Escrow's limbo of fear Gone? Homebuyers who think their deposits are safe as the Bank of England should think again. A cautionary tale.

March 22, 1998|By Robert Nusgart | Robert Nusgart,SUN REAL ESTATE EDITOR

It is a homebuyer's worst nightmare.

Contracts are signed. A deposit is made. Excitement abounds. Dreams begin to turn to reality with the sound of hammers and the scent of freshly sawed wood.

But then -- seemingly in an instant -- it all comes to a mysterious halt. Workers are nowhere to be found. Phone calls to the builder go unanswered. Subcontractors return, but only to swoop in like a SWAT team to pillage unfinished homes, taking out shelving, mirrors, even address numbers.

Rumors start moving from one family to the next that the builder has gone under. And in the case of Manor Builders Inc., it was no rumor but the simple truth, spelled out in a farewell note. The letter, left on a sales trailer's door, was written in February by builder Palmer Williams and his wife, Carol.

In the note to an office worker, the Palmers said the stress of business forced them to move out of state to an undisclosed location.

The demise of Manor Builders left a chaotic aftermath for those already in their homes as well as those holding contracts.

Two townhouse communities, Summerwoods in Owings Mills and the Village of Gracecroft near Havre de Grace, were in disarray. Twenty-eight buyers had settled with Manor Builders and moved into their new homes. Twenty-three other homes were in various stages of construction, leaving in limbo thousands of dollars in buyer escrow funds.

And then there are the 75 unsold, mud-filled lots. As one buyer in Gracecroft, Everett Rees, said, "It looks like a war zone."

But one of the most distressful aspects for those holding essentially dead contracts is the potential loss of deposit money -- money thought to be safe in escrow accounts opened by Manor Builders and protected by law.

That wasn't the case. In January, Palmer Williams closed the escrow account containing numerous deposits from various homebuyers at the First National Bank of Maryland.

When word spread that Manor Builders was gone, homebuyers soon learned their deposit money was no longer where their contract said that it was.

"This is the first time I have ever bought a house," said Jonathan Hawkins, who with his wife, Rose, made a $4,200 deposit on a Gracecroft townhouse that was half-finished when the builder went under. "I was excited. My wife was excited. We looked at this thing [the contract] and it says the law is protecting us we're not going to worry about it. Well, I guess we were naive to that point."

Some of the uncertainty for those contract holders in Summerwoods and Gracecroft was cleared up last week when a $20,000 escrow account -- opened in late February by Palmer Williams -- was confirmed at Sparks State Bank. It has since been frozen, and Jerry S. Sopher, attorney for the bank, said the money is to be turned over to Baltimore County Circuit Court. The lien holder on Summerwoods garnished the funds. But "where it goes from there, I don't know," Sopher said.

The situation raises questions about how consumers should protect themselves and their deposits when a builder fails.

Many homebuyers think that an escrow account can't be touched by either party. That's not necessarily true, according to John Nethercut of the Consumer Protection Division of the Maryland Attorney General's Office. It all depends on what is specified in the contract.

"Builders are supposed to have an escrow account, a surety bond or a letter of credit, one of those three things," the assistant attorney general said. "If they have a letter of credit or a surety bond, it's easier to check up on because it is filed with a public agency, either the Department of Labor, Licensing and Regulation or the Insurance Commission.

Nethercut said that, before any sale, builders are required by law to give buyers a disclosure form furnished by his office apart from the contract. The disclosure form lists options and explanations concerning escrow accounts, surety bonds and letters of credit.

Although not spelled out in the disclosure form, the buyer may negotiate with the builder as to whether the account will be interest-bearing, and to whom the interest will be paid at settlement.

Another assumption made by buyers is that they automatically have a separate escrow account with the builder. That's not the case, according to Nethercut. Many builders commingle deposit money in one escrow account set up by the builder.

Since the account is the builder's, he can transfer the funds to another institution. But, as Nethercut points out, buyers should receive an addendum to their contract telling them that their escrow account has been moved. In the case of Manor Builders, this was not done, homebuyers say.

Nevertheless, the law states that the builder may not use those funds for any other purpose. To do so is a felony.

According to Nethercut, deposit money from escrow accounts can only be legally disbursed if:

* The builder transfers the deed to the buyer at settlement and the escrow funds are used as part of the payment toward the purchase price.

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