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Real estate vulture funds are scouring the U.S. for distressed housing developments and land sites being sold at cheap prices by homebuilders looking to clean up their balance sheets.

These funds, which target internal rates of return greater than 20%, are not betting on any immediate recovery in housing. Instead, they're seeing profit in buying the housing sites today --many of which are selling at 50% or greater below their peak 2005 values -- with the aim of flipping them or selling homes at the projects in two years or more.

"We're seeing plenty of opportunities. The market changed in the last 90 days," says Rich Knowland, a partner with Pacific Terra Holdings, a Seal Beach, Calif.-based fund that is looking for land opportunities on the West Coast.

Land prices over the past year have generally been "sticky" -- meaning prices aren't falling much, if at all, even though housing prices are sliding and public homebuilders are recording massive impairment charges to write down the value of their land holdings.

Now, however, distressed opportunities are starting to emerge in California and other overheated housing markets.

"We see in certain situations where that is loosening up, not by choice. Many deals have debt. Prices have to go down to be moved," says Knowland, who joined Pacific Terra earlier this year after leaving his post as regional vice president of


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Orange County, Calif., division.

One major player looking for distressed land deals is Starwood Capital, a Greenwich, Conn., private-equity firm that is considered one of the smartest opportunistic investors in commercial and residential real estate. Starwood Capital recently formed a new joint venture called Starwood Land Ventures to target distressed homebuilder projects.

"The timing for making investments is very good," says John Peshkin, CEO of Starwood Land Ventures. He agrees that opportunities are starting to open up after land prices having been generally stagnant over the past year.

Starwood is mostly looking at the previously "overheated" housing markets of California, Arizona, Las Vegas, Florida, and the Mid-Atlantic for deals.

The Starwood joint venture has three properties under contract set to close in coming weeks. Two of the deals are with public homebuilders, but Peshkin declined to say which.

All three deals are in the overheated markets, Peshkin says. Starwood is purchasing finished lots, an entitled community and a partially developed community.

In each case, Starwood plans to sit on the projects for at least a year, and possibly longer. Peshkin says the housing market recovery is still two to three years away. And he warns a recovery will not result in an immediate return to peak prices once again.

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When the market reaches equilibrium, the developments and raw land will likely be worth around 20% to 25% less than their 2005 peak values, he says.

Today, finished home sites and raw land are now being sold by homebuilders for 50% to 75% discounts off peak 2005 values in the formerly hot regions, Peshkin says. For urban markets, prices have generally dropped about 25% in these states; the peripheral areas may have had 80% to 90% declines. In some peripheral areas, sellers can't even catch bids on communities under development and raw land, he says.

Starwood aims to make hefty returns by buying land and housing developments today at 40% to 50% of their 2005 peak market values. The bet is that values return to 70% or 80% of peak market value in the next three years.

"We're not seeing too much competition. Everyone is getting ready and is afraid to catch a falling knife," Peshkin says.

Peshkin says his firm is not calling a bottom in the market and grants the market could fall further. But at some point down the road, he expects the economy will improve and housing prices will stabilize.

In the interim, builders will continue to look to shed land and other assets that can't immediately be turned into cash, so as to preserve their balance sheets, he says.

With the exception of


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, which controls nearly all of its land through option contracts, nearly every public homebuilder has large amounts of land left on its books, and cash is tied up in that inventory.

On Thursday, luxury-home builder

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warned of another $250 million to $450 million of land and inventory writedowns for its most recent quarter.

"For many years ... for public builders, land was a good word," Peshkin says. "Now it is a four-letter word."