Buyers vs. Builders in Down Market : Gamble: People don’t ask a broker for refunds when a stock falls; why should they think buying a house is any different?

call your stockbroker, buy 100 shares of Wigetronics and the stock goes down. What do you do? Sue the broker to recoup your losses?

You buy a pair of shoes at a department store. Two weeks later, the shoes you paid $95 for are on sale for $65. Do you go back and demand a refund?

You buy a new car in May. But in June the dealer offers free air conditioning and other options. Do you expect your car to be retrofitted?

In each case, the reasonable answer is no.

So why is it that, as the housing market has slumped, recent new-home buyers are protesting, picketing and suing builders in Southern California and in other expensive real estate markets?

The answer is that new-home prices have dropped as much as 20% to 25% in the last 18 months, wiping out much of the recent buyers’ equity, and these new owners want the builders to make up the many thousands of dollars they have lost.

You don’t see people who bought existing homes going after the previous owners for a refund. And, for that matter, you don’t see those complaining owners of new houses mailing checks to the poor guy who bought their previous house before the recession.

How can home builders be held responsible for the recent drop in prices? In a free market such as this one, they can’t.

“Builders have a legal responsibility to provide quality workmanship, but no responsibility to guarantee price. Outside of fraud, a builder has no responsibility to compensate a homeowner for a decrease in value,” said Patrick Breen, a partner at the Los Angeles law firm of Allen, Matkins, Leck, Gamble & Mallory.

Not only are builders exempt from legal responsibility when prices drop, they are victims of the same whims of the marketplace that buffet their buyers.

“Builders don’t have any control over the market,” said Steve Ellis, Los Angeles district manager for the California Department of Real Estate.

“If the market goes down, builders have the right to lower their prices. (Recent) buyers never complain when prices go up, only down. But it’s the law of the jungle out there. It may seem obvious, but it doesn’t lessen the pain.”

Although the state regulatory agency has heard plenty of complaints from angry new-home buyers about price cuts in their developments, there is no current investigations into pricing practices because of declining market values.

“The only time we would look into this would be if there were some kind of positive representation made by a sales agent, a guarantee, that a buyer would never lose a dime,” Ellis said. “Or if the agent promised equity buildup, misrepresenting the deal in any way.”

“Just where to draw the line can be tough,” he said. “These guys are sales people. They have to be gung ho. If they were to say that in the last 20 years a house is the best investment the average guy could make, they wouldn’t be lying.”

So what has really happened is that the housing market, buyers and builders alike, has become victim to its own hype. Everyone believed their own sales pitches and the cocktail-party boasting as an absolute truth, instead of a rule of thumb subject to change. All that happy talk has come full circle, and now in new-home developments sprinkled across the Southland, new owners are demanding that builders make good on their losses.

Antelope Valley homeowners picketed their builder, Griffin Homes, and demanded money back when the company lowered prices on remaining unsold homes. In Orange County, a group of Dove Canyon homeowners took their frustrations even further and sued their builder, D.T. Smith, when he sold his remaining homes at auction for $70,000 to $110,000 less than they had paid only months earlier.

The new-buyer protests and lawsuits are not a subject the building industry likes to discuss. A normally garrulous group, most builders, their attorneys and their trade organizations had to be coaxed to comment for this story.

“People, buyers, have to recognize that we live in a free-market economy, whether buying a car or a house,” said Kent Colton, executive vice president of the National Assn. of Home Builders.

“Some people get better deals than others. There are risks, losses, as well as profits. Without sounding cavalier, the buyer never goes back to the builder to refund their profits when the market goes up.

“A builder is very conscious of trying to protect prices, both for the sake of his earlier buyers and for his own sake when trying to sell his remaining properties.

“In a tough market, first the builder looks at what additional amenities he can use to attract new buyers. Shifts in price only occur at the very end, as a last resort. There is certainly a point when he has to make a decision: Do we drop the price or file for bankruptcy? In the end, the whole neighborhood is better off when the empty houses sell.”

Buyer incentives are a matter of survival for many companies, said Eric Elder, marketing director for Kaufman & Broad Home Corp., one of the biggest builders in Southern California.

“Builders are trying to do just two things,” he said. “First, they want to keep their business running and people employed. Secondly, they are trying to move inventory, as all businesses must do from time to time because markets become stale when you have a product that sits. . . .”

Most builders said they have a specific policy not to refund money after a deal is closed.

Marion Kiesling, vice president of sales and marketing for Calabasas-based Griffin Homes, said: “Our policy is that buyers can come back at any time during escrow if they want to renegotiate, but after they close and purchase their home, the deal is done. At that point our responsibility is to keep the properties in good condition, clean and maintain the landscaping. To be good citizens.”

While many home buyers may believe builders make large profits on each home and that it is just a question of how much profit to take, builders say that’s not so.

“Builders generally aim for a 12% return,” said Bart Doyle, general counsel for the Building Industry Assn. of Southern California.

“The attitude is that if you can’t make a minimum of 8%, you might as well leave your money in the bank. At the right time and place, a builder might make 20%. But now, many companies are selling off at cost.”

While watching over their shoulders, most builders made the decision early to drop prices and reduce inventories to avoid being bled dry by carrying costs, as they were in the housing slumps of the early 1980s.

To protect themselves from the growing number of complaints, some of which have led to lawsuits, many builders in Southern California are using price-disclosure forms, waivers or “cover-your-backside” papers, as some in the industry call them. Among the builders using such forms are Kaufman & Broad, William Lyon Co. and Griffin Homes.

The disclosure simply states the obvious: that the builder isn’t responsible for fluctuations in the market, price cuts or concessions to future buyers. Buyers typically sign or initial the statement along with myriad other documents at sale time.

While the price disclosure protects the builder, buyers are protected in a recently announced price-guarantee program.

The Lyon Co. said it would buy back the houses in nine of its developments for the sale price minus a 6% sale commission if any customer wants to sell any time up to two years after escrow closes.

Even the company’s competitors like the program, because it signals that Lyon, the largest home builder in Southern California, believes the market has finally bottomed out and is recovering.

“We believe in the future value of real estate and we are willing to back it up,” said Richard M. Sherman, vice president of Lyon. “With this guarantee program, the company is putting its money where its mouth is.”

Indeed it is. The state real estate department required the company to put up $10 million in bonds to cover the program.

So maybe the market is on the way to recovery. And maybe prices will return to 1989 levels. But there are better reasons for buying a house than the bottom line. The first reason must be the personal investment in a home and a community, the second for saving and tax advantages, and the third for investment potential.

Said Robert Sutton, director of public affairs for the Building Industry Assn. of Southern California:

“Much of the problem is that home buyers have been conditioned for several years now to think of homes as a short-term investment because values have been increasing so quickly. That is a false perception. Traditionally, homes have been, and will continue to be, a long-term investment.”