Remember the basic premise of The Producers? If you oversell interest in a Broadway show, and then deliberately produce the worst musical you can, none of your investors will complain when they lose all their money… and you keep their 40,000% ownership. So our intrepid producer duo went off in search of the worst script they could find, and… hilarity ensues.
So why hasn’t anyone tried this idea with real estate as well? Maybe it’s because not enough in the industry figured out the same trick: in a market downturn you can make more money not selling houses than you can selling them. Read on to know it Tolls for thee.
By Matthias Gafni, Contra Costa Times
Posted: 07/27/2012 09:12:51 AM PDT, Updated: 07/27/2012 05:00:58 PM PDT
As newly minted empty-nesters, Daven Sharma and his wife, Anu, spent 2010 searching for a spot for their dream house with views of San Francisco Bay. They found it in the Hayward hills, within a Toll Brothers development.
Shortly after plunking down about $100,000 in deposits, the couple’s dream fizzled. The Sharmas lost not only the house, but their deposit, attorney and arbitration fees — and a sense of justice.
Critics say and records show that Pennsylvania-based Toll Brothers — the nation’s largest luxury homebuilder, with developments in Contra Costa, Alameda, Santa Clara and San Mateo counties — has made it a regular practice to collect forfeited deposits from prospective homebuyers. In fact, it was the builder’s No. 1 source of profit during the down years of the housing market, according to a Maryland class action lawsuit.
From fiscal years 2006 to 2011, according to its own SEC reports, the publicly traded company retained $123 million in forfeited deposits from 3,300 prospective homebuyers.
Read that again: during the housing slump, the number one source of profit was forfeited deposits. At least that’s what one lawsuit says.
There are 155,000 results for the search Toll Brothers Lawsuit. This website has quite a story to tell. While it’s about severe construction problems, the other part of the story is the lengths their attorneys would go to to avoid fixing the house. Ellen Nevens has been fighting Toll Brothers for twelve years. That’s a lot of time and effort to build a house badly and then not fix it. It would be much easier to not build it in the first place.
And that’s what happened to Daven and Anu Sharma when they put a $98K deposit on a Hayward hills homesite in a Toll Brothers community. The Sharmas found out what many others have previously experienced: the sales contract has little flexibility on loan funding. And if, or maybe we should say when, the loan isn’t funded, the contract says no loan means Toll keeps the deposit. The Sharmas indeed lost in arbitration, plus they had to pay another $5600 in fees.
Jim Daman had to sue to get some of his $104K deposit back on a home in Danville. When Toll Brothers didn’t build his house within the promised six months, he watched its market value sink. He eventually settled for $70K. Compared to the Sharmas, he did well. Someone the corporation won the arbitration, claiming that customization had been done and they had outlays. Yet the photo of the dirt lot above is all that was in place when the Sharmas cancelled their contract because their current house didn’t sell.
Here’s the contract language that one attorney called confusing, Daman called “99.9 percent in their favor” and another tried diagramming on a whiteboard to understand it:
Buyer’s failure to fulfill any of such conditions or the termination or expiration of the mortgage commitment after it is received, for any reason, shall not release Buyer from its obligations under the Agreement.
A latter attorney notes that Toll offered some of his Pennsylvania clients loan commitments with conditions that made no financial sense, such as amounts far larger than the agreed sales price. When buyers balked, then Toll would keep the deposit, claiming they were in breach.
“They can make more money by not building the house,” he said.
While the Sharma’s Arundel Drive homesite is not listed, this nearby home on Stonebrae Road is. It looks quite lovely when photographed with a sunset, and it’s “within the gates of TPC Stonebrae Country Club.” According to the virtual tour, the builder is not Toll Brothers, but a firm called True Life Communities who seem to be avoiding any hint of describing themselves with specifics.
But given the story of the Sharmas and their Arundel Drive site being so nearby, we assumed it was the same community. (In fact there are several different builders.) And if you buy this house you’ll have quite the run of neighbors to entertain!