Quests for dream homes turn into nightmares

THE BALTIMORE SUN

When Debra and Burton Waxman handed Jonathan H. Scott a check for $49,000, they thought they'd made a down payment on their dream: a handsome Colonial home with panoramic views that Mr. Scott was to build on 4 acres in Clarksville.

But their dream has become a nightmare. Mr. Scott never built the home. And the Columbia couple says he's never given their money back.

"It's been a living hell," Mrs. Waxman says. "Now it's over. It's just overwhelming. We've lost close to $100,000 on this," including attorney fees and interest payments.

The couple, whose suit against Mr. Scott has not been resolved, are among almost a dozen would-be homebuyers in Central Maryland who recently have found that the adage of "buyer beware" applies to custom-home builders.

Scott Homes is one of several custom builders in Baltimore area to leave a trail of woe among its customers, contractors and suppliers lately. At least two other well-known custom-home builders, John F. McDonough III and Jerome J. Kendall, have been caught up in legal actions involving allegations they defaulted on contracts.

This troubles some building experts in the local real estate industry, and they believe new controls on custom-home builders may be needed.

"I don't know why people think they have more security buying a custom home than they do a used car, but that seems to be the case," says Robert Pollock, a custom-home specialist with O'Conor Piper & Flynn real estate office in Greenspring.

Scott Homes, which had offices in Gaithersburg and Columbia, now is out of business, Mr. Scott said in court records. It and its officers -- Mr. Scott and his two brothers, David and James -- face a mountain of customer and bank lawsuits and subcontractor liens, court records show.

On Friday, Reisterstown Federal Savings & Loan sold at auction four Scott homesites in Howard County -- among them the lot for which the Waxmans say they gave Mr. Scott a deposit to build a home.

Mr. Scott's attorney, John Garza of Rockville, declined to comment other than to say Scott Homes would be filing counterclaims against Reisterstown Federal. The institution, Mr. Scott argues in letters contained in court documents, is to blame because it began refusing to release money from Scott's escrow accounts set up for construction loans.

Other Maryland custom-home builders involved in similar cases include:

* John F. McDonough III, who operated Columbia-based McDonough Homes, was building large custom homes in the $300,000 to $400,000 range in Howard County. He was indicted in August on four counts of theft and four counts of failing to place customer deposits in escrow accounts. At issue is about $40,000 in deposits from three customers.

On Friday, he pleaded guilty in Howard Circuit Court to failing to place a $19,000 deposit from a customer in an escrow account. In a plea bargain, Mr. McDonough was placed on 18 months' probation for the other charges.

The state agreed to the plea, said Joseph Murtha, senior assistant state's attorney, because Mr. McDonough made full restitution to two victims. Mr. McDonough's attorney, M. Brooke Murdoch, said the money was raised by Mr. McDonough's relatives.

Mr. McDonough, who filed for bankruptcy late last year, also faces three suits in Howard County involving separate allegations that he never repaid a total of $225,000 in personal loans. Also, several building material suppliers have filed liens against Mr. McDonough for failure to pay for supplies.

* Jerome J. Kendall, who served 10 months in prison for a 1992 federal bank fraud conviction, was indicted in December in Delaware on six counts of felony theft, five counts of improper use of contractors' funds and one count of perjury. The charges stem from a custom home that Evan and Barbara Al-Chokhachy say they paid Mr. Kendall to build in Cecil County, but which he did not complete. Mr. Kendall was charged in Delaware because that is where the contracts for the home were signed.

In the 1980s, Mr. Kendall had a history of leaving unfinished houses, unpaid debts and angry suppliers from Baltimore County to the Eastern Shore, according to news reports then. In 1986, his case spurred Maryland legislators to enact a law requiring builders to disclose if they are in bankruptcy as well as how they handle deposit money and construction funds.

But that law was not enough to protect the Waxmans. Having failed to get their dream home after dealing with Mr. Scott, the couple has been living in a cramped two-bedroom apartment in Columbia for 18 months.

"Even though building custom homes is an enormously complicated task, anyone who can nail two four-by-fours together can go out tomorrow and say they run a custom-home business," notes Louis Siegel, president of the Siegel Organization, a custom home and property management company in the Baltimore area for about 20 years.

"Therein lies part of the problem. So many of these builders have absolutely no financial assets that the minute something goes wrong on a house, everything comes apart. Suddenly the buyers find they have no builder and no home," he said.

Homebuilders aren't required to have any training to enter the business. Requirements for training in financial management, construction techniques and building codes might prevent some the problems home builders encounter, real estate experts say.

The Home Builders Association of Maryland is considering sponsoring a certification program for custom homebuilders, said spokeswoman Cindy Wick. Such a program might help buyers determine which builders are reliable, according to industry experts.

The association does not back new state regulations, arguing that they would drive up new home prices.

Michelle Rutherford, president of Frederick-based Rutherford Construction, which has filed lien actions against Scott Homes for failing to pay for framing work it did on several Howard County homes, believes there is a simple solution to problems with custom builders.

"Before a county building inspector approves each level of the building process, they should require that the builder prove that all subcontractors have been paid for work up to that point," she said. If builders can't pass that test, it would signal customers and banks that the company may be in financial trouble, she said.

Mrs. Rutherford said Scott Homes always was behind in payments to her company while it worked on homes in Clearview Estates in Howard County.

"It seemed they were more interested in keeping up on their luxury items than paying us for the work we had done," she said.

"The Scotts always had new cars popping up, big [Chevrolet] Suburbans and Corvettes. It was unnerving to see when they owed us so much money," she said.

Industry experts say that the recent custom-builder cases illustrate a common trap in the industry: Builders eager for work underbid the true costs of a custom home.

As subcontractor bills come in, unless builders have strong financial assets, they find it difficult to make ends meet. The builders then begin dodging subcontractor payments, while ,X hunting for new customers to drum up revenues, industry experts say.

"It's the classic shell game," said Mr. Siegel of the Siegel Organization.

"But the buyer is not lily-white with innocence," Mr. Siegel said. "If someone tells you they will sell you a $100 bill for $50, you know right away that something about the $100 isn't kosher."

Mr. Pollock, the custom home specialist with O'Conor Piper & Flynn, agreed that buyers bear some responsibility.

Common sense on their part would eliminate many problems, he said.

"People will test-drive a car, pull the consumer reports and do all kinds of research before they buy a car," Mr. Pollock said. "But when it comes to a custom home, they get all wrapped up with the bottom-line price and leave common sense behind."

He advises potential buyers not to sign any documents before taking these precautions:

* Check builders' references thoroughly. Talk to other clients, the builders' bankers and their subcontractors.

* Hire a real estate agent who specializes either in new home sales or the geographical area where the home is to be built. Have the agent review the contract and price the builder is offering.

* Hire a real estate attorney to review the contract to determine if it has sufficient safeguards against fraud or failure to perform.

Mrs. Waxman says she wishes that she and her husband had done this kind of homework before handing Scott Homes a deposit. "It's easy to be misled," she said.

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