Preconstruction ‘Rose Garden’ Turns Into Litigation
The Sun Sentinel reports on preconstruction profits turning into lawsuits in Florida. ” Most everything was in boxes as Dottie and Gary Sahadeo prepared to move out of their Coconut Creek home to a more spacious, custom-built house. But with construction almost complete, the Sahadeos received an unwelcome call: Their developer was canceling their contract, requesting $150,000 more to finish the work.”
“Instead, the Sahadeos are locked in a legal battle to force completion of the five-bedroom house, which was under contract for $590,000 in 2003 but could sell for around $1 million today.”
“From the home buyers’ viewpoint, developers have been breaking contracts to sell the home at a higher market value. Some developers, though, cite the rising cost of building materials as having forced them to back out. Speculative buyers in the condominium market likewise have been pulling out as interest rates and other costs rise, making their investments less profitable.”
“Typically, the developers who break contracts entered the market during the building boom that began in 2001 and recently has tapered off, said Jack McCabe. At the end of last year, McCabe started noticing an upswing in developers returning down payments, and he expects to see more cancellations this year. Speculators who signed contracts to flip properties for a quick profit also are pulling out, he said.”
“It’s more common for homebuyers than developers to pull out of contracts, said Gopal Ahluwalia, an economist at the National Association of Homebuilders. The cancellation rate is historically 20 percent. With interest rates expected to rise, Ahluwalia said, cancellations will likely increase. ‘When home prices are rising, people want to get on the bandwagon,’ he said, ‘and when they start hearing of a slowdown, they want to back out.’”
“Construction attorney Steven Lesser said the issue arises when contracts do not account for changes in material costs. Or, he said, when homebuyers sign a contract without understanding its implications. ‘If the price of construction goes up, then who’s going to bear the monetary risk?’ Lesser said. ‘No one’s in the business of losing money.’”
“In the next couple of years, McCabe anticipates a ‘tremendous amount of litigation,’ speculators suing brokers and lenders, developers suing speculators to get them to close and homebuyers suing developers. ‘It’s been a rose garden the last four to five years,’ he said. ‘Everyone’s been happy because everyone’s making money.’”
Thanks to the readers who sent this in. Thinking back to all the camping out stories, etc, this was always in the back of many observers minds. How would all this crazy ‘money making’ play out? In typical American style, it would seem.
Im convinced that you never get any sleep Mr Ben Jones . I want to thank you for all your hard work .
Ben never sleeps so we can.
sleep is for wimps
That is about as succinct a way to put it as I have read here. I sleep much, much, much better because of Ben and his blog. Renting, waiting, watching.
That is total bs that a builder would try and charge you more for a home after they entered into a contract. That is imply unethical business. I had this happen to a friend down in yuma. The property went up in value and the builder wanted the profit so they cancelled the contract. I have seen some homebuilders wait and sell the homes when they are very close to being done so they could profit from the rapid appreciation growth. Most notably , Trend Homes.Well, more business for the lawyers as the bubble pops.
The root of all evil ..money . Hey Arizonadude is it still raining in Arizona ? If it is , is it solving the drought problem ?
The rain stopped yesterday. I think the rain will help us but we are still in a bad drought. Would take a lot more storms to real help solve the problem. It was a good rain and all the mountains around the valley were covered in snow, great view.
The contract allowed them to do this. They’re not “backing out”. They’re meeting the terms of the agreement. They buyers shouldn’t have signed.
I agree that the builder is meeting terms of the agreement.
I disagree that it is ethical. I believe it is unethical if the builder is cancelling the contract to turn around and sell the house to someone else at a higher price.
There are many things in this world that are both legal and unethical. Just because it’s legal doesn’t make it right.
Ben,
The only thing there are more of in South Florida than realtors are lawyers. Tt appears the lawyers will be busy for the next several years suing anyone associated with sour real estate deals.
My question is this- how long can the standoff between sellers and buyers continue? My guess is we will see in the next two months the sellers crack when the “spring fling” doesn’t materialize in the lift they had hoped for.
The Florida Association of Realtors has just more than 145,000 members. The Florida Bar Association has just more than 75,000 members.
Given the ease at which a person can become a realtor… I suspect the realtor:attorney ratio is rapidly increasing.
Don’t miss out on the coming boom in real estate litigation!
Where is Jon Lansner’s responses?
I want it now!
Just kidding.
