A reader sent me a note along with a notice he received that custom home builder Classic Stellar Homes of Phoenix has filed for Chapter 7 Bankruptcy. The Bankruptcy Court has set a date for meeting with creditors on February 12, 2009. Unfortunately, my readers’ earnest money deposit is in their corporate account and not a separate escrow. He likely will lose his substantial down payment.
Chapter 7 is much more drastic than Chapter 11. Essentially, they will begin liquidation of all eligible assets to pay off creditors in a priority order. Chapter 11, as is currently the case for Woodside Homes, allows the entity to reorganize and continue business while restructuring debt repayment.
I mentioned before that the Arizona Dept of Real Estate maintains a document listing builders in financial trouble. Classic Stellar Homes is on the list. currently not on it. My reader has also notified AZDRE so they can update their list. Any builder on the list is required to keep deposits in a neutral depository.
It has been common practice for home builders to hold deposits in their private accounts instead of with an escrow company as typical in resales. This was not a problem when most builders were solvent with good business. In today’s reality of a tough market for builders, it would be prudent to insist that your deposit be kept in a neutral account. If the builder won’t agree, then you should move on especially if it will take months to complete your new home.
Photo Credit: Thorne Enterprises
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