A dream interrupted
EVEN now, Charlene De La Rosa recalls how pretty the model homes were. She remembers the well-dressed and conscientious sales staff, the professional-looking office.
Rancho Las Flores was to be a 550-home, 135-acre development offering homes in the mid-$100,000s to mid-$200,000s in the growing Riverside County city of Coachella. In April 2004, De La Rosa, a court services assistant, put a $2,500 deposit on a $219,000 five-bedroom, four-bathroom home planned for the development’s second phase. She felt secure -- and lucky -- that she had locked in an affordable house in a market that was quickly spiraling out of her price range.
But in March 2005, the four companies with a financial interest in the development filed for Chapter 11 bankruptcy protection. More than 170 buyers who had put deposits on single-family houses in Rancho Las Flores were left without new homes, missed out on almost a year’s worth of appreciation and didn’t know if they would get their money back.
Their experience underscores the importance of buyers checking out a builder’s credentials and track record before signing a contract to purchase a newly constructed house.
A builder going belly up is uncommon in Southern California these days, experts say, because large, well-financed companies dominate new housing construction. Even as interest rates rise and housing appreciation begins to lose some steam, industry watchers don’t expect a repeat of the beating that builders took in the 1990s downturn when many went bankrupt, were restructured or were bought out. Back then, there was a recession and a high inventory of housing stock.
Ben Bartolotto, research director for the Construction Industry Research Board in Burbank, says the housing market today, coming off a three-year economic boom, is not the same.
Still, as the market cools, the risks may be greater for small builders -- those building about 100 houses a year -- who are putting up new houses in outlying areas such as Victorville, Lancaster, Hemet and Coachella, where land has been less expensive. They make up about 60% of the state’s builders, according to Nick Slevin, publisher of Builder and Developer magazine in Newport Beach.
What does that mean for consumers looking to buy homes from smaller developers?
“When you have an expanding economy in any field, you will find new entrants into the market that are getting in at the hottest stages,” said Max Neiman, program director of governance and public finance for the Public Policy Institute of California research group. “When that market begins to cool, those who entered late or as marginal entrants will be the first ones to drop out.”
Neiman said regional builders, who often use buyer deposits and contracts as collateral for quick loans, would be more affected by higher interest rates eating into their already small profits.
“Some will be overextended and suddenly get hit with an unanticipated rise in short-term borrowing,” he said.
Jim Hamilton, president of the California Assn. of Realtors, recommended that in vetting developers, home buyers ask builders for references from other buyers so they can inquire about their experiences and satisfaction level.
Also check with the Contractors State License Board, www.cslb.ca.gov, for any violations by the builder, especially a license revocation, which is a red flag.
“If you’re buying from a smaller developer,” Hamilton said, “you would serve yourself well to check them out.”
David Harding, president of Ultimate New Homes Sales and Marketing in Anaheim, which works with small builders, said that buyers should also talk to staff and subcontractors. Are people being paid on time? Look for continual progress: sticks and bricks going up steadily.
De La Rosa and the other families started becoming nervous when they would stop by the job site and see no activity on their homes.
By October 2004, they brought their concerns to the Coachella City Council. According to the City Council minutes of Oct. 27, City Attorney Jimmy Gutierrez told them there was little the city could do about a developer reneging or lagging in construction. Even today he doubts they could have changed the outcome.
“I don’t know what the city could have done differently,” Gutierrez said.
After a November town hall meeting, many of the families, represented by attorneys Terry Singleton and Anthony Shafton (and later joined by attorney Stephen Cooper), joined in a lawsuit against the developers. Rancho Las Flores Development Inc., Rosedale Properties, Desert Community Developers Inc. and Desert Community Developers II Inc. all had a single shareholder -- principal Mark Ladeda.
Jeff Kaufman, the attorney representing Ladeda, said he advised his client not to speak to the media and declined repeated requests for comment. Michael Reynolds, a Costa Mesa lawyer who represents the four corporations in the bankruptcy proceedings, also said Ladeda was not available for comment.
