As Market Cools, Home Buyers Seek a Way Out
Builders Face Lawsuits, A Rash of Complaints; The $266,000 Refund
By MICHAEL CORKERY and RUTH SIMON
The Wall Street Journal
May 4, 2007
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 Florida and California. As the marketstarted 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% -- 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
homes 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% 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 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% 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."
