That pile of dirt and half finished house next to yours may be staying that way for a while. Individual homeowners are not the only ones defaulting on their mortgages - the developers are starting to default, too, and the dollar amounts are staggering.
Anyone looking to purchase a home in a new development owes it to themselves to understand the "health" of the developer and of the project. Just enter the legal name of the owner / developer in the "Grantor" line on the Recorder’s site. If you get a huge number of hits, just go to the last couple of pages. Make sure you are using the legal name of the seller - for instance, PN II is the legal seller of Sierra Canyon, not Pulte or Del Webb. Beyond just NODs and NOSs, Mechanic’s Liens are also a pretty good sign that things are going south.
I’m currently tracking over $150,000,000 worth of projects in some level of default.
SunCal Copper Canyon - This is the big daddy so far (and the the news of the project’s financial difficulty broke on this blog 2 weeks before the RGJ picked it up). This mixed use development on the eastern edge of Sparks was to have over 2000 residential units, 4 million square feet of office, 70 acres of commercial, and potentially a casino. No construction work had started yet, and the lender foreclosed (TD) for $35,000,000 a week ago. I believe there was another $5,000,000 note out there somewhere.
R & K Homes Tucker Ranch, Foothills at Wingfield Village 7A - I’m pretty sure this is their Stoneridge project for 128 homes that is under construction, and DR Horton also shows up as a Grantor. First loan of $12,759,000 and second of $6,500,000. Purchased by Zion’s Bank last week at a Trustee’s Sale for $10,303,457. They are also 3 payments behind on property taxes on their local HQ building. Grandview in the NW?
Reynen & Bardis Stonebrook - I can’t tell which development this is, but they receive a NOD 24 January for $27,000,000. It could be the Estates at Mount Rose, or a future development in the North Valleys, or both.
Reynen & Bardis Verdi - This was to be a 600+ unit development located just west of Somersett. No serious construction has started yet. NOD 14 February for $20,808,650.
Reynen & Bardis Silver Terrace, 1170 S Rock - This is a new 32,240 SF commercial structure. NOD $6,277,950.
Breaking news: R & B (Callamont) got served with a NOD Friday afternoon for $16,106,000 on the Estates at Mount Rose project. Interesting, the sale included 650 acre feet of water rights, far more than would be required for the project. The water rights alone are worth more than the value of the default including the land.
Consolidated Pacific Development City View Terrace - This 60 unit project is under construction in North Reno, just west of Wildcreek. NODs were filed 13 February on 2 loans, one for $6,938,944 - $15,000,000 (can’t tell how much of the construction loan has been used so far) and the second for $6,985,000. A side note, CPD was the group trying to put together the Wingfield Tower highrise condo project downtown.
Sunset Bluffs - This is the 41 lot subdivision connecting Mogul to Somersett, and earthwork has been going on for 2 years. A NOD has been filed for $185,000 on a Somersett lot they bought to provide emergency egress. There is a $6,900,000 outstanding construction loan. Numerous mechanic’s liens have been filed, and there was a bankruptcy order on 6 February.
Lakemont Granite Ridge, Wild Stallion and Canyon Pines - No defaults to date, but the mechanic’s liens are piling up. Never a good sign.
And that’s not all. There are numerous smaller developers in trouble on $1-2,000,000 loans.
It looks like the national firms are still standing. I’ve got a lot of concern for the regional and local developers. And an awful lot of the liens are from local subcontractors, consultants, and suppliers. These defaults are going to hit home pretty hard.
Is this scaring you? Or might there be fire-sale opportunities lurking out there?
23 comments
Wow!
Where would one ever learn of this data were it not for someone like Mike on this blog? Thanks a lot!
I keep waiting to hear of defaults like the ones the subject of this post in Montreux and St. James Village. If/when they surface, that’s when you’ll really know that the chicken has come home to roost.
Keep up the good work Mike!
Mike, amazing… who knew that public records could reveal so much?