According to U.S. Bankruptcy Court documents filed on behalf of the creditors, Ladeda was convicted in the 1990s of misdemeanor forgery in Riverside County and felony bank fraud in Arizona.
In a letter dated Nov. 22, 2004, Ladeda notified proposed buyers of the cancellation of the development’s purchase and sale agreements, assuring them they would receive their deposits back. “Based in large part on the escalating costs of construction, as well as the unavailability or shortage of materials, DCD has been unable to secure financing to complete the remaining phases of Rancho Las Flores,” he wrote.
For families left without a new home, anger gave way to financial panic.
The families have received their deposits back as ordered by the bankruptcy judge. Any class-action suit for damages will have to wait until after the proceedings, which could drag on into next year.
As it turned out, De La Rosa was one of the relatively lucky ones. She scraped together the money to buy another house before rapidly appreciating prices soared out of her reach.
“We couldn’t wait,” said the 45-year-old, whose household includes two grandchildren and a fiance. “The prices were going up.”
Two months before getting her deposit back, she found a new home in La Paloma, a K. Hovnanian Homes development only two blocks away, for $386,000.
Those who bought in Rancho Las Flores’ first phase are hopeful the project will continue. The largest asset of the four companies filing for Chapter 11 is the development’s unused land, Reynolds said. The parcel was recently sold for more than $21 million to Forte Investments of La Quinta.
Mark Du Pont, president of Forte Investments, said he plans to break ground in late February on the first of 389 lots, but the city requires him to keep the name Rancho Las Flores and “clean up the Phase 1 problems that the previous developer left.” The community park and green space weren’t done and sidewalks, streetlights and roads were not completed. He said he also plans to sell off some of the land.
Robert Carranza, 29, a first-time home buyer, lives with his wife and two children in a five-bedroom, three-bathroom home he purchased in Phase 1 in August 2004 for about $174,000.
“The house is OK, but the developer was saying there was supposed to be a park here,” he said, gesturing to a corner lot.
Carranza, a merchandiser for Budweiser, was one of the last of about 160 families to move into a Rancho Las Flores home. By then, the gardeners for the common areas had stopped coming, he said. The areas, which the developer was supposed to maintain while the other houses were being built, were choked with weeds.
And the lone sign proclaiming “Rancho Las Flores” is covered with graffiti.
“At first, we weren’t sure we were ever going to be able to sell it [the house] because of what happened to the development,” he said. “But most of the housing prices around here have gone up, so we’re hopeful.”
Carranza has reason to be. A five-bedroom, three-bathroom Las Flores home comparable to Carranza’s is now listed at $389,900.
Staff writer Diane Wedner contributed to this report.
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In the know about new construction
Although it’s not possible to foresee every outcome in considering a new development, buyers should think critically before making a purchase, said Ed Kibbey, executive director of the Building Industry Assn. of Southern California, Desert Chapter, based in Palm Desert.
“When you are looking at the model homes, look very carefully at the quality of the construction,” he said. “If there are some homes completed, knock on a door or two and ask if people are satisfied with what they got.”
Next, check out the builder with local lenders and the city or county planning department, he said.
A search on the Internet can yield useful information. Try the Contractors State License Board at www.cslb.ca.gov. Click “Consumers” on the left-hand side to search by the contractor’s business name or license number or by an individual, or a personnel, name. You can also call the license board at (800) 321-2752. A general Internet search may provide additional information. It’s also a good idea to check with the local Better Business Bureau.
Err on the side of caution. “You are making the biggest investment in your life and you should treat it as such,” Kibbey said. “Read everything you sign.”
Speak up if something in the sales contract bothers you. Builders can be open to small changes in the sales contract, Kibbey added, if it doesn’t affect their bottom line.
Never waive your right to an inspection of a newly built house. Consumer advocate watchdog Clark Howard has these and other tips on his website, clarkhoward.com:
* The purchase should be contingent on your ability to get financing at or below a set interest rate.
* Hire a real estate attorney to review the closing papers and, if you’re buying a house still under construction, to draft or review the purchase contract.
* Learn about the area surrounding a potential purchase, including plans for new roads or new development.
-- Barbara Hernandez
