Thursday, August 6th, 2009
My wife and I were over at a neighbor’s some time ago. Somewhere in the conversation, he mentioned having stumbled on my website by Googling “maravilla homes”. He found and read my previous post about Maravilla Homes.
While recounting all of this, he was walking towards his refrigerator, arriving in front of it right at about the time he said that he read my entry. His impression of my writing was that it was cheesy, and while saying this, he reached into the fridge and pulled out a block of Velveeta to really drive home the point. In retrospect, I suppose it was a bit trite. But whatever. His feedback was true enough, and I can use it as fuel for improvement.
Well, that entry was written excitedly about two and a half years ago. We were poised to be closing on our home within a week or so of when I wrote it. First home together. First place without college roommates. Etc. Soon after that post, however, Maravilla effectively stopped work on the subdivision and eventually filed for bankruptcy. Several homeowners were left with liens, investors and subcontractors lost a lot of money, homes were left half finished, and on and on.
We were no exception to these problems — stress, legal counsel, legal fees, liens, lien payments, etc. But here we are today, my wife and I have closed on our house, and all of that is behind us. I still feel like I need to clear things up about my last post, though. If nothing else, it’s been an interesting and educational ride.
During its downfall, Maravilla was the subject of several expose-style KVUE news stories. Emotions and tensions were high. Neighbors gossiped about the goings on. There was a persistent feeling of “What’s going to happen next?”. The eventual culmination of Maravilla’s decline was handed down by the Texas Rediential Construction Commission:
At its February 13, 2008, meeting, the Texas Residential Construction Commission revoked the registration of Austin-area builder Primera Homes Ltd. According to an agreement with the commission, the company’s owner, Michael Kelly, is prohibited from working in the residential construction industry in Texas for 20 years.
(From http://www.texasrcc.org/Publications/NewsReleases/021408News_Release.asp.)
In the Beginning
We signed our contract in early 2006. The deal was structured in such a way that my wife and I actually financed the construction of the home through an interim construction loan. During construction, Maravilla was to take draws on our loan for two reasons: 1) to pay for the actual construction of our home and 2) to pay the monthly interest on the note.
Before executing the contract, I reviewed things with my dad, who is a seasoned real estate investor. He told me that the financing structure that Maravilla had set up struck him as odd. Having the buyer finance construction is something that is done more so in commercial real estate than in residential real estate. And when it is used in residential real estate, it’s typically used for things like remodeling projects. I told him that every other house in the subdivision had been structured in this manner, and that it seemed to work.
Since we were one of the last houses in the neighborhood, I felt confident in my assessment. Safety in numbers I guess. To be fair though, I really didn’t know how each of the other houses had been financed. I really was just assuming that they were done in a way similar to ours. I thought I was correct. As it turns out, a significant number of the other homes were investor financed, and not owner-occupied.
For the next year or so…
Progress on our house was reasonable, but fairly slow. Things would happen, and then things would come to a near stop. The pace was erratic.
We signed draw requests throughout this time period. A roof would get put on our house, and then we would receive a draw request to pay for the roof. Tile would get put in, and we would be asked to sign for that. And so on. From our perspective, work was being done, and we were signing the appropriate documents to pay for it.
Maravilla was contractually obligated to pay the subcontractors from the money it obtained through our draws. It’s called fiduciary responsibility.
…bringing us up to shortly after my previous post.
Maravilla told us our house was finished and that we could moved in. So we did. However, we had no final grade, no lawn, no irrigation system, and no doors on our utility room. We have since remedied most of these items ourselves.
Shortly after moving in, we received a bill from the bank that held our construction loan. The notice stated that the loan term was up, and that all of the interest and penalties were due. I flipped out. What had happened? What was this bill? Where did it come from? As it happened, the last interest payment Maravilla made on our loan was in December of 2006, so by this time (February of 2007), the note was due and we were late two cycles! Further, Maravilla never informed us of this.
To be fair, my wife and I were the holders of the note, and because of this we were solely responsible for it. We should have been more on top of things than we were. However, I strongly believe that the right thing for Maravilla to have done was to at least give us a heads up — the arrangement that we had been under (they were paying interim interest on our loan) for the previous year was stopped — suddenly.
So we smoothed things over with the bank, paid the outstanding items out of pocket, and made the loan payments. In fact, we made these interest only loan payments on the construction loan for nearly a year and a half before closing on our home. Why?
Because We Blindly Trusted Our Builder
In order to refinance the construction loan into a permanent, conventional 30 year mortgage, lenders require a clear title. For around a year and a half after we moved in, we worked on clearing the title for our property. Maravilla failed to pay several subcontractors for work that was performed on our home — work that was authorized by my wife and I and for which we distributed funds via draws on our construction loan. What happened to this money? Where did it go? I don’t know for sure, but I know that it did not go to the people to whom it was intended.
Naturally, the subcontractors wanted (and deserved) the money for the work they performed. Subs are entitled to place a lien on any property on which they performed work and for which were not paid. Lien law is pretty complicated. I know more now than I ever wanted to know. And I still don’t know much, other than my wife and I were on the hook for clearing these liens before we could close.
The damage? Roughly $50,000 in liens and 18 months of legal fees. Maravilla’s marketing tag line "Live the Dream" really stings when you look at numbers like that.
Moving Forward
We’re finally in permanent financing, and the bad is behind us. Like I said — it’s been quite the learning experience. Most of our neighbors have similar-ish strories, but I think the general feeling around the neighborhood is that we’re a normal neighborhood now. Or close to normal, anyway. I think everyone’s a little wiser and more cautious because of what happened.
Maravilla did get one thing right, though. The physical construction on the homes, like I wrote about in my first post, is top-quality. The homes are really nice, and the neighborhood has character. Yes, we have some rough spots (unfinished homes, no HOA, etc.), but these will get ironed out. It will take time, but I am confident things will continue getting better.
Thoughts and Suggestions
Knowing your builder is not enough! I’ve seen this sentiment over and over again by people giving out real estate advice. I wish I had followed it more closely. We had no idea that subcontractors weren’t being paid. We didn’t know the exact financial happenings of our house. We wrongly concluded that physical work being done to our house was predicated on proper payments being made.
I don’t care how well you think you know someone. If you are financing the construction of your home or your remodel, demand everything in writing. It’s your money, and homes aren’t cheap. If subcontractors are being hired by your contractor, you should demand, at the very least, the following items:
- A written notice by the contractor stating the the bill was paid to the subcontractor for the work for which a draw was released.
- The invoice and notice of payment from the subcontractor for the work that was performed.
- A lien release from the subcontractor for the work that was performed.
Do not trust a “notice of all bills paid” by your builder/contractor! What happens if they go bankrupt? You need protection granted directly by the parties that are doing the billing — the subcontractors themselves. Demand this of your builder. Get your builder to contractually agree to provide you with lien releases from each subcontractor hired to work on your property. And if your builder won’t agree to this, then find another builder.
For More Information
Here’s a news article and a KVUE video if you still want more information: