How Can I tell If a Homebuilder is Stable or is going Bankrupt?

Question: I'm interested in purchasing a home in Del Webb's Shadow Hills project in Indio, Calif. I note that Pulte Homes, which builds the homes there and may even own Del Webb (or vice versa), is on the danger list on the Home Builder Implode-O-Meter Web site. Any thoughts or recommendations? Should I stay away from this Del Webb community?

Answer: Pulte Homes Inc. owns Del Webb, of that I'm sure. But otherwise, who knows? This is a tough, tough market, and only time will tell which builders survive and which do not. I hesitate to give more than general advice about any particular builder because I have no greater insight than anyone else, save for perhaps a stock analyst, who should be able to go over the company's financials and determine whether or not it has any staying power left. But I will say this, though: Pulte did pretty well in J.D. Power Co.'s most recent home-builder customer satisfaction study. Why is this important? Because in times like these, the first thing many builders cut back is customer service. Once buyers close and move in, they are often forgotten because a troubled builder is concentrating on selling other homes, not making previous buyers happy. But Pulte brands (which besides Del Webb include DiVosta Homes) ranked highest is customer satisfaction in 11 of the 33 markets surveyed. You can find the rankings for all 33 markets here. "In 2008, a wide variety of home builders perform(ed) well," said J.D. Power's Paula Sonkin. "In the midst of the volatility that has defined the overall housing market during the past two years and has caused several home-building companies to go out of business, many local and regional builders have seized the opportunity to attract and serve potential home buyers."

Also, let me point out what the Home Builder Implode-O-Meter itself points out: The builders on its watch list are not necessarily in deep do-do. The companies may have gone through some kind of adverse change -- perhaps a key executive has stepped aside -- but they are still up and running, the Web site notes in its fine print. Other possible setbacks include a steep and rapid decline in the firm's value -- and what big builder hasn't experienced that kind of fall from grace? -- or there may have been a rescue by a parent company.

Beyond that, it's always wise to make sure your prospective builder has a solid foundation, not just in these troubled times but always. Doing this kind of legwork isn't simple, but it is worth it. Otherwise, you could end up going down with the ship. There isn't any precise way to research a builder's staying power, but here are some steps you can take to protect yourself against the possibility the company might fail:

1. Check with your local courthouse to see if any of the builder's subcontractors and material suppliers have filed liens because they have not been paid. "Follow the money," says an Idaho builder who asked to remain anonymous for fear of being ostracized by his colleagues. "Once a lien has been filed, 70% of all builders won't be able to dig out from under. So this rolls right to the issue of stability." It's not uncommon for a builder to use his cash to meet his own payroll before paying any or all the 120 or so vendors who work on a house, hoping he can use cash from the next sale that comes through the door to pay for the work and materials on the previous sale. Subs and suppliers often let a builder slide because they want to keep working too. But only for so long. When it becomes evident to them that the company is in dire straights, they file liens against the builder so they'll be in the line of creditors should the builder file for bankruptcy.

2. Talk with the subcontractors you see working on the project. "We hear from subs about slow pay problems long before a builder files for bankruptcy," a Maryland consumer affairs expert advised me a long time ago. Even if they aren't being paid on time -- a sure sign of cash flow problems -- they might remain mum. But one or two may be angry enough or so far behind that they'll spill the beans. After all, they are consumers too. While you are walking the job, look for tell-tale signs of problems. Lack of activity is one. The absence of building materials is another. Sales are slow these days, to be sure. But if there are no signs of activity, the pace may be too slow to carry the project.

3. Require the builder to provide lien releases signed by every vendor on the job saying they have been paid. This may be a logistical nightmare for the builder, but if he wants your business, he may agree. Sales are hard to come by these days, so a builder who is in good shape may agree to do this just to ease your concerns.

4. Ask for permission to speak with the builder's bankers about his financial strength. Lenders are often the last to know when a builder is in trouble. Still, a builder who balks at your request may or may not be trying to hide his difficulties. But in today's troubled times, a sound company shouldn't have any problem with this request either. And if the builder does agree, the bank has a duty to be honest. If not, it could be held liable if the builder folds.

