When Zudi Karagjozi launched his semi-namesake home building company, Kara Homes, in 1999, it was barely a glint on the industry's stage. In its first year, the New Jersey-based company closed on six homes and barely pulled in gross revenues of $1 million. But the company outgrew its humble beginnings, as the new-home market picked up speed.

By 2002, Kara Homes' had earned a spot on BUILDER magazine's Fast Track list for its explosive growth. And by 2005, the company was closing on 590 homes a year and pulling in gross revenues of $288 million.

But the Cinderella story is overat least for the moment.

On Oct. 5, 2006, the company filed for Chapter 11 bankruptcy protection. The seventh largest builder in New Jersey owes nearly $300 million to more than 1,000 creditors.

Most of the creditors consist of subcontractors and suppliers, such as Morrisville, Pa.–based A-1 Bracket, which has one of the largest claims at $1.9 million, according to The [Bergen County, N.J.] Record. However, lenders—including Magyar Bank, which lent money to Kara for entitled land—also are feeling the effects of Kara's cash crunch. The Magyar's lending relationship with the builder consists of four construction loans with an outstanding balance of $7.6 million.

John Reissner, vice president and marketing director for Magyar, says that it's too soon to know exactly what's going to happen or when. “We're working with the courts, and we want to get this resolved as quickly as possible,” he says.

LAND IMPERILMENT Although Kara's highly concentrated position in land-constrained New Jersey, a haven for red tape and NIMBYers, is partially responsible for its success, it also is to blame for its undoing. When the new-home market was hot, the slow-growth environment coupled with strong buyer demand worked in Kara's favor, inflating land values, raising home prices, and consequently boosting profits.

But because competition with market leaders such as K. Hovnanian, Toll Brothers, and Ryan Homes was ferocious, Karagjozi tried to box out the big boys by outbidding them for lots. He quickly became “infamously known for overpaying for land,” says one local source.

However, since the market has deteriorated, Karagjozi's brash moves now are exposed as imprudent. The builder's sales pace has slowed in the past six months, buoyed sporadically by incentives and deep discounts ranging to $246,000 for spec homes.

When absorption rates or home sale prices fall in a community, the price paid for land is called into question, especially if a lender provided a majority of the debt needed to acquire the land.