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Is it Safe to Buy from Bankrupt Builder?

Friday, June 19, 2009 posted by Tommi Crow

Dear InfoTube:   My husband and I are considering the purchase of a townhome.  We found a great unit, much larger than most for the money, but the builder has filed for bankruptcy.  Also, the development is not entirely finished and it has a lot of unsold units.

We would like to take advantage of the $8000 tax credit and low interest rates, so we are in a hurry.  Should we buy this unit?  Your thoughts and expertise would be a big help. 

Dear First Time Buyer:  You don’t say where you live, but bankrupt builders are common in this market.  The fact that the builder is insolvent doesn’t mean that the construction was sub-standard.   But, it does mean you won’t have the builder backing up his work.  Keep in mind that all warranties for appliances, roofing, flooring, etc. are backed by the manufacturer, not the builder, anyway, then make sure you have a very good home inspection before moving forward.

The issue of the unsold and unfinished development should probably be of more concern to you than construction or inspection problems.   There are issues that you need to discuss before considering buying into a paritally vacant, multi-family development.

  1. How much do you want to live through??  Since the development is unfinished, it could take years before the project is completed.  And, you will have to tolerate construction noise and dirt while the work is done.
  2. How long do you plan to live there?  You need to be aware that prices may drop subtantially on the completed unsold units before everything is said and done.  This means that you may lose your equity and owe more than the people who buy later for less money.  Also, when the remaining new buildings are finished, you will face a lot of competition from new or newer units than the one you own.  If you decide to buy here, make sure you can stay until everything is complete and the market has stabilized.
  3. What about the Homeowners Association?  Unsold and vacant units mean that the association will need to cover their expenses.  If the development is large and has ammenities such as pools, tennis courts, greenbelt area’s, etc. you may have only a few owners splitting the costs of insurance, maintenance and upkeep.  This situation can dramatically raise dues beyond what most people are willing to pay.  Verify the financial situation of the HOA and make sure you understand the by-laws before jumping into a situation with no real ceiling on future expenses.

I would offer you one piece of advise for any property you are considering, never buy a home because of tax incentives.  Although the $8000 credit is very enticing, make sure you buy a home that is located in a good neighborhood and suits your families needs.  Low interest rates, and the tax credit are strong motivators, but make sure you are buying the right home, in the right spot and at the right price.

Thank you for writing to homes for sale and lease website.  I hope I have answered some of your concerns and if you need more information, please let me know.