Wednesday, April 30, 2008 at 08:33AM
Barratt Update
Remember the other day when we were speculating about the lis pendens problem in Magnolia Estates? Rob Dawg said, "this isn't a nothing burger". Sure enough, and thanks to a couple of readers, Bunka and shoppingaround, for following up on the story - they noted that there are 53 lawsuits filed against Barratt in the San Diego court system.
Then this today from Zach Fox at the North County Times:
One of North County's largest home builders is struggling to raise enough money in bank loans to pay its bills, forcing it to search for new investors, the company president said Tuesday.
The housing recession appears to have damaged the financial standing of Barratt American, a private builder based in Carlsbad. More than 40 civil lawsuits, many from subcontractors suing over failure to pay, have been filed against the company in the last six months.
Barratt American cannot afford to pay off the subcontractors, which include drywall and concrete companies, because of a credit crunch that has left banks unwilling to make loans ---- especially to companies with significant exposure to the housing downturn, said Michael Pattinson, president and one of the company's owners.
Barratt American is forced to turn to London in hopes of securing foreign investment so it can pay off the outstanding bills, Pattinson said. The builder was originally a British company, starting an American division in California 28 years ago. Barratt American is now an independent entity.
"The story here is that the U.S.-regulated banks are basically getting out of home building as quickly as they can, and to the maximum extent that they can," Pattinson said. "And so we're getting proposals for capital not only for U.S., non-bank sources, but from overseas as well."
The company expects to secure enough cash to be able to pay off its outstanding bills within the next 30 days, said Pattinson in a phone interview Tuesday. He was in Atlanta Tuesday speaking as a panelist to members of the Federal Reserve, the nation's central bank, about the effects of the credit crunch.
Civil suits regarding contract and payment disputes are fairly common in the home building industry. However, about as many lawsuits have been filed against Barratt American in the last seven months as were filed in the seven years previous.
Housing weakness has hurt home builders across the board.
Goldman Sachs, a global investment firm, expects most of the nation's largest builders, including KB Homes and Lennar, to post losses this year and has applied a "sell" recommendation on Lennar's stock, according to a report released by Goldman Sachs Monday.
"This is, by far, the toughest time for home builders since World War II," said James Hamilton, an economics professor with UC San Diego. "It's really a phenomenal collapse in the market these past two years. So it's serious times for anyone trying to make a living by selling homes."
Some building analysts acknowledge rough waters for home builders. But one does not expect Barratt American is in danger of bankruptcy.
"There are some builders that are in trouble. Cash is king right now and those companies that have a lot of cash are sitting in a better position. Companies that are a little bit more leveraged are having a little rougher time," said Russ Valone, president of MarketPointe Realty Advisors, a San Diego research firm that tracks new home sales. "I don't expect to see Barratt American go away."
Valone has not seen Barratt American's financials. Because Barratt American is a private company, it does not publicly release revenue or liability numbers.
The Carlsbad builder typically builds and sells about 500 homes a year but sold only about 125 homes in 2007, Pattinson said.
http://nctimes.com/articles/2008/04/30/business/nctc249e8505b4110c58825743a0061b.txt
Jim the Realtor
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Reader Comments (20)
I'm sure Barratt's not alone. What about all those developers who still have lots to fill up with new homes? You drive through LC Greens or Ridge lately? You know they're sweating big-time. And I wonder how Bosa's doing downtown these days . . .
Poor homemoaners. Not only paying top dollar but soon liable for the liens on a property worth far less except they cannot sell with the liens in place. Could take years.
People keep mistaking this solvency crisis as a liquidity crisis. That's happening here.
A bit off subject, but has anyone had any experience or done a loan through:
http://www.americaninterbanc.com
They are based in the OC. Seem to be surviving the mess.
Like Mr. Buffet said: it isn't until the tide goes out until you see who has been swimming naked.
so let's say you got a bunch of liens on the property and the property forecloses. what happens then? are the buyers of the foreclosed properties still on the hook for the liens?
From a friend of mine in the construction biz:
We haven't done anything for Barratt in 4 years. But we've been really getting squeezed by almost all the builders either not paying or asking for discounts, after the fact!!! We've got liens on several projects. It sucks!
IANAL but the general orders of getting paid are:
Taxes
Municipal fees
Homeowner fees if recorded
Mechanic liens if recorded
1st, 2nd, mortgage etc.
Owner of record
Those then "go away" in reverse order. Oftentimes there will be infighting between parties such that a 2nd mortgage holder greenmailing the 1st asking for a little something to go away quietly. Sometimes Mechanics liens and HOAs can overlap or have equal standing and stuff like that. It is very rare that so much money gets pissed away that Taxes and Municipal fees are impacted. Indeed while it may cause a temporary cash flow problem for cities tax arrears have been ultimately very profitable. This time may be different as I foresee back taxes and penalties accruing so quickly that some properties may not be marketable with tax forgiveness.
I've never bought a brand-new house. Do these liens somehow not show up on title searchs and not get covered by title insurance, or are people buying new homes without the searches and insurance?
oc and gene,
Liens are paid off in a regular sale, and insured by title company. Regular sales include buying an REO from the bank.
The trustee sales on the courthouse steps are where you inherit all senior liens - don't buy there unless you get a thorough title search done either same day or day before.
