The Housing Chronicles Blog: Some builders staying alive by working for banks

Wednesday, March 3, 2010

Some builders staying alive by working for banks

As I had written about in January of 2009, in which I suggested that some builders could keep their operations alive by taking on remodeling work and also working for banks to finish up half-finished project, it appears that's just what has happened. From a story in the Wall Street Journal:

Home builders in some of the nation's hardest-hit housing markets are going to work directly for banks, in a little-used arrangement that is helping to ameliorate conditions in some battered local economies.

The builders traditionally got loans from banks to build homes, but that credit has largely dried up. The contract work builders are getting is welcome as many of them struggle to stay afloat... from California to Florida are starting to contract their services to lenders, many of whom have been left holding unfinished homes after the original builder went belly up. While there are no data on the trend, many builders are taking this work for the first time, particularly in markets like Nevada, Arizona and California, says Stephen Melman, director of economic services for the National Association of Home Builders.

The trend helps preserve relationships between builders and lenders in a strained time for the two. In some of these situations, home builders are working for the same institutions that won't lend money to them. While banks have hired builders before for fees, the trend is more prevalent now as more financial institutions own foreclosed properties, experts said...

The shift also helps the banks. In Atlanta, Beazer Homes USA Inc. in November was selected by Hearthstone Inc., an institutional investor in Los Angeles, to build and market homes on 462 lots over the next two to three years after another builder on the job went out of business. Hearthstone President Mark Porath said the company initially faced selling the lots for a loss after the first builder went bust. Now with Beazer on board, Hearthstone stands to eke out a small profit, he said.

Beazer officials said the deal—its biggest ever with a bank—allows it to expand in a market they feel has growth potential without facing much downside risk. Beazer is being paid "more a fixed than variable" payment for its work, with some "upside" compensation if certain goals are met, said Beazer Chief Financial Officer Allan Merrill...

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