When Builders Go Bankrupt: Finding Trustworthy Homebuilders Takes Some Homework

When the homebuilders whose signs you’ve seen around your neighborhood suddenly declare bankruptcy, it can give you pause. But when news of those bankruptcies opens a floodgate of customers with unhappy experiences, prospective homebuyers begin to worry even more.

After Bella Vita Custom Homes and M. Christopher Custom Home Builder filed for bankruptcy last month, we’ve been hearing from worried folks that have been considering building a new home.

The questions were consistent: “How do I know this won’t happen to me?” and “How do I avoid choosing a bad builder?”

With that in mind, I reached out to Phil Crone, executive officer of the Dallas Builders Association, to get some advice.  I’ll also share an extra step I take when choosing a contractor that can also be applied to choosing a home builder.

“The best advice that I give to people is to do some research first,” he said. “You have to treat this like a job interview. Vet them to the point that it’s like someone who is dating your child.

“And get references. I would not be shy at all about calling up those people on those references and asking about their experience,” Crone added.

In fact, asking for references is often a good way to see if the builder can back up its claims. “If you have a builder that is hesitant to do that, you have a huge red flag,” Crone said.

“A simple Google search can also tell you a lot,” he continued. “For instance, with the issues that we’ve seen with these current (bankrupt) builders, a Google search even prior to the things that have come up would’ve brought up some red flags.

“This is definitely where an ounce of prevention is worth a pound of cure.”

For me, an additional step can provide peace of mind as well — a search of pacer.gov, which is a repository of court documents nationwide. It’s something I became familiar with early in my career as a journalist when I was covering court cases and crime, and again came in handy when I covered the stock market.

Anyone can get a Pacer account, and it’s free to open the account. Each page is 10 cents, but the costs to view documents are capped at $3 per document, and if your total bill for a month is less than $15, you’re not charged at all.

Anyone can get a Pacer account, and it’s free to open the account. Each page is 10 cents, but the costs to view documents are capped at $3 per document, and if your total bill for a month is less than $15, you’re not charged at all.

With a Pacer account, you can look up a business to see if they have had any suits or bankruptcies. While being sued wouldn’t in and of itself be a big red flag, multiple suits (and you’ll be able to look at every document, so you’ll be able to see what the plaintiff alleged happened) could be.

And armed with the information from your Pacer search and your Google search, you can always ask a prospective builder about anything you saw. Sometimes the way they answer the question can either put you at ease or raise another red flag.

Some builders may have done business under various names before. This may or may not be a red flag, but finding out also requires some due diligence.

“You can usually find it in a Google search,” Crone said. “If they’re a member of our association, people are always welcome to call us and ask if they’re a member in good standing, and if they’ve ever done business under other names and why.”

Crone said that sometimes builders may have done business under a different company name previously, but then during an economic downturn or other circumstances were forced to hang up their tool belts.

“It’s not always something nefarious, but it’s good to find out why. Sometimes they had to quit building for a while through no fault of their own.”

There has been some discussion about the Texas legislature taking up some sort of licensing requirement for certain aspects of home construction and maintenance like roofing and home building, Crone said.

“There’s been a lot of talk about licensing and registration that is a barrier to entry for homebuilders,” he said. “I’m more interested in the barriers to re-entry.

“If they’ve defrauded a homeowner before, they should never be allowed to be in a situation where they can take money from someone again,” Crone said. “They shouldn’t be allowed to start another business and do it again.”

Crone said that while every builder has to contend with the current labor shortage, he said that part of the issues some builders have now has more to do with taking on too much. A builder that maybe did two to four homes a year may decide to take on more work because of the strong demand in the Dallas-Fort Worth area, and then find themselves in the weeds.

“They can take on more than they can handle, when they’re equipped to handle maybe two or three homes a year realistically,” he said.

We have also heard from several homeowners who are less-than-satisfied customers of Bella Vita and M Christopher. We will be telling those stories over the next few weeks, but complaints of poor workmanship and houses that are experiencing more than normal wear-and-tear after just a year or two are becoming commonplace, with many homeowners saying the builders have not been responsive to their complaints.

So how do you protect yourself from poor workmanship?

“Ask if there’s an express home warranty. Ask if they have a third-party warranty provider,” Crone said, adding that the DBA provides both third party warranty recommendations and the paperwork for member builders to use.

“For instance, we have a 37-page document that says exactly how the home is supposed to work,” he explained.

In the absence of that agreement, “trying to get a builder that’s insolvent to come in and fix something probably isn’t going to happen,” he added. “If the builders are not involved anymore, sometimes there might be manufacturer’s warranties that cover some things.”

Other homeowners complained of being out hundreds of thousands of dollars when home builders asked for another draw on their construction loan without completing the work that was supposed to be done with the last draw.

“Things that we’ve paid for  — that we paid Bella Vita to pay — they never paid,” Joel and Tracey Lackovitch told Austin station KXAN. “We gave Bella Vita $300,000 and we didn’t have $300,000 worth of work done.”

A good contract, Crone said, is your first line of defense.

“You should have a contract — our contracts address it — that says the builder must finish the current step before asking for another draw,” he said. “Have a contract that is very clear on that subject as to when the builder has a right to ask for money, and how they have to perform to get there.”

Often a lender will also have a series of checks a builder will need to go through to get the next draw as well.

But the biggest defense, Crone said, can be where you look for your builder.

“Make sure you look at people that have nationwide professional designations,” he said. “Those designations indicate they’ve spent some time in a classroom and have done some additional work to attain them, which are things that show they want to be here for a while.”

The DBA offers consumers a way to find reputable builders and contractors, through an online search tool and a ProFinder tool that allows a homeowner to request a bid on a project.

“Look at the home builders that are members here — and we have almost 400 of them — and we can tell you anything you want to know about them,” Crone said. “We want to be a resource for people.”

He is also quick to assure people who may be considering a new home build that there are far more good and reputable builders than there are bad.

“The vast majority of these builds have a good outcome,” he said. “The ones that don’t, very often you can find those red flags.”

Crone says that while he’s in the business and can see things objectively, he also knows that building your dream home is a really big deal.

“There’s an emotional component to it,” he said. “It’s a big mile marker in your life.”