One day after Ken Neumann's Neumann Homes, the 59th-largest builder in the country, announced that it was filing for bankruptcy, there wasn't much surprise in the building community. In fact, the feeling was more one of inevitability. Neumann's demise has been rumored for months.
"This is a classic case of someone growing too fast and going into markets at exactly the wrong time," said John Burns of John Burns Real Estate Consulting in Irvine, Calif.
Neumann's 2005 venture into Detroit turned out to be his downfall. In the press release announcing that he intended to file Chapter 11 bankruptcy, Neumann, who did not returns calls for this story, said the Detroit housing market dropped more than 80% since he entered. That cost the company in excess of $60 million in losses. The company departed the market in July with the second of its two auctions there. Big Builder reported on this auction in its September issue.
"I think he just had some bad timing in relation to getting into Detroit," said Christopher Shaxted, executive vice president for Hoffmann Estates, Ill.-based Lakewood Homes.
Neumann's other markets also have been hit hard. He said inthe press release that the Chicago and Denver housing markets have lost more than 50% of sales and home prices are dropping from 10% to 25% in some sub-markets.
Shaxted said he doesn't think Chicago is that bad and doesn't see a lot of other builders in the market going out of business. "I don't think business is that bad in terms of having to close up shop," Shaxted said. "If he didn't make those decisions [to go into Detroit], I think things would have been fine. He's got some decent communities that are up and running and he just fell short of cash. It doesn't bode well for any builder when that starts to happen."
As of August 31, 2007, Neumann had eight active projects in Denver and 32 active projects in Chicago, according to Hanley Wood Market Intelligence (HWMI). Neumann told the Chicago Tribune yesterday that he had 130 to 135 homes under construction in 15 projects. The company also planned three projects, totaling 977 units, in Chicago, and one project, with 69 condos, in Denver, according to HWMI.
Burns said some of his clients have expressed passing interest in these communities. Under the right circumstances, Shaxted said he would have interest as well. "He's got some decent communities," Shaxted said. "If we were approached by banks or sellers, we'd certainly look at it. We're not out there trying to gobble up the man's issues."
Instead, Shaxted said he is focusing on changing the attitudes of Chicagoland homebuyers. After being inundated with bad news about the mortgage market, they're now hearing that a builder that was once in Chicago's top five is going out of business.
"When people hear about this stuff, it gives them a reason why they shouldn't buy," Shaxted said. "That's not the case. We need to give them a reason to buy."
Neumann didn't return calls for this story.
Learn more about markets featured in this article: Chicago, IL.