I talked with Mike Morgan recently and to no surprise, things are still extremely slow. Morgan told me he stopped sending out weekly updates to his clients because they were tired of hearing bad news (no sales and falling prices). He is also not accepting new clients unless they are willing to price their homes at what the market will bear.

One of his clients smartly backed out of a deal on a Lennar home under contract at $490,000. Because of defects, the would-be buyer got his deposit back. Lennar sold that home for $315,000. That is a 35.7% reduction in price. Another one of his clients has been “walking the market down” for one full year trying to unload a townhome. The client keeps wanting prices that he could have gotten two months ago. That client is now in the red and profit is no longer possible.

If you have not checked out Morgan’s new website on Defective Lennar Homes, please do so. The inspection reports he has posted are amazing, particular the roof and stucco problems. But there were numerous fire safety hazards as well. Even after Lennar claimed to have fixed the problems, the homes failed the second inspection. It seems the easy stuff was fixed and the harder stuff (such as the roof) was ignored. To do the job right, entire roofs might have to be redone. Obviously that would be a huge expense to Lennar so it will be interesting to see how this finally shakes out.

We also discussed down payments and when the money could be used by the developer. Mike said it varies contract by contract but the standard contract allows those funds to be used as soon as ground is broken. In a few cases the money is held in escrow until final delivery.

There is a theoretical risk of a developer breaking ground just to have access to the funds with the developer then going bankrupt. In such a case the buyer would lose his down payment. The reason I said “theoretical risk” is because the smart person is going to walk away from his down payment anyway because home prices are dropping well in excess of any down payments that were made. It remains to be seen if there will be lawsuits attempting to force buyers to close.

I also talked with John Vergopia, Chairman of the Board & CEO of Veemac Corp.
Veemac is a framing subcontractor and I first talked about his plight in Prominent homebuilders failing to pay subcontractors.

There are other blogs out there, notably URGENT: WORKERS NEED HELP, placing the blame squarely on Veemac.

One of the first things out of Vergopia’s mouth after a brief introduction about his business was the statement “I have to tell you right up front that I am an ex-convict guilty of money laundering. I may as well tell you that because if I don’t you will find it out later anyway.”

What follows is the rest of his story. Perhaps I am being conned but I do not think so. According to Vergopia, he built Veemac from nothing to a group of about 400 employees at the maximum point back in May. His largest projects were for U.S. Home (a division of Lennar), and Richmond American Homes. He is now 60 years old and has no desire to spend the rest of his life in prison.

He was building about 8 units a month before May when all of a sudden U.S. Home (Lennar) asked him to ramp up to 25 units a month on two projects “Skyline Ranch” in Queen Creek Arizona (about 25 miles east of Phoenix), and “Rancho Eldorado” in Maricopa Arizona (about 20 miles south of Phoenix).

Veemac also had increased work orders from Richmond American Homes. The Richmond projects were Dobbins Ranch in Laveen Arizona and Trianda Terrace in Goodyear. Both Richmond American Homes and U.S. Home allegedly stopped paying Veemac for work performed. Veemac ramped up from 100 workers to 400 workers to meet this need.

Obviously Veemac can not pay its employees if Veemac is not being paid. When you have 400 people not being paid you have a lot of angry workers. This was not a quality control issue as Vergopia emailed me recent statements from the builders praising Veemac’s work. Here is one of them from Tony Zychowski, Senior Superintendent for Richmond American Homes:

I just wanted to make you aware that Arnulfo past three first time strap inspections today. That is just about inconceivable with today’s inspectors in Phoenix. Richmond American Homes could not be more impressed with Arnulfo’s performance!!!

Have a great day,

Tony Zychowski
Richmond American Homes
Senior Superintendent
Phoenix Central Division

The above answer was in response to:

From: john@veemac.com
Sent: Monday, May 08, 2006 1:29 PM
To: Bloyer, Brad

Subject: FW: Signature strap inspections

Hi, Brad, I’m just a little proud of my superintendent Arnulfo @ Dobbins Ranch, I hope that your satisfied with Veemac.

The whole thing is rather peculiar to say the least.
Why would Lennar ramp up units like this with demand falling off the cliff?

I suppose one answer would be to get out and get the units sold at any price because Lennar knows it will get less for them a few short months down the road. If that is the thinking it perhaps explains the silly ramp in home starts we saw a couple months back. Is panic completion of projects the story of the day?

Even if so, why would Lennar and Richmond American Homes stop paying a subcontractor for work performed? The story gets messier because Vergopia has placed a mechanics lien on 90 Lennar Homes (53 at Skyline Ranch and 37 at Rancho Eldorado) at and a mechanics lien on 47 Richmond American Homes (12 at Trianda Terrace and 35 at Dobbins Ranch) for completed work. Those homes can not close now without an escrow fund for the amounts owed Veemac put up by the respective builders ($1.4 Million for Richmond and $803,00 by Lennar).

Some of those 400 workers Veemac had hired are probably stretched to the limit as well. In yet another odd twist to this story a Spanish radio station in Phoenix was reporting that Lennar and Richmond would pay the workers directly via 1099s without withholding any taxes, except for supervisors and office personnel who would not be paid at all. This is odd for several reasons. Direct employees of corporations should not be paid via 1099s and more importantly Vergopia claims that neither homebuilder has an up to date list of what workers are owed what or even who those workers are. Does this not expose the builders to some fraud? Are the builders trying to make themselves out to be some sort of heroes to those workers?

Let me address one other point that was made in the “Workers Need Help” blog above.
Here is one comment as well as a response.

Comment:
“One would also wonder why John Vergopia bills himself as the President and CEO of Veemac, but isn’t listed as an officer of the company; or why anyone should trust or believe anything a convicted felon says.”

Response:
Eric, the man has paid his debt to society.
I would suggest to you that a person currently on probation would do nothing that would violate that probation or he could be returned to jail. Seems like an excellent motivation to me.

After talking to both Vergopia and his attorney (his attorney did confirm those liens), and with Vergopia being 60 years old with a successful business and not wanting to go back to prison, I am inclined to agree with the above response. Furthermore Vergopia does not bill himself as the president of Veemac even though he is the CEO. Apparently this arrangement was acceptable to his parole officer.

According to Vergopia, a senior superintendent for Lennar on the Skyline project told Veemac’s senior superintendent “I don’t know why we are building all of these houses. Only eighteen are sold”. That was as of early June with only 18 out of 82 homes under contract. If that is still the current situation, Lennar is sitting on a lot of homes they need to unload in a hurry.

Something about this story still does not add up, but I can not quite put my handle on it. All I know for sure is that Lennar seems to be involved in yet another mess. Let’s see how quickly and at what prices they can get rid of homes with mechanics liens on them.

Mike Shedlock / Mish/