By Renae Merle
Washington Post Staff Writer
Wednesday, June 25, 2008

Caruso Homes filed for bankruptcy protection Monday after a cost-cutting campaign failed to sustain the local builder through the housing downturn.

Caruso, which is based in Crofton and builds homes throughout Maryland and Virginia, said in its Chapter 11 filing in Baltimore that it has more than $100 million in debt.

"The housing market is experiencing a challenging economic cycle, which requires proactive financial management," Jeffrey V. Caruso, the firm's sole owner, said in a statement. "I am proud of how our management team has acted quickly to address the current volatile real estate market."

Caruso joins many other home builders stumbling through the downturn. New home sales in April were off 42 percent nationally compared with a year earlier, and the May report, due out today, is not expected to show improvement.

"It is not surprising that we're seeing more of the smaller and mid-size builders end up in bankruptcy," said Mike Larson, a housing analyst at Weiss Research in Jupiter, Fla. "They do not have the financial resources, the borrowing capability to ride out these extensive downturns."

The problems facing Caruso are endemic to the industry, said Kenneth Wenhold, a director of the mid-Atlantic region for Metrostudy, a housing research firm based in Houston.

"They are a very good builder. They offer excellent products in good locations and decided to expand their product and their geography," Wenhold said. But, he said, "they expanded their geography at the wrong time, just as the market started to slow down. They could not sustain the sales velocity to keep operations going."

Over the past year, Caruso scrambled to avoid bankruptcy proceedings, lowering its prices and scaling back production. During the past five months, Caruso laid off nearly three-fourths of its workforce, said Christopher Block, Caruso's vice president of operations. But that was not enough to offset the loss of more than half of its business since 2006, when it settled on about 300 homes.

"The market conditions are just not rebounding fast enough, and we're burdened with debt," Block said.

Among the firm's largest creditors are construction, landscaping and plumbing contractors. The biggest debts are to 84 Lumber, which is owed $451,261, and to L&L Carpet Discount, which is owed $274,007.

Caruso said it would continue work on its projects, including homes in Prince George's and Charles counties, as well as the Annapolis area. They include seven homes under construction and 10 finished properties that the company plans to bring to settlement within months. It has completed another 46 homes that are not under contract.

The company said it expected to emerge from the bankruptcy proceedings in 90 to 120 days and is attempting to negotiate terms with its lenders that would allow it to continue to sign contracts with new buyers for homes, Block said. "Our intention is to continue as normal," he said.

In 22 years, Caruso has built more than 2,000 homes.