Oops is should be are
OT
Are we all assuming that YOY January home prices fell nationwide? I mean, if it were otherwise, wouldnt NAR be crowing about it? Didnt we see YOY declines in December, and NAR said they’d stop reporting monthly and instead do it quarterly, next data to be published in May. But we really can’t trust them, right?
Have a friend in Bakersfield, Ca who chose to buy after being a renter for some 18 yrs. He felt that if he didn’t buy he’d be locked out of the market. He opted to buy in a new development priced in the low $200,000’s in 2003. The developer took his down payment and then dragged out the building process for over a year. During this time he kept locking in interest rates and loosing money. The builder kept trying everything to subtlely get him to back out. When they knew he had tickets to go across country on a trip they scheduled a walk through and told him that if he didn’t show he’d loose the property. He cancelled his flight. He liked the development because they had a security guard driving through checking things out. How long will this last when the other owners rebel at the added costs? One of the deed restrictions is that you can’t go out in your front yard without a top or wash you car in front of your house in a bathing suit. Anyone going to Bakersfield in the 100 plus heat of summer knows that this is absurd.
The hoa camp is getting ridiculous. It makes you feel like a prisoner in your own home. No one ever comes out to socialize around here because of it.
Please keep me posted on all other financial decisions this person makes so I can do the opposite, a perfect contrary indicator is a rare and valuable thing. Renting for 18 years to buy now that is amazing!!
Speaking of South Florida… When I started counting on February 1, 2006, 17,359 residential properties were listed for sale in Miami. As of March 13, 2006, that number has risen to 20,207 residential properties. This 16% increase has been slow and steady, and shows no indication that the arrival of spring is staunching the deluge of increased inventory.
17,359 residential properties as of February 1, 2006
18,162 residential properties as of February 10, 2006
19,194 residential properties as of February 21, 2006 (10%)
19,538 residential properties as of March 3, 2006
20,207 residential properties as of March 13, 2006 (16%)
Are you not including condos? Housing tracker has been showing 27,492 as of 3/7/06 and judging by my drives around the county, the numbers are rising and fast!
added costs? One of the deed restrictions is that you can’t go out in your front yard without a top or wash you car in front of your house in a bathing suit.
Since when did HOA get the ability to enforce dress codes?? I have the feeling it would never standup in court ( of course the other home owners would have to foot the court costs ).
We’re planning our second/retirement home in Florida. Our current home in California has no HOA and Deed Restrictions. It was essentially impossible to find land in Florida that was unencumbered by an HOA. The county, in fact MANDATES HOAs for new developments!
Finally, after looking for a year, we found a 20-acre parcel that was outside of any development (we got a bargain for it…actually paying less for it in inflation-adjusted dollars than the previous owner did 15 years before!) It had some legal issues that we were able to clear up–before closing–for just a few thousand dollars of legal costs.
Now we’ll be able to put up TV antennas, wash our car, have a BBQ, fly the flag, decorate for holidays that aren’t Christmas (we’re Jewish!)
And we’ll be feeling sorry for our neighbors that live under the tyranny of a “private government”. Imagine having some old biddy on a “review board” tell you what color you can paint your trim?!
Since when did HOA get the ability to enforce dress codes??
It’s Bakersfield…home of mullets, tattoos and beer guts. less skin is better IMHO
Did they sign a contract that gave the builder the right to cancel? (Let’s presume the buyers get all the money they spent so far back.) Then what’s the issue? Let’s hope that the jury doesn’t feel sorry for the buyers, because this is clear cut!
We shouldn’t be spending taxpayer money on trials like this! With any luck it’ll be over on 10 seconds after the Jury agrees to accept the defendant’s “motion to dismiss.”
Of course, in Florida, the notion of a binding contract, something America depends on to function, means nothing to legislators. Remeber when Governor Jeb Bush interfered with Homeowner’s association contracts a few years ago? Someone moved into a community signing an agreement that he won’t be able to fly flags. Jeb Bush stepped in and invalidated that contract by making it illegal!
To skip,
A segment of the homeowners who moved in there like the control over others behavior so I think that any contesting of deed restrictions would be borne by a few at a heavy cost….
