.
By Peter Y. Hong
May 5, 2009
Curtis Forrester moved into a brand-new house in Victorville last week, but there was little time to enjoy the Jacuzzi and designer kitchen. He was there only to see it destroyed.
Like the human body, which is an entity comprised of organs, a house is an entity comprised of components.
An entity, but also components
The Jacuzzi and designer kitchen will be surgically removed and carted off.
One kidney, worth about $15,000 as a transplant?
Even with this salvage, value is being destroyed as you watch:
Just a few days after his arrival, the two-story residence and three other luxurious model homes were crushed and hauled off for scrap, the latest fallout from
Saluting a fallen comrade: the house goes under in Victorville
The homes were part of a planned 16-unit project in this community 100 miles north of
The alternative described is incomplete. The Texas bank doing the foreclosing would actually have to do three things:
1. Complete the property
2. Hold and protect the property during the sales period
3. Sell it.
Holding the property has become more expensive thanks to the perverse consequences of a recent anti-foreclosure California law, SB 1137:
[Snip]
[A]uthorizes government entities to assess fines of up to $1,000 per day per occurrence for failing to maintain property acquired through foreclosure. Items subject to fine include:
1. Permitting excessive foliage growth
2. Failing to take action to prevent trespassers or squatters from remaining on the property
3. Failure to take action to prevent mosquito larvae from growing in standing water
4. Tolerating other conditions that create a public nuisance
With words like ‘excessive’ and ‘public nuisance,’ SB 1137 gives localities a self-renewing club with which to beat owners of foreclosed property – that is, out-of-state banks – over the head.
What $1,000 per property per day can do to your balance sheet
At $1,000 per day per property, it won’t take long for the fines to exceed any conceivable net value from selling.
In effect, SB 1137 signs many properties’ death warrant.
I don’t like the look of this
Forrester was hired to keep thieves away and help sell off the fixtures.
An empty home is a hugely vulnerable thing. Empty properties invite clandestine occupancy, and readily become houses of crime. Whole neighborhoods can become crime magnets; indeed, whole slums, such as
This story has no happy ending. As a failed state,
More and more narcotics have begun flowing through
When protection can be bought, like any other commodity it creates a marketplace.
In a recent report on
Has threatened the state. Has destroyed the state.
If only asking could make it so
Mr. Forrester, as local agent in Victorville for the Texas bank, is there to prevent this from happening – and to oversee the dismantling of potentially valuable housing.
“All my life I’ve been building things,” said the 59-year-old construction worker. “It’s kind of fun tearing them down.”
Mr. Forrester is not alone:
The Victorville demolition is one of the most dramatic ends to a bad bet made during the housing boom, but abandoned developments have become an all-too-common sight in
As I posted in Rug? What Rug?, developers become upset when they are stopped from using other people’s money because they are allergic to putting in their own:
A developer’s handbook
The builder had announced its intention to go out of business before the bank acted, blaming its financial straits on earlier steps taken by JPMorgan Chase and other banks.
We’re throwing in the towel, have mercy
The New York Times wrote a story headlined Banks Foreclose on Builders With Perfect Records, except that:
The bank cited didn’t foreclose – it appointed a receiver.
The builder didn’t have a perfect record – it was in default.
The builder wasn’t put under by the bank – it had decided to dissolve before the bank acted.
Under those circumstances, if you were the bank, and your money were hostage to unfinished houses being completed by a builder who’s just announced they’re throwing in the towel, would you sit still?
From the New York Times:
An unfinished house is the result of abruptly withdrawn bank financing in a development near
Whose failure prevented its finishing? The bank’s or the builder’s?
The same walkaway – rational, you understand, and completely predictable – occurred by the Victorville developer because the arithmetic collapsed:
The developer of the Victorville project had hoped to sell the houses for more than $300,000 as they were being built last year, Forrester said.
That’s the completed and sold cost. Project (say) $50,000 apiece in costs to renovate.
But reality quickly diverged from that vision. Home prices have tanked faster in
Project (say) a 40% price drop, over $125,000 gone.
Project (say) $50,000 in fines to the cash-strapped town of
Money all gone!
Officials of Guaranty Bank of
When you can’t say something nice, don’t say anything at all.
But Victorville city spokeswoman Yvonne Hester said the bank decided not to throw good money after bad.
“It just didn’t pencil out for them,” she said. “They’d have to spend a lot of money to turn around and sell the houses. They just made a financial decision to just demolish them.”
Not penciling out?
Curious how Ms. Hester forgets to mention the $1,000-per-day fines that she had the power to levy.
[Continued tomorrow in Part 2.]
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