It was a simple pitch: Investors would put little to no money down and take out construction loans that a developer would use to build modest homes in a fast-growing stretch of Southwest Florida. When finished, the homes would be flipped for tidy profits of $30,000 to $40,000 apiece.
Too simple, perhaps.
Nearly two years since the developer started marketing the investment plan nationwide, work on the homes has come to a halt, leaving 482 investors with half-built houses and thousands of dollars in construction liens. Coast Financial Holdings, which owns the bank that made the loans, has disclosed that $110 million, or a fifth of its total loan portfolio, could be troubled. Its shares have fallen 46.5 percent so far this year, and banking regulators are investigating.
“It was strictly a passive investment,” said Paul Matera, a retired contractor from West Islip, N.Y., who signed up for two houses and introduced dozens of others to the plan.
“You didn’t pick out the model of the house. You didn’t pick out the exact location. Everybody signed papers without reading what they were signing.”
During the housing boom that ended in 2005, money poured into real estate from investors ranging from the ultrarich to middle-class professionals like doctors, teachers and midlevel managers. Places like Florida, the Southwest and the West Coast were the biggest recipients of the investment wave because housing there was often deemed a sure bet.
The case of a relatively small development in Southwest Florida illustrates the important role that real estate investors played. Like the day traders who drove up Internet stocks in the late 1990s, these investors, aided by cheap mortgages, helped drive a housing boom over the edge.
“It was a groundswell,” said Jerry Manning, who runs J. J. Manning Auctioneers, which sells homes in the Northeast and in South Florida. “Everybody thought that they were going to be a real estate mogul.”
Last year, however, a number of such plans started failing, causing pain to a large food-chain of investors, builders and lenders. Beyond their inherently speculative nature, many of the investments were never fully investigated and were poorly monitored. And now some lenders and investors are starting to wake up to a harsh day-after reality.
“You will have a correction, and the correction will make regional homeowners unhappy” as property prices fall, said John Lonski, chief economist at Moody’s Investors Service. “Regional mortgage bankers will find their livelihoods threatened.”
So far, the slumping housing market has not claimed a major casualty, though lenders to people with weak credit have started shutting down and regional builders in formerly hot markets are hurting.
Transeastern Homes, which builds homes in Florida, is in settlement talks with lenders who contend it is in default on debt totaling hundreds of millions of dollars. WCI Communities, which builds condominiums in Florida and in other areas, recently hired Goldman Sachs to advise it on strategic options, including a possible sale of the company.
“We’re going to see much bigger builders and much bigger lenders facing bankruptcy because so much of the building has been on a speculative basis,” said Jack McCabe, a real estate consultant in Deerfield Beach, Fla.
Mr. Matera, the retired contractor, learned about the chance to invest after a limousine driver, taking him to the airport for a Caribbean vacation, mentioned that his boss owned a part of a real estate company, Seashore Resorts in South Carolina, that helped people buy investment properties.
Mr. Matera did not blindly jump in. He said he visited Seashore and even hired a private investigator to look into the company. Later, he visited lots where the homes were to be built in the Florida towns of North Port and Rotonda.
The paved roads and empty lots reminded him of the affordable homes of Levittown that decades ago transformed Long Island into the suburban expanse it is today. Mr. Matera invested $12,000 in two homes. And his pitch to others persuaded 40 members of the Long Island Real Estate Investors Association and a half-dozen relatives and neighbors to invest similar amounts.
Mr. Matera acknowledges receiving a $500 fee for each client he referred to Seashore, but insists he did not pressure anyone. “I solicited no one,” he said. “People came to me. I’m not a salesman.”
Now, Mr. Matera is paying $4,800 a month on four properties near Sarasota that he cannot sell and that do not collect enough in rent to cover their costs. Two properties, which are complete, are under his name and have tenants. His mother-in-law and his sister each own one of the two incomplete homes that cannot be finished because they have liens.
All together, about 100 of the nearly 500 investors are from the New York area, according to lawyers who are representing many buyers. Seashore recruited most of them through marketing materials it circulated through networks of friends and family members.
Seashore steered borrowers toward loans that start out as construction debt and convert into traditional mortgages when the house is built. “I’ve got my father stuck, my brother stuck, an ex-wife stuck,” said Carl Cirinelli, a partner at Seashore who previously lived in New Jersey. He says that he recruited 25 relatives and friends and has a $200,000 loan under his name.