5. Demand that your deposit money be held in a separate escrow account. In most states, builders are permitted to place earnest monies into their own accounts and use the funds to operate their businesses. But in today's market, some will use your money to finish the previous buyer's house, again hoping to use the next buyer's money to work on yours. Builders may balk at first, but if it means the difference between a sale and no sale, they should cave. "I've never seen a single builder blow a deal over (earnest money), not one," says an Ohio buyer-broker.

6. Ask for the names of the company's most recent buyers to get their take on the builder. One of the first places a builder in trouble will cut is warranty work, so you'll want to know whether or not the company is attending to so-called "punch list" items in a timely manner. Also ask if the builder cut corners, switched suppliers in midstream -- say from one appliance maker to another -- without notice or permission, or has generally failed to be responsive.

7. Add a "springing" provision to the sales contract. This is a clause that allows you to back out of the deal if the builder files for bankruptcy. Builders typically won't let a buyer amend their standard contracts. But today's housing market calls for extraordinary measures, so a sound builder shouldn't have any trouble with this consumer protection.

8. Another place builders tend to cut early is office personnel. If the company lays off construction staff, it could simply be phasing down to get in step with the slowing market. But if there is no one to answer the phone and direct calls, trouble may be brewing. Ditto if the builder has canned project superintendents, estimators or design and sales and marketing staff. These are all "lifeline" positions, so if these key personnel slots are vacant, buyer beware.

9. Consider taking out a construction loan, one that automatically switches to a permanent mortgage when the house is completed, in your name. That way, the builder will be paid in draws only as various phases of construction are completed. If the builder fails, you'll be left with a partially completed house that very likely will cost your more to finish than you originally planned to spend. But at least the unfinished place will be yours. You won't lose your deposit, and your house won't be tied up in legal proceedings.

10. Make sure the builder offers a third-party warranty. This won't protect you if the business goes under while the house is under construction. But if the builders goes belly up after you move in, the warranty company should step forward to make whatever repairs are necessary. Many builders have their own one-year warranties. But they aren't worth a hoot if the builder is no longer around to back it up.

Nationally syndicated columnist Lew Sichelman has been covering the housing market for 35 years. Because of the volume of mail he receives, he cannot answer individual questions, nor can all questions be answered in this space. E-mail lsichelman@aol.com

Homebuilders DownFall Hurts Commercial Real Estate Too - WCI, Divosta Empty Offices

Woes touch commercial real estate (From Palm Beach Post Staff Writer By Jeff Ostrowski)


The commercial real estate market largely has shrugged off the housing market's woes, but that happy trend might not last forever.
With builders and mortgage companies downsizing and in some cases going broke, there's suddenly a lot of empty office and industrial space coming on the market.

For instance, DiVosta Building Corp.'s former industrial complex in Palm Beach Gardens now is available for lease. The downsizing company last week sold five buildings totaling nearly 100,000 square feet, and Asset Specialists Inc. of West Palm Beach is marketing the space.

DiVosta isn't the only builder adding space to the market. Bonita Springs-based WCI Communities has announced layoffs, and Grubb & Ellis is subleasing about 26,000 square feet of offices in Broward and Palm Beach Counties that WCI no longer needs. That includes 3,800 square feet in Palm Beach County, said Owen Sagar, senior vice president at Grubb & Ellis in Boca Raton.

And Mercedes Homes is selling a 5-acre truss-manufacturing plant in Delray Beach. Sagar sees such sales as evidence that the residential downturn is hurting the commercial market.

"We're definitely starting to see the slowdown," Sagar says.
It's not just the builders that are adding space to the market. HomeBanc Mortgage Corp. went broke this year, and First NLC Financial Services announced layoffs soon after moving from Deerfield Beach to Boca Raton - and before it found a taker for its Deerfield offices.
With the dollar marked down to fire-sale prices, foreign investors should be swooping in to buy Palm Beach County's commercial properties on the cheap, right? Not exactly.
Foreign investors have been selling more than they've been buying, even as the greenback has plummeted in value against the pound, the euro and the Canadian loonie.

