When Home Builders Hit the Skids
Consumers Deal with Uncertainties
The tumbling housing market is claiming a new class of victim: customers of insolvent home builders.
In the latest sign of trouble, Ft. Lauderdale, Fla.-based Levitt & Sons, a unit of Levitt Corp., filed for Chapter 11 bankruptcy protection last Friday, citing the "sudden and steep" downturn in the Florida housing market. Levitt's move follows bankruptcy filings by a number of local and regional builders, including Neumann Homes Inc. in Illinois, Elliott Building Group in Pennsylvania, Turner-Dunn Homes Inc. in Arizona and Kara Homes Inc. in New Jersey. Many other builders simply close up shop.
And the situation is likely to worsen in the first half of next year, says Ivy Zelman, an independent housing analyst. "We're in the first or second inning," Ms. Zelman says. "There are going to be a significant number of insolvent builders."
Unfinished Business
As more builders flounder, their customers can face the following issues:
• Buyers who haven't yet moved in could lose all or part of their deposit -- or wait months for their house to be completed.
• Homeowners could find that liens have been put on their homes by contractors who haven't been paid.
• Communities may have to wait for the completion of roads and amenities such as swimming pools.
What a builder's troubles mean for its customers can vary, depending on factors such as state law, contract terms and how long it takes to get the project back on track. In some cases, buyers may lose all or part of their deposit or wait a year or more for their house to be completed or the builder's financial troubles to be sorted out.
Homeowners who've already moved into a new development can find themselves living near a half-finished house where work has been halted. They also face other questions, such as who will handle needed repairs, what will happen to a promised swimming pool and whether contractors have put liens on their properties -- which could block access to financing. In some cases, local communities have stepped in to fix unfinished roads or pick up overflowing Dumpsters.
Jeff Benes and Maggie Byrne paid $269,000 for a four-bedroom Neumann home in Antioch, Ill., in 2003. Now they are wondering what the company's bankruptcy filing will mean for property values -- not to mention who will plow the development's unfinished streets this winter and when the promised clubhouse, pool and volleyball courts will be completed. "We're all up in the air now not knowing what is going to happen," says Ms. Byrne.
As the housing market has slumped, builders have struggled with rising inventories, falling home prices and cancellation rates that have topped 40% in some markets. Land prices have also dropped, leaving builders owing more for some parcels than those properties are now worth. Banks, meanwhile, are tightening their standards -- not only for home buyers, but for the builders as well. IndyMac Bancorp Inc., which lends to small and midsize builders, said earlier this month that it expected 30% of its home-builder loans to be delinquent by the fourth quarter. The company says that it stopped making new construction loans to builders in August.
During the early 1990s housing downturn, some 15% of home builders went out of business, according to the National Association of Home Builders. The number of bankruptcy filings was very small, says NAHB research director Gopal Ahluwalia. Most troubled builders simply shut their doors or moved into other ventures. No one currently tracks builder bankruptcies, he says.
Often, builders' problems are evident long before any public filing. Before Kara Homes filed for Chapter 11 bankruptcy a year ago, construction crews at its Horizons at Birch Hills development in Old Bridge, N.J., began disappearing, and vendors who had worked on the development were replaced by others who seemed less experienced, says homeowners' association president Frank Ramsom. Kara employees also "started to neglect meetings" and provided "cryptic" answers to homeowners' questions, he says.
Perry M. Mandarino, who was brought in to serve as the chief restructuring officer for Kara Homes, advises people buying a new home to "drive past it every few days or every week, not just on a Saturday," to check on construction. "The warning signs are real obvious," he says. "There's a lot of construction, and all of a sudden it stops. There's inclement weather and they are not boarding up the property."
For buyers who are under contract, the biggest risk is that they will lose their deposit. Some states, such as California, require that homeowner deposits be held in escrow or that the builder post a bond. But in other cases, the builder may be able to tap the money, which may make it harder to recover.
When Turner-Dunn filed for Chapter 11 protection last year, more than 150 homeowners had outstanding deposits ranging from $2,500 to nearly $28,000, according to bankruptcy filings. Turner-Dunn had disclosed in a public report given to buyers that deposits would be used to fund construction and were not being held in escrow, says Mary Utley, a spokeswoman for the Arizona Department of Real Estate.
It's not yet clear how much of that money will be returned. Dan Collins, an attorney for the bankruptcy trustee, says the outcome will depend on future litigation. Under federal bankruptcy law, homeowner deposits take priority over certain other unsecured claims, but only amounts up to $2,225 are covered.
