October 24, 2006

A classic American rags to riches... to rags story. The collapse of Kara Homes

It's amazing the faith people will put in builders, simply because they have nice marketing brochures and advertisements, and plans for huge McMansions like this monstrosity to the right.

The late great housing ponzi scheme will have so many Kara Homes, little homebuilders who shot straight to the moon when the bubble money was falling from the sky. But one thing the new guys didn't see is that all booms end in busts, and they kept building and building and building, assuming the bubble was just normal business.

And then the roof caved in.

You can still see their spashy website here, with no mention of them going belly up. And heck you can still buy one of their homes (ha ha ha ha) and get $100,000 off. The only question is - is there anyone from Kara still at the model home to take your money?

Caught in housing undertow - Kara Homes got in over its head during boom times

It was a time when Kara and other homebuilders could hardly keep up with demand, selling homes long before a shovel hit the ground. That same year, Kara Homes was recognized by Builder magazine as the fastest-growing homebuilder in the country, and Karagjozi was predicting his company, which had barely $1 million in revenue in 1999, would hit $1 billion by 2006.

Then the bottom fell out.

After several years of meteoric growth, the market for new homes first slowed, then sputtered. House after house went unsold long after it was finished.

Suddenly, contractors working for Kara saw their payments go from weekly to bi-weekly, until they had to go to Kara's offices in East Brunswick to get paid. Work at 21 developments across the state stalled, then stopped altogether. The company, which once employed hundreds, had shrunk to a skeleton staff.

And the "golden punch list" was no longer so golden, contractors said.

"It was get them up, throw them up," one contractor said. "I don't care if the punch list is 100" things wrong.

By late August, even the Porta Johns started disappearing from construction sites -- a sure sign, the contractor said, the company was about to hit the wall.

And so it did.

Instead of reaching the $1 billion sales mark this year, as Kara's founder predicted, one of the state's largest privately held homebuilders filed for Chapter 11 bankruptcy protection this month, becoming the biggest casualty so far of the dramatic change of fortune in the state's housing market.


tabasco jenkins said...

Great business plan.
Let's build thousands of mini castles!
The demand will never stop!
Might as well water down vodka and sell it for $400 a bottle and see how well that goes over.

Anonymous said...

Holy crap! I thought the house you've pictured with this thread was some cartoonists piss-take of a McMansion.

I stand corrected - it is a luxury home offered in all seriousness under the moniker 'Darien'.

More like Damien, as this bad-boy is diabolically ugly. Note to budding RE tycoons - if you can see the garage doors on the front of the house it ain't luxury. And lots & lots of little gables aren't charming - they're lame. Thankfully Frank Lloyd Wright isn't alive to see the pathetic state of modern Americana...

Cheers, Haggis

Mike said...

I was visiting my folks in NJ recently and up the street, there is a Kara neighborhood. Or should I say, "Was"

Mike said...

Anyway, as I was saying, they had basically strip-mined some beautiful woods to hold 20 or so of these Ugliths. Only one had been completed by September, when I returned to Cali.

I guess the only thing 'developing' the neighborhood now will be the tried and true process of forest succesion, as nature spends the next century or so repairing the scar.

real estate 101 said...

Bad builders collapse in good markets. Bad builders collapse even faster in bad markets. Kara was underfunded and poorly run, no matter what the guys mother says.

The mega-builder homes I've seen locally are crap. Crap construction, crap interior/inferior materials. Contractor grade to the max.

Anonymous said...

Builder's bankruptcy raises questions in O.B.
Staff Writer

OLD BRIDGE - Kara Homes, the developer of two township communities, has left creditors and clients in a quandary as to whether the builder will meet its contractual obligations.

The East Brunswick-based builder with projects all over New Jersey but most notably in Monmouth and Ocean counties, filed for bankruptcy on Oct. 5.

The move came in the midst of a housing slump that left the builder scrambling to find buyers for its developments all over the state.

