What Happens When the Developer Goes Bankrupt?

It’s a sad siren song but one that I have personally heard several times and that I know other agents have as well. New home communities – many hanging on by their chewed off finger nails – tossing promises, buyer incentives and agent bonuses out to any potential clients. Many buyers don’t see the need for an agent when buying a new home so many of the obvious land mines are never recognized. Unfortunately, some agents representing new home buyers are too lazy, too stupid or just don’t care to properly research potential issues. The obvious question then, is what happens when the developer goes bankrupt? What recourse do owners have? Usually, none.

In metro Atlanta, there are no natural boundaries and the bubble kept expanding. More than 69,600 home lots with curbs and gutters in place sit vacant in Fulton, DeKalb, Cobb, Gwinnett, Cherokee and Forsyth counties, according to Metrostudy, a real estate research firm. That doesn’t consider other outlying counties like Douglas, Henry, Bartow, Barrow, Clayton and Dawson. Once foreclosed, banks typically try to assemble packages and approach developers; while there are occasional jewels, they are wrapped with garbage as the banks look to unload inventory.

In addition to broken promises by developers, there are many other concerns when buying into an incomplete community. These include:

Price point of future development.I’ve researched communities in Roswell and Alpharetta that have standing inventory (and recent sales) in the 800K range…while signs boast that “phase 2 prices start in the low 500’s”

Structure and stability of the HOA. As noted in this AJC article, developers became less concerned with completing infrastructure once money became tight. Promises are routinely broken and existing homeowners are left to sort it out – often by writing unplanned checks….and sometimes things don’t get fixed. During a foreclosure appraisal in Sandy Springs I found a very similar situation to that Canton example in one article.

Completion of amenities.Many developers look to get homes up before installing amenities, when money is tough the amenities rarely get finished. Once into a bank’s hands, they’re essentially out of the question as the bank is just looking to move negative holdings. A fairly large community in Acworth-West Cobb took years to get the clubhouse finished along with a reduced scale of other amenities.

Market stigma.There’s not much appeal driving into a community of waist high weeds and white PVC sewer taps. These communities – many in highly desirable areas like Roswell, Alpharetta, Milton, Cumming….never materialized and sporadic owners have weeds and sewer taps for neighbors.

Lenders and Underwriting issues. In some cases, financing can be hard to get if a community is partially built, in transition or surrounded by bank owned parcels.
Future construction. You might be living with workers, heavy equipment and construction activity for years. It’s possible the community may take years to build out.

There are a myriad of other concerns and cautions and each situation is different. The bottom line is that while you might think you’ll get a fantastic buy, getting into a partially completed community might be a disaster. Going in unrepresented or with a lackadaisical agent is foolhardy at best and financially devastating at worst. Do your homework – all of it – before even considering one of these homes. Here are a few AJC articles to review – Click here and here

Educate yourself, work with skilled agents and verify everything. There are gems to be had – I’ve placed several buyers in small East Cobb communities – but understand both the upside and potential downsides.