David Lichtenstein, chief executive and founder of Lightstone Group David Lichtenstein, chief executive and founder of Lightstone Group. (Courtesy Lightstone Group)

After the housing market tanked, real estate investors began snapping up foreclosures at bargain prices, betting they could rent them for a tidy profit and sell them when the market recovered.

But not David Lichtenstein, 53. He went after the land, convinced it would yield better returns for his New York firm, the Lightstone Group, a privately-held real estate company he founded in 1988.

The move was an especially risky one back then. There were so many cheap foreclosures flooding the market that a comeback for newly-built homes – and the lots needed to construct them – seemed unlikely to pay off quickly. Only a few hedge funds and other investors took a chance on land acquisitions when the market unraveled, real estate experts said.

Now, the high-risk proposition could pay off big time.  As builders position themselves to take advantage of the market's slow recovery, they're eager to buy the types of finished lots that Lichtenstein owns.  Nearly 60 percent of builders say the supply land is low to very low, according to the National Association of Home Builders. They say the shortage of buildable lots is one of the key reasons the number of new homes for sale remains tight by historical standards (206,000 as of August).  The low level of new homes for sale is likely to be a big factor in driving housing construction in the coming years, according to LPL Financial.

“We’ve seen prices skyrocket in a number of markets to where lot costs are as high or higher than what they were at the peak of the boom,” said Jack McCabe, a real estate consultant in Florida.

In an interview with The Washington Post, Lichtenstein explained his investing strategy in the residential market and talked about some of the hard lessons he's learned in the boom-bust cycle. The interview has been edited for clarity and space.

 Dina ElBoghdady: Why did you decide to buy land instead of homes?

David Lichtenstein: I started my career buying and owning single-family houses, and I know that’s a really tough job. Toilets break. Trees fall. There are so many things that can go wrong. Land, on the other hand, is cheap to manage. It’s painless, really. All you have to do is pay your taxes, and that’s it.

D.E.: How did you decide on where to buy the land?

D.L.:  We looked at a map, and chose to buy land wherever housing prices had declined the most. Our hunting grounds were in Florida, Nevada, Arizona and Southern California. We saw areas in the country where the chasm in pricing between homes and land was greater than it should have been. Home prices were down 50 percent in some areas, but land was down 90 to 95 percent. When the housing market recovers fully, the land will be the better investment. Think of it this way: Let’s assume a house was once worth $1, and then it fell in value to 50 cents. When the market bounces back, the investor who bought that house at the 50-cent low will see their investment double. The investor who bought the land at 5 cents will see their return multiply 20 times.

D.E.:  Who were you buying the land from, and how much of it did you buy?

D.L.:  We’d go to foreclosure auctions. In some cases, we bought from the banks. The banks have loans that were made to builders, developers or other landowners. They were selling the loans that weren’t being paid back. We also bought land from municipalities that have been taxing and taxing landowners, but nobody was paying. Many of those landowners had abandoned their lots, and we’d buy the lots at tax sales. There was just this illogical dumping of land all over the place. We’d go to Realtors in local markets and say: Buy all the lots you can at 5 cents on the dollar, (based on their values in 2007, when the market peaked). We bought around 15,000 lots from 2009 through 2011, most of them single-family lots. We paid around $60 million all in.

D.E.: Was the competition fierce?

D.L.:  Not at all. I remember so well there was a golf course in Florida called Copperhead. The bank was selling 400 lots at a foreclosure auction next to the golf course. We bought a $27 million lien for $587,000 that day. We were the only bidders. The minimum bid was $585,000, so we went up by $2,000, and we got it. There were some guys in the back of the courthouse watching, and they said to me: “You’re obviously not from Florida. Don’t you know Florida is never coming back?” I'm thinking: “Is the sun going away? Is the ocean going away? Which of these things am I not getting?” They thought the land was worthless because the existing homes and foreclosures were so much cheaper. They thought nobody’s going to buy land and build houses. But if you assume housing is coming back, builders will come back.

D.E.: How long are you willing to wait?

D.L.:  I’d say five more years we’ll be out. I think land will have fully recovered so that you’d want to have sold all the lots by then. All of the land we have has already gone up in value. It’s tripled, from 5 cents to 15 to 20. It’s going to go back to a dollar. I’m confident of that.

D.E.:  What makes you so confident about the timing given that new home sales continue to be very depressed compared to the long-term average?

D.L.:  The National Association of Realtors index shows that houses are substantially more affordable today than they were in 2000. The population is also larger than it was back then. Mortgage rates are low.  And the supply of existing homes is old, so there’s got to be real pent-up demand for new housing. (Here's the chart Lichtenstein provided on the last point.)


So, why are the sales and supply of new homes so low? You’d think there would be a lot more builders wanting to build. I postulate it’s because medium-sized and small-sized builders can’t get construction loans. The market is starving for capital, which is why no product is available. There was $177 billion worth of outstanding construction loans for single-family homes in March 2007. By March of this year, there was only $46 billion outstanding. (Lichtenstein provided the following FDIC data.)


When the capital does come back for small and middle market builders, land values have to take off. I think it’s still a good time to buy land, and a bad time to sell land. If you have land that's ready to go (without restrictions) when the builders have money, it’s going to be a rush for the guys who have the land. That’s why we haven’t sold yet.

D.E.:  You haven't always made the right bet. When the market peaked in 2007, your firm purchased the Expected Stay America hotel chain for $8 billion, but the chain filed for bankrupcty in 2009 after the financial crisis hit. How has that experience informed your investment strategy?

D.L.:  One valuable lesson I learned is that buying cheap is very important. Buying without debt is also very important. Leverage is your enemy. That deal hurt me personally. I lost a lot of money.

(Note: Lightstone's decision to put the hotel chain in bankruptcy led to a court battle. But the chain survived. Blackstone Group, Centerbridge Partners and Paulson & Co. purchased Expected Stay out of bankruptcy in 2010 for $3.9 billion, and the chain went public last year.)