Q&A With Mike Morgan About Homebuilder Bankruptcies

I had a brief conversation with Mike Morgan on Saturday about what might happen should Levitt declare bankruptcy. Here is the background story...

Fort Lauderdale-based Levitt and Sons halts all work on houses.

Levitt and Sons, the cash-strapped Fort Lauderdale company trying to survive the housing slump, said Thursday it has temporarily stopped building houses as it tries to restructure its debt.

The action is an inconvenience for consumers who plan to move into Levitt homes and now are in limbo.

My Comment: Inconvenience?! Putting down 10%-20% on a house and having the builder walk away in bankruptcy is merely "inconvenient"?

"I'm up in the air," said Angelo Palermo, 69, who's renting an apartment in Pembroke Pines while waiting for his $380,000 house in Port St. Lucie to be finished. "This is a very bad situation."

The builder's parent, Levitt Corp., said last Friday the subsidiary faces an uncertain future if it can't work out a deal with lenders.

My comment: "An uncertain future"? What's with these wimpy comments from Levitt? The future is very certain. If Levitt cannot work out a deal with lenders, the future is guaranteed. That future is called bankruptcy. Even IF lenders are willing to throw more money into this sinkhole, Levitt is still may go bankrupt. What new buyers would make a down payment on a house with Levitt with all this uncertainty over things?

"We realize that there are a number of questions from customers," said Michael Freitag, a spokesman for Levitt Corp. "But until the matter of financing is resolved, we don't have answers to those questions." Levitt home buyers can call 877-538-4889 for information about the status of their homes.

My Comment: Levitt does not have any answers so if you call them that is all you will hear. But there's the number to call in case you want an actual voice to tell you just that. By the way, I called the number and talked to "Loretta" who was very pleasant but could not answer media questions. No one answered the media phone number she gave me.

Bob Oblas of New York was scheduled to close on his two-bedroom house in Seasons at Tradition on Oct. 31, but said a company representative told him Thursday that it was not likely to happen. He wonders about a clubhouse and other amenities that have yet to be built. "I'm very concerned about the viability of the community," said Oblas, 66.

My comment: "Clubhouse"? Sheeesh That should be the least of your worries. People seem worried over the wrong things here. "Viability of the community" is certainly a more valid concern. There are a host of other pitfalls to be worried about as well which we will get to in a moment.

Joel Dramis, assistant building official for the city of Port St. Lucie, said his office has received no complaints about Levitt and Sons. But he said a contractor has filed nine liens against the builder.

Last month, Levitt Corp. said it was laying off as many as 200 of its 573 employees because of the housing downturn. Most of the cuts were planned at Levitt and Sons.

The builder did not pay $2.6 million of interest payments due last week to its five primary lenders. Levitt Corp. said it has loaned $84 million to Levitt and Sons through Sept. 30 but is unwilling to loan more money unless the builder can negotiate better financial terms with the lenders.

Levitt Corp. said it doesn't expect to recover the money it loaned to the builder.

Q&A With Mike Morgan

Mish: What happens in Florida if a builder goes bankrupt before the buyer closes?
Morgan: It depends. Most builder contracts request that deposits go into a general fund. You can opt out of the general fund, and your deposit will go into an escrow account, but this usually means you give up builder incentives. I’ve never had a single buyer opt out of the general fund for the escrow fund. It simply means giving up too much in incentives. So if the builder goes bankrupt, and your money is in the general fund, you are nothing more than an unsecured creditor. Even if your money goes into an escrow account, it depends how viable that escrow account actually is.

Mish: Who has first rights to the houses or partial houses?
Morgan: In each case I advise buyers to take their contracts to an attorney licensed in the state they purchased the home in as well as an attorney in the state they are in, if that is where they signed the contract and it is different than the state where the home is being built. Each state has different laws for contracts.

Mish: Should someone actually get to closing in these situations, what is the likelihood they will immediately be upside down on the loan.
Morgan: It's nearly guaranteed.

Mish: If someone decides to go ahead with a purchase shortly before or after a builder goes bankrupt are there any other potential pitfalls?
Morgan: Yes. It is quite possible that subcontractors who were not paid by the developer or only partially paid by the developer decide to slap mechanics liens on the house after closing. Another possibility is builder defects caused by rushed completions or builders cutting corners to save money. Both of these can be very expensive problems for the buyer sometime down the road.

Mish: Could a bankruptcy by Levitt be a blessing in disguise for those who have not yet closed on their homes?
Morgan: Absolutely. The smaller the original down payment, the bigger the potential blessing might be. This is true for any potential bankruptcy, not just Levitt. Depending on how contracts were written and whether any "outs" are present for the buyer, many potential headaches such as being upside down on a loan, amenities promised not being delivered, and the possibility of mechanics liens placed on homes for those who do manage to close, walking away can easily be the best option. Once again, I would advise talking to a real estate attorney over this matter. Contracts can vary for different buyers even with the same developer.

Contact information for Mike Morgan about this article or for Ground Zero Consulting Services to Wall Street and Retail Buyers
Email: Mike Morgan

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/