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As prices soar, some builders backing out of bargain contracts for new homes

By Patty Pensa
South Florida Sun-Sentinel

March 13, 2006



Most everything was in boxes as Dottie and Gary Sahadeo prepared to move out of their Coconut Creek home to a more spacious, custom-built house west of Boynton Beach.

But with construction almost complete, the Sahadeos received an unwelcome call: Their developer was canceling their contract, requesting $150,000 more to finish the work.

"We bought stuff for it. It's depressing," said Dottie Sahadeo, who expected to move a year ago.

Instead, the Sahadeos are locked in a legal battle to force completion of the five-bedroom house, which was under contract for $590,000 in 2003 but could sell for around $1 million today. Their case illustrates an emerging problem between developers and homebuyers now landing in court to settle contract disputes.

From the home buyers' viewpoint, developers have been breaking contracts to sell the home at a higher market value. Some developers, though, cite the rising cost of building materials as having forced them to back out. Speculative buyers in the condominium market likewise have been pulling out as interest rates and other costs rise, making their investments less profitable.

Experts expect the trend to continue despite the recent slowdown in the real estate market.

In the case of the Sahadeos, the dispute originated over deposits the developer, Estates of Boynton Waters West Corp., said were not paid on time. The couple disputes that, saying they paid a $56,500 deposit and brought a check for another $56,500, as the developer requested.

"There is a phenomenon going on in South Florida with the skyrocketing in real estate," said Robert Pasin, the Sahadeo's attorney, of Coral Springs. "The time span to build could be two years, and in that span the price goes up. ... In any circumstance, you have a contract and you think you have a deal."

The developer's attorney, Andrew Schwartz of Boca Raton, said the developer did not take advantage of the Sahadeos, as the couple agreed to the terms of the contract.

"The Sahadeos had a full and fair opportunity to negotiate the contract and they did so," Schwartz said. "Now they must live by the language they had agreement upon."

A trial is set for May.

Pat and Martin Lenzer have a similar case against Boynton Waters, where they already live. In July 2003, the Lenzers signed a contract for a $736,000 house a few lots down from the their current home.

Two years later, they got a call from the developer. Contract canceled.

Pat Lenzer said it came without explanation. "It's a very nerve-racking kind of thing," she said.

Typically, the developers who break contracts entered the market during the building boom that began in 2001 and recently has tapered off, said Jack McCabe, a Deerfield Beach real estate analyst.

At the end of last year, McCabe started noticing an upswing in developers returning down payments, and he expects to see more cancellations this year. Speculators who signed contracts to flip properties for a quick profit also are pulling out, he said.

Rising construction costs are mainly to blame, McCabe said. Most developers add a clause to contracts allowing them an out when costs jump, he said.

A recent example: Miami developer Panther Real Estate Service canceled reservations for much sought-after condominiums at The Promenade on Boynton Beach's Intracoastal Waterway.

"It was unfortunate that we couldn't build at that cost," said Stacey Promish, the developer's spokeswoman, citing rising materials prices, especially after the past two years of hurricanes.

The reservations were nonbinding, though, allowing either side to pull out, she said. Sales prices are now about 18 to 25 percent higher than originally advertised.

Boca Raton attorney Eric Lee in January filed a lawsuit seeking class action status on behalf of Promenade buyers.

Lee recently settled a class action case against Engle Homes of Boca Raton, a subsidiary of Hollywood-based builder Technical Olympic USA. The lawsuit, on behalf of 100 homebuyers in Naples, claimed Engle Homes canceled contracts because it couldn't get approvals from county officials.

But the developer got the approvals six months later, Lee said. When the buyers signed in 2003, villas were selling for $179,000 and houses were going for $300,000. Prices have doubled since then.

"It was pretty clear their profits were going down as market prices were skyrocketing," Lee said. "There's a huge motivation to get out of the contract, to increase the contract."

Officials at Technical Olympic USA declined to comment. The settlement, Lee said, allowed homebuyers to buy the homes for $30,000 to $60,000 more than the 2003 prices. They also didn't have to pay closing costs, and they got free title insurance and the option of reselling before the house is built.

Miami attorney Richard Wolfe said his firm, Wolfe and Goldstein, has about 15 contract cancellation cases pending in Miami-Dade, Broward and Palm Beach counties. And it's getting "more cases every day," he said.

But as the market cools, developers most likely would close the deal instead of scouting for a higher sale, Wolfe said.

Wolfe is handling a case against Fort Lauderdale developer Isaac Kodsi, who Wolfe said failed to give his client, Mark Grossman, "sufficient and correct" information to close on time. Grossman is buying two condominiums at the Estancia at Palm Springs in Palm Beach County.

The contracted 2003 price was $160,000, but today the condos could go for $260,000.

Kodsi disputed that he broke Grossman's contract to make more money, contending Grossman failed to show up to the closing twice. All 32 other buyers closed, he said.

It's more common for homebuyers than developers to pull out of contracts, said Gopal Ahluwalia, an economist at the National Association of Homebuilders. The cancellation rate is historically 20 percent. With interest rates expected to rise, Ahluwalia said, cancellations will likely increase. "When home prices are rising, people want to get on the bandwagon," he said, "and when they start hearing of a slowdown, they want to back out."

Construction attorney Steven Lesser, with Becker & Poliakoff in Fort Lauderdale, said the issue arises when contracts do not account for changes in material costs. Or, he said, when homebuyers sign a contract without understanding its implications.

"If the price of construction goes up, then who's going to bear the monetary risk?" Lesser said. "No one's in the business of losing money."

In the next couple of years, McCabe, the real estate analyst, anticipates a "tremendous amount of litigation" -- speculators suing brokers and lenders, developers suing speculators to get them to close and homebuyers suing developers. "It's been a rose garden the last four to five years," he said. "Everyone's been happy because everyone's making money."

Patty Pensa can be reached at ppensa@sun-sentinel.com or 561-243-6609.