Field of Schemes

Florida real estate has long been synonymous with speculation. In the 1920s, get-rich-quick dreamers bought up property and then, quickly sold it for a profit to someone who hoped to earn as much selling to the next guy. After the 1920s bust, some properties, notably a Ritz Carlton on a barrier island, stood half-finished for years, eyesores that eventually had to be torn down.

Between the 1950s and the 1980s, the infamous General Development Corporation (GDC) paved hundreds of miles of roads through mostly uninhabited land on the border of Sarasota and Charlotte counties. GDC built some homes, and sold tens of thousands of empty home-sites to out-of-state buyers, most of whom didn’t realize their property was then in the middle of nowhere. Thousands abandoned the lots in the area now known as North Port when they realized there was no there there. And General Development executives went to prison for fraud.

With the pretense of an up-and-coming development unmasked, the county eventually foreclosed on much of North Port’s paved wilderness for back-taxes. The roads, webbed with cracks and dotted with weeds, lay unused except, as local legend has it, for landing strips by an occasional drug running plane. By 1998, 85 percent of the former GDC area was still undeveloped.

The boom that got rolling around 2003 changed that. Those vacant lots became hot properties again. First-time home-buyers and investors, priced out of the more established Sarasota and Fort Myers markets, rushed in to North Port to buy their piece of paradise.

Just as in earlier booms, people who heard about properties doubling, even tripling in value, believed that the market could go nowhere but up. The cycle was about to repeat itself.

Those eschewing caution during the most recent Florida boom included plenty of solidly middle-class, ordinarily risk-averse people who signed on to have investment homes built in North Port, Florida, by Construction Compliance, Inc. (CCI), a St. Petersburg, Florida builder. Among the dozen or so CCI investors AARP interviewed: a CPA from Long Island; an engineer from Orlando; a financial planner from Seattle; a middle manager from Ohio. As real estate prices kept rising, all around the country, and interest rates for mortgages dipped to 40-year lows, they decided it was time to get in the game.

Bradenton, Florida registered nurse, Gloria Chaignet, 49, another of the CCI investors, is a single mom who was looking for a safe place to grow her kids’ small college fund.

In September 2005, Chaignet learned from American Mortgage Link, a mortgage broker, that she could build a CCI investment home in North Port for “no money down.” The builder’s realty company would sell it for her, at a 10 percent profit, before the building was even completed. CCI would pay all closing costs, and all construction loan interest for the house as it was being built— all for a $3,500 finder’s fee upfront.

AARP asked if she was aware that her money could be at risk. “Not at all,” she answered. “I had a lawyer review [the builder’s documents] and, while he saw areas of ‘caution,’ overall it seemed okay,” says Chaignet.

Chaignet says now that almost none of what she was told by those offering this “deal” was accurate. She was stunned to discover, on the day she took title to the lot, that the closing costs, on a house and lot that were to cost $214,000, totaled $26,000. That’s a whopping 775 percent beyond the $3,350 that a survey says is the average in Florida closing costs. When Chaignet asked for an explanation for the high fees, she claims, “I was threatened with the deal being cancelled right then and there. I would have walked but I had to pay $3,500 to get this agreement.”

So she signed. She had heard good things about Coast Bank, the local institution that was financing it. The mortgage broker, AML, had told Chaignet that CCI, the builder, would pay those sky-high closing and all other costs. North Port was sprouting new homes faster than a lawn sprouts dandelions. It still seemed to her to be a solid investment.

But 14 months later, in November 2006, the booming Florida real estate market had gone bust again. CCI closed down operations, abandoning almost 500 customers. Some properties were in various stages of construction. Some, like Gloria Chaignet’s, were still just vacant lots more than a year after closing.

Worse, Coast Bank, which financed most of the CCI deals, claimed she owed more than $84,000. “We signed an agreement stating that [CCI] would pay all closing costs,” says Chaignet. “In fact, [Coast] took that money out of my first draw.”

In addition to the initial $26,000 in closing costs, the bank claimed she owed $42,500 for the lot, and about $15,500 more, including funds that the bank had released to CCI from her loan proceeds — without her knowledge or consent, according to Chaignet.

The bank demanded mortgage interest payments of about $600 per month — payments she, again, was originally told CCI would pay.

“I’ve been paying what I can afford, which isn’t very much,” says Chaignet. “And they’re still threatening me with foreclosure.” The lot’s value (if it sold at all in a market that’s all but evaporated), is, at best, about 25 percent of what Coast claims she owes. Even if she allowed the bank to foreclose, it wouldn’t make a dent in that $84,000.


How could this happen? Christopher Peterson, associate law professor at the University of Florida, Levin College of Law, notes that, “Real estate scams have just been chronic in Florida.” Meanwhile, on a nationwide level, changing the terms of a loan, without informing the consumer prior to closing, has “almost become part of the real estate closing ritual,” says Peterson.

Mix together a shaky Florida real estate deal, a cooling market, and a slippery lending scheme, and the effect on the consumer’s finances can be the equivalent of a Molotov cocktail.

