Assessing the risks in bargain-priced golf communities

One of the occupational hazards of visiting golf communities virtually every month of the year is that most of them -– the communities and, especially, their golf courses -– seem like bargains in this economy. Those that have survived the recession still are showing significant market value erosion as employment numbers remain low and the national political scene remains uncertain. Club fees are way down as well. I have been encountering more and more communities lately whose prices are so low and that have reasonable chances of survival that I think to myself, “How much lower could it go?” and “Maybe I should talk with Connie [my wife] about this.”

The urge to buy low ranks right up there with other human urges that cause a rush of blood to the head. But such temptations can carry big risks, as well as big rewards. Some of the low-priced and potentially high-value communities I quite like have suffered financial difficulties in the past few years, and their survivals are anything but sure things. Still, there is much to recommend some of them. The bad press they generate scares away most potential customers, but it also forces the owners to drop prices so low as to re-energize the market. No matter how much a property may have suffered, there is always a price low enough for someone to buy it.

Growth Properties

Not to sound like a Merrill Lynch broker, but undervalued golf communities I have visited lately seem to fall into two groups –- those that are value plays and those that are growth plays. The growth opportunities are those communities that have barely gotten off the ground, suffered financial setbacks, but are now under new owners who seem to have a plan. A few weeks ago, I visited one such community outside of Richmond, VA, Mountain Run, and played its excellent Federal Club golf course.

Mountain Run is barely a golf community, since only a couple dozen homes have been built. The original owners of the development did not survive the recession, defaulting on their $8 million loan, but not before they transformed the private golf club into a public one to generate some much needed income. At auction, Richmond area developer Chris Gilman purchased for just $2.6 million the remainder of the 625 acres that comprise both the real estate and the excellent Arnold Palmer designed golf course.
Gilman is acting like he is in it for the long haul. He has announced that Federal Club will revert to private status again in September 2012; as advance announcements go, coupled with a bargain initiation fee of $6,000 for full-family golf (dues $350 per month), this is smart. Those who like the club may join now for the discounted rate of $4,000, play all the golf they can, and not worry about fee increases later. Gilman is also building confidence by not putting the available lots up for sale at the moment, preferring to wait a little for the market to recover. His patience is commendable and a signal that he has the deep pockets to execute his plan for the golf course and community. That said, it is hard to imagine any developer passing up an opportunity for a little cash flow: This may be an opportune time for those looking for a bargain piece of property in a community with a future private golf club to make an offer.

Value hunting

Value-oriented communities are those in which most or all of the infrastructure has been completed, residents are in charge of the property owners association and the club is at least functioning, if not making much money for the owner. My wife and I own a second home in Pawleys Plantation, south of Myrtle Beach, where there was much gnashing of teeth among club members and residents earlier this year when the club owner and original developer of the 20-year old community decided to sell the golf course. Property values in Pawleys Plantation have dropped an average of about 25% since the market began to erode in 2007, and we all worried that a sale of the club to the wrong type of owner could accelerate more losses in value.
But the buyer is the Myrtle Beach National golf group, owner of 13 other courses along the Grand Strand. MBN sees the Nicklaus-designed Pawleys Plantation as one of the jewels in its crown, and they have made all the right moves, enhancing the course in their first few months of ownership and announcing that members can play any of their other courses for a ridiculously low rate of $22. My fellow members at Pawleys and I will have to work a little harder at planning our play dates on our own course since MBN will be filling the tee sheets with more and more vacationing golfers. But on the face of it, their ownership of our course should enhance the value of our properties. Those looking for less risk and more value in a golf community might look for such situations in which residents own the community and a smart operator owns or manages the golf club.

A little bit value, a little bit growth

There are also some interesting communities that fall somewhere between the growth and value definitions, like the 750-acre Cobblestone Park in Blythewood, SC. Originally developed around the former University of South Carolina golf course, the community was purchased by the Ginn organization in 2004. Typical Ginn flourishes and promises followed, most unrealized as that company spiraled downward. By the time Ginn abandoned the project in 2008, the clubhouse was only partially finished and property owners had lost nearly 50% of the values in their homes.

Linger Longer Inc, part of the operation that developed the well-regarded Reynolds Plantation in Georgia, took over the property and priced the remaining properties to sell. For example, a corner lot with views of tee box and green is currently available at $40,000 and includes a waiver of club initiation fees. Lawn maintenance is included in the property owner association fees. Completed homes for sale at Cobblestone range in price from $240,000 to $650,000. All developer properties and most of the homes for sale include initiation fees to the golf club, which features a nice P.B. Dye 27-hole layout threaded through the community, plus such amenities as lighted tennis courts, a pool and fitness facility. The 28,000 square foot clubhouse is finally set to open in a few months. South Carolina state capital Columbia is just 20 minutes away and, as host to a large state university, it is economically sound. Columbia and the university are good sources of upwardly mobile folks who could consider Cobblestone as their future home. The semi-private golf club should attract local members as well: full-golf initiation fees are just $1,850 initiation for locals and $250 for a “national” membership, with monthly dues of $275 and $61.25 respectively (national members are limited to 10 no-green-fee rounds annually).
As calculated risks go, Cobblestone Park seems to have all the ingredients of a good bet. With experienced developers now managing the property, all originally promised amenities either completed or on the way, and prices lower than they will reasonably be in the future, Cobblestone may warrant some investigation by bargain hunters looking for a golfing lifestyle near a university community. (Note: As always, do your homework and understand circumstances in this current market can change quickly.)

More than 20 years, and then trouble

Some developers stumble even after they have turned management of the community over to the residents. A couple of years ago I visited the family-owned Ford’s Colony in Williamsburg, VA, which began selling properties in the 1980s and was considered a top planned community in its day. I found little to criticize but nothing wowed me either. The Dan Maples designed golf was plentiful -- 45 holes -- but not as stimulating or challenging as either the nearby River Course at Kingsmill or the Tom Fazio-designed course at Governors Land. However, something must have been going right at Ford’s Colony because the Ford family decided to build a second community in Rocky Mount, NC, and named it Ford’s Colony as well (perhaps more out of ego than marketing clarity). Then the recession started, and you can figure out the rest.

Both Ford’s Colony developments declared bankruptcy last April and the operations’ creditors, with the help of the courts, are now trying to mediate a resolution for the golf clubs and unsold land. But as is the case with more mature communities that hit the skids, bankruptcy by no means brings the curtain down on operations. In the case of Ford’s Colony/Williamsburg, the homeowner’s association is in charge of the community. The banks could sell the clubs to a professional management organization, or conceivably keep the clubs and bring in professional management to run the golf club, or the members could buy it from the banks. In any case, the outcome for golfers and residents could very well be positive (as it appears to be the case at Pawleys Plantation as explained above). The court expects to hear from the creditors on a resolution in three weeks. If they cannot reach a settlement, a judge will likely decide who winds up with the club.
Although club and community are often in the hands of two different entities, the status of the golf club at the heart of a golf community affects the values of the homes surrounding it. Stable clubs owned and run by members who practice good governance pass that glow onto the adjacent real estate, which will be relatively higher priced than properties in less harmoniously run communities. The true bargains are those clubs and communities that are not yet living in perfect harmony, but have the potential to do so. With a little research, you can uncover these bargains. And with some calculation and an appetite for risk, you can take advantage of them.