The new ghost towns
More people buying into new developments are being left high and dry
when their builders file for bankruptcy. Here's how homeowners can
protect themselves.
By Melinda Fulmer, MSN Real Estate [© Construction
Photography/Corbis ]
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The view from Mari Kunz's new house in Murrells Inlet, S.C., is far from
what she pictured when she and her husband, Larry, bought into this
Levitt and Sons retirement community last summer.
Instead of tropical landscaping, lush green lawns and a steady stream of
other active seniors on bikes, she sees street after street of empty
lots, framed unfinished houses and streetlights that don't work.
"We are the only house in Phase 2," Kunz says. "We are kind of out here
by ourselves."
Levitt filed for Chapter 11 bankruptcy in November, putting the brakes
on construction at the couple's development, Seasons at Prince Creek
West. The move left them and the rest of the residents without the
lifestyle, amenities or services promised them.
The posh Grand Clubhouse was never built, and the fitness center
consists of little more than a gaping hole for the indoor pool and a
couple of walls.
Homeowners like the Kunzes are just the latest victims of the tumbling
housing market, which has forced a number of home builders into
bankruptcy. In the past year, at least eight home builders have filed
for bankruptcy protection, according to the National Association of Home
Builders, including Levitt of Fort Lauderdale and regional builders such
as New Jersey's Kara Homes; Elliot Building Group in Pennsylvania;
Neumann Homes in Illinois; and Turner-Dunn Homes in Arizona.
A number of others are expected to follow suit in the next year, says
James Wilson, senior housing analyst at JMP Securities in San Francisco.
Others may simply wind up giving community assets back to the bank to
avoid bankruptcy. "The market is really focused now on which builders
could fail to make it," Wilson says.
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What they lost
Empty streets and missing clubhouses and swimming pools are just the
most visible problems that the customers of insolvent builders face.
Many will deal with subcontractor liens on their property that block
access to refinancing or a sale. And when things break down -- as they
often do in the first year of homeownership -- no one is around to
perform needed warranty work. The Kunzes have already paid for a broken
pipe fitting and drywall work, after they discovered a leak. And the
sprinkler system was never installed in their phase of the project.
At Seasons, security also was a casualty of the bankruptcy. Guards who
had manned the front of the gated community were fired. The gate is now
left propped open during the day. "We are feeling quite vulnerable,"
Mari Kunz says.
And, she says, they are frustrated because they are still paying
association fees for security, an activities director and other staff
and services that are not being provided.
Homeowners are doing their best to pick up the slack. Mari Kunz says she
has begun watching her new neighbors' half-built homes to make sure no
one vandalizes them or steals fixtures and kitchen cabinets, as some
thieves have done on other streets.
And one of her neighbors has begun lining up activities, so the
residents' social outlets don't consist of angry homeowner meetings.
The Kunzes are actually among the luckier customers in Seasons; their
house was finished before the bankruptcy filing. Dozens of other
residents who put down a deposit for the $300,000 to $400,000 homes in
this community south of Myrtle Beach don't know when they will see their
houses built or their money back. Some had already sold their other
homes and were living with relatives. And many can't afford to walk away
from their pricey deposit.
"We have seen homeowners stressed. The two couples that have houses
across from us
all of their goods are in storage somewhere and
they have no idea when it is going to be resolved," says Larry Kunz.
Some states, such as California, require that deposits be held in
escrow, or that the builder post a bond. But in other cases, contracts
specify that the money will be used to fund new construction. That was
the case for Turner-Dunn Homes of Phoenix, which filed Chapter 11
bankruptcy a year ago, leaving many residents with little hope of
getting their money back.
Levitt's Florida bankruptcy attorney, Paul Singerman, has said publicly
that he has asked the court to return customer deposits obtained after
Aug. 29. However, he did not return repeated calls for comment.
How things went wrong
As the housing market has tumbled, builders have been stuck with large
inventories of land -- and the debt that goes along with it. Many
buyers, seeing housing prices fall, have decided to wait out the bust.
Others simply can't qualify for a mortgage as the credit crunch has
tightened lending guidelines. Cancellation rates by prospective
homeowners have exceeded 40% in some markets, analysts say, forcing
builders to slash prices even further to raise cash.
"The housing downswing is still under way," says Dave Seiders, chief
economist for the National Association of Home Builders. "The pressure
is continuing to build."
