They have money to build my house, right?

January 30, 2008 7:02 AM

How concerned should I be about my builder's finances?

So I'm thinking about buying a townhome in a new development. I like the location, design, and the price is outstanding, but I'm concerned about my builder. It's a Centex home, and they seem to have an OK reputation as far as builders are concerned, but they lost 975m last quarter and are slashing prices all over the place.

The place I want to buy is pretty well below market, but their actions reek of desperation a little bit and I'm concerned I'm going to throw down my $2k deposit, sign some paperwork, and watch them declare bankruptcy next month while I wind up out 2 grand.

Should I be all that concerned, or am I making too big a deal out of this?

posted by PFL to home & garden (20 comments total)

A lot of builders are losing money, I wouldn't let it worry you. If they are not insured, that is a worry.
posted by parmanparman at 7:11 AM on January 30, 2008

In this market it pays to be concerned. Many builders finance their current project with the up front payment from the next one. If a next one fails to come along they go belly up and take your dough.
posted by caddis at 7:13 AM on January 30, 2008

I would be concerned, but not overly so. Centex is a really big company. While there is a chance that they would do as you described, it's going to be a smaller chance than if you went with a smaller builder.

However, I would have your buyer's agent (you ARE using a buyer's agent, right?!?!?) ask the question of the sellers agent about builder financials and specifics, and mention this as a specific concern of yours. Then see how they respond. If you don't like what you see, walk away and buy a resale townhome in a completed development - there are plenty of bargains there these days, with no risk of having a builder's bankruptcy eat your deposit money.
posted by deadmessenger at 7:19 AM on January 30, 2008

Get it inspected. The only concern I can see is that if you move in and find problems, don't expect they will lift a finger to correct them. It's hard enough when companies are solvent, so in this case it's a certainty that you'll be left to fix the problem.
posted by docpops at 7:28 AM on January 30, 2008

Make absolutely sure the house has a clear title on it before you buy it. It they are going belly up, the subcontractors will put a lien on the house to get their money if they aren't getting paid by the builder. You don't want to buy a place that has those liens against it. They are big, though, so I think if your market is losing money they will find their money in another market to cover costs. They generally have a good reputation and they aren't going to want to ruin that by screwing you.
posted by 45moore45 at 7:33 AM on January 30, 2008 [1 favorite]

975m out of how much?
posted by winston at 7:37 AM on January 30, 2008

This was in the NYTimes a few weeks ago. Your concerns are valid. I would definitely do more homework, and possibly contact someone with the financial expertise necessary to see whether a similar event could befall you as well.
posted by SeizeTheDay at 7:47 AM on January 30, 2008

Additionally, look into the legal arrangements that underpin your development. There are some surprising pitfalls hidden away in weird corners of the law, which vary by state (so my anecdotes would have nothing whatsoever to do with what may affect you).
posted by aramaic at 8:01 AM on January 30, 2008

Just following up.. yes, I do have an agent and I will ask - I just decided to do some research on the builder last night and haven't had the opportunity yet.
posted by PFL at 8:04 AM on January 30, 2008

No offense to real estate agents, but I would be very surprised if anything that your agent or the agent on the other side is going to do much financial analysis or give you much protection. This kind of concern is not something that they are really trained or incented to deal with. I would talk to your real estate lawyer about these issues.

That said, $2k is not really that much in this context.
posted by iknowizbirfmark at 8:11 AM on January 30, 2008

iknowizbirfmark, that's one reason I posted it here. Not really expecting my agent to sift through their financial statements and give me some serious insight.
posted by PFL at 8:19 AM on January 30, 2008

You say you're thinking of buying a "townhome in an existing devlopment". Is the unit already built, or is there a lot of work to be done? If it's an already-built unit that's close to move-in ready, the risk factors are slightly different than if there's a lot of work to be done. Also, what about promised common amenities? (Clubhouse, pool, etc.?) Are those already in or yet to be built?

In either case, if you move into the townhouse and the builder goes under in a year or so, odds are that any existing units in the builder's inventory will be sold at a firesale price. This has a hugely negative impact on the property value of people who bought at full price. Would such a short-term drop in property value be something you could handle?

The other risk is that the builder might fail to install or finish common amenities (ie, clubhouse). That could also have a negative impact on your property value.

