Can The Builder Sue Me To Close? California Law on Specific Performance in Residential New Contraction Contracts

If you have signed a contract to purchase new residential construction in California, such as a spec house or condo unit, but now do not want to actually close on the purchase, you might be wondering if there is a way the developer can force you to complete the purchase.

The answer, generally speaking, is no, the developer cannot force you to close. When a contract is breached (e.g., you don’t show up at closing), there are two types of remedies for the aggrieved party: damages (a court award of money) and specific performance (a court order compelling the breaching party to abide by the contract.)

Here is the rule, excerpted from a California State Court of Appeals case, on when specific performance is allowed:

Specific performance of a contract may be decreed whenever: (1) its terms are sufficiently definite; (2) consideration is adequate; (3) there is substantial similarity of the requested performance to the contractual terms; (4) there is mutuality of remedies; and (5) plaintiff’s legal remedy is inadequate.

Blackburn v. Charnley, 117 Cal. App. 4th 758, 766 (Cal. Ct. App. 2004).

In most cases requirements No. 4 and No. 5 cannot be met, making specific performance unavailable. Requirement No. 4 (“mutuality of remedies”) means the purchase agreement needs to give the buyer an equal remedy of specific performance against the seller in order for the seller to have such a right against the buyer. I have never seen a purchase contract that meets this requirement.

Requirement No. 5 (“plaintiff’s legal remedy is inadequate”) is more commonly phrased “no adequate remedy at law.” This means there has to be some reason why an award of money does not adequately compensate the seller for losses from the real estate buyer’s breach before the seller can compel you through specific performance to close.

The five requirements above are not either/or requirements. All five requirements must be met before a builder might be able to force someone who has contracted to purchase a property to close. While it is possible to think up a hypothetical where all five requirements will be met, in the real world such circumstances will rarely occur. And even if all the requirements are met, the buyer still has a number of other defenses. Remember, the rule is that if the five requirements are met, only then the judge may order specific performance. If the judge doesn’t feel doing so is fair, he or she may still decline decreeing specific performance.

Developers, whose lawyers have already explained the law to them, will often threaten a specific performance when a buyer refuses to close on a residential real estate purchase contract, hoping that buyers will be ignorant of this law.

Defaulting buyers should not be scared of this talk. California’s residential real estate law was specifically designed to shift a large part of the risk of a real estate downturn onto developers and off of home buyers and small scale real estate investors. If you have put down a deposit on a real estate deal, but now don’t want to close because of the drop in the real estate market or your own changed circumstances, it is a good idea to talk to a real estate lawyer to figure out what your options are. It is especially important that when you decide not to follow through on the purchase contract, you consult with a lawyer to take the proper steps to notify the developer and mitigate the developers damages.

Just don’t trust the self-serving statements made by your developer.

My fellow real estate law blogger Jared Beck has his own post on the law in Florida governing specific performance in real estate contracts.

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This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Greg Weston is an experienced business litigator licensed to practice law in California and Florida, and is a graduate of Harvard Law School. Mr. Weston’s frequently represents individuals and small businesses against large corporations, including cases involving condominium purchase agreements and other real estate investments. He can be reached at (619) 255-7098 or greg@thewestonfirm.com.

Big trucks and SUVs sales fall

There have been a lot of articles lately about the shift in the US towards small, fuel efficient vehicles. For the first time ever, 4cyl vehicles are outselling 6cyl vehicles.

What these articles have missed is just how rapidly the sales of the largest SUVs and pickups are falling when you look at the data model by model.

GM April 08 v. April 07 shows that sales of Escalade EXT truck are down 45.7% and the regular Escalade SUV down 33.6%. The largest Chevrolet pick-ups and SUVs (Suburban, Tahoe, Silverado, Avalanche) are down 30.7%, 34.9%, 30.8%, and 34.9%.

The giant GMC Envoy, Yukon, and Yukon XL are down 68.6%, 38.4%, and 44.9%. Hummer sales are down 49.8%.

