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Big foreclosures signal the burst bubble of North Georgia real estate

"Hay pastures to upscale developments and back to hay pastures"

originally published 9/23/2010


Waist-high grass stands where high-end homes were planned at this development in the Jerusalem area.      Earlier in September, legal notices printed in the Progress showed what must be a record dollar amount for property facing foreclosure with more than $20 million in total loan value attached to more than 50 properties.


Included in this mammoth dollar value were five commercial/development loans going bad. Together those loans totaled $16,859,629. Companies involved were Gremlin LLC with $1,301,186; BlackJack Investments with a $4,275,000 loan; 2573 LLC with $5,373,430; Northtrop, Ga with $2,628,639 and Big Sky Land and Cattle Company, LLC with $3,381,372. 
Although it is hard to track exactly what happened with these properties, Roy Dobbs of the county tax office said he had not seen any property transfer forms indicating any of these properties had changed hands as of Monday.
While these collapses of future residential/commercial developments may not directly impact home owners in Pickens County, they do clearly signal the exploded bubble of North Georgia real estate, which expanded here with quick growth during the 1990s and early 2000s.
“Everyone said the bubble was gonna burst,” said Chuck Payne of Payne Appraisal Services. “Really everyone in the industry said the bubble was going to burst, but I thought Pickens would be more insulated.
“I thought that Atlanta was growing, and we would continue to see growth coming up Highway 575. I also thought we didn’t see the prices here inflate to the point they did in larger markets around the nation such as Florida. I was really surprised by the extent that it did deteriorate. It is honestly horrible.”
Payne was not alone in his dismal assessment of the real estate industry here. Everyone from bankers to real estate agents has said it will be a long time before this area sees anyone working to convert raw land into residential subdivisions.
The market here remains so flooded with home sites from the previous boom cycle that there will be little need for new land developments locally for years to come, even if the number of willing buyers were to suddenly rebound.
Paul Nealey, with Jasper Banking Company, said that when the more than $20 million in foreclosures showed up, it represented a final step in a long process. He said a lot of work took place behind the scenes in weeks leading up to publication of the legal foreclosure notices.
Nealey estimated the behind-the-scenes activity may have kept an equal amount of bad loans out of foreclosure. The foreclosure total for that month could have been more like 35 to 40 million dollars, he said, if banks had not been diligent in working with the parties involved and creative in their approach to handling loans heading into default.
The behind the scenes work involved renegotiating payments, extending the time frame of loans,  even selling off a portion of assets to lower debt, plus any other measures that could stave off foreclosure, Nealey said.
“An astute banker has to try anything in these trying times,” he said. “A foreclosure is the last option.”
Nealey said the amount  landed in foreclosure during that period was troubling but not surprising when you consider the state of North Georgia property sales.
There are a lot of individual reasons why a property ends up in foreclosure, but they all boil down to the fact a borrower has lost hope they can continue making payments, ever make a profit, break even, or even sell the property involved for enough money to get clear without losing too much, the banker said.
He said all across the country, from large cities to small towns, people simply paid too much for property during the fast-growth years. Now with the downturn in real estate values, they owe much more than the worth of what they are holding.  “It was like musical chairs, and when they stopped, someone gets caught standing up [holding a property bought with a loan that will no longer sell],” he said.
Particularly troubling for the future of real estate in North Georgia is the over-supply of available home sites. Many experts say the flooded supply of residential lots could take years to clear out.
Both Payne and Nealey, along with real estate agent Ron Barnes, noted  there are simply too many lots ready for sale, and too few buyers.
Barnes estimated there are 700 residential lots now available in Pickens County, some more prepared than others. “Until that [oversupply] is sucked up, nobody will start anything new with raw land or be able to get a loan for it,” he said.
Chief Tax Appraiser Roy Dobbs defined the real estate problem facing North Georgia as a “stocking problem.” Similarly, Nealey referred to it as an inventory problem, “like a car dealer with 500 of the same model on the lot.”
“We kept building when the faucet shut off and sales slowed, we kept going,” Nealey said. “There was a belief that the mountain property, with a constant appeal that had already sheltered us from previous downturns, would help us avoid this big collapse.”
But the national real estate slowdown did find its way to Pickens County and right as many new developments were just getting underway.
Payne, who does property appraisals for a living, said at this point it is hard to find any comparable sales for many types of property, including large tracts or upscale homes, as these type properties just aren’t changing hands.
According to Payne, no home priced at $400,000 or higher has sold during the past year in Pickens County, except for homes in the Bent Tree or Big Canoe subdivisions.
With 20 years of real estate experience, Payne said he had not seen a time when raw land in Pickens County would not sell––before now. “I have never seen a time where you couldn’t sell dirt,” he said.
Payne estimated that raw land prices are now reduced by half from where they were at the peak of the boom cycle, a point he identifies as late 2006. Payne said real estate values are now about what they were in the years 2000 and 2001.
In the tax office, Dobbs said sales continue to come through at roughly market level, but not in the quantity they once did. He said finished home prices haven’t fallen that far, as it still costs about the same amount to build a house regardless of whether a boom or bust cycle exists.
Dobbs said one change he has seen with real estate sales is that buyers are now mostly “end-users; someone planning to live on the property. The speculators are out of the game,” he said.
Dobbs estimated that for raw property the current going rate per acre is around $8,000 to $12,000, down from the typical average of $12,000 to $15,000 an acre a few years back and off the high of $17,000 to $18,000 at the peak.
