Prospect Homes fell victim to housing, liquidity crises, says president
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MORE: • Bankruptcy Court petition |
Prospect Homes of Richmond Inc., a large homebuilder that filed for bankruptcy protection last week, fell victim to the ailing housing industry and the liquidity crises facing the nation.
The entire mortgage market froze last year, the president of the company said in papers filed with the U.S. Bankruptcy Court in Richmond.
"After several years of growing revenues and record profits, the residential homebuilding industry took a severe downward turn in 2007, which continues through today," Joseph R. Audi said in a sworn statement.
"Across the country and the central Virginia market, unit sales dropped dramatically, home prices fell and record profits turned to record losses," Audi said.
The Henrico County-based builder said the company was forced to seek protection from creditors because it couldn't obtain lending to finish current projects.
Also, its cash reserves dwindled, demand for new houses dropped, and judgments and liens hurt its ability to sell the properties.
"This is the perfect storm," said David Reel, spokesman for the Home Building Association of Richmond. "It may not be an isolated situation."
Banks and subcontractors aren't the only ones who can get caught short in this type of bankruptcy.
People who bought houses from Prospect Homes wonder if their home warranties will be honored.
Connie Taylor said the front porch on her new house in Chester isn't draining properly, her floors squeak, and her countertops need to be replaced.
She said she has been trying to get someone to fix the problems for months. Prospect Homes has a phone number for maintenance and repairs, but no one is answering it, she said.
"I didn't buy this home with the intention of doing major work," she said.
Under Virginia law, builders must provide a one-year warranty on workmanship and materials and a five-year warranty on the foundation, said S. Page Allen, chairwoman-elect of the real estate section of the Richmond Bar Association.
Most builders have contracts with third-party warranty companies to provide coverage in case problems arise, Allen said. If a builder provides its own warranties, homeowners may need to line up with the rest of the creditors to see if any money is left to get repairs.
It could not be determined whether Prospect Homes has any such coverage. However, the company has received approval to maintain its various insurance policies.
The bankruptcy court also granted permission for the debtor to pay wages, salaries and other compensation.
Prospect Homes, in its original filing, listed assets of $50 million to $100 million and debts in the same range.
According to the filings, the builder is constructing single-family houses and town houses in 18 communities ranging from $150,000 to $500,000 or more.
Audi said in the papers that he founded Prospect Homes in 1988, although the company Web site says 1983.
Regardless, "you don't last that long without doing something right," Reel said. "The demographics might have shifted out from underneath them."
Consumers for years had been buying big houses in the suburbs, he said. But the shift recently has been toward smaller houses.
Prospect Homes has been a top-10 builder in terms of unit sales in the Richmond market for the past 10 years. The most recent ranking put it at No. 6 in the Richmond area last year, according to the local builder association.
In 2007, Prospect Homes sold about 190 houses for total revenue of nearly $60 million, the bankruptcy filing states. "In 2008, sales dropped 40 percent in line with total home sales in the local market and the company failed to make a profit."
Audi said he has not taken a regular salary for nearly two years, the petition states. He did not return phone calls.
The company's work force has been reduced by nearly 70 percent since the beginning of 2008, and overhead expenses have been reduced by more 60 percent in the past 12 months.
The company has reduced debt by more than $11 million since early 2008, bankruptcy papers say. In an attempt to restore positive financial performance and continue turn-around efforts, it was forced to file for bankruptcy reorganization.
Contact Carol Hazard at (804) 775-8023 or
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As pointed out by David Reel of the Home Building Association, the collapse of Prospect Homes is due to a “perfect storm” of crisis events in the national economy and real estate market, a storm that may take down other local builders as well. This problem is made worse as banks hoard funds or greedily invoke seldom-used fineprint policies that choke off “Main Street” businesses from the funds required to get through a crisis.
CEOs of top businesses rarely skip their own salaries for two years for companies that can’t recover. That personal sacrifice is often based on success weathering previous downturns in order to protect the company, employees (and their families), clients, and associated businesses. And financial institutions that hobble turnaround efforts of proven businesses should be held accountable for their part in these failures.
This builder had the worst customer service. During the past several months no one returns phones calls on any issues.
They totally had no respect for their past customers. Even in bad times they could have at least responded to my and other customers phone calls.
I noticed that the owner would not and the company has not responded to calls from reporters this is the same as it has been for us customers.
Some homes have not even started in several months.
I asked my sales person about these issues and I was told I cannot comment.
Why feel bad for a company that caused its own problems due to being run so poorly and making bad business decisions.
Who was at the helm and not responding to the downturn in the market for the past two years or perhaps not being able to see the problems coming and plan to do something about it.
I say greed played a big factor. The bubble was not real and they thought it would continue and bet that things would get back to normal.
In 2007 they made 60 millions so where did all the money go?
Someone really made some bad decisions.
I am sick of people feeling sorry for businesses that caused their own problems.
Other builders are building I notice, and I bet they have good customer care.
Hopefully they get what they deserve. This company wanted the sale but not the issues after the sale.
I live in Chester and it is a long drive to go to Prospect Homes and asked for them to do what they promised when I purchased.
I could not recommend this company before they filed Chapter 11 or today.
If they go into Chapter 7 they could regroup under a new name and that would be bad for future customers.
Like they say do your homework before you buy. This has never been truer then with this company.
I don’t blame the employees as much as their management; they can only do what they were allowed to do.
