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A dream interrupted

Instead of new homes, buyers get a rude awakening when a local builder goes belly up.

January 15, 2006|Barbara E. Hernandez | Special to The Times

EVEN now, Charlene De La Rosa recalls how pretty the model homes were. She remembers the well-dressed and conscientious sales staff, the professional-looking office.

Rancho Las Flores was to be a 550-home, 135-acre development offering homes in the mid-$100,000s to mid-$200,000s in the growing Riverside County city of Coachella. In April 2004, De La Rosa, a court services assistant, put a $2,500 deposit on a $219,000 five-bedroom, four-bathroom home planned for the development's second phase. She felt secure -- and lucky -- that she had locked in an affordable house in a market that was quickly spiraling out of her price range.

But in March 2005, the four companies with a financial interest in the development filed for Chapter 11 bankruptcy protection. More than 170 buyers who had put deposits on single-family houses in Rancho Las Flores were left without new homes, missed out on almost a year's worth of appreciation and didn't know if they would get their money back.

Their experience underscores the importance of buyers checking out a builder's credentials and track record before signing a contract to purchase a newly constructed house.

A builder going belly up is uncommon in Southern California these days, experts say, because large, well-financed companies dominate new housing construction. Even as interest rates rise and housing appreciation begins to lose some steam, industry watchers don't expect a repeat of the beating that builders took in the 1990s downturn when many went bankrupt, were restructured or were bought out. Back then, there was a recession and a high inventory of housing stock.

Ben Bartolotto, research director for the Construction Industry Research Board in Burbank, says the housing market today, coming off a three-year economic boom, is not the same.

Still, as the market cools, the risks may be greater for small builders -- those building about 100 houses a year -- who are putting up new houses in outlying areas such as Victorville, Lancaster, Hemet and Coachella, where land has been less expensive. They make up about 60% of the state's builders, according to Nick Slevin, publisher of Builder and Developer magazine in Newport Beach.

What does that mean for consumers looking to buy homes from smaller developers?

"When you have an expanding economy in any field, you will find new entrants into the market that are getting in at the hottest stages," said Max Neiman, program director of governance and public finance for the Public Policy Institute of California research group. "When that market begins to cool, those who entered late or as marginal entrants will be the first ones to drop out."

Neiman said regional builders, who often use buyer deposits and contracts as collateral for quick loans, would be more affected by higher interest rates eating into their already small profits.

"Some will be overextended and suddenly get hit with an unanticipated rise in short-term borrowing," he said.

Jim Hamilton, president of the California Assn. of Realtors, recommended that in vetting developers, home buyers ask builders for references from other buyers so they can inquire about their experiences and satisfaction level.

Also check with the Contractors State License Board,, for any violations by the builder, especially a license revocation, which is a red flag.

"If you're buying from a smaller developer," Hamilton said, "you would serve yourself well to check them out."

David Harding, president of Ultimate New Homes Sales and Marketing in Anaheim, which works with small builders, said that buyers should also talk to staff and subcontractors. Are people being paid on time? Look for continual progress: sticks and bricks going up steadily.

De La Rosa and the other families started becoming nervous when they would stop by the job site and see no activity on their homes.

By October 2004, they brought their concerns to the Coachella City Council. According to the City Council minutes of Oct. 27, City Attorney Jimmy Gutierrez told them there was little the city could do about a developer reneging or lagging in construction. Even today he doubts they could have changed the outcome.

"I don't know what the city could have done differently," Gutierrez said.

After a November town hall meeting, many of the families, represented by attorneys Terry Singleton and Anthony Shafton (and later joined by attorney Stephen Cooper), joined in a lawsuit against the developers. Rancho Las Flores Development Inc., Rosedale Properties, Desert Community Developers Inc. and Desert Community Developers II Inc. all had a single shareholder -- principal Mark Ladeda.

Jeff Kaufman, the attorney representing Ladeda, said he advised his client not to speak to the media and declined repeated requests for comment. Michael Reynolds, a Costa Mesa lawyer who represents the four corporations in the bankruptcy proceedings, also said Ladeda was not available for comment.

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