Over the next several months, Neumann Homes, which will file for federal bankruptcy protection on Thursday afternoon, expects to wind down its home building operations and start selling off most of its land assets in four states. But the Warrenville, Ill.-based builder is likely to encounter reluctance among builders and developers to acquire more land while business continues to be soft. Builders also fear that Neumann Homes' failing could further erode consumers' already shaky confidence in the housing industry.
Ken Neumann, CEO and owner of Neumann Homes, tells BUILDER that his primary objective during bankruptcy proceedings would be to maintain his company's "ethics and integrity" with customers, suppliers, and lenders. As Neumann Homes has closed its sales, production, and customer services offices, and laid off all but 20 of its employees (from a peak of 550 a few years ago), Chicago-area newspapers in recent days have recounted buyers' frustrations and anger stemming from their inability to reach the builder about the status of houses they've purchased and their down payments; about subdivisions whose infrastructures and amenities haven't been completed; and about how the builder would meet its obligations relating to construction warranties and municipal reimbursements. There have also been reports of suppliers retrieving building products they haven't been paid for.
Several of these issues remain unresolved, but Neumann insists he is making sure that a customer service representative is available to answer buyers' questions. He will also ask the bankruptcy court judge to release $1.3 million in earnest money that buyers had put down for 130 houses that Neumann hasn't started yet and to mutually terminate those contracts. Neumann says that the 10-year structural warranty coverage for all new homes would continue (through a third-party provider), but Neumann Homes would not be responsible for one-year warranties covering construction.
Contrary to news reports that quoted estimates claiming that Neumann Homes had five years' worth of unsold homes, Neumann contends that his company has 58 spec homes, of which 42 are completed. It also has 132 homes under contract that are under construction, of which 40 are either completed or near completion. Neumann says he is working with his company's lenders to obtain financing needed to complete the construction of all those homes and communities, even as he shuts down his home building operations and sells off all of his house models. "Our concern right now is managing our pipeline," he says.
Neumann acknowledges, however, that his company is now paying for the gambles he made on market growth that never materialized. "What has hurt us dramatically is that we have way too much land, and we couldn't liquidate land in a quick-enough fashion" when the market conditions worsened. Neumann Homes lost $60 million in Detroit, a market it entered in early 2005 through its acquisition of Tadian Homes, but exited last summer. Neumann still controls 334 lots in Detroit, of which 92 lots are undeveloped. Neumann Homes has another 3,148 homesites in Chicago and southeast Wisconsin, of which 2,506 are undeveloped. It also owns 860 acres of land in that market, which Neumann says are "semi-entitled." In Denver (where the builder intended to start 1,095 homes this year, according to the Denver Post), Neumann controls 703 sites, of which 417 are undeveloped, and a 960-acre master planned development that's been entitled for 4,400 homes and 1.35 million square feet of commercial space. (Neumann Homes' sales in Chicago and Denver have been off 50 percent this year.)
During his company's travails, Neumann says he's received "tremendous cooperation" from his eight primary lenders. "Their workout departments can be tough as nails, but we realize that we are in this together." However, how quickly Neumann is able to appease his creditors by selling off assets could hinge on when the housing market starts showing signs of life again. Tracy Cross, who runs a real estate research firm in Schaumburg, Ill., says that some of Neumann Homes' land is "incredible" in terms of its attractive position in Chicago's submarkets, where he believes the builder could have better luck finding buyers, although he warns that each deal comes attached to its own set of "complications."
In other towns where competition is fiercer, however, Cross suspects there might be less interest in Neumann's land, an opinion echoed by at least two national builders. "Because of where the market is right now, there's going to be some caution," predicts Andy Konovodoff, president of Hovnanian Enterprises' Town & Country Homes division, based in Lombard, Ill. Konovodoff expects builders to hold off on making offers until the value of Neumann's land is established. And even then, "I don't anticipate a Gold Rush," he says. Tim Stapleton, president of Centex Homes' Chicago division, adds that builders will want to see "how much hair" is on any asset-in terms of liabilities such as vendor liens or lawsuits-before making a purchase. Neumann confirms that Gary Tadian is suing his company for allegedly backing out of a $14 million land acquisition deal in Illinois, and that an excavation company has filed a lien against Neumann Homes for $1.7 million in unpaid work.
While competitors have been aware for some time that Neumann Homes was foundering, Neumann insists that he resisted bankruptcy until now because he was exploring "some real opportunities that would have helped us avoid all of this." He declines to say what those opportunities were, but notes that they evaporated once the housing market took a sharp downturn in August. Competitors now worry Neumann Homes' bankruptcy will exacerbate buyers' perceptions that the housing market is unstable. "It's terrible for consumer confidence because [Neumann] was a big player in this market," says Jim Hughes Jr., co-owner of Wiseman-Hughes Enterprises, a Wheaton, Ill.-based builder. (Neumann is the 9th-largest builder in Chicago.)
Neumann says he's not sure about his future. His company has hired the high-powered law firm Skadden Arps Slate, Meagher & Flom to guide it through bankruptcy. (The initial filing will state only that Neumann Homes has more than $100 million in assets and liabilities, and between 200 and 1,000 creditors. Neumann says that details about his company's financial condition and indebtedness won't be filed with the court for another 10 to 14 days). Neumann sounds particularly intent on wanting to leave buyers, former employees, and lenders with a good taste in their mouths about how his company handles its shutdown.
He envisions that he and his wife Jean, who was Neumann Homes' marketing director, would continue to build homes or sell land in some capacity. Ever the optimist, Neumann anticipates that, as the housing market shakes out over the next year, there will be "numerous opportunities" to capitalize on. "We travel through life with very strong faith," he says. Hughes thinks Neumann might be right, and that many builders will be taking stock of their own viability as they get a clearer picture, over the next six months, of how long the housing slump will last. At that point, Hughes expects other builders could be selling assets, too.
Learn more about markets featured in this article: Chicago, IL.