Ford’s largest SUVs models, the Explorer, Expedition, Moutaineer, and Navigator are down 38.5%, 35%, 55.7, and 7.1%. Ford’s all-SUV division Land Rover division sales are down 39.3%. Finally Ford’s full size F-Series pickup sales are down 21%.

Over at Chrysler, Dodge Durango is down 45%, Nitro is down 41%, Jeep Commander is down 49%, and Grand Cherokee is down 31%.

At Toyota, Lexus SUV sales are down 8.6% despite the introduction of the new LX 570, while Toyota’s light truck division saw sales fall 15.7%. Here are some individual vehicles:
FJ Cruiser SUV -46%
4Runner SUV -41.6%
Tundra pick-up -13.2%

Also, Toyota’s most expensive and gas-guzzling car, the Lexus LS, saw sales fall 42.2%. Meanwhile the company’s two most efficient cars, the Yaris and Prius, are up 45.9% and 53.8%. Prius is now Toyota’s 3rd best selling vehicle, and will soon outsell Toyota’s entire Lexus car and SUV lineup put together.

Those impressive Prius sales are even more remarkable when you consider that the current 2nd generation Prius model is now almost 5 years old. Usually sales fall substantially the last year before a model is refreshed. The 3rd generation 2009 Prius, due out in early 2009, will be bigger and faster than the current model, and is rumored to get as much as 94 MPG.

Meltdown in San Ysidro: 47-68% price drops from ‘04-’06 prices

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San Ysidro is located about 15 minutes south of Downtown San Diego and the last neighborhood before the US/Mexico border station. Washington Mutual (WaMu) seems to be the major mortgage bank serving this region.

 

As ugly as the market looks from these big losses, a lot of these are closed sales that were priced in 2007 or REOs where the borrower fell behind 4-10 months ago. In other words, they reflect 2007’s economic problems, before the economy was in a recession. As 2008 wears on, these numbers will get much worse.

 

Don’t miss the sneak preview at the end of this post of my forthcoming look at the market in San Marcos, a middle-class suburb and college town in northern San Diego county.

 

2 bed/2 bath Condo at Villa Serena

Sold 6/06 293K

Bank owned foreclosure for sale now at @110K

-$183,000 (-62%) drop

 

3 bed/2 bath condo on San Ysidro Blvd

Sold 1/06 360K

For sale @ 154.9K

-$205,100 (-57%) drop

 

15xx Smyth Ave 3 bed 2.5 bath

Sold 6/05 $385K

For sale @ $199

-$186,000 (-48%) drop

 

Sunset Village #6X (1 bed unit includes new granite/maple/chrome kitchen, patio, and fireplace)

Sold 9/04 235K

For sale @ 75K

-$160,000 (-68%) drop

 

1545 Terrace Pine Lane #X (3 bed/1.5 bath)

Sold 6/05 320K

For sale now at @135K

-$185,000 (-58%) drop

 

1816 Isla Del Campanero (4 bed/2 bath 1978 build SFH)

Sold 5/06 560K

Bank owned foreclosure for sale now at @299K

-$261,000 (-47%) drop

 

2 bed/2 bath Condo at Villa Serena

Sold 4/05 285K

Sold 4/08 125K

-$165,000 (-56%) drop

 

2746 Terrace Pine Dr #X (2 bed/1 bath townhouse w/granite kitchen and hardwood floors)

Sold 6/05 313K

Bank owned foreclosure for sale now at @139K

-$174,000 (-62%) drop

 

2 bed/2 bath Condo at Villa Serena

Sold 6/06 293K

Bank owned foreclosure for sale now at @110K

-$183,000 (-56%) drop

 

3095 Iris Ave #E (3 bed/2.5 bath condo)

Sold 10/05 360K

Sold 1/08 159.9K

-$200,100 (-56%) drop 

- San Marcos Sneak Preview –

5XX Debra Place, 2 bed / 1.5 bath / built 1975

 

Sold 10/06 290K

Bank owned foreclosure for sale now at @132K

-$158,000 (-54%) drop

Update on failing mortgage stocks #1: FMAR

Since I first posted on FMAR on March 17th, the stock has fallen about 34% from $6.45 on 3/17 to $4.26 today, setting many record lows along the way. I had an interesting discussion about the company with an investor who told me that a smaller hedge fund was short FMAR.