Diane
To answer your question, it’s scaring me. I’m scared for those who’ve filed mechanics’ liens because it doesn’t sound as if they’ll have much chance of recovering what they’re owed. As you said, they include small local businesses. We can hope the ones left out in the cold were greedy, flaky people who overcharged, did shoddy work and didn’t return calls or show up when they said they would. But it’s just as likely they were innocent people who did good jobs and provided supplies and paid crews out of their own pockets, all on good faith. Maybe it’s their fault they didn’t see it coming or ignored people who tried to warn them, but I still feel sorry for them. And it will affect everyone else in the community.
Ann Onn, I suggest that what goes around comes around. Let us not forget 4 years ago when people were camping out for 3 days to be in line to get a chance to be “lucky enough” to put down a deposit on some developer’s overpriced Deal of the Century. Surely you remember when prices went up every Monday, dont’t you, Ann? You remember when everybody in the construction and real estate business was a genius, don’t you? When every contractor and builder in town was rolling in the dough because they were all such incredible financial and business Masters of the Universe?
Now, as we witness many of these same geniuses go down in flames, we are reminded that every boom is inevitably followed by its bust.
Some developers who shall not be named have other financial issues which don’t appear in the county recorder’s records, but which a search turns up elsewhere. A County superior court civil index of defendants can be searched in many counties, also you can scan through reports in local business journals where the developers have projects in construction, and just running a google search on project names, or the developer’s corporate name, shows things like the following: suits by numerous home buyers sometimes at different projects by the same builder, over alleged construction defects; suit by a former executive officer in the eight figure range involving obligations allegedly owed him and assumed in an acquisition by defendant developer of another developer company; suit by a county agency for breach of covenant to replace mature trees removed during building the tract, low seven figure range; published articles in regional business journals on various bank loan defaults; articles on developers laying off substantial numbers of staff. As one might say, “the creditors in the rear view mirror are closer than they appear” for some of these developers. The developers have to deal with all of such problems plus try to complete projects, meet payroll, and sell product…not necessarily an easy task when houses aren’t selling.
I have been thinking about having Diane represent us to make an all-cash, quick closing offer on select, FINISHED houses of some of these developers, one at a time, but I would first need my bankruptcy partner to review the situation, and I would want special title insurance to cover mechanics liens. It is necessary to be cautious about trying to negotiate an advantageous purchase from a troubled developer when these issues appear, but for the careful buyer, probably there will be bargains out there because Cash Rules in these cases. To avoid being pushed into default, or having to file a chapter proceeding, or sometimes to meet a payroll, even a large business in temporary difficulty will sometimes consider a quick cash deal bringing in $800k plus of “new money.” But I am aware that it is possible for mechanics’ and materialman’s liens to survive a closing and those may not be covered by standard title insurance; also, those liens generally may still be timely perfected after the preliminary title report was issued, in the case of a recent job completion. Thus the sub-contractors could file claims which might not be disclosed on the preliminary title report and those claims might still be valid liens on the improved property. Builders also may not be able to perform on their home owners’ warranties to make repairs, even if they want to do so. And if they settle a claim on a defect, or even return a purchase deposit, there is the voidable preference period to worry about if the builder subsequently files a petition for relief in the bankruptcy court, if the builder’s situation deteriorates to the point where a chapter proceeding is filed. It is important to avoid being one of many in line at the bankruptcy court, trying to get your money back or asset a claim for repairs. Worse still if some U.S. Trustee orders you to restore money to the bankruptcy estate because some refund of a deposit to you is viewed by him as a voidable preference of you over other creditors of the applicant.
Hopefully when a developer is in difficulty, he can gain an infusion of cash and regroup. But it can be problematic. If too many problems pile up, potential new money venture partners might feel that more than just a “move on” grubstake is needed, because too much money is needed for old problems, as when the cost of curing old problems makes it too expensive to move forward with new homes. The potential white knight investors are going to be reviewing all of those issues as part of their decision.
I would be very careful about the ability to convey fee title free of all claims, and ability to perform on warranty repairs. Also, in projects with homeowner associations, are enough of developer’s common area improvements done, and enough lots sold already, or will a big maintenance cost or completion cost be shifted onto the HOA prior to enough lots being sold to make the costs tolerable for each member? There may be a completion bond for common area improvements, but that involves motivating some agency to make demands upon sureties, or an HOA to do so. It is intriguing to think of the bargains that may turn up, but it may not be so easy to make that bargain into a trouble-free purchase transaction.
