As Market Cools, Home Buyers Seek a Way Out

As Market Cools, Home Buyers Seek a Way Out

by Michael Corkery and Ruth Simon
Wednesday, May 9, 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.”
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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 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% – 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.”

Write to Michael Corkery at and Ruth Simon at

Not in this market area…

Ahead of the pack
Housing slide is milder here than in most areas.

Source: Philadelphia Inquirer
Published: 2007-05-06

The numbers say it all: Philadelphia and the seven counties surrounding it are weathering the slower residential real estate market better than much of the rest of the country.

In the first quarter of 2007, pending existing-home sales for this region were down just 5.3 percent, or 685 houses, compared with the same period in 2006, according to data compiled by Trend, the multiple-listing service (MLS). It took about two weeks longer to sell a house this year than it did last year, but median prices continued to increase, the Trend data showed.

That repeats the pattern begun in 2006, which also was a bit of a mixed bag for existing-home sales, according to Prudential Fox & Roach’s HomExpert market report, based on MLS data. Last year, median prices rose in all eight counties, while sales declines were mainly in the single digits.

In 2006, Center City experienced a 24.3 percent increase in sales over 2005’s levels, according to HomExpert, but a 3 percent drop in median price.
Over the long haul, however, that seems to mean very little. Data compiled for the Center City District by economist Kevin C. Gillen of the Wharton School showed that average sale prices for condos and houses have increased 8 percent a year since 1986, with appreciation rates ranging from 201.7 percent to 684.8 percent, depending on the neighborhood.

Though the numbers were tracked over two decades, much of Center City’s housing-price appreciation has occurred in the last 10 years. In the “condo world, prices rose 15 percent from 1980 to 1996, or 1 percent a year,” said Allan Domb, president of Allan Domb Real Estate, who has developed several high-end condo buildings downtown. “From 1996 to 2005, there was a 300 percent increase.”

Yet while sales were slower in the first quarter of 2007 than in the first three months of 2006, Trulia Inc., a California firm that tracks real estate trends, ranked the Philadelphia market third (after Manhattan and Chicago) in the number of properties for sale viewed on its Web site.

What are these surfers looking for? A 1,911-square-foot single-family with “3.2 beds, 2.1 baths,” and a $262,900 median list price, said Trulia’s Alissa Weinstein.

Larry Flick, Prudential Fox & Roach’s chairman and CEO, called Southeastern Pennsylvania’s 3.8 percent median-price increase in 2006 “more typical” than the double-digit rises of the previous two or three years.

The National Association of Realtors, which relies on figures from multiple-listing services, will not have its first-quarter data until May 15, but an 11.3 percent drop in sales nationwide for March compared with March 2006 led chief economist David Lereah to suggest that the fallout over problems with subprime lending may continue to dampen the housing market.

Long-term mortgage rates are about half a percentage point lower than they were in the first quarter of 2006, but short-term rates remain higher than in the boom years of 2003 and 2004, when many buyers turned to adjustable “exotic” loans to cope with rising home prices - and are now facing higher payments.

That said, this region also appears to be riding out the storm over subprime lending better than most. For the first quarter of 2007, Philadelphia was ranked 67th of the 100 largest metropolitan statistical areas in foreclosure activity, with one for every 366 households, according to the RealtyTrac Foreclosure Market Report.

The No. 1 market, Detroit, registered one foreclosure for every 51 households, with No. 2 Las Vegas at one for every 57 households, RealtyTrac reported. Pennsylvania’s foreclosure rate dropped almost 30 percent from the first quarter of 2006, while New Jersey’s rate rose about 50 percent - most of it in the northern, higher-priced part of the state.

One reason why this region’s foreclosure rate may be lower than others is the fiscal conservatism of the typical borrower here, said Brett Warren, president of Buyers Home Mortgage in Abington.

“People here still tend to go for fixed-rate rather than adjustables,” said Warren, who puts the ratio for his brokerage business at nine out of 10. “I’ve done very few ARMs in the last two years.”

In addition, median prices here remain well below those in troubled parts of the country such as Washington, D.C., Southern California, Florida, Las Vegas, Boston and Phoenix, “which means that buyers here didn’t have to reach to afford the sale price in the majority of cases,” Warren said.
In fact, when housing economists and consumer groups lobbied successfully with federal regulatory agencies to limit the writing of so-called “exotic” mortgages, they mentioned California, Florida and the Southwest as areas in danger of having too many.

Still, there is growing evidence that poorer neighborhoods in Philadelphia, Camden, Chester and the older suburbs have been victimized by predatory lenders.

In Lost Values: A Study of Predatory Lending in Philadelphia, published by the Reinvestment Fund, author Ira J. Goldstein analyzed 15,500 properties citywide and concluded that “conservatively,” 3.1 percent of owner-occupied homes in the city “manifest a financing pattern suggestive of the fact that they were touched by predatory lending.”

That percentage increases when accessing home equity is put into play, and the number of times that was done increases the foreclosure rate far above the numbers RealtyTrac’s survey shows for the population as a whole.
The problems of predatory lending cannot be minimized, but this region’s real estate market remains in better shape than others.

Warren’s reasoning on this point is seconded and further explained by economist Lawrence Yu, of the Realtors’ association.

“Markets that had extreme run-ups in prices are seeing soft sales figures and flat or no growth in prices,” Yu said. Philadelphia’s home price increases were moderate by comparison, especially “because the region is between New York’s New Jersey suburbs and Washington,” where the run-ups were frenzied.

“With more moderate increases, you would only expect a modest slump,” Yu said. In addition, Philadelphia’s market didn’t have the hordes of investors “who artificially drove up prices in other markets, then pulled out, creating an oversupply of artificially depressed prices.”

Even after a few years of double-digit increases in median sale prices, housing here remains a relative bargain, although how eager buyers are to pay even reasonable prices depends on where they are coming from.
“People from the South and Midwest, for example, are having to cope with declining values of the homes they are trying to sell,” said Terry Kirkwood, relocation director for Duffy Real Estate on the Main Line. “The one thing that has changed is that buyers are more cautious and take longer to decide.”
Center City, characterized by Penn professor Eugenie Birch as one of just five “fully developed downtowns” in the United States, grew in population by 28 percent between 1960 and 2000 while the city as a whole lost 24 percent of its residents.

Even if you don’t have time to count the people, it is easy to see how much the central business district has changed physically over the last two decades, with One and Two Liberty Place, the Kimmel Center, new residential construction and condo conversions, cafes, specialty food stores, and shops.
Or, as the 2007 Center City District report headlines it: “Steady appreciation, sustainable growth.”

Contact real estate writer Alan J. Heavens at 215-854-2472 or

If not now… then coming soon to a market near you.

It appears the greater-fool theory is still attracting those who believe they will reach financial freedom by buying & selling homes like a commodity or stock in your market. Problems only arise when buyers (like those in Florida) refuse to drink the Same kool-Aid as the Flippers. :mrgreen:

Always so Optimistic?

Merely pragmatic!