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Down-Payment on a Disaster: A Battle for Homes

Squeezed in a court fight between lenders and a Yorba Linda developer, families must pay more or lose what they've invested.

November 03, 2002|H.G. Reza | Times Staff Writer

First, Maurice and Debi Gallarda rushed to sell their home so they could make a down-payment on a big new house in a tract called Yorba Linda Estates. The 4,000-square-foot hilltop home with a view of a Santa Catalina Island was worth every penny of the $642,000 sales price.

But halfway through construction of the tract, the financially troubled developer abandoned the project -- leaving the homes with missing windows, garage doors and plumbing.

After living in a two-bedroom apartment with five young children for eight months and paying to store their furniture, the Gallardas decided to move into their unfinished dream home anyway, completing the work at their own expense and putting up with such inconveniences as partly paved streets and no sidewalks.

Now, more than a year later, they and 11 other families in the same situation must choose between walking away from their houses or paying far more than they expected to keep them.

For The Record
Los Angeles Times Friday November 22, 2002 Home Edition Main News Part A Page 2 National Desk 18 inches; 658 words Type of Material: Correction
Capital gains taxes -- A story in some editions of the California section Nov. 3 about residents who accuse a developer of abandoning their Yorba Linda housing tract included an inaccurate account of tax law. A lawyer representing the home buyers said at least two families had to pay capital gains taxes on the sale of their previous homes because they were unable to complete the purchases of the new homes in time. Since a 1997 change in tax law, however, homeowners are no longer required to reinvest sale proceeds in a new home to avoid the taxes.

"My 7-year-old son's prayer was, 'Dear God, please don't let us lose the house,' " said Maurice Gallarda, a civil engineer. The boy's fear was stirred by conversations he overheard as adults discussed their predicament, he said. The would-be homeowners are in U.S. Bankruptcy Court in Santa Ana, squaring off against the two companies that financed the project, Weyerhaeuser Realty Investors and Prism Builder Financial Group.

The companies are threatening to foreclose on the developer who defaulted on the loans unless they reach a settlement with the home buyers. If the judge allows the foreclosure to proceed, Weyerhaeuser and Prism will own the houses.

To settle the bankruptcy, Weyerhaeuser and Prism are demanding that the residents pay thousands above the contract price of the houses, which originally sold for $540,900 to $662,500, to cover back taxes, principal and interest on loans made to the developer, and street work.

The only certainty is that the families will pay thousands more for their homes, whether they settle in bankruptcy court or repurchase their homes in a foreclosure.

Richard A. Marshack, the trustee appointed by the court to sort out the mess, described the Gallardas and the other residents as "unequivocal victims who are in a horrible position." And he blames the developer, Timothy Roberts, and his company, Compass Homes Inc. "The legal issues in this bankruptcy are many. It's such a tangled web," Marshack said.

Roberts, a Villa Park resident, declined to comment. Like the others, the Gallardas put a $10,000 deposit on their new home. To move in, they paid contractors an additional $50,000 to finish some of the construction left undone when Roberts ended work on the project.

Other residents said they also invested money to make the houses livable, assuming they eventually would gain title to the properties. Resident Jeff Moore said he paid contractors $60,000. Per and Anne Lindby said they paid an additional $100,000 for upgrades to their $540,000 home -- on top of $13,000 for plumbing.

"We would like to walk away from the house. But we already have so much money in it," said Anne Lindby, who emigrated from Denmark with her husband in 1989. "If we walk away, we don't get any of that back."

Residents said they were pressured to sell their old homes so they could close escrow on the new ones within 30 days of completion. After months of living in apartments and paying additional expenses such as storage and kennels, most families chose to accept an offer made by Roberts when the project ran out of money in mid-2001.

Buyers agreed to pay the contractors on Roberts' promise that they would recoup the costs when escrow closed, said Casey Barnes, spokesman for the families. "He said it was OK for us to move in because he was lining up new financing to finish construction," Barnes said.

But that never happened. The developer defaulted on payments to Weyerhaeuser, Prism and contractors, prompting the companies to file notices to foreclose. Compass and Yorba Linda Estates LLC, the company formed by Roberts to build the homes, were eventually forced into Chapter 11 bankruptcy by one of the families. This stopped foreclosure proceedings.

Pam Privett, one of two attorneys representing the residents, said the family acted in desperation to stop the foreclosure and give buyers an opportunity to go to court and save their homes.

But under bankruptcy laws, the buyers do not have to be reimbursed for the money they have sunk into their homes if Weyerhaeuser and Prism foreclose, Marshack said. If foreclosure occurs, "the lenders own the land and houses, and they could foreclose at any time," he said.

Marshack also said it was easier for the companies to recover their losses by getting money from the home buyers. Going after Roberts and his companies would result in years of litigation, he said.

Spokesmen for Weyerhaeuser and Prism declined to comment, except to issue written statements saying they are negotiating a settlement with the buyers and their attorneys.

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