With its inventory of unsold houses and apartments multiplying at a staggering rate, U.S. Home Corp. posted a $44 million loss at the end of last year and had slipped from being the nation's largest builder of single-family homes to the fourth-largest.
About a year ago, top managers had decided that it was time to bite the bullet. They pulled out of several major markets, unloaded many of the vacant dwellings at bargain prices and slashed the staff by about 20 percent.
By the second quarter of this year, the company had managed to staunch the losses and earn two cents a share -- its first profit since 1983.
Cutting the inventory and ending the red ink, however, did not eliminate another problem for U.S. Home: Between 1981 and 1984, about 300 civil lawsuits were filed against the company in Texas, Colorado, Louisiana and other states. Some of the suits included allegations that U.S. Home used poor materials and workmanship in its houses and condos, failed to honor warranties or engaged in deceptive sales practices. Other suits were filed by local governments and taxing authorities for collection of taxes.
Representatives of U.S. Home responded to a reporter's questions about the suits by saying that the company has "some of the finest quality workmanship and uses better-quality materials than most builders." They also said the company is careful to honor warranties and to accurately represent the properties it sells. One spokesman said most of the tax suits resulted from mistakes in transfer of records, and that the taxes were owed by purchasers of the homes, not U.S. Home.
Company records show a total of 222 suits pending throughout the country as of June 30, with 134 filed by homeowners and homeowner associations, a U.S. Home spokesman said. Others have been settled, some have been dismissed by the court or dropped by the plaintiffs, and some have been won by U.S. Home, according to company representatives.
Isaac Heimbinder, U.S. Home's senior vice president, said the volume of lawsuits is small in relation to the large number of homes -- more than 12,000 in 1984 -- that the company builds every year. He also said that he would be "very surprised" if the number of lawsuits filed against the company was high compared with the number filed against other large builders. "I could give you horror stories about our competitors," he said.
And he said the company's financial problems have not caused it to cut corners. "We have a very heavy emphasis on customer service," Heimbinder said. The company "spends over $3 million a year . . . to satisfy warranty claims," requires employes to respond within 24 hours to homeowners with problems and make "a tremendous effort" to get to the house within seven days to make repairs, he added.
Overall, the company has an excellent record in honoring its warranties, Heimbinder said. A measure of U.S. Home's success is the fact that "over 30 percent of our new customers are referred from old customers," he said.
Because the company directs much of its sales efforts toward first-time home buyers, many of its customers "come out of apartments," Heimbinder said. "They're used to having a superintendent or somebody else take care of their home."
Court records show that the majority of the lawsuits -- more than 250 -- were filed against the company in Houston between 1981 and 1984. The suits were brought by individual buyers, homeowner associations, subcontractors and suppliers, as well as by local governments suing to collect unpaid taxes. Another 80 complaints went to the American Arbitration Association for settlement outside the courts in 1984, according to the association's records.
"We've had lapses," Heimbinder said. He said many of the problems in Houston were the result of a labor shortage in the city's "tremendous growth market" a few years ago, poor subcontractors and unsophisticated home buyers.
U.S. Home's financial losses followed several boom years and finally "came home to roost" last year, said Larry Horan, a housing analyst for the brokerage firm of Smith Barney Harris Upham Co. Most of its troubles stemmed from the effects of the recession of the early 1980s and the collapse of Houston's oil-based economy. The company built 2,249 homes in the Texas city last year, more than in any other market.
Large-scale speculative building paid off during the years of rising inflation and relatively low interst rates. When inflation slowed and interest rates rose, the company found itself with thousands of houses it couldn't sell and an inventory of hundreds of acres of land, Horan said. A year ago, the company had $315 million worth of unsold houses, he added.
"When this company was in its heyday, if it built a house that cost more than they thought it would . . . they waited two months and the prices would go up. Now if they do that, they're up a creek," said Barbara Alexander, who analyzes the housing industry for Salomon Brothers. She said U.S. Home did a "remarkable job of cutting their losses" after making changes in top management last year.
Resorting to auctions to move its inventory in several cities, the company sold single-family homes and condominiums for amounts far below the original sales prices. In other cases, blocks of condominiums were sold to investors who turned them into rental units. The special sales helped cut the inventory to $180 million, Horan said.
"I think they're on the right track, but it will be a long rocky road" to corporate health, Alexander said. She and other analysts predicted that profits will continue to be small in the immediate future, but said the worst is probably over for the company.
Among the Houston lawsuits was one filed by the homeowners association of a condominium development called Candlelight Trails. The association alleged that the company changed its plans for the project after a number of units had been completed and sold. The homeowners claimed the changes diminished the value of their homes. The homeowners alleged in court papers that, when they purchased the units, they were told Candlelight Trails would be a 300-unit luxury condo development with three swimming pools and six tennis courts. The owners contended in the lawsuit that they faced "the prospect of owning units in a patchwork development" with some condominiums that are small and have few amenities, and of sharing one swimming pool and two tennis courts among residents of 378 units.