Man, lets not get started on HOA’s. In 1997 I was building a house in Incline Village, NV (Lake Tahoe). During one of my many “mother may I” meetings with the HOA to ask permission for some change or another, the PTB were considering restrictions on allowing certain color cars and autos with signs in driveways! I was the only guy in attendance that wasn’t on the board. Most of the members were the usual demographic, retired, bored, reasonably well off. They never did actually do this but they were talking about it pretty seriously. The association housing ran the gamut from 1960’s built small homes that were occupied by middle class workers to large expensive homes mostly occupied by wealth retiree’s. So these guys were trying to keep Joe the plumber from being able to park his work truck at home or any number of other permutations that would be onerous. I do support the basic premise that homes shouldn’t look run down or unsightly but this seemed to be going into micromanagement of people’s lives. Luckily I sold that home in the summer of 2004 (for a 200% gain, thankyou). I’ll always remember the control this board wanted over people’s lives.
there is proposed bill in florida that would allow, if paassed, homestead exemption portability…many first time home owners who want to upgrade cannot afford to as homestead exemptions would expire and one would have to pay about 2% of the current price ..meaning PT could increase from 2-4 k to 8-10 k ..(if u were to look at the 1/2 mil homes on sale, you would notice taxes as say $4000 and u say not bad…but that’s realtor’s trick..Those taxes would often double or even triple..what a joke!
Now this legislation means the old home owner would pay 1/2 to 1/3 rd of the taxes on his new home purchase than say a first time home owner..
Now if that is not a violation of equal opportunity law, i dunno what is..
I doubt it will pass.
http://www.sun-sentinel.com/news/local/florida/sfl-ftax13mar13,0,3442590.story?track=mostemailedlink
For this reason alone (SOH), I will not purchase a home in FL.
Imagine purchasing a forty-five year old concrete block (3b/1ba) dump in a sketchy neighborhood and paying twice as much or more property tax as the guy in the late 90’s built home on 1 acre with pool in the best school district. It happens here, the property tax system is entirely out of whack.
One more point. Did these homeowners consult a lawyer BEFORE they signed a $590.000 contract? In the two R-E transactions I’ve ever completed in my life, I used a laywer for each one, even though the “Agents” claimed they can handle it.
Agents are just housewives who have passed a test. They’re not experts in anything. Don’t believe a word they say.
If you’re dealing with large amounts of money, spend a few thousand for a laywer! (Of course, you actually have to have a few thousand to pay them! You can’t finance it from the mortgage–maybe that’s why the “howmuchamonths” don’t bother!)
Oh, here we go again with “Consult a Lawyer” crap….I am not a lawyer but I am a “Expert Realtor”….The problem is the realtor they selected not that they did not consult a lawyer
When a developer is ready to sell, he works with a team of lawyers. Those lawyers are paid to draw up contracts that intentionally obscure the obligations of the buyer and which exagerate the importance of the developer’s reciprocal obligations.
“Expert Realtors” if they are worthy of being called that, are expert only to the extent they grasp the tilt of the playing field and tell their prospective buyer to have an attorney run through the contract with a fine toothed comb. When they pretend that their knowledge of real-estate conditions has left them capable of understanding legal jargon, they are not expert realtors…they are delusional realtors.
SCDave is probably right in private party sales using standard NAR/CAR forms.
In cases where a developer wants me to sign his paper the lawyer is worth his weight in gold. Glenn is right in that case.
IMO
“…developers suing speculators to get them to close… ”
This is why I think Jeff of the 11+ spec properties under contract is screwed.
You can’t always back out of these contracts.
Can you post the link to Jeff’s postings…I lost it and I want some intertainment.
Well I can tell from experience, I had to file suit on a builder for breach of specific performance in 01 and can tell you it was not easy. This was in MA and was finally settled in mediation right before the trail last week. The courts are slow and the Attorney costs are high. I totally knew that we would prevail since it was a clear breach, but my lawyers and I just did not know how the jury would react in the settlement side. The end result was that the builder paid 70% of the appreciation in the last 5 years , I had to pay for a appraisal that showed the value as of September 05, to me and I never went to trial. I feel only ok about it, I also had to absorb my attorney cost to get it to the point of trail and the builder will build the home and eventually once sold will get most of his money back..
This is the way the system works and knowing what I know today I don’t think I would go through this process again.
Happy to say I’m really out of RE now…
—AL
These people should be happy the builders cancelled their contract.
Someone signing a $500K on blind faith is a complete fool. Bakersfield is better off ‘keeping it covered’ - but is does get hotter than Hades there.
Does anyone have an update on the idiot lady in Las Vegas that had bought 15 speculation homes last yr, and then had the new home builder drop the price by about $100K per house. She was trying to sue them for ‘forcing’ her to buy the houses at the higher price, knowing that the price was being cut. She was quoted in some newspaper there, and bemoaning the $4M in loans that she owed on. I would like to know the result.