Thanks Rob for the summary of who gets paid first. I believe that Mello-Roos fees are senior to the mortgages too, right? They have to be hurting, wonder when they'll expect the remaining payers to make up what's short? The HOAs, government entities, etc. all have to be looking for some scapegoat to bear the burden.
Lookout taxpayers!
Thanks Rob for the summary of who gets paid first. I believe that Mello-Roos fees are senior to the mortgages too, right? They have to be hurting, wonder when they'll expect the remaining payers to make up what's short?
I lumped Mello-Roos in with what I called "Municipal fees." Included as well are brush clearance, mandatory landscaping ordinance compliance, zoning fines, etc.
M-R can be interesting. Supposedly they are joint and several obligations meaning anyone left is responsible for all. Sure you can assign fees and penalties to the properties being abandoned BUT if those prevent the property from selling it isn't a good practice.
Besides, as you know there is a small group of "us" who will generally not participate in a Mello-Roos on principal. Not fatal but like multi-story houses another small dimunition of potential buyers.
The REO sale in Barratt's Magnolia Estates still hasn't closed, and it should have by now. They're not returning my messages, but it has to be because of these liens.
The neighborhood is paralyzed by the builder, and they still have houses/lots to sell. I wonder if you could get a good deal for a quick close right about now?
If the builder's unresolved liens were covered by the original buyer's title insurance, why would they still be an issue when the house went into foreclosure?
gene - I'm sure there has been some heated discussions on this topic in the title officer's conference room.
The liens came after the houses closed escrow, which you would think meant that the indebtness came later, and the title company would be off the hook.
But these are going to be mechanic's liens, which were filed prior to the closings. The title officer must have given Barratt some leeway, and insured "around" the liens. The attorneys will be looking at that verbiage very carefully, because the plantiffs will have a case against the title company too (or at least their attorney will include them in the lawsuit, and figure it out later)
In general, what happens to the property if the owner pays the mortgage, but doesn't pay the property taxes? Is there a point where the property tax is so far behind that the state/county, etc. forecloses on the property?
So what's the situation for someone who bought into this development and is not in foreclosure or trying to sell? Are they having shouting sessions with their lender and/or title co over liens that were slapped onto their homes after they bought them?
It seems like the title insurance must provide a firewall, otherwise what good is it? If the work was done before the title insurance was issued, the insurance should cover it. If the work was done after, it's your responsibility. The date the lien paperwork is filed shouldn't make any difference. If the title company goofed and missed something because the drywaller hadn't filed the paperwork yet, well too bad, but that was their mistake and they are responsible for it.
(Note that I'm speaking of what I think should be, not how it actually is!)
""The story here is that the U.S.-regulated banks are basically getting out of home building as quickly as they can, and to the maximum extent that they can," Pattinson said. "And so we're getting proposals for capital not only for U.S., non-bank sources, but from overseas as well.""
I find it VERY hard to believe that the Brits are eager to help out Barratt. It sounds like he is just blowing smoke.
My guess is that Barrett's land holdings now have negitive book value, and most of the equipment in leased. Whould you give someone a loan based on very little collatral and declining sales? I predict BK very soon.
As a potential buyer, even if the builder would be willing to deal on a house in M.E., wouldn't that mean that the property wouldn't be able to clear title as the home would have (a) lien(s) against it?
How would it ever get cleared if they don't get funding and end up in bankrupcy?
In response to Jim:The REO sale in Barratt's Magnolia Estates still hasn't closed, and it should have by now. They're not returning my messages, but it has to be because of these liens.
The neighborhood is paralyzed by the builder, and they still have houses/lots to sell. I wonder if you could get a good deal for a quick close right about now?
No deals for quick closes now or back in April. Barratt was hanging on by a song and a prayer back in April that they could get some type of funding to pay the liens, but it didn't happen. London is not willing to help and no one here in the states is either.
As of a few weeks ago, all homes went back to the bank and Barratt is holding on to some undeveloped land in Encinitas and Santee. They are hoping to make it through on "Custom Home Builds" and continuing to re-build homes from last year's fires.
The employees that are left seem to be hopeful.
In response to shoppingaround:
As a potential buyer, even if the builder would be willing to deal on a house in M.E., wouldn't that mean that the property wouldn't be able to clear title as the home would have (a) lien(s) against it?
How would it ever get cleared if they don't get funding and end up in bankrupcy?
It wouldn't. They would have strung you along day after day with claims that the escrow was being held up, but that a solution was around the corner. In the meantime you would bite your fingernails because no work was being done on the home because none of the subs would come to work. It is a really awful thing that they did to the few people interested prior to the bank taking back the homes (and this includes any and all of their projects). I had friends in escrow at one of their Perris communities for over a month and 2 days prior to their scheduled closing the agent called and told them "sorry, but we can't close the escrow because there is a lien on the property we can't pay for." And then the builder closed the sales office the next day and hasn't been back...not even to mow the lawns at the models... and that was the first few weeks in April.
No doubt the same practices were put into place at their other communities too. But when you are that desperate for cash flow I guess you will tell your customers anything to get them to stick around long enough to play out all your options even if it is a long shot in hell that you could close the escrow.