Wall Homes LTV Ratios at Default
Wall Homes filed for bankruptcy on January 17, 2009. Like many builders which went into bankruptcy, Wall Homes was affected by the deteriorating residential real estate market. In the first day declaration, the builder stated that homes purchased on contracts with modest earnest money had a higher failure rate than had previously been experienced.
An additional factor leading to the Company’s liquidity problem stemmed from lots going “stale”, i.e., vacant lots for which it was unable to build houses. Under terms in the credit agreements with lenders, stale lots carry reduce borrowing capacities under revolvers, causing a substantial reduction in its credit availability.
Wall Homes estimated around $110 Million in liabilities to bank lenders and trade creditors (debts to the latter were estimated at $3.5-4 Million). When we delved deeper into the details of the construction loans, we found the Loan-To-Value (LTV) ratios to be at the 66-72% level. Typically, banks declare a default on real estate loans when LTV goes close to 100%. At these LTV levels, this may be interpreted a pre-emptive strike by Wall Homes in filing for bankruptcy protection prior to reaching default point.
Alternatively, it is possible that the collateral values are under-estimated. Assuming an 80% LTV for each loan (a level which would put the asset on special watch-list by many lenders thereby warranting funding restrictions), the values of the property might possibly be considered 10-17% lower.
For more analysis as to whether Wall Homes will emerge from bankruptcy and the value of its assets, read our Wall Homes Research Reports for more details.
We have given a substantial deposit to this builder and have had 7 different closing dates. They tried to push us into closing at the end of December - we figured out why on Jan 17, 2009 when they filed bankruptcy. We want to know whether we can get a refund, whether we should proceed further and if so, should we ask for a price concession due to the uncertainty of future development in the neighborhood and potential warranty claims that might go unanwswered. Laura Height Estates has a projected build out of 155 homes and currently has approximately 30 closed with 3 under construction. They have also started offering their lots to other builders.
David,
Asking for a refund or a price concession and other incentives are potentially actions which you can take. Whatever you decide, you have to note that (unless your deposit is in escrow) you are an UNSECURED creditor.
Historically, recovery for unsecured creditors is extremely low (an average under 10%) because they are a low-priority claimant and there is typically a huge pool of unsecured creditors. In a way, you are “fighting” with your neighbors to get your money back. So do more research, get legal advice and act fast!
If you haven’t seen it yet, take a look at our post on 10 Things Home Buyers Should Know About their Deposits if the Builder Goes Bankrupt.