I continue to think the fair value of the company’s stock is zero, which is to say I do not think the company, which has unwisely lent hundreds of millions of dollars secured by questionable collateral (including used boat loans!), will be able to survive the bursting of the housing and credit bubble

FMAR reported a 1st quarter loss of 52 cents per share, which was even worse than the $0.40/share loss that analysts were expecting.

FMAR’s situation is even more dire than the large loss the company actually reported. Specifically, its provision for loan losses seems way to small. REO’s are only being written down by 42%, while its loss reserves for its non-performing Alt-A loans is 18% of their collateral’s appraised value. That’s rather amazing considering that investors these days won’t touch performing Alt-A loans without a very significant discount.

The most fishy item in FMAR’s earnings report is that its loan loss reserves only increased by $1 million, from $12.8 to $13.8 million, despite the fact that FMAR has a loan portfolio of well over $800 million, and that REO and nonperforming assets are going through the roof, and the US economy is now in recession.

If a WAMU or a Countrywide were trying to get away with such unrealistic loan loss reserves, financial reporters and short sellers would be all over them. Instead the big banks are taking big charge-offs as they increase loan loss reserves. FMAR is clearly trying to hide the degree of its future loan losses by understating reserves, but it can only do this for so long.

The bottom line is that the company’s numbers are not an honest reflection of its financial situation. So while the company has fallen quite a bit on its very negative earnings reports, much bigger losses are coming when FMAR finally comes clean and takes a big write-off for future loan losses. From the looks of its balance sheet, such a write off would eliminate well over half of the company’s book value.

Huge declines in asking prices in Detroit, Riverside, Florida, Las Vegas

The website HousingTracker.net has been compiling 25th, 50th, and 75th percentile asking prices since the summer of 2005. The trend is not pretty.

In Detroit the market has completely collapsed. In 8/05 the 25th percentile asking prices were 90K. Now it’s 40K. A decline of more than 50%.

In Miami it’s the high end rather than the low end that has suffered the most, falling from more than $700,000 for the 75th percentile to just $479,900 now.

In the Riverside area the drop in median asking prices is from $475,000 to $299,900.

In Las Vegas, median asking prices peaked in early 2006 at 349,900. They are now at $250,000.

 

Will First Mariner Bancorp (FMAR) be the next small bank to go bankrupt?

My bet is yes, this small Maryland bank will in the near-future go bankrupt.

Weak Balance Sheet  

The bank has equity of $72.7M (all figures as of 12/31/07). That thin bit of equity is supporting $1.244 billion in assets and $1.171 billion in debts. Thus the bank is leveraged 1,711%, that is to say assets are more than 17 times equity. This in turn means a decline in the value of its assets as of 12/31/07 of 5.88% would wipe out all of the bank’s equity and likely leave the bank’s stock worthless. A decline of less than 5.88% could still render the bank in violation of regulatory minimum capital ratios.

I wonder if such a decline hasn’t already happened so far this year.

The bank has $134.5 million in residential construction loans to businesses and $91.4 million in residential construction loans to individuals at average interest rates of 7.9 and 8.3% respectively. These high interest rates indicate the loans were fairly risk when they were taken out. I would expect a very high percentage of these loans will fall into default as the residential real estate market in Maryland is very weak right now.

The bank has $292.6 million in commercial mortgages. As consumers cut bank on spending, retailers curb expansions and close down underperforming stores I think this aspect of their portfolio will also perform poorly. The average interest rate on these loans is 7.4%, again indicating that these are less than stellar borrowers.

Used Boat Loans

The bank also has $188.4 million in consumer loans at an average rate of 13.5%. Again this very high interest rate indicates these are less than stellar borrowers. According to the company, some of these loans are “originated though direct mail solicitation,” “unsecured” or secured by “new and used” cars and boats(!!!).