Locally, after years of difficulties with the two Old Bridge projects, the question being asked by observers, customers, residents and town officials alike is: Are Kara's difficulties isolated and the result of mismanagement and bad luck, or the beginning of a trend that will be repeated as the housing market bottoms out.

According to Old Bridge Mayor Jim Phillips, Kara's problems at least in his township have little to do with a sluggish housing market. The mayor said he could not say what was the basis of Kara's difficulties, but he did say that despite slumps in the housing market, other large developers like K. Hovnanian continue to provide quality products in a timely fashion.

Phillips said towns like his are equipped to deal with the situation largely because the projects are secured by performance bonds, a standard protection device towns use when dealing with developers. The bonds help to ensure that roads, curbs and other infrastructure amenities are built even in the event of a situation such as that now faced by Kara.

"What concerns us most in all this are the individual homeowners, many of whom have their entire life savings tied up in deposits on the units," Phillips said.

Will those home buyers get their money back?

The law states that if a home buyer's deposit is in an escrow account, the buyer is entitled to get his money back, but if the homeowner has already released the money from escrow to enable the builder to construct the home, the situation could become tricky. A possible solution might include allowing the buyer to purchase the property at a discount and have another builder complete the house.

Kara has about 100 homes outstanding of the original 200 it proposed for Horizons at Birch Hill on Route 9 some two-and-a-half years ago, according to Alex Tucciarone, construction official in Old Bridge.

At Bridgepointe, an Old Bridge development Kara took over from another developer three years ago, Kara has completed construction of the units and amenities like the clubhouse and the pool, Tucciarone said. He did not comment about whether sidewalks and landscaping had been completed at Bridgepointe, whose homeowners association has been working with Kara to have several issues resolved over the past year.

Tucciarone believes Kara's difficulties are rooted in a downturn in the housing market, a market he describes as "super-saturated" with upscale homes.

"I think we overbuilt the market," Tucciarone said. "Once you out-build the market, there's no one left to buy the homes. It's not just Kara, I think we overbuilt the state."

Tucciarone, who says Old Bridge is a wonderful place to live and that his statement is proved by how many people move to the town each year, thinks that Kara and other developers need to begin scaling down and building more lower-priced "starter" homes for first-time buyers and working-class pocket-books.

According to Phillips, Kara's next move will be to present a plan of how to reorganize, provided it wins court approval to continue doing business. If it doesn't get that approval, it could be forced to sell off its assets to pay off creditors.

Kara Homes was founded in 1999 by its president, Zudi Karagiozi, whose goal was to build more than 20 luxury developments, many designed exclusively for residents 55 years of age or older, throughout New Jersey.

Calls seeking comment from Kara Homes were not returned.

Anonymous said...

Tale of KARA HOMES and SOLOMON DWEK`s Real Estate mess in NEW JERSEY Shoes !!!!

read: The DWEK`s ongoing Federal case

Stuck in So Pa said...

It’s somewhat of a shame actually. If you read the entire article, it looks like he started with good intentions and a higher-than-average quality product. Too much enthusiasm and start up initiative and not enough hard learned experience. I'll bet he's learning now.
I wonder what the "Big Boy's" excuses will be!

Anonymous said...

How about the people that buy now is their title going to be clear. Contractors get real nasty when they don't getpaid.


Anonymous said...

This is beautiful! It just shows you how badly real wealth gets misallocated when the "cost" of money is made too low.

Anonymous said...

Did you know that this guy, Zuhdi Karagjozi, is Albanian? I am sure he allready has ''back up plans''.

Anonymous said...

yeah Z man how about all of those millions you have put away I guess your kids will be going to college unlike the disappointments we have had to tell our kids because we haven't been paid for 3 weeks. Which I know you knew and had no guts to tell anyone. You are truly a salesmen so how is it at the very bottom of the food chain. Where will robbie & hektor be when your sorry a** is in jail... Hope a nice man has his way with you.... you might have to hold JK's hand !!! Good work.... there is only one word for you DIRT BAG

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