True, GLL Real Estate Partners of Munich, Germany, in September paid $180.2 million for the Legacy Place shopping center in Palm Beach Gardens, and a German group in August paid $37.25 million for Wellington Green Square on Forest Hill Boulevard.
But GLL in May sold the office building at 3601 PGA Blvd. for $21 million to an American investor.

Other foreign sellers: Hans Vogler, a German who in June sold 537 acres at Florida Research Park for $162 million; Siemens AG, the German telecom giant that in July sold land and offices in Boca Raton for $37 million; and Canadian investor Murray Dalfen, who got $37.7 million for the Boynton Commerce Center last month.

All three sales were to American investors. But Manuel de Zárraga, executive managing director at Holliday Fenoglio Fowler in Coral Gables, reads nothing more into those sales than simple profit-taking.

"They're harvesting some pretty big gains," he said.
While foreign investors have been flocking to Florida to buy vacation homes and iPods, buyers of commercial real estate tend to focus on a property's income stream, not on the discount provided by a weak yield, said Bob Sullivan of RJS Realty in West Palm Beach.

"Real estate is a very different commodity," Sullivan said. "You're buying a yield."

Palm Beach County Real Estate Statistics

Numbers dismal but better balanced
By Linda Rawls
Palm Beach Post Staff Writer
Monday, November 05, 2007
In Palm Beach County's new-home developments there is evidence that supply is working its way toward a better balance with demand, according to a study released last week.
There were 755 single-family move-ins during the third quarter of this year - the fewest in more than a decade, according to MetroStudy, a West Palm Beach-based housing consultant.

That's also 52 percent fewer than the same quarter last year, when there were 1,585 move-ins. There were 1,135 move-ins in the second quarter of this year.

There were 486 single-family home starts in Palm Beach County developments in the third quarter of this year, MetroStudy said, a 52 percent drop from the third quarter of 2006, when there were 1,017 starts. There were 408 in the second quarter of this year.
In the peak construction year of 2003, MetroStudy noted, starts averaged more than 2,600 a quarter as builders throughout the county feverishly pounded nails to feed the boom.

Brad Hunter, an analyst at MetroStudy, said the move-in pace (755) was greater than the starts pace (486) in the third quarter of 2007. That's a healthy situation, he says.
Another good sign, Hunter said, is that total new-home inventory in Palm Beach County dropped to 2,989 units in the third quarter from 3,258 units in the second quarter.
The number of units under construction fell to 1,464 units in the third quarter from 1,776 in the second quarter.

Here's some good news for Port St. Lucie house hunters, especially first-time buyers.
Mercedes Homes' Treasure Coast Division, reacting to the still-slumping housing market, has introduced The Cottage Series, with two designs that can be built on your lot or on a Mercedes Homes lot.

The Paige, a three-bedroom, one-bath home, has 1,212 square feet of living space and starts at $103,990, the builder says. The Nicole Deluxe has 1,404 square feet and starts at $109,900. It has three bedrooms and two full baths.

Both have two-car garages and open kitchens that flow into "great rooms."
Got more money? There are plenty of options.

"I believe we've got the lowest prices in town," said Robert Smithwick, division president.
Log on to mercedeshomes.com if you don't believe him. Or even if you do.
Many other local builders are offering incentives to attract buyers in what has become the worst housing slump in 16 years.

Some of them are impressive indeed, although to date Mercedes takes the prize for most affordable. Truth be told, we don't have room to list them all in this column.
We see news releases from CentexHomes and DiVostaHomes on our desk, for instance. It's a trend we expect to continue well into next year as builders seek to work off their bulging inventories homes and condos.

Linda Rawls writes about residential real estate. Contact her at The Palm Beach Post, 2751 S. Dixie Highway, West Palm Beach, Fla. 33416-4700; (561) 820-4722; e-mail: linda_rawls@pbpost.com.