Tag Archives: Sonoran Desert

Hedge fund guru John Paulson tests his hot hand in the illiquid undeveloped real estate market. Trouble ahead?

Marketwatch reports:

John Paulson, head of hedge-fund giant Paulson & Co., turned bullish on the U.S. housing market in early 2010. Now he’s got a fund that’s betting on a rebound.

One of the firm’s latest projects has taken it into the Sonoran Desert in the American Southwest, in search of empty residential-development lots.

The fund already has put some money to work.

In August, Paulson agreed to pay $42.4 million for 8,277 unstarted lots and 22 model homes in Arizona, Colorado and Nevada from bankrupt home-builder Tousa Inc.

The biggest chunk of land in the portfolio is Red River, a development about 50 miles south of Phoenix in Pinal County, on the eastern side of the Sonoran Desert.

The article goes on about the potential for profit and the risk involved.

I don’t see how this makes sense. Paulson is buying illiquid assets on which he will earn no return until the land is developed but on which he will have to pay property taxes until that time. One of the strengths of great traders is that they realize when their position is not working and getting out quickly. Not every trade will be a winner and great traders realize this. But this position will trap Paulson for years. Yes, he’s locked in his investors for years, but what if the investors are locked in for three years and it takes five years to develop these properties or find a suitable buyer?

Additionally, buying land in the middle of the desert requires a lot more research and work to close the transaction than buying up credit default swaps or gold futures and bullion on the open market, as Paulson has done in the past. Paulson has been a great trader, but you can’t trade real estate like you do stocks, futures, options, and other financial contracts. It will be interesting to see if Paulson succeeds in this new venture or if venturing into a field in which he has little experience will lead to failure.