Buy the Land . . . Get the House for Free
Benjamin Graham, the father of value investing, famously recommended buying stocks that trade at a discount to the company’s underlying “book value” (basically, assets minus liabilities).
His rationale was that a company’s book value established a floor under its stock price: even if the company’s business went away, investors’ share in the company’s net assets would make them whole (if not a profit).
In the housing market, an analogous approach would be to buy homes selling for less than the value of the land they sit on. Even if the home is assigned a value of zero, in theory the value of the land literally puts a floor under the owner’s investment.
Today, it’s possible to find hundreds of Twin Cities homes selling for less than their “book value” — that is, the tax-assessed value of the land underneath them.
However, before you rush out to buy one of them, two caveats:
One. A lot with a house on it is not the same as an empty, buildable lot. Transforming the former into the latter can easily cost $20,000 in demolition, permits, etc.
Two. Who’s going to buy the lot? In a healthier market, demand would come from both developers, who would put up “spec” housing (“build it and they will come”), or, owner-occupants who wanted new construction.
In a recession, neither group is very active.