At one time, U.S. Home considered changing the size of some of the units and asked the homeowners for their reaction, said Patricia Hair, an attorney for U.S. Home. The owners were not in favor of the proposed changes and, as a result, the company never implemented them, she said. The homeowners sued after U.S Home dropped its proposal, according to Hair. The homeowners subsequently dropped their allegations.
The lawsuit filed by homeowners in Candlelight Trails also seeks damages for alleged construction defects. U.S. Home denied the allegations, Hair said. A Houston engineering firm hired by the homeowners association found "a serious, substandard quality of construction workmanship and materials," according to an inspection report subpoened by U.S. Home in the case. The report by Associated Inspection Services Inc. said "major repairs" were needed.
The report said "the scope" of substandard conditions "is so wide that correction may be impossible or impractical." Engineers looked over damage done at Candlelight Trails by Hurricane Alicia in August 1983 and found that roofs over the balconies of two buildings "were inadequately connected at the time of original construction, which was the primary cause of their lifting off at the time of the storm."
The report has "not proven to be well founded or sufficiently descriptive to permit U.S. Home Corp. to make repairs," Hair wrote in a letter to a U.S. Home official.
Inspections of the property by U.S. Home "have demonstrated that the roofs and foundations of the property are performing adequately, with the exception of one isolated area that may be in need of some underpinning," Hair wrote.
Heimbinder said the Candlelight Trail condominiums were "some of the first we built in Houston," and the company "could have done a better job. . . . I'll take care of it." He said U.S. Home's attempts to make some repairs in the condo complex have been blocked by the homeowners association.
Hair wrote that, although the board of directors of the homeowners association has "hampered" U.S. Home's efforts to work with the association, the company is "in the process of formulating a repair program" in an effort to reach a settlement of the lawsuit.
In another case, 12 owners in a Colorado condominium known as Christie Lodge went to court alleging that U.S. Home improperly converted the condo to a vacation time-share project. The conversion diminished the value of their property, the owners claimed in their lawsuit, which has since been settled.
Market conditions in Colorado led to the mid-stream change of plans for Christie Lodge, which is near the ski resorts of Vail and Beaver Creek, Heimbinder said. The project "started as a condo. It was not successful," he said. "We felt conversion to a time-share project was a reasonable way to solve the problem. . . . We had a right to do it."
Sales people "are admonished not to make promises about future construction," Heimbinder said, and the company always complies with deed restrictions that specify the nature of the project. "Market conditions do change . . . .We make it a point to leave ourselves flexible. We don't make claims we can't live by," he said.
Christie Lodge was involved in another legal dispute in Illinois, when the state's attorney in Cook County filed a consumer fraud lawsuit last March against the project, its sales manager and U.S. Home. The civil suit alleged that they violated the state's consumer laws by using deceptive prize offers to lure customers to the firm's offices.
The suit was settled out of court when the project's officials agreed to "clarify certain matters in its marketing letter and to institute a complain mechanism to review all written complaints," according to a lawyer for U.S. Home.
Heimbinder said U.S. Homes sold Christie Lodge to Resort America Corp. three months ago, after the case was settled. The marketing of time-sharing is a "type of sales that puts strong emphasis on getting people into sales rooms' and on gifts to customers, he said. "We feel more comfortable selling single-family homes."
Another group of Colorado homeowners has taken U.S. Home to court, saying the company built their development over a coal mine that had been abandoned in the 1940s. Local authorities recently designated the area where the homes are located "a geologic hazard zone," representatives of both sides told a reporter.
Allan Van Horne, attorney for the 16 homeowners who are suing, said their suit contends that "U.S. Home should have known the mine was there" when it built the houses in the mid-1970s. Homeowners are asking for "reasonable compensation" for alleged drop in the value of their homes caused when the location of the mine became general knowledge and the area was designated a hazard zone, he added.
Heimbinder said his company is not responsible for any problems the mine might have caused.
"When we built there, there was no knowledge it was over a mine . . . Why are they looking at us as culpable?" Heimbinder said. " . . . Is this one of the unfortunate things that happen in our society?"
At the time U.S. Home built the houses, it "reasonably relied upon a report of soil conditions prepared by an independent contractor which did not reveal any problems concerning, or the existence of, a mine adjacent to or beneath the plaintiffs' homes," according to Craig W. Palm, a Denver attorney representing U.S. Home. A report funded by the state of Colorado found that only five homes in the subdivision "have any possibility of being potentially damaged from trough subsidence from the mine," Palm said. Four are owned by plaintiffs in the lawsuit, he added.