Nealey said it’s hard to know what property is currently worth with sale prices all over the board. “We have to wait for it to settle down some,” he said.
Concerning the large tracts now in foreclosure, none of the experts interviewed would speculate much as to what may ultimately happen with these parcels through foreclosure or by returning to bank ownership.
“That’s the question we all want to know,” Dobbs said, regarding the hundreds of acres now in default.
Barnes said he doubted the developers or banks left holding the land would be furnished many options. There are few people now in a position to buy or hold such large parcels, even at a good deal, because too many acres are involved. Even at a greatly reduced price, parcels of 400 or more acres will exceed a million dollars in price.
“It’s a fact of life, not many people can carry that load [of debt],” Barnes said.  “It’s quite a pickle.”
Nealey perhaps best summed up the cycle of North Georgia real estate with his response. “We’ve seen property that were hayfields and planned for upscale subdivisions now being viewed only as hayfields again,” he said. “Nobody knows what will ultimately happen to the property. It’s back to raw land.”
Adding to the uncertain future for the large tracts is the fact many developers “are out of the mix” due to other foreclosures, bankruptcies, and the realization there may be small demand for new residential housing sites for years to come, according to Payne.
Dobbs seemed the most optimistic, saying some of these large properties could be bought for farms or estates or cut into smaller parcels (20 to 50 acres) that might appeal to a family or an investor.
Dobbs painted a best-case scenario of developers able to sit on the tracts they are holding or even able to buy some of the larger foreclosed properties as future investments.  Historically in times like this, investors “stock up on future inventory,” Dobbs said.
Nealey and Payne both said the real estate collapse is creating a banking problem which may have a broader impact. Banks are hampered from making other loans due to the real estate losses they have endured.
Nealey said FDIC regulations make it tough on banks with rules on how long they can hold a piece of property. Banks also face stockholder pressure to turn profits and pay dividends. Foreclosed homes held by banks also cost banks money, as houses require insurance and maintenance.
“If there were one or two [houses], it wouldn’t matter, but all the banks have too many [houses],” he said.
Nealey said banks are forced to explore new ways to dispose of the homes and properties they’ve taken back in foreclosures. He noted again how foreclosure is considered the absolute last option for banks, as it immediately puts a drain on their profits.
“The banks that survive will be innovative enough and strong enough to figure out ways to resolve these problems, probably by means they have never had to try before,” he said.
While Payne didn’t see a direct impact from so many large tracts in foreclosure at one time, he expressed grave concern that, if all these bad loans cut into the banks’ ability to operate, “the impact could be huge.”
“The community banks are the lifeblood of a rural community,” he said.
Payne said he is encouraged Crescent Bank was taken over (after FDIC forced closure) by another bank whose management leaders appear “to be bankers, not investors.”
Still, if other banks (not just banks in Pickens, but banks holding loans on Pickens real estate) were to fail and be taken over by investors who sought to quickly unload all the problem properties, the effect could be catastrophic. “If you get investors who just dump stuff, prices will plummet,” he said.
Dobbs, while generally more optimistic, expressed the same concern. He said a bank that has been closed and re-opened through an FDIC deal can sell a property for much less than the original loan amount and still come out ahead, due to FDIC involvement.
Dobbs expressed the same warning that if banks started dumping large tracts at a fraction of their original appraisal, it would cause values to tank across the board.
Dobbs and Barnes noted that in some cases it is better that large tracts were foreclosed upon while still raw land. Both said the complexities of foreclosing on a future subdivision rise drastically when a few houses have already been built there.
For zoning, usage, and even appraised value, large tracts entering foreclosure while still in the planning stage of development and physically unchanged maintain a continuity and even offer a bit of greenspace for those living around them, Dobbs said.
Barnes said problems may be expected when you see a planned 100-home development change hands through foreclosure after a few homes are sold. One issue is that if a subdivision reverts to a bank, original covenants may be void. The new owners can do anything they wish that is allowed under government zoning regulations.
“It can have a pretty dramatic impact, especially when people have already bought, and there are vacant lots,” Barnes said. “When you have a development that is supposed to be 100 homes, and you get six to eight built, and then some other developer comes in, they can change the character as long as it falls within zoning.”
Barnes said this scenario is pretty limited in Pickens County but is becoming distressingly common in counties to the south.
Those interviewed for this article were generally pessimistic on the short-term future of North Georgia real estate.
Payne said there are other factors he believes will continue to hold the market down, and, scary as it seems, we may not be at the bottom. Payne specifically noted the wave of price drops and foreclosures may only be beginning for commercial projects, particularly if no improvement is seen in employment.
“There will be a continuing downward spiral if we don’t get people back to work,” he said. “You are going to see more commercial vacancies.” Payne noted that continuing commercial vacancies would further increase unemployment, leading to even tougher conditions. “The thing just keep feeding on itself,” he said.
At one point, Payne referenced the ghost towns that developed after gold rushes played out.
Nealey also said the “bloodbath” for investors in commercial and residential real estate isn’t coming to an end any time soon. He said speculators who invested frivolously are already out, and sadly, foreclosures are now striking many solid businessmen.
“We haven’t hit the bottom,” he said. “I wish I could be upbeat, but I’m trying to be honest. There is a little more flushing out to go. Unfortunately now we are flushing out good people, people who were not arrogant, people who always took care of their business.”
Nealey said what is needed now more than anything is “to put the American Dream, the American spirit back into the system.” He said leadership at the local level, all the way to Washington, and not just with political figures is lacking and must be developed for the turn around.