 

Would you say that soliciting loans via junk mail, and then extending loans to people with bad credit (@13.5% APR) with the only security being a used boat or a used car is a sound banking practice? Do you think that high-interest used car and used boat loans will perform well during a recession?

I don’t, but FMAR thinks these loans will perform stupendiously. While it has hundreds of millions of dollars worth of these junk loans, it has only set aside $12.8 million in allowances for loan losses, or 1.50% of its loan portfolio. Non-performing assets meanwhile rocketed up from 0.52% of assets at the end of 2006 to 3.48% at the end of 2007. Non-performing loans are 5.01% of all loans at the end of last quarter compared to 4.27% at the end of Q3. Additionally it is the bank’s practice to count loans as “performing” if the borrower is currently making payments but is 90 days or more behind in payments. Since I doubt these past-due amounts are written off, this would seem to indicate that past-due payments by such borrowers are counted as performing assets (as interest receivable).

The bank also owns $55 million in mortgage-backed securities. Some portion of these are GSE securities, but it is not possible to tell from the company’s financial statements what portion of these are increasingly worthless private label securities and what portion are GSE MBS, which have also suffered in value but much less so. If you assume a 60/40 split in favor of GSE then the company will probably report suffering a loss of $5 to $15 million on its MBS portfolio.

Shaky short-term financing?

FMAR discloses several short-term sources of capital. Given the current liquidity crisis FMAR’s lenders may ask it to repay these loans rather than allow it to roll them over, potentially forcing the company into default and/or bankruptcy. FMAR’s short-term debt include loans includes commercial paper and “a mortgage warehouse line of credit secured by certain loans held for sale.” Such an event might cause the bank to go out in a bang, like Bear Stearns or Thornberg Mortgage. More likely in my opinion is the bank goes out in a whimper over the few quarters as losses from bad loans mount.

Either way, I like FMAR as a short play.

Houses and Condos in San Diego’s College Area fall 40-60% in price

San Diego’s College Area is an older middle-class neighborhood eight miles northeast of Downtown, and is primarily residential, but also home to San Diego State University and a variety of small shops and strip malls. It was a popular area for speculators and first-time home buyers, and now prices are plummeting. Here are 18 examples. 

64xx Bradford St
sold 7/06 $545K
REO, For sale at $330K
-$215,100 (-39%) loss

 

41xx Donna Ave
sold 9/05 $598K
REO, For sale at $350K
-$248,000 (-41%) loss

 

43xx Cartagena Dr

sold 12/04 $545K
resold 1/08 $330K
-$216,100 (-39%) loss

 

4314 48th St #x
sold 6/05 $326K
REO, For sale at $135K
-$191,000 (-59%) loss

 

Parkridge Unit #5xx
sold 8/05 $241K
short sale approved for @ $100K
-$140,500 (-58%) loss

 

5980 Dandridge Ln #2xx
sold 6/06 $340K
For sale at $165K
-$175,100 (-52%) loss

 

6504 College Grove Dr #X
sold 6/04 $289K
REO, gutted and treated for mold, for sale at $130K
-$159,300 (-55%) loss

 

4261 49th St #X
sold 4/05 $272K
For sale at $128K
-$144,000 (-53%) loss

 

6522 College Grove Dr #2x

sold 9/05 $327K
resold 2/08 $161K
-$165,500 (-51%) loss

 

4357 51st St #X

sold 7/05 $215K
REO, condo conversion has “granite counters, ss appliances” for sale at $104K
-$111,000 (-52%) loss

 

6560 College Grove Dr #7x

sold 8/05 $305K
resold 1/08 $175K
-$130,000 (-43%) loss

 

6516 College Grove Dr #5x

sold 3/05 $277K
resold 2/08 $150K
-$122,100 (-46%) loss

 

4425 50th St #3

sold 2/04 $187K
resold 12/07 $105K
-$82,000 (-44%) loss

 

4310 54th St #2xx
sold 8/05 $163K
REO, for sale at $85K
-$78,100 (-48%) loss

 

6101 Adelaide Ave #1xx
sold 6/06 $175K
For sale at $89K
-$86,000 (-49%) loss

 