Home Affordability Calculator Yearly gross income $ Monthly debt
payments $ Cash avail. for purchase $
Even builders in far better shape are mothballing projects, leaving
ghost towns of empty houses and sales offices. Lennar Homes, for one,
decided to halt construction at its planned 1,100-unit Central Park West
development in Irvine, Calif., after finishing one group of 259 attached
homes. It has since returned the 14 deposits to buyers who signed a
contract for that phase of the development and will just let the units
sit empty until the market improves.
The problem is most apparent in the extreme boom-and-bust markets of
California, Florida, Texas and Nevada, where a strong economy had
builders bidding up land at public auction, says John McManus, editorial
director of Big Builder magazine.
While a slowing market should have given builders pause before starting
a new phase of a community, many had already invested so much that they
couldn't stop, McManus says. "At that point, there's no going back."
Local communities left to pick up the pieces
When construction on large communities stalls, it's not only residents
who are victimized. Municipalities are often the ones left to clean up
the mess.
When New Jersey builder Kara Homes filed for bankruptcy protection last
year and ceased construction on the Horizons at Birch Hill development
in Old Bridge, N.J., the city was left to cope with a number of
potential health and safety hazards. Besides dealing with a stagnating
retention pond in the community, city crews had to pull out the 40-foot
trash bins that were left there; put a fence around the gaping hole that
had been dug for a swimming pool; finish some of the streets and bring
in a police patrol to keep contractors and others from vandalizing the
50 or so lots that were left in some partial state of construction.
"It was pretty unsightly," says Old Bridge Mayor Jim Phillips. "The 70
people who lived there were really left in the lurch. I felt the town
had to respond to the situation."
Hope for a rescue
The hope for residents in Horizons and other stalled communities is that
a new builder can step in and take over the projects. Some will be
brought in by the banks that have taken back property. One of Kara's
lenders recently hired a new builder, the PRC Group, to take over
Horizons at Birch Hill, Phillips says. However, work has not yet
started.
Maplewood Homebuilders, a joint venture between developer Glen Fishman
and hedge fund Plainfield Asset Management, acquired 12 other Kara
communities in September.
Work began last month on Kara's old developments, including the
Horizons Woodlake Greens development in Lakewood, N.J., where the mostly
finished clubhouse -- which sat empty for a year -- should be opened in
the next week. The 100 homes and lots that were in some stage of
development are now being finished, says Maplewood Chief Operating
Officer Kevin Fiore.
Maplewood, he says, is honoring the 16 contracts and deposits that were
put down on the Woodlake Greens development before Kara filed for
bankruptcy protection. A handful of others, he says, decided to walk
away from the project and their deposits, which in most cases totaled at
least $50,000.
"For the most part, there is a huge sense of relief about us coming in,"
Fiore says. "People are really anxious to move into their homes," after
more than a year of no construction. With some of the larger homes, he
says, the wait was even longer -- up to four years.
"(Maplewood) came in with a lot of vim and vigor after they got the
properties," says Jim Lithgow, president of the Woodlake Greens
homeowners association. "They have really cleaned it up tremendously."
And, he says, to their credit, Maplewood has taken on some of the home
repairs promised by Kara, after that builder left homeowners "high and
dry."
How to protect yourself
There's no sure-fire way for prospective buyers to ensure that they
won't get caught up in a builder's financial woes. Buyers' rights in
this situation vary with state law and the terms of their contract.
Real-estate attorney Bruce Lorman in Santa Monica, Calif., advises
buyers to have an attorney look over the sales contract before they sign
it.
And, he says, check out your builder's financial condition as best you
can, before you sign on the dotted line. That may be pretty easy, if the
builder is a large, publicly traded entity like Lennar. If it's a
smaller home builder, he says, you have to do a little more homework.
Get a list of the builder's other developments and search court records
for lawsuits against the developer in those projects. Ask the builder
for proof of liability insurance and check to make sure he is licensed.
But, perhaps most important, make sure your deposit goes into an escrow
account, which a builder can't touch unless he has delivered the goods.
"Make sure you are protected," Lorman says. "The market has changed
pretty dramatically, and a lot of builders are stuck with a lot of
land."
Moreover, builders say, drive by the property you are considering at
different times of the day to make sure construction is continuing.
The Kunzes' neighbor Donna Jones says it became pretty clear about a
month or two before Levitt filed bankruptcy that work was slowing down
or stopping on certain houses. "Crews were getting laid off and we said,
'Something funny is going on around here,'" she recalls. "They were
putting up a lot of them, but not getting them finished."
So far, Larry Kunz says, no one is getting any answers about the
project's future from Levitt officials or its attorneys. But he remains
optimistic.
"My basic emotion is I'm saddened," he says. "I think it's a viable
development and it will finish out. But there's going to be some rough
sledding over the next months or years."