Few had to be convinced. Several investors said they saw little downside to investing in Florida real estate, especially with an experienced builder. The area south of St. Petersburg where they were investing was promising because prices were relatively affordable and rising.
Residential building permits issued in Charlotte, Sarasota and Pinellas Counties, where all of the homes are located, doubled from 2000 to 2005 before falling significantly in 2006, according to data from the Census Bureau.
Jesse Battle III, who heads the developer, Construction Compliance of St. Petersburg, was a charismatic figure with experience in single-family homes. One contractor who worked for the company noted it had moved aggressively and had paid its bills on time, at least for a while.
“I had a great relationship with them, and I got paid well,” Fernando Cacoilo, the contractor, said. He recently fired 23 of his 32 workers because of the souring real estate market and because he has been unable to collect $1 million from Construction Compliance.
Mr. Cacoilo, whose firm Jodfer Land Services is based in Sarasota, acknowledged that he had missed some obvious red flags, including the fact that none of the people having homes built ever checked on the progress.
The problems with the projects did not become apparent until the end of 2006, when contractors who had not been paid for months started imposing liens against the homes, and when Coast Bank of Florida, the bank owned by Coast Financial, started asking the borrowers to make interest payments that had previously been paid from the loan balances.
On Jan. 24, Mr. Battle sent a letter to investors saying his company was facing “great financial challenges” because of a falling real estate market and lenders were no longer willing to provide financing. The letter held out hope that the company would be able to pull through.
In an interview earlier this month with The St. Petersburg Times, he said Coast Bank prevented him from withdrawing the cash to finish work on 70 homes.
Mr. Battle did not return calls seeking comment for this article.
An adviser, Tramm Hudson, hired by the board of Coast Financial to speak on its behalf, said the bank had never lent directly to Mr. Battle, who was allowed to withdraw money from the investors’ accounts in accordance with schedules they had signed. He said a law firm hired by the bank is conducting an investigation.
Tension between the bank and the borrowers has been running high, with the two sides accusing each other of lax oversight. Some investors contend that Coast did not honor its fiduciary duty to verify that Construction Compliance was finishing work and paying contractors when it withdrew money from their accounts. Mr. Hudson denies that allegation and said the bank had used an independent inspector.
Mr. Hudson said the bank would hold investors responsible for the loans and has asked them to declare whether they intend to complete construction, leave their properties undeveloped or sell them.
But Alan Tannenbaum, a lawyer based in Sarasota who represents about 100 investors, said it was wrong to blame the investors because they did not fully understand loan documents and other paperwork they signed.
Coast, which was founded in 2000 and went public in 2003, has had financial problems almost since its inception. It has lost money in all but one of the five years from 2001 to 2005. Brian Peters, who was the bank’s chief executive when it started making the 482 loans, resigned in July after two years in that job because of what he and board members described as “personality differences.”
Mr. Hudson said the bank has dismissed two employees, a married couple, Philip W. Coon and Melissa Coon, who were closely involved in making the 482 loans. The Coons did not return a phone call.
Investors who signed on to buy the homes say the experience has been a painful reminder that real estate can be risky, but they insisted that the rewards can be great, too.
Alan and Linda Ellman, who live in Plainview, N.Y., put a $12,000 deposit on a $300,000 home in the spring of 2005 after hearing about the offer from Mr. Matera at the investment club. Given their previous successful experience with investment properties, Mr. Ellman estimated that he would be able to sell the home for a $40,000 profit. “Nobody twisted our arms,” he said.
Instead, the home now has liens totaling $17,000 from landscapers, painters, insulation companies and cabinet makers. They still have not seen the house, but a real estate broker there reports that the driveway is unpaved and the swimming pool is an empty shell.
In spite of the problems, Mr. Matera, for one, believes that real estate is a safer investment than stocks. “I would rather have a house that I can’t sell at the moment than a stock certificate,” he said. “I still have a house. It’s not what an owner of Enron stock can say.” *
( *Comment: Had the person who owned Enron opened up his eyes, he could have gotten out all along the way. The problem with real estate: Sometimes there really aren't any buyers, or the bid is so far below what you think your house is worth that you're unable to react -- until such time as the market falls to that level, and then it's at a new, lower level. So, when it comes to being able to change your mind, folks who believe that real estate is better because it isn't a piece of paper have it exactly backwards.)