The Housing Scene

When Your Buyer’s Homebuilder Shuts Down

Buyers Have Limited Options to Protect Themselves

Lew Sichelman

It’s not an everyday occurrence. But once in a while, a homebuilder abruptly shuts down, leaving customers holding the proverbial bag.

At the height of the Great Recession, for example, dozens of homebuilders suffered adverse changes that affected their buyers, whether that meant the company went bankrupt or was purchased outright by another entity.

More recently, a major Florida builder called Metro Home Builders Inc. filed for bankruptcy this summer. When it closed its doors, it left some 60 houses in various stages of construction. In one case, according to the Naples Daily News, the company was paid over 75 percent of the home’s contract price but left it “not even half built.”

And in Raleigh, North Carolina, a local TV station reported that eight families have been left with “a mountain of debt” – and no homes – when J&R Homes suddenly went out of business.

Stories like this should send shivers down the spines of every homebuyer, and they should take every precaution to protect themselves. Buying or building a house is a participatory sport; you can’t just sit on the bench if you want the process to be successful.

Lawyer Up, Move Fast

If your builder shuts down before your house is completed, the best advice is to lawyer up right away. Do not hesitate. As soon as you get wind of any financial difficulty, gather up all your paperwork and run, don’t walk, to an attorney. And not just any attorney, but one who specializes in real estate law.

Bring the lawyer your signed contracts, along with photocopies of every check you’ve written to the builder (and to any affiliates) that has been cashed. You’ll also want to stop payment on any outstanding checks that have yet to clear.

At this point, the likelihood of saving your investment isn’t good, especially if the builder is insolvent or declares bankruptcy. Secured creditors with the right to foreclose are paid off before the builder’s buyers. But those who are first in line with their claims stand the best chance of getting at least some of their money back.

Some advice for anyone thinking about entering into a contract with a homebuilder: Thoroughly check out the company before you sign on the dotted line.

Start by looking at the firm’s financials, either with its local bank and lenders or by running a credit check. Make sure it is on sound financial footing and is unlikely to go belly-up in the middle of construction. Ask to speak with the company’s backers – if the builder balks, your antennae should wiggle.

Next, walk the construction site and start a casual conversation with the subcontractors. Speak with their foremen to make sure everyone is being paid – on time and in the proper amounts. If they are being shortchanged or stiffed, they’re likely to let you know.

If the subs aren’t happy, the builder is likely to be in some kind of financial squeeze, usually from lenders and subs on another project. According to one attorney, it’s very common for builders to find themselves in trouble when they start using funds from one property to pay vendors for work elsewhere.

Also, check out the builder with your local Better Business Bureau and consumer affairs agencies. Too many complaints about missed deadlines or unfinished work could be another sign of trouble.

Be Cautious and Double-Check

Once you are satisfied the company is in sound financial shape, proceed cautiously. Make sure the contract commands the builder to put all the money you pay during construction in escrow, and not to mingle it with the company’s operating funds. That way, your money will be safe until closing, when it will be handed over to the builder. And add a clause that said if the company declares bankruptcy, your contract is void and your money will be returned.

Prior to construction, make sure all the necessary permits have been issued and the required bonds have been posted. During construction, make sure the subcontractors are being paid by obtaining copies of all lien release forms, which they should sign every time they are paid. Otherwise, they can file a lien on your house, and you may not be able to close on the place until the liens are settled.

If the builder bails before your place is finished, you may be able to make a claim against the builder’s insurance or security bond. You also may be able to enforce the warranty the builder provided to protect you against defective craftsmanship and structural issues.

Some states have guaranty funds, to which aggrieved buyers can file claims for unfinished work. But the investigations often take months, and payouts are slow. According to one press report, 97 claims were filed with the Maryland Home Builder Guaranty Fund between July 2017 and June 2018 – but there was only one payout.

Finally, let’s discuss what happens if you move into the new house, but your builder fails before taking care of all the “punch list” items – either cosmetic or structural – that were noted on your final walk-through before closing. They promised to fix those things, but now they’re out of business.

Here, there’s little you can do other than make a claim against the warranty you were provided. If you haven’t yet closed, you might demand that some money be set aside in escrow to cover the cost of said issues. That way, if the builder goes kaput, the money for any repairs will go to you, allowing you to fix things on your own.

Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at