The hard-hit Phoenix market is taking its toll on established Scottsdale, Ariz.-based Hacienda Builders. Driven by deteriorating market conditions and pressure from banks, co-CEO Todd Stevens confirmed that the company is in the very early stages of due diligence and feasibility on a possible sale to local developing firm Montage Holdings, which is led by Garth Wieger.

"Hacienda has an excellent reputation," says a builder active in the marketplace who would not speak for attribution. "That's a huge casualty for Phoenix. They are considered to be a first-class operation."

Hacienda is the third major building company to be forced into financial distress by market conditions in a wave that analysts expect to continue sweeping the industry in coming months. In September, Dunmore Homes, based in Granite Bay, California, transferred all of its asset and liabilities to a successor company controlled by Sacramento businessman Michael A. Kane. Just this week, Neumann Homes announced it was filing for Chapter 11 bankrupcty.

No financial terms of the proposed Hacienda sale were disclosed. "I would be happy if the transaction happened, but I have no idea what the results of their feasibility and due diligence will be," said Stevens of the arrangement. Since 1991, when Stevens, along with co-CEO David Cohen began the company, Hacienda has built more than 5,000 homes.

Wieger was unavailable for comment, but local sources cite him as an industry veteran who is well respected in the community and who carries a lot of credibility with vendors. Just last fall, Montage Holdings acquired nearly 10,000 acres of land in the Mobile, Ariz., area of Maricopa County in a venture with Weyerhaeuser Realty Investors. The entity reportedly paid $317 million in the transaction.

Currently, Montage has no home building operations, which may bode well for current Hacienda employees. Market sources speculate that Wieger is also exploring the opportunity to buy other builders in the area with plans to assemble a sizeable operation that could build as many as 1,000 to 1,500 homes annually.

In a market paralyzed by inventory oversupply, builders have been forced to repeatedly drop prices in an effort to spur home buyer demand. However, even today's buyers remain on the sidelines, waiting and wondering: "How low can you go?" In Phoenix, where market share is dominated by public companies such as D.R. Horton, Pulte, and M.D.C., prices and incentives have been driven so low, many active builders fear the land basis is effectively a wash.

"What we are seeing in this market, and probably all over the country, is that subdivisions and projects are not going to appraise for anywhere near what they were purchased for," Stevens said. "Banks have the opportunity to work with you to a degree. But at some point, because they are regulated, they are forced to re-appraise every project ... and there are probably going to be capital calls.

"When you look at the building environment with the reduced number of sales, higher cans [cancellation rates], and the fact that margins are so skinny now since the capital is not there, most private builders are going to have struggles appeasing their banks. A lot of what you will see are defaults that aren't so much operational, but are going to be more technical because land is not appraising and they are going to be re-margining projects."

When house prices went crazy in the market place heyday of 2005, land prices quickly followed, and Hacienda slowed its land acquisition activity. "I think our position today is as good as anyone's," Stevens said. "If you take out the equity and get right down to our debt, and use that as your land basis, you probably could sell houses and make a couple of nickels."

The company has control of roughly 4,000 lots, but that figure includes some option deals that "we are probably going to walk on," according to Stevens. Active in approximately 15 communities, the company closed on 611 homes in 2006, down from more than 850 the year before. This year, Stevens projects approximately 400 closings. In 2006, revenues came in at $210 million.

Learn more about markets featured in this article: Phoenix, AZ.