Gan
02-05-2008, 11:23 AM
A dream home can become a house of horrors overnight if your builder goes bankrupt. With the collapse of subprime mortgages that had helped fuel housing starts, that scenario is becoming a reality for consumers across the country as the housing market continues its tumble.
Builder bankruptcies can halt or indefinitely delay construction — meaning buyers can’t move in, customers stand to lose thousands in deposit money and consumers get stuck in a contract with no house to show for their troubles.
In November, Levitt & Sons of Fort Lauderdale filed for Chapter 11 bankruptcy protection. The Levitt Corp. unit, which is in default on more than $300 million in loans, stopped construction of 11 active-adult communities in Florida, Georgia and South Carolina.
Levitt joined a growing list of builders who have either filed for bankruptcy protection or have closed their doors. Other recent bankruptcies include Elliott Building Group in Pennsylvania, Turner-Dunn Homes Inc. in Arizona, Kara Homes Inc. in New Jersey and Neumann Homes Inc. in Illinois.
When the housing market went bust in the early 1990s, nearly 15 percent of home builders closed. During that time frame, the companies filing for bankruptcy included Reston, Va.-based NVR Inc. and US Home Corp. of Houston, now part of Miami’s Lennar Corp. Those filings were in the minority, according to the National Association of Home Builders, which said that many cash-strapped builders simply closed.
At the peak of the most previous boom, builders constructed more than 2 million housing units nationwide in 2005. In 2007, housing starts fell to an annual rate of 1.2 million.
While some builders like Centex Corp. and Pulte Homes will try to ride a strategy of unloading inventory at bargain prices, cutting jobs and forgoing growth plans, the atmosphere surrounding residential real estate could trigger even more bankruptcy filings by builders.
For buyers, a builder’s bankruptcy potentially leads to many issues, including:
-- Losing all or part of their deposits.
-- Uncertainty about the completion of unfinished homes.
-- Failing to receive service on builder-backed home warranties.
-- Finding liens imposed on their homes by unpaid contractors.
-- Waiting for roads and amenities like swimming pools, tennis courts or clubhouses to be built.
While it may too late for customers who already have homes under construction, potential buyers can take steps to protect themselves against a potential bankruptcy filings by having their real estate attorney insert a so-called “springing provision” into their contract with the builder.
The clause would “spring” into effect and protect the buyer in the event a builder declares bankruptcy. Standard contracts often provide buyers no such protection, which is why an attorney is an essential part of this type of transaction.
Of course, while your attorney might draft the provision, the details and whether the builder will accept the terms still must be negotiated into the contract. Acceptance is not a given.
However, properly drafted, the provision can protect the buyer from financial loss if the builder has allowed a third party to act as an escrow agent for the deposit. Still, the buyer could stand to lose if money from construction draws were not used to build something on the buyer’s land.
Those in the market to have a house built from scratch should evaluate all their positions, including the potential that their builder goes bust.
http://www.naplesnews.com/news/2008/feb/02/dream-homes-become-nightmares-buyers-when-builders/
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Definately an interesting twist. With rates dropping, people with liquidity see this as a great opportunity to either buy up or invest in additional property.
For those buying up, I would recommend buying a home already built, as they represent a better overall deal during these times.
That being said, for those interested in building their new 'dream' or 'custom' home, this article outlines some precautions that are definately requisite.
The two important things I saw mentioned was:
1. Negotiate the springing provision into the contract.
2. Set up the construction draws to be deposited with the title company and held in escrow so that you're protected in case of builder default.
Good article.
Builder bankruptcies can halt or indefinitely delay construction — meaning buyers can’t move in, customers stand to lose thousands in deposit money and consumers get stuck in a contract with no house to show for their troubles.
In November, Levitt & Sons of Fort Lauderdale filed for Chapter 11 bankruptcy protection. The Levitt Corp. unit, which is in default on more than $300 million in loans, stopped construction of 11 active-adult communities in Florida, Georgia and South Carolina.
Levitt joined a growing list of builders who have either filed for bankruptcy protection or have closed their doors. Other recent bankruptcies include Elliott Building Group in Pennsylvania, Turner-Dunn Homes Inc. in Arizona, Kara Homes Inc. in New Jersey and Neumann Homes Inc. in Illinois.
When the housing market went bust in the early 1990s, nearly 15 percent of home builders closed. During that time frame, the companies filing for bankruptcy included Reston, Va.-based NVR Inc. and US Home Corp. of Houston, now part of Miami’s Lennar Corp. Those filings were in the minority, according to the National Association of Home Builders, which said that many cash-strapped builders simply closed.
At the peak of the most previous boom, builders constructed more than 2 million housing units nationwide in 2005. In 2007, housing starts fell to an annual rate of 1.2 million.
While some builders like Centex Corp. and Pulte Homes will try to ride a strategy of unloading inventory at bargain prices, cutting jobs and forgoing growth plans, the atmosphere surrounding residential real estate could trigger even more bankruptcy filings by builders.
For buyers, a builder’s bankruptcy potentially leads to many issues, including:
-- Losing all or part of their deposits.
-- Uncertainty about the completion of unfinished homes.
-- Failing to receive service on builder-backed home warranties.
-- Finding liens imposed on their homes by unpaid contractors.
-- Waiting for roads and amenities like swimming pools, tennis courts or clubhouses to be built.
While it may too late for customers who already have homes under construction, potential buyers can take steps to protect themselves against a potential bankruptcy filings by having their real estate attorney insert a so-called “springing provision” into their contract with the builder.
The clause would “spring” into effect and protect the buyer in the event a builder declares bankruptcy. Standard contracts often provide buyers no such protection, which is why an attorney is an essential part of this type of transaction.
Of course, while your attorney might draft the provision, the details and whether the builder will accept the terms still must be negotiated into the contract. Acceptance is not a given.
However, properly drafted, the provision can protect the buyer from financial loss if the builder has allowed a third party to act as an escrow agent for the deposit. Still, the buyer could stand to lose if money from construction draws were not used to build something on the buyer’s land.
Those in the market to have a house built from scratch should evaluate all their positions, including the potential that their builder goes bust.
http://www.naplesnews.com/news/2008/feb/02/dream-homes-become-nightmares-buyers-when-builders/
__________________________________________________ _
Definately an interesting twist. With rates dropping, people with liquidity see this as a great opportunity to either buy up or invest in additional property.
For those buying up, I would recommend buying a home already built, as they represent a better overall deal during these times.
That being said, for those interested in building their new 'dream' or 'custom' home, this article outlines some precautions that are definately requisite.
The two important things I saw mentioned was:
1. Negotiate the springing provision into the contract.
2. Set up the construction draws to be deposited with the title company and held in escrow so that you're protected in case of builder default.
Good article.