That’s quite a litany of things to be worried about when thinking of buying a house from a developer that may be on the brink of bankruptcy or simply going out of business. With a list that long of things that could go wrong, I am wondering why in the world would anybody do it? No doubt it helps to be a lawyer, but even then, would you still want to spend the first 3-5 years of home ownership (even if buying as an investor) in litigation?
I’ve been to a couple of county fairs in my day, and I’ve done pretty well all things considered. I think a major reason for that is a piece of advice I got from a successful entreupeneur many years ago: AVOID LITIGATION LIKE THE PLAUGE.
As a business owner, I have done my best to do that. But over the years Iv’e had a couple of situations involving litigation. I have great respect for your posts here Tom; they are consistently informative and relevent (unlike at least one other person who posts here). You add considerably to this blog. But with all due respect, my observation is that the only people who benefit from litigation are the lawyers. Everybody else loses. Even when you “win”, you lose.
So, in some way does this make purchasing an older home preferable to buying into all of these potential problems with a new home? Does this support existing home prices more than new house prices?
ScrapGuy, I agree that litigation is expensive and to be avoided. It is unpleasant for everyone. But I wouldn’t be afraid to buy a new home from a developer who is in difficulty and walk away from a nice house just for that reason. I am just saying that I would want to be sure I did my homework first. Special provisions in escrow instructions, selecting a house already completed, expanded title insurance, and considering ability to make warrant repairs would be things to think about. No purchase is wholly risk-free, it becomes a matter of assessing an acceptable amount of risk compared to the rewards of an advantageous purchase. If a particular developer who has a house you like might be willing to deal, because he is in some difficulty, that can be a good thing; just keep in mind that care and precautions are indicated
So Tom, where exactly have you been thinking about making all-cash, quick closing offers on select, FINISHED houses of some of these developers, on a one at a time basis? And what makes you think Diane could secure her commission paid for by one or more of these developers [as opposed to you] given not all “cooperate?”
Stated differently, didn’t Guy post a site sometime ago which cataloged the various new home developments where builders were offering commission incentives to local agents? Maybe current conditions combined with a relook at these developers might be prudent?
Finally, I’m just curious insofar as your personal long term interest in purchasing multiple such properties for “all cash” is concerned. You’re an attorney in Southern California who for whatever reason[s], chooses to continue working [presumably in California as an attorney]. You’ve been monitoring Montreux for some period of time as a potential new home domicilliary [presumably to retire]. Reno is not a particularly good market for landlords nor at the present time, for real estate investors. So what exactly do you have in mind in accumulating multiple SRF Reno non-owner occupied “investments?”
Thanks.
Tom, and if the special provisions in the escrow instructions are not complied with, what then?
I’m sure as a lawyer you can interpret the greek sounding legalease of a title insurance policy, and would know what magic language to add to the standard policy, but for a regular buyer, what then?
How does regular Joe buyer negotiate the ability to make warranty repairs without voiding the builder’s warranty guarantees?
It sounds to me like I would have to hire a lawyer (at $300 an hour) to draft all these special provisions, and then when the the guy on the other side doesn’t do what he says he will do, I have to hire a lawyer again (also at $300 an hour). As in lawsuit.
So yes, home pop, I would say all these concerns that Tom cautions about would clearly steer me away from buying a house from a developer about to go bk or about to cease operations. And as I am sure Tom will agree, even the most elegantly drafted contract carries no asuurance that it will performed according to its terms by the other side. I see no point in going out and buying a lawsuit when I can go out and buy a house with none of these issues.
Smarten, I am considering this on a one-at-a-time basis, and I would stop once the first were accepted. If not, I would go to prospect number two. So this does not involve multiple target investment properties, rather a shopping list concept. This would be for a personal residence, not as a financial investment. I would also make payment of buyer’s agent’s commission a condition, and if not accepted, I would go to the next property. I suspect it may be the case that developers in general may be more willing now to pay a buyer’s agent than they might have been last year.