4357 51st St #X
sold 12/05 $195K
For sale at $100K
-$95,400 (-49%) loss

 

4860 Rolando Ct #XX
sold 3/05 $225K
for sale at $116K
-$109,100 (-48%) loss

 

4338 Altadena Ave #1xx
sold 9/05 $300K
REO, For sale at $161K
-$139,000 (-46%) loss

 

Newcastle, one of the USA’s biggest commercial RE investors, posts gigantic loss and decline in book value

NCT is organized as a REIT, but unlike most REITs does not purchase actual buildings, but instead invests in mortgage loans and securities, primarily backed by subprime commercial (the majority of assets), residential, and mobile-home loans and loan securities. They just reported a whopping Q4 loss of $106.2 million, or $2.01 per share. Their stock price has dropped from $31 in April 2007 to about $11 today.

Book value per share fell between Q3 and Q4 from $12.66 to $5.59, a decline of $7.07 per share. NCT says Generally Accepted Accounting Practices (GAAP) understates their book value because it does not allow them to write down their limited-recourse liabilities at the same pace as the assets securing them.

That argument isn’t entirely without merit, but strikes me as a very fine one to make. If GAAP book value drops another $7.07 a share in Q1 2008 it would fall to -$1.48 per share.

Would you invest in such a company, or offer it loans, given (1) a negative book value, (2) rapidly depreciating assets, (3) regular massive losses, based on the assurance that essentially amounts to “don’t worry, while we may be insolvent according to the standards of most US accountants, but once we default on debt we owe to other people we’ll have plenty of assets to pay the loan we want from you.”?

Also, many lenders use GAAP accounting in making loan decisions, and even if NCT’s more creative non-GAAP accounting were used, their books still look weak and getting weaker, and there are plenty of prime borrowers out there who are having trouble getting loans.

But wait, it gets worse! The biggest part of NCT’s huge writedowns have come from its subprime portfolio.

It also owns $542 million in mobile home loans. How well do you think those will do in a recession? A writedown of 30% of the value of the that portfolio would create a loss of $162.6 million. And remember, GAAP book value is a mere $295.1 million as of 12/31/07. Mobile home loans were the downfall of Conseco, once a giant financial company. They are especially vulnerable to foreclosure, since they retain their value very poorly in foreclosure auctions, and because they are usually low-value units, the fixed costs of foreclosure take a much larger bite from their value that SFHs and condos.

UPDATE

Commenter David Free notes that NCT paid off much of its short term debt in so far in Q1 2008, and wonders if that is a good sign. I say no. Given the market situation I am not sure that NCT had the ability to roll over this short term debt. And it didn’t pay off the debt with earnings, it has lost tons of money in 2007 and so far in 2008.

Instead, NCT sold one of the few assets that anyone would want to buy, namely its AAA-rated GSE securities, which made up 60% of its Q1 asset sales. The remaining 40% of the assets it sold in Q1 ‘08 were lower quality RE loans/securities that nonetheless were rated higher than its overall portfolio. The other two big sales were $254M of REIT debt rated BBB, and $248M of CMBS rated A-. By contrast, the remaining REIT debt and CMBS are both rated an average of BBB-. So it dumped (at a loss) its A- and BBB assets, while keeping the BBB- assets. NCT is thus taking on more credit risk at a time when defaults are rapidly increasing.

So how are BBB–rated CMBS that are still on NCT’s books doing these days? Compare the chart at the end of Q4, when spreads were at 950bps, to today they are at 1,650bps. (Remember, on this chart up is down.)

The Impotent Federal Reserve: Mortgage rates are going up

See the story here on Housing Wire. Conforming rates are averaging 6.37% and jumbos 7.55%. Not only are rates high, the requirements for getting a mortgage are also getting tighter, especially with higher down payment requirements, not just by the banks, but also by the mortgage insurance companies.

Corporate borrowing rates too, for both prime and non-prime corporate borrowers, have also refused to fall in response to the Fed’s rate cuts. Here is a graph that Princeton University economist and NY Times writer Paul Krugman put up on his blog:

So what is happening is that the Fed is making cheap money available to the banks, but the banks are refusing to lend it out cheaply, to neither big businesses nor home buyers, and instead are hoarding it to cover the losses they know they are going to face over the next few years.

