Protect yourself from builder's bankruptcy
By Vicki Gerson • Bankrate.com

When a home builder goes bankrupt, the company's creditors aren't the only ones who suffer. Oftentimes, those who pay the price are homebuyers who have put down sometimes hefty deposits for houses that remain unbuilt, and new homeowners living in a development with half-built homes and incomplete amenities.

In the past year, the tumbling housing market has claimed large builders, such as Fort Lauderdale, Fla.-based Levitt and Sons, a unit of Levitt Corp.; Elliott Building Group in Pennsylvania; Turner-Dunn Homes Inc. in Arizona; Kara Homes Inc. in New Jersey; and Neumann Homes Inc. in Illinois.

When these builders file for bankruptcy, subcontractors stop working, leaving unfinished homes in various stages dotting communities. Crippling liens are placed on occupied homes, clubhouses are left uncompleted and swimming pools and parks are never built.

People who have placed deposits on homes either never get their money back or face delays of months or years before funds are returned.

And it's not going to get better anytime soon. Some experts predict that the housing market will not start recovering until the second half of 2009.

"There will be a few more builders that will declare bankruptcy because they have been caught with excess inventory and too much debt," says Tracy Cross, of Tracy Cross & Associates, a Schaumburg, Illinois-based real estate research firm.

Take Neumann Homes, which had 5,044 units planned for 17 communities in Illinois and Wisconsin.

According to Cross, Neumann Homes has an escrow fund for deposits on new homes or townhomes, and a bankruptcy judge will decide when to release those funds. But those individuals whose houses are under construction will be in limbo for an unknown period of time.

"The houses sit until someone comes in and decides to complete them," Cross says. The buyers "can't move in, they can't get their deposit back and they can't get out of the contract."

In November 2007, Levitt and Sons became the nation's largest builder to file for bankruptcy. In its bankruptcy filing, the company lists assets of less than $1 million and debts of more than $100 million.

Signs were obvious in the final months as Levitt and Sons laid off most of its 400-plus workers and stopped building houses.

Some home builders, such as Centex Corp. and Pulte Homes Inc., aim to survive by selling houses at bargain prices, scrapping growth plans and slashing jobs. But as the housing market continues its downward slide, other home builders could find themselves in jeopardy.

Problems for homeowners and buyers
Attorney Brian Meltzer, of Meltzer, Purtill & Stelle LLC, in Chicago, has represented home builders for more than 30 years. He notes that these bankruptcies create numerous problems for homeowners. One of the most pressing issues will be warranty service issues on their homes.

On its Web site, Neumann Homes offers a 10-year limited structural warranty.

"Any warranty issues which arise within the first two years of coverage are handled by your Neumann Homes Customer Care Team," the site says.