One homebuyer, Brett Angner, put down about $26,000 on a Turner-Dunn home he was purchasing as an investment. He calls his chances of getting his money back "minimal."
Frontier Homes Inc., an Ontario, Calif., builder that bought Turner-Dunn's assets, offered buyers the chance to complete their purchases without an additional deposit. "But it would have been imprudent of us as businessmen to say, 'Here's your money back,' " says Frontier senior vice president Michael Dwight.
Buyers who still want to move into their homes can find themselves living in limbo. One couple waited three years for their $1 million Kara home to be completed. "This woman and her husband had twins," says Mr. Mandarino. "They had to live with a relative."
Another issue: Who will handle the inevitable problems that come with new construction? Builders often provide third-party warranties, but Neumann Homes told buyers it would cover defects that appeared in the first year itself. Homeowners are concerned that the company won't honor that warranty, says Dennis Crosby, a trustee for Antioch, Ill.
Residents are grappling with other uncertainties. Each year, Neumann has installed a ice-skating rink in its Antioch development. But some residents aren't sure they want to pick up the roughly $8,000 tab this year -- or if they have the authority to stop it, says Mr. Crosby, who owns a Neumann home. Village officials say they expect any developer who takes over the project to complete the clubhouse, swimming pool, parks and other promised amenities.
Ken Neumann, the company's chief executive, says that "it's likely that the one-year builder warranty will lapse," but adds that structural and major mechanical defects are covered by a 10-year third-party warranty. Mr. Neumann says money has been set aside in escrow to cover the cost of uncompleted amenities. Neumann Homes is working with its lenders to get homes under construction completed, he says.
Troubled builder Levitt & Sons halted construction at its Seasons at Prince Creek West development in Murrells Inlet, S.C., a few months ago.
For homeowners, promised amenities can sometimes seem like pipe dreams. At Levitt & Son's Seasons at Prince Creek West in Murrells Inlet, S.C., a gated community for residents 55 and older, a 25,000-square-foot community center -- with tennis courts, indoor and outdoor pools, computer rooms, bocce court, an arts and crafts room and health club -- is only partly completed.
"We were told that if it wasn't protected [from the elements] within 30 days, whoever picked up the project might have to knock it down and start all over again," says Charles Brindley, a retired graphic artist, who closed on a $375,000, 2,124-square-foot home in the community in July.
Many builders, including Levitt, have also stopped paying their vendors. Those vendors, in turn, have placed liens on the homes of people living in the communities. Some Levitt homeowners have as many as 20 different liens on their home, according to an executive at one of Levitt's Georgia divisions. Such liens mean that the owner can't refinance, get a home-equity loan or sell the home. Other Levitt homebuyers can't close on their properties because the builder hasn't been able to sign a sworn statement that it has paid off all subcontractors and suppliers.
Paul Singerman, lead bankruptcy counsel to Levitt, says that since the filing, the builder "is already trying to ameliorate a number of legitimate concerns." Those include asking the court to allow it to resume home sales, returning deposits posted after Aug. 29 to certain customers and filing claims for the vendor liens so payments can be arranged.
In addition, Mr. Singerman adds, under the supervision of the bankruptcy court, Levitt will attempt to move ahead with a plan to either finish substantially completed homes or sell partially completed developments to another developer or investor. Levitt has about 30 developments, none of which are completely finished, Mr. Singerman says.
In some cases, homeowners and local governments have stepped in to pick up some of the pieces. After Kara Homes filed for bankruptcy, residents of Horizons at Birch Hill hired an attorney to represent them in the bankruptcy case and a maintenance man to fix common problems.
To keep the stalled project from turning into a health and safety hazard, the town of Old Bridge, N.J., pulled out 40-foot Dumpsters that had been left on the property, sent in police for regular patrols and fenced in a hole that had been dug for a swimming pool. "These people were left in one heck of a lurch," says Old Bridge Mayor Jim Phillips.
For some homeowners, the good news comes with the arrival of a new developer. Kara Homes' Horizons at Woodlake Greens development in Lakewood, N.J., was bought by Maplewood Home Builders in September. The new builder says it is now working to fulfill its promise to complete the clubhouse in time for Christmas and have the swimming pool ready by spring.
Since Maplewood took over, "the tempo here has been terrific," says Jim Lithgow, who bought a Kara home two years ago and is president of the homeowners' association. "It's a story of anguish and passion. But now we've turned the corner."
By Ruth Simon and Kemba J. Dunham
From The Wall Street Journal Online
Email your comments to rjeditor@dowjones.com.
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