Given that banks aren’t lending and consumers aren’t spending (auto sales are down 16% so far this month), the best way to stimulate the economy and create jobs right now would be investment in public infrastructure, including schools, roads, bridges, sewers, and public transportation. This would provide jobs to many of the construction workers who are being laid off or having their hours cuts because of the housing crisis. We also need more public investment in clean energy and fuel-efficient vehicles. Unfortunately President Bush and his economic advisers seem to favor more tax cuts for the wealthy + government bailouts for the banks that got the economy into its current mess.

Escondido, CA market in freefall, many many examples of 40%+ price drops

Escondido is has a population of 133,000, making it the 4th largest city in San Diego County and 178th largest city in the USA. As you can see from the examples below, price drops of 40% or more are getting very common. And remember these aren’t even 40%+ drops from the absolute peak of the bubble, but from sales in 2004. So these losses may be excluding 2nd mortgages written off due to short sales or banks deciding to eat losses rather than pursue deficiency judgments.

Pepperwood Unit #10x

Sold 6/04 $240K

Bank owned foreclosure for sale now at $125K

-$115,100 (-48%) loss

 

Pepperwood Condos Unit #9x

Sold 5/04 $225K

Resold 1/08 $126K

-$119,000 (-44%) loss

 

Pepperwood Condos Unit #3x

Sold 9/05 $245K

For sale @ $118K

-$127,000 (-52%) loss

 

2566 White Oak Place #x

Sold 9/06 $309K

Bank owned foreclosure for sale now at $150K

-$159,100 (-51%) loss

 

31xx Sycamore Crest Place

Sold 2/05 $735K

Bank has approved short sale $450K

-$285,000 (-39%) loss

 

2012 E. Mission Ave #xx

Sold 6/05 $231K

For sale @ $120K

-$110,700 (-48%) loss

 

16xx Hawk Ridge Pl (5 bed 2.5 bath 2820 SF on cul-de-sac!)

Sold 8/06 $588K

For sale @ $320K

-$268,000 (-46%) loss

 

475 N Midway #2xx

Sold 5/04 $225K

Bank owned foreclosure for sale now at $125K

-$100,000 (-44%) loss

 

Sun Mountain Springs Condos – 520 Sandalwood #1x

Sold 10/05 $318K

Bank owned foreclosure for sale now at $175K

-$142,500 (-45%) loss

 

7xx Goldenrod St. (3 bed 2 bath single family with big yard)

Sold 9/06 $488K

For sale @ $220

-$267,000 (-55%) loss

 

24xx Hawthorn Glenn

Sold 8/06 $365K

Bank owned foreclosure for sale now at $200K

-$165,100 (-45%) loss

 

2912 E Valley Parkway #x

Sold 5/05 $355K

For sale @ $180

-$175,000 (-49%) loss

 

1xx Foxdale Place (2/1 bungalow with small garage)

Sold 5/05 $331K

Bank owned foreclosure for sale now at $180K

-$151,100 (-46%) loss

 

915 N Fig St #x

Sold 9/06 $275K

For sale @ $120K

-$155,000 (-56%) loss

 

1xx Espanas Glenn

Sold 10/05 $320K

Bank owned foreclosure for sale at $149K

-$171,500 (-54%) loss

 

1405 N Broadway #x

Sold 6/06 $386K

For sale at $195K

-$191,000 (-49%) loss

 

8xx Daisy St

Sold 1/06 $480K

Resold 1/08 $283K

-$197,000 (-41%) loss

 

10xx Nightingale Place

Sold 8/04 $560K

Resold 12/07 $322K

-$238,000 (-43%) loss

 

280xx Glenmeade Way

Sold 2/07 880K

Listed for sale 12/07 by foreclosing bank @ 570K

-$310,000 (-35%) loss (bank lost 300K+ on this loan in less than 10 months! Likely a first payment default)