Don't expect an immediate rush of offers for Neumann Homes' assets after that builder files for bankruptcy, say Chicago-area builders and developers. Neumann's defensive maneuver is likely to further erode buyer confidence in the markets it was active in.

"Anytime you have news like this, it isn't good," says Tim Stapleton, president of Centex Homes' Chicago division.

Yesterday afternoon, Neumann Homes, the industry's 59th-largest home builder in closings last year, and currently the 9th-largest in the Chicago market, announced that it would file for protection from its creditors under Chapter 11 of the U.S. Bankruptcy Code. The 27-year-old company stated that it was "unable to procure adequate funding" to continue operating its business. Neumann has laid off most of its employees, and had closed its sales, product, and customer service offices. Its statement said that the company would ask a bankruptcy judge to release from escrow earnest money paid by buyers for homes that Neumann hadn't started.

BUILDER couldn't reach Ken Neumann, the builder's CEO, or Jean Neumann, its marketing director, so it could not determine definitively whether the Warrenville, Ill.-based builder intends to reorganize under Chapter 11 or liquidate its assets. The builder stated it would seek financing from its lenders to complete homes it has started, which Joel Carlins, co-CEO of Chicago-based Magellan Development Corp., thinks the banks might be amenable to "because it would give them the best chance of getting paid" for loans extended to the builder. However, some newspapers report that Neumann Homes had also struck an agreement with creditors for loan relief and time to evaluate its assets for their possible liquidation.

Neumann Homes currently has 46 active developments in Illinois, Colorado, and Wisconsin, 15 of which are in and around Chicago, where competitors generally agree that Neumann's land position and locations are strong. But its business in Denver and Chicago is off 50 percent this year, and the company is saddled with five years' worth of unsold inventory in Chicago alone, according to estimates by the real estate research firm Tracy Cross & Associates, which was quoted in the Daily Herald of Chicago. Neumann also lost more than $60 million in the Detroit market, which it entered in early 2005 through its acquisition of Tadian Homes, and exited from this summer, after massive layoffs in the auto industry had devastated Detroit's housing market.

Neumann's competitors say they've been aware that it was foundering for some time. "There were so many rumors floating around for so long that [the bankruptcy announcement] is no surprise to anyone," says Jim Hughes, co-owner of Wiseman-Hughes Enterprises, a Wheaton, Ill.-based builder. "But it's terrible for consumer confidence because [Neumann] was a big player in this market."

Even before Neumann's announcement, buyer demand in the normally sturdy Chicago market was softening; Tracy Cross estimates that new-home sales there were off 34 percent in the third quarter. Given these unkind market conditions, builders are likely to take a wait-and-see approach toward any of Neumann's assets that might come onto the market via the bankruptcy proceedings. "Because of where the market is right now, there's going to be some caution," predicts Andy Konovodoff, president of Hovnanian Enterprises' Town & Country division, based in Lombard, Ill. Konovodoff expects builders to hold off on any offers until the selling value of Neumann's land and homes is established. And even then, "I don't anticipate a Gold Rush," he predicts.

Stapleton of Centex says that builders would want to see "how much hair" is on any asset-in terms of liabilities like warranty coverage, vendor liens, or lawsuits-before even considering a purchase. (Crain's Chicago Business reports that a Michigan developer is suing Neumann for allegedly backing out of a $14 million land acquisition deal, and an excavation company has filed a lien against the builder for $1.7 million in unpaid work.)

Who the buyers for Neumann's assets might be is also a question, as "a lot of [builders] aren't generating much cash right now" because of slower sales, observes Stapleton. (BUILDER couldn't reach Paul Ivers, president of D.R. Horton's Cambridge Homes division, or Brian Brunhofer, president of Pulte's Chicago division-the two market leaders-for comment about their companies' possible interest in Neumann's land or unsold homes.)

Whenever one builder falters, "there are always certain guys who make hay, buy assets, inventory them, and wait for things to get better," says Hughes, who expects Neumann's assets to attract speculators more than builders or developers. His own company is "not in a buyer's mode right now." But that could change next year, says Hughes, who thinks builders will see more clearly by next March 31 just how long the housing slump is going to last, and take stock in their own viability then. At that point, he suggests that some other builders might decide that bankruptcy is an option.

Learn more about markets featured in this article: Chicago, IL.