Builders Face Lawsuits, A Rash of Complaints; The $266,000 Refund
By MICHAEL CORKERY and RUTH SIMON
In the latest fallout from the housing market's decline, disputes are breaking out between builders and buyers who signed contracts for new homes and condos when the market was hot -- and now want to get out of them.
Even as many of the new buildings are completed, buyers are filing lawsuits claiming they were duped into purchases they couldn't afford, or victimized through fraudulent investment schemes. Some are scrutinizing their contracts looking for loopholes, or searching out tiny flaws in finished homes that might allow them to back out without losing their deposits.
For some builders, the disputes are contributing to cancellation rates as high as 30% and writedowns in some markets. "People will go to great lengths to get out of a legally binding transaction," said Larry Sorsby, chief financial officer of Hovnanian Enterprises Inc. "They were willing to ride the real-estate boom on the way up, but some are not willing to ride it on the way down."
Newly constructed homes make up only about 15% of total home sales. But a wave of building helped fuel the run-up in housing prices during the real-estate boom, especially in
One lawyer recently took out an ad in a
Typically, buyers of new homes and condos put down a cash deposit when they decide to buy, then pay the balance when the home closes and is ready to occupy. But condo buyers, in particular, have a lot to lose by walking away from their contracts because their deposits can total as high as 20% -- and some buy multiple units.
Consequently, some condo buyers are aggressively seeking ways to back out, said Brad Hunter, director of the
"If they can find some way in which the developer has not delivered according to the contract, they're using that as a way to get out," he said.
Dennis Freeman, an attorney in
Freeman. He is suing to rescind the contract.
Mr. Freeman recently settled another case in which the developer agreed to return a $266,000 deposit to a condo buyer who claimed that the size of the pool deck and gym were smaller than the developer promised. Mr. Freeman said he was surprised by the settlement. "To me, it's a reach," he said.
Other disputes are more heated. Red Bank, N.J.-based Hovnanian, one of the largest builders in the
One of those buyers, Daphne Sewell, received three construction loans, totaling about $750,000, to buy three houses in
An administrative assistant in
houses are vacant, and two of her loans are in foreclosure.
"If I close on them I deplete my savings in two or three months," said Ms. Sewell. "It's worth the fight."
After she was served with foreclosure lawsuits by the lender, she filed a countersuit, which names the builder, First Home Builders of Florida, the lender and a real-estate firm that she alleges promoted the deal, claiming she was defrauded by an investment scheme that promised minimal risk. A lawyer for First Home Builders said his client denies any wrongdoing.
Hovnanian, which bought the assets and contracts to build homes from First Home Builders in August 2005, said it has not been served by Ms. Sewell's
lawsuit and that she took out her construction loans before Hovnanian bought
out the assets of First Home Builders.
Still, complaints like Ms. Sewell's are causing a major headache for the company, which says it is trying to help buyers close on the homes by lowering prices by as much as $100,000 while fending off allegations of fraud. Hovnanian took a charge of $175 million in over the fourth and first quarters related to the
Mr. Sorsby, the chief financial officer, said many of these complaints are from regretful buyers trying to take advantage of a public backlash against the housing industry amid the subprime mortgage meltdown. "They are going to great lengths to paint somebody other than themselves the bad guy," Mr. Sorsby said.
Mr. Brincefield said the terms of that settlement are confidential. In general, he said, builders have agreed to lower purchase prices by as much as 35% or refund 25% to 100% of a would-be buyer's deposit. NVR declined to comment.
Mr. Brincefield said that in many of the contracts he's seen, "the remedies are very one-sided." These contracts allow the builder to retain the borrower's deposit or sue for damages if the buyer cancels, he said, but only allow buyers to get their deposits back if the builder doesn't meet its
obligations. In some cases, he said, builders may have violated the Interstate Land Sales Full Disclosure Act, which requires them to make certain disclosures and meet other requirements.
Some developers are not backing down. Ceebraid-Signal, a
"That's called chutzpah," said Marvin Moss, a lawyer in
"This is to frighten people and force them to close," said Mr. Moss. "It costs a lot of money in legal fees to defend these actions." A couple of buyers hit with such lawsuits have backed down and gone through with the sale.
Said Richard Schlesinger, managing director of Ceebraid-Signal: "I don't think there is anything that we are doing that is inappropriate." "These are not situations where a woman bought a unit and she's now a widow and can't pay," he said. "These are people who don't want to close because they can't flip and make $100,000."
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