We have not found anything in the Montreux neighborhood yet for an attractive price, but are still looking; that would be my first choice area. We are looking at other areas also.
RE: I’m sure as a lawyer you can interpret the greek sounding legalease of a title insurance policy, and would know what magic language to add to the standard policy, but for a regular buyer, what then?
A regular buyer could always retain a real estate attorney. They’re not that expensive, especially considering the risk of going without.
Quite true MikeZ, but that’s only about 25% of the problem. As a guy who has had to deal with lawyers and the legal system in his business over the years, I have learned that the most elegantly crafted and designed contract is just a piece of paper. If the other side decides it isn’t going to perform, you have a choice: you can walk away not getting what you bargained for, or you can hire a lawyer to enforce the deal. Ah yes, MikeZ, you can pay $300 a hour for years of litigation trying to enforce that contract that was so inexpensive at the beginning. Based upon your suggestion, it is my hunch that you have never been involved with lawyers and the courts, correct?
I’m not here to bash anybody, either you Mike, or Tom. The system is what it is. But I suggest that anybody who has been through the litigation circus knows that a contract is no guaranty of anything, and that you can easily spend more in lawyers fees than the case is worth. Not to mention the years of distraction from what is important. Again I ask: why in the world would anybody thinking about buying a house want to run the risk that you could spend the next 3 years paying a lawyer tens of thousands of dollars chasing down a developer that isn’t even in business anymore or fighting with a Chapter 7 Trustee or a debtor-in-possession builder trying to dump all it’s obligations? Why? When you can just go buy a house in an established neighborhood with none of these issues?
Tom, your premise is a good one except for one nagging detail:
There isn’t much standing inventory aside from the models from the builders because they sold the bulk of inventory off last quarter.
There won’t be any standing inventory until after the Jan fire sale contracts are completed in August, and the financing of those contracts falls through before closing.
Now, if you want to buy undeveloped dirt… the developers have plenty of that. You might be able to find some highly upgraded models for sale as well but you won’t be able to get them for less than the lowest contract price because of all these price lock guarantees in effect.
You’ll have to wait until the fall of this year, which is when I predict the proverbial stuff will hit the fan with the builders because they’ll have to have another standing inventory fire sale with an even bigger haircut than they took last year.
So Tom -
Two long term rentals in Montreux have popped up on craigslist.
The first is PostingID: 608535831 - a 3,000 square foot 3BD/3.5BA “Cottage” on Zermatt at $4K/month. This is a longtime listing with Dickson that hasn’t sold [because the seller is unrealistic in his/her pricing]. The seller is looking for anything to stem the flow of blood [well not anything given the unrealistic rent] - either lease or lease/option.
The second is PostingID: 608623380 - a 3BD/3.5BA “custom, executive, home” in an unidentified portion of Montreux. This home is probably being offered by its owner [he’s/she’s “seeking (a) long-term tenant”] for an even more unrealistic $4.5K/month.
I know of a third [4BD/3.5BA, 4,200 square feet] home in Montreux which is no longer on craigslist with an asking rent of $4K/month [yet a willingness to rent for $3.3K/month].
These are all examples of Montreux sellers who NEED to sell but are in denial because they’re unwilling to drop their prices to fair market. Nevertheless they need cash flow to cover their debt service. But as that debt service mounts and they realize no cash flow [because $4K/month is more than fair market rent], the dam is going to start cracking.
At that point these sellers will need to do something. As I said before, it should be an interesting summer.
The dam has cracked and its leaking, Bear Stearns broke and more to follow. No one left to buy the mortgage paper.
Red sky in the morning.
Umm… Toll, KB, Lennar defaulting over in Vegas. Pulte can’t dump developments fast enough… The Feds bailing out Bear Sterns…Gold >1K.
What’s that old Navy saying? Red sky at night, sailor’s delight. Red sky in the morning, sailor take warning.
You missed my point, SkrapGuy: If you don’t understand the legalese of a mortgage contract or title insurance policy, then go in with someone who does, like an attorney who specializes in real estate contracts.
To answer your question: No, I haven’t had to use litigation to settle a contract dispute (and I’m sure it’s costly and frustrating and time consuming) but I credit that to always going in with legal representation to make sure the contract that we’re signing is exactly what I think it is.
