Why buyers should never risk pushing builders into bankruptcy

Not long ago, there were numerous stories about home buyers angry because builders had cut prices on new phases, thus giving them immediate paper losses. Some would demand refunds to protect their investments (which many builders were willing to do if the home had not yet closed escrow), but others would band together to sue the builder, not realizing that if a builder can't sell homes, then he's OUT OF BUSINESS, adding yet another example to the Law of Unintended Consequences.

In today's New York Times, writer David Streitfeld (who recently wrote for the L.A. Times) gives a depressing example of what happens when a builder (in this case Levitt & Sons) goes belly-up midstream through a project:

The collapse of Levitt, the first big home builder to fail in the current slump, illustrates how the turmoil in real estate is spreading far beyond subprime borrowers who cannot pay their mortgages. Levitt had a fabled brand, decades of experience and enthusiastic customers with good credit, but none of that was enough to save it.

Paul S. Singerman, Levitt’s bankruptcy lawyer, said that as the real estate market in Florida went into “an absolutely unprecedented and catastrophic downturn,” the builder’s customers across the Southeast became victims. “There is a bad story, an unfortunate story, about every customer that placed a deposit,” Mr. Singerman said.

The lesson? Many builders don't have unlimited pockets, and those buyers who win the battle may end up losing the war.