As market cools, home buyers seek a way out by suing builders
By MICHAEL CORKERY and RUTH SIMON.
The Wall Street Journal
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 percent 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 percent of total home sales. But a wave of building helped fuel the run-up in housing prices during the real-estate boom, especially in Florida and California. As the market started turning last year, prices on new homes and condos quickly stalled, then began dropping. That gave skittish buyers time to get cold feet.
Florida, a magnet for housing speculators in the boom, is Ground Zero for such disputes. The state long has been a boon to housing attorneys, some of whom are now filing lawsuits against developers.
One lawyer recently took out an ad in a Palm Beach newspaper reading: "Do you want your money back? Your contract for purchase of a new house or condominium may be illegal ... To see if you are entitled to a refund, call us for a free consultation."
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 percent - and some buy multiple units.
Consequently, some condo buyers are aggressively seeking ways to back out, said Brad Hunter, director of the South Florida region for Metrostudy, a residential real-estate market research firm. He expects more to do so in the next year as projects sold during the boom become ready for occupancy.
"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 Aventura, Fla., said he is representing a family who bought a roughly $1.6 million condo in a waterfront high rise, expecting a private entrance. But, he said, the family has now learned that the door to the garbage chute, which is shared with neighbors, cannot be locked. "The privacy of my client's apartment has been lost," said Mr. 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 U.S., currently is embroiled in one such dispute with buyers in Florida.
One of those buyers, Daphne Sewell, received three construction loans, totaling about $750,000, to buy three houses in Cape Coral and Lehigh Acres, Fla., in May 2005.
An administrative assistant in Broward County government, Ms. Sewell said she and her husband, a carpenter, earned $90,000 a year at the time of the deal and never should have qualified for their mortgages. She also claims a real-estate firm involved in the deal promised that it would find them tenants to rent out the houses. But the renters never materialized, her 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 Fort Myers market, partly because it had to lower prices on the First Home Builders homes.
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.
In Alexandria, Va., real-estate attorney Beau Brincefield said he has settled roughly 50 contract disputes and has another "50 or more" in the pipeline. They include a case brought last year by more than a dozen buyers who had contracts to purchase homes from NVR Inc., a Reston, Va., builder that sells home in 13 states.
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 percent or refund 25 percent to 100 percent of a would-be buyer's deposit. NVR declined 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 West Palm Beach developer of condominiums and condo-hotels across Florida, and its affiliated development entities are suing about 30 buyers who are trying to cancel their contracts. Ceebraid-Signal said it is citing a "specific performance" provision in its contracts requiring buyers to hold up their end of the deal and close.
"That's called chutzpah," said Marvin Moss, a lawyer in Aventura, Fla. He represents a client who did not want to close on a $375,000 condo because real-estate values had fallen dramatically since she put down her 10 percent deposit, from which she was willing to walk away, he said.
"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."