Taking Steps To Make Sure Your Builder Won't Go Bust

It’s always wise for would-be home buyers to make sure that the builders they choose are on solid footing. But at a time when many companies are teetering on the brink of financial ruin, it’s necessary to be as picky about the builder as the floor plans and options he offers.

There already have been 35 “major” implosions and 27 “tiny” ones among the building community, according to the Home Builder Implode-o-Meter. And the website has 15 builders on its “ailing” watch list, including some of the biggest names in the business.

The website’s roll call of fallen firms is somewhat subjective because the companies on it may not have shut down operations altogether. Some have filed for bankruptcy protection, while others may still be running but have gone through some sort of adverse change.

Whatever the case, when a builder becomes crippled, his buyers usually go down with him. Current customers often lose their deposit money or end up with a partially completed house. Recent buyers who have already moved in could be left with no one to come back to fix the numerous items that invariably require attention.

It’s not always easy to check on a builder’s financial stability, but you need to protect yourself. So it behooves you to do some investigating to make sure that the builder will not only be around to finish your house but also to take care of warranty items that may pop up after you take occupancy.

There isn’t any precise way to research your builder’s staying power, but here are some steps you can take to avoid a sinking ship:

* Check with your local courthouse to see if any of the subcontractors and material suppliers have filed liens against the builder because they have not been paid. It’s not uncommon for a builder to use his cash to meet his own payroll before paying any or all of the 120 or so vendors who work on a house, hoping he can use cash from the next sale that comes through the door to pay for the work and materials on the previous sale.

Subcontractors and suppliers often let a builder slide because they want to keep working too — but only for so long. When it becomes evident to them that the company is in dire straits, they file liens against the builder so they’ll be in the line of creditors should the builder file for bankruptcy.

* Require the builder to provide lien releases signed by every vendor on the job saying they have been paid. This could be a logistical nightmare for the builder, but if he wants your business, he may agree. Sales are hard to come by these days, so a builder who is in good shape may agree to do this just to ease your concerns.

* Ask for permission to speak with the builder’s bank about his financial strength. Lenders are often the last to know when a builder is in trouble. Still, a builder who balks at your request may be trying to hide his difficulties. But a sound company shouldn’t have any problem with this request. If the builder does agree, the bank has a duty to be honest. If not, it could be held liable if the builder folds.

* Demand that your deposit money be held in a separate escrow account. In most states, builders are permitted to place earnest money into their own accounts and use the funds to operate their businesses. But in today’s market, some will use your money to finish the previous buyer’s house, hoping to use the next buyer’s money to work on yours. Builders may balk at first, but if it means the difference between a sale and no sale, they should cave.

* Ask for the names of the company’s most recent buyers to get their take on the builder. One of the first costs a builder in trouble will cut is warranty work, so you’ll want to know whether the company is attending to so-called “punch list” items in a timely manner. Also ask if the builder cut corners, switched suppliers in midstream without notice or permission, or has generally failed to be responsive.

* Add a “springing” provision to the sales contract. This is a clause that allows you to back out of the deal if the builder files for bankruptcy. Builders typically won’t let a buyer amend their standard contracts. But today’s housing market calls for extraordinary measures, so a sound builder shouldn’t have any trouble with this consumer protection.

* Another place builders tend to cut early is office personnel. If the company lays off construction staff, it could simply be phasing down to get in step with the slowing market. But if there is no one to answer the phone, trouble may be brewing. Ditto if the builder has canned project superintendents, estimators or design, sales and marketing staff. These are all “lifeline” positions, so if these key personnel slots are vacant, buyer beware.

* Consider taking out a construction loan, one that automatically switches to a permanent mortgage when the house is completed, in your name. That way, the builder will be paid in draws only as various phases of construction are completed. If the builder fails, you’ll be left with a partially completed house that probably will cost you more to finish than you planned to spend. But at least the place will be yours. You won’t lose your deposit, and your house won’t be tied up in legal proceedings.

* Make sure that the builder offers a third-party warranty. This won’t protect you if the business goes under while the house is under construction. But if the builder goes belly up after you move in, the warranty company should step forward to make repairs. Many builders have their own one-year warranties. But they aren’t worth a hoot if the builder is no longer around to back them up.