Another case of problems caused from the top down. Like GM and others, the employees have to pay the price for poor management.
Sad times for all.
realestateguy..
I am not sure what type of relief you mean to give a builder. The problems stem from people not being able to secure mortgages. I am sure the lenders to Prospect homes have worked with them as much as they could. BUT, the bottom line is that these houses should be worth what it cost to build them right? I mean, are you saying that the home that they are trying to sell for 300K.. cost them 250 to build.. should be sold for 200K and the taxpayers should pay the difference?
A lot of the reason we are in this mess is because artificial demand was created for housing. The government pushed loans to unqualified candidates because it furthered their agenda. Localities pushed for high assessments to further their agendas. Real Estate professionals pushed sales to further their agenda. Loan companies made loans with little consequence if there were defaults because the mortgages were bundled up with others supposedly spreading the risk thinner. They got their profit w/no worry of loss. In ever instance, we were incenting people to sell, oversell, overvalue, overprice. The result was rising property values.. but we were all ok w/that because OUR properties were going up too. We could take out those easy equity lines to take cool vacations and flat screen tv’s. I mean, no one was going to complain.. “hey, I think my house is too valuable” With increases in prices.. all the realtors would advise people to go as big as you can to maximise this potential return.. Brokers were often fine with fudging the numbers a bit.. and appraisers would value accordingly. When credit markets tightened, the bottom fell out and there was no longer the level of demand for new/existing homes. In addition, people unsure of keeping their jobs were deciding to stay put and not upgrade. So.. cut the demand off and prices are going down.. pretty simple econ 101. What is the solution? Well, eventually the credit markets will equalize a bit. Right now, only “perfect” credit is really able to easily borrow money. Eventually, there will be a little loosening and as prices fall, eventually, more people will reenter the market.. thus a new equalibrium will be established and we should return to getting modest gains in our housing values.
It’s a scary thought that a local home builder like Prospect Homes is having the problems they are. Prospect Homes has provided a lot of families livings over the past couple decades. Not only their employes but hundreds of contractors, lenders, realtors, and settlement agents. All of those jobs are local jobs which help pay taxes that support our schools and local infrastructure. Prospect Homes is not the only local builder having financial issues. Just look at the sitting inventory of homes from all the other builders. The worse is still ahead.
How do we get out of this jam? Well it has to start with builders getting some relief so that they can sell these homes at lower prices. Until we clear the back log of completed new homes, our local building business cannot get back to normal. Homeowners get releif through loan modifications and short sales. Builders don’t necessarily have the same options.
If banks won’t renegotiate loans many of the existing new homes won’t be sold and will eventually become bank owned homes - which will be sold at a much lower price. It’s our local bulders that we need to help because they provide jobs locally.
Local county governments also need to help. Let’s make it less expensive to build a home by reducing proffers and letting builders build affordable housing. In some areas - particularly Hanover County - lets make it possible for a builder to display a weekend sign directing buyers to their new communities. The signage restrictions in this county are ridiculous and Hanover residents need to understand that we need to do everything we can to help sell homes.
It may take years before we recover from the current real estate crisis but if we lose our local builders in the process, we will be losing jobs that may not come back to this market. When a Prospect Homes client buys a house, they get carpet from a local business, plubming from a local business, bricks from a local business and they usually get a loan from a local lender. These people who earn money from the sale of a Prospect Home are your friends and neighbors.
Without a doubt this is a rough spot for Prospect Homes and I’m sure a frustrating time for people have purchased their homes recently. I feel for everyone but if everyone helps support our local bulders, we all can win. If you are looking to buy a home, think locally - don’t just consider Prospect, but look at the other dozens of local homebulders who provide jobs locally. We cannot afford to loss companies like Prospect Homes.
AFell vistim? They only fell victim to their own greed of building housesw to large and expensive for the common perosn to afford. When you only provide houses costing over $300,000.00 then say that is what people want you are asking for what happened to yourself. Where are all the 1400 to 1800 square foot houses that people really want and can afford? They deserve what they got.
If they were overpriced, why did they buy them? They bought those homes because they were buying an investment, and when the economy turned they could no longer afford the investment. They aren’t victims. They never should have bought what they couldn’t afford.
I won’t argue with you that homes cost too much in Richmond—they do—but it’s not because the builder tacks on 50 percent for profit. New homes cost too much in Henrico County, and every county around here, because land costs are extreme and the government doesn’t allow builders to build single-family homes that don’t cost $300,000. We can’t build top-quality 1,500-square-foot homes that would cost $210,000 (which is still overpriced) because current residents think smaller homes mean garbage homes and the planners and supervisors don’t want to hear the whiners at county meetings claiming erroneously that their home values are being harmed by smaller homes.
None of these counties want affordable housing. You should be able to build a home that costs between $100 and $120 per square foot. In Henrico it’s $135 for the smallest size home they’ll allow. The counties think $200,000 is affordable. You have to earn $65,000 a year to buy a $200,000 home. That means no one earning less than the median household income in the county can afford a single-family detached home. That’s bad.
Prospect got caught with too much product when the economy collapsed. There are many builders in the same category right now. Prospect won’t be the last to fold. And until these counties get serious about affordable housing, more builders are going to go under and counties are going to continue to lose tax revenue. So get ready for tax increases, folks, unless local governments start allowing builders to build what people want—smaller homes at smaller prices.
Fell victim? If anyone was a victim it is the people who bought these overpriced houses. Now they are stuck with them.
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