Asbury Park Press

Consumer Advocates Want Law To Protect Buyers

Asbury Park Press — Sunday, September 30, 2007


In the wake of Kara Homes Inc.'s bankruptcy, New Jersey should pass a law that would safeguard home buyers' deposits until the home is complete, a consumer group said last week.

A law, modeled after an existing law in California, would change a common practice in which home builders use deposit money to fund their operations. As it stands, if a home builder goes under, buyers risk losing thousands of dollars.

"It shouldn't be operational money," said Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action, a consumer group. "It's clear that the deposit shouldn't go for something it's really not for."

The bankruptcy case of Kara, an East Brunswick-based company that was one of the Shore's biggest home builders, shed light on the risks consumers face when they buy a new home. And it raised the question: Could consumers be better protected?

Experts say they could if the state required builders to put deposit money in escrow until the home is completed. But such a law could run into opposition from the building industry, which says it needs deposit money to operate.

Kara had contracts for 300 homes that weren't complete when a slowdown in the housing market forced it to file for bankruptcy a year ago. Kara used customers' deposits to help it build homes.

In the eyes of U.S. Bankruptcy Court, home buyers are considered unsecured creditors. They are reimbursed only through liquidated assets. In the end, Kara emerged with new owners and a new name, Maplewood. The company plans to complete 12 developments and in many cases honored customers' contracts.

But buyers whose projects weren't completed were part of a group of unsecured creditors and recovered about 9 percent of what they were owed.

It left many Kara customers in the lurch. Elliot Egenburg, 40, of New York City, put down $220,000 to purchase a Kara home at Crine West in Marlboro. The project's lender, Amboy National Bank, eventually foreclosed on the property, leaving buyers to get reimbursed through bankruptcy court.

"It's a major blow financially," Egenburg said. "We're not talking about $20 here. It's a significant amount of money. It's a major, major blow."

In retrospect, the only way buyers could have protected their deposits was to demand in their contracts that Kara insure their deposits with bonds. To recoup their money, they had to file claims with the bonding company.

To prevent a repeat, observers pointed to a California law that protects consumers. There, developers building on five or more lots are required to put deposit money into a trust account. The money stays there until the developer delivers title to the owner, said Tom Pool, spokesman for the California Department of Real Estate.

Builders can only use the money for operations if they post a completion bond, he said.

"There are checks and balances in place to make sure homeowners' deposits are protected against a home builder," Pool said.

Other states are examining similar measures. In Arizona, home builder Turner-Dunn filed for bankruptcy last year, jeopardizing the deposits of hundreds of buyers.

The state's Department of Real Estate set up a commission to find ways to protect consumers, department spokeswoman Mary Utley said.

"We've been working hard to try to develop something with the Legislature, but you have to realize the home builders have a strong lobby as well. That's part of the challenge," Utley said.

Builders who put money in a trust account are "highly recommended, but not aU builders do that because they're using the money while they are building. We want to assist the consumer (without hindering) the developer. We want to promote the economy in the state," Utley said.

Would new legislation fly in New Jersey? Patrick J. O'Keefe, chief executive officer of the New Jersey Builders Association, said the idea could work, but it might increase costs. Since builders wouldn't have access to deposits, they might face higher interest rates for construction loans. That, in turn, would be passed on to consumers.

"Anything that further encumbers the contracting process is going to be looked at with caution," O'Keefe said.

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