What has happened to the Dayton Real Estate Market.
R and B Owned a lot of dirt down there
You missed my point MikeZ:
You can go to the finest lawyer in all of Nevada and have that person draft up for you the finest contract you want. Cover EVERY point you want covered. Make it ELEGANTLY clear what you and the other side are obligated to do. Then, you can go to bed at night feeling totally secure that you are protected by the finest piece of contract draftsmanship ever witnessed in the legal community. You can sleep well with your “contract that is exactly what you think it is.”
And then, MIkeZ, after you have paid your money and fully performed your obligations under this mastery of lawyering, the other side says, well, we don’t think it means what you think it means. We don’t think it is what you think it is. Or the other side says, well, we think we have met our obligations and if you don’t think we have, too bad.
Now what, Mike Z?
Your elegantly crafted legal document doesn’t mean squat until some judge or jury says it does. And the only way you are going to get a judge or jury to say you are right in your interpretation is to litigate.
Welcome to $300 an hour hell for months and months, if not years and years.
But if you think I am just being silly here, then go ahead and buy a half finished house from a builder on the brink of extinction. Go ahead and buy a house from a builder who will give you, and your topgun lawyer, an indemnification from any and all liability arising out of mechanics liens. Go ahead and buy a house from a builder who assures you and your lawyer that there is a completion bond that will cover all repairs even if the developer goes bk. Pay your lawyer well to cover every last contingency in your agreement.
And then, when the builder goes bk and turns into a debtor in possession in a Chptr. 11 proceeding, and moves to void your elegantly drafted contract, what are going to do?
And then, when the developer does not indemnify you from mechanics liens, what are going to do?
And then, when the bonding company refuses to make any repairs, what are going to do?
Are you going to say, but, but, I have this carefully drafted contract.
And then, maybe in 2 or 3 years, after you have spent tens of thousands of dollars enforcing your elegantly drafted contract, maybe a judge or a jury will agree with you. And then you can go out and celebrate your “win” in court.
The point is that you can hire a lawyer to draft the Magna Carta of contracts for your protection. But if the party on the other side decides it is not going to perform, you are in litigation hell.
And then,
Let me caution everybody to heed well the words of skrapguy. Last year my son and his wife purchased a not quite completed house in Phoenix from a local builder. The deal was that my son received $25,000 off the “regular price” because the house was not quite complete with the finishing work. It was complete enough to get a COO. My son actually went to a lawyer to have the sales contract reviewed before he signed it. My son thought he was protected because he had a legal contract reviewed by a lawyer.
This has turned out to be a disaster. The builder had not paid the subs. There were “legal and equitable” liens against the house. The builder has gone out of business. The premiums on the completion bonds were not kept current, so the bonding company disclaims all responsibility. The title insurance co. says it is not responsible under some theory.
The lawyer says my son can sue the builder, and maybe the insurance co. but the case may take years to complete, and there is no guaranty my son will get anything. The lawyer wants a $10,000 retainer. Another lawyer suggested to my son that the first lawyer may have committed malpractice in not advising my son against these problems. So maybe my son could sue the first lawyer. Great. Years in litigation either way.
Anybody who deals with a builder in financial trouble is a fool. What’s the point when there are thousands of houses for sale without these potential problems?
I think SkrapGuy’s comments are well taken. We all have to evaluate the liklihood that the persons or businesses we are dealing with will act in good faith and will do what they say they are going to do (”perform the contract”). It seems to me rather obvious that the possibility that the contract will not be performed is substantially enhanced when dealing with persons or businesses who are teetering on the brink of dissolution or about to cease operations, perhaps never again to be heard from.
And yes, once one has to resort to litigation, it is only a matter complexity as to what wrung in Dante’s hell he will descend to.
BREAKING NEWS AT R&K STONERIDGE - The new “owners” of this defaulted development have just listed 3 of the model homes for sale (6647, 6659 and 6679 Fabric). They come tricked out, fully furnished, and with backyard landscaping complete.
Pricing is 10-15% below what these models sold for a year ago on adjacent Globe Ct. Is this an example of an entire street under water?