If the construction is still ongoing on your unit, you also need to worry about cutting corners. There are lots of ways for a buyer to get screwed over by a financially distressed builder -- but many of those can be identified and headed off by a constant informed buyer presence on the job site.

If you're talking to people about distressed builder finances, you should be sure to distinguish your situation from those where the buyer gets a construction loan, and pays a general contractor to build the house. Sometimes the general contractor goes under, and there are ugly issues to clear up. The ways you defend against that are different than with a condo developer, though.

Bottom line is that it's a buyer's market out there. Be careful, but you probably have lots of options!
posted by QuantumMeruit at 8:47 AM on January 30, 2008

A friend of mine dropped 100K when the builder who was working on his addition went under. Unfortunately, there isn't any legal resource; that's the flip side of bankruptcy protection laws.

2G isn't much though, and Centex is publicly traded, which means lots of financial disclosure. They are unlikely to go bankrupt in such a way that they liquidate your money- they are far more likely to want the rest of it, and will do better financially to sell you the rest of the townhouse than taking your deposit.

Probably a safe deal.
posted by jenkinsEar at 8:48 AM on January 30, 2008

On preview, yeah, Centex. As of 3Q 2007, they report $10.9 billion in assets (of which $7.7 is "inventory") against $6.8 billion in liabilities. That is what it is, but bottom line is that they definitely are not a fly-by-night local builder.
posted by QuantumMeruit at 8:57 AM on January 30, 2008

Quantum, the development is up and some people are living there, but it is far from complete. The specific home I would be living in has not been built yet.

If I lose $2k on the deal that really sucks but I'll get over it. Not the end of the world by any means. I am more concerned about what happens if I wind up buying a place in a half-finished development with nobody responsible for common area maintenance and such. I imagine that would crush the resale value of my place pretty dramatically.

With that said, comparable places in slightly different (but not necessarily better) are selling for 40k more than these. Part of my concern is over how good a deal this place appears to be.
posted by PFL at 8:58 AM on January 30, 2008

Odds are that the entire development is being sold a condominium, with CAM (common area maintenance) charges levied against the property owners. It might just be a plain old homeowners' association, too. There are usually provisions for when the builder "hands off" responsibility to the condo association.

The maintenance-related risk isn't that the maintenance won't occur at all -- it's just that the existing owners will have to pay a disproportionately large share of the maintenance charges (since there would be fewer sold units in the development).

You can ask to see the condo paperwork (it's usually given to you with the "covenants and restrictions") but usually it'll be a very thick legal document and you likely would not be able to negotiate out of any of the provisions.

On the comps, are places $40k more expensive the asking price or the closing prices? If it's the asking price, remember that everything is negotiable...
posted by QuantumMeruit at 9:38 AM on January 30, 2008

You can ask that any earnest money be placed in escrow.
posted by theora55 at 9:40 AM on January 30, 2008

I think the biggest problem is that if the builder goes broke, then the bank could take the property, return your deposit, void your contract, and offer to sell you the property for significantly more than the price you were getting from the builder. This can happen.

In this market, it's less of a worry though...
posted by ewkpates at 10:07 AM on January 30, 2008

A performance bond is basically an insurance policy that guarantees the house will be built to spec, no matter what. Ask the builder or your agent about this.
posted by electroboy at 10:25 AM on January 30, 2008

QuantumMeruit: As of 3Q 2007, they report $10.9 billion in assets (of which $7.7 is "inventory") against $6.8 billion in liabilities. That is what it is, but bottom line is that they definitely are not a fly-by-night local builder.

You haven't been paying attention, QM; those 87,000 "inventoried" homes are being "written down" or "impaired." Centex no longer claims they're worth $7.7 billion or anything near it, and they're probably still being too optimistic. They're selling some of them at 12.5% gross margin - far below the price needed for them to generate an operating profit - but mainly they can't sell them, at any price. Which means they're worth zero.

This guy, whose blog I've been reading since July and who has been eerily accurate, sees Centex going out of business in the first half of 2008, and although that particular post is a bit histrionic, he's been right on the money so far and I have no reason to doubt him.
posted by ikkyu2 at 10:01 PM on January 30, 2008