“It’s a testament to the change that needs to take place in the way that the courts and the legal system think about contracts that involve residential real estate closings,” says Peterson. “And it’s also a testament to the fact that the public needs to educate itself about how truly dangerous residential real estate closings can be for them financially…Their life savings, their fortunes, their dreams, can all slip through their fingers if they’re not extremely careful.”

Alan Tannenbaum, a real estate attorney in Sarasota, Florida, who represents about 250 clients who allege they’ve been ripped off by CCI and about a dozen other builders, blames the banks that financed the projects as much as the contractors.

“You had small builders, who probably were qualified to build 12 to 15 homes a year, all of a sudden getting 50 contracts, 75 contracts, and in the case of CCI, 500 contracts,” Tannenbaum says.

Although a bank’s underwriters ordinarily assess the wherewithal of the general contractor, before the institution agrees to lend construction money, “I think the attitude was, we now have a home-owner to look to and, if the builder defaults, the note is payable by the eventual homeowner,” says Tannenbaum.


While CCI’s 500 abandoned projects grabbed the headlines in southwest Florida, hundreds of home buyers, who contracted with numerous other small builders throughout the area, tell similar stories. Their builders closed up shop once the boom fizzled, leaving unfinished houses and mountains of bills.

What too many prospective homeowners don’t realize is, in Florida and most other states, when a general contractor defaults on paying construction invoices, building suppliers and sub-contractors can place liens on the property. If the lien goes unpaid, these creditors can and often do sue the homeowner for foreclosure.

That’s what happened to customers of Avalon Homes, another small builder operating in North Port. Avalon shuttered operations in July 2006, leaving about 50 would-be homeowners with unfinished houses on which liens had been filed by unpaid sub-contractors.

Avalon Homes’ owner Joseph Pufta has been indicted on criminal charges: 20 felony counts; one for grand theft and 19 for misappropriating construction funds.

Pufta’s attorney, Henry Lee, claims his client was trying to complete the homes but was stymied when the market dropped off and “new home sales fell to zero.”

Lee suggested that Pufta had been unfairly singled out for what’s become a common practice among some Florida builders. “Builders would take funds from House A to finish House B, and then they’d sell the new house and use those funds to finish House A,” says Lee. “It was the only way they could keep their cash flow going.”

“A thin justification,” is how law professor Christopher Peterson described Lee’s rationale. “If you’re conducting business that way, as soon as there’s any shock to the system, then the house of cards is going to fall down.”

Just south of North Port, in Punta Gorda, State Representative Paige Kreegel has been hearing from constituents who have been threatened with foreclosure due to such practices by yet another company. Some are retirees who were trying to rebuild the homes they lost to Hurricane Charley. Others are out-of-staters, planning to move to Florida.

“Construction companies are vastly more stable in a place where there’s not a chronic boom and bust cycle,” says Kreegel. During a boom, Kreegel says, new builders enter the home construction business, and established ones expand. “Some of them just get in over their heads. And others enter with the intent of taking people’s money and running.”

In one respect, Chaignet, the CCI customer who faces foreclosure for a deal gone bad, is among the luckier victims. Because work never began on her property she won’t get hit with the liens from sub-contractors and suppliers that piled on financial problems for so many others. Numerous sub-contractors who worked on CCI properties claim they were never paid, although CCI withdrew money from investors’ construction accounts, supposedly to cover their invoices.


CCI, more than $2 million in debt by the end of July 2005, the first year of the no-money-down building program, was more than $6 million in debt by the time it closed in November 2006.

In bankruptcy hearing testimony, Jesse Battle, owner of CCI, admitted that he used more than $2 million that Coast Bank released to the builder to pay sub-contractors to, instead, cover other CCI operating expenses. Battle insisted however that any mistakes he made were innocent ones. Between building permit delays, the many people taking cuts off the top, and the inability of CCI to deliver on its home-building commitments, costs rapidly grew greater than returns. Add a cooling market — and everything collapsed.

In its SEC filings, Coast Bank reported $66.9 million in outstanding loans were “impaired” as a result of its dealings with CCI and its affiliated companies. The FDIC ordered Coast Bank to “cease and desist…unsafe and unsound banking practices and violations of laws and/or regulation” including “following hazardous lending practices and operating with an inadequate loan policy.” It also directed the bank to fire its president.

When asked how Coast’s underwriters could have approved almost 500 construction loans involving a shaky builder, Tramm Hudson, an adviser to the board of Coast, abruptly terminated an interview. A representative of American Mortgage Link hung up on this reporter when asked to comment. Phones for CCI and owner, Jesse Battle, have been disconnected. Battle’s lawyer never talks to reporters, according to the employee who answered his phone.

Gloria Chaignet has had no better luck getting answers. Until the bank demanded payment, she hadn’t been told how much CCI withdrew from her account. Now severely in debt, and worried about her kids’ future, she has filed a lawsuit against Coast, asking that the bank take the lot in exchange for the money it claims she owes. She’s one of more than125 Coast-CCI-AML customers who have done so.

Those whose lives have been upended by the tsunami of Florida builder defaults have almost no hope of reversing their losses in the short term. Some dig into their savings to complete building their homes on their own. Others are resigned to bankruptcy. In a situation where almost everyone loses something, the lawyers may be the sole players to come out in the black.


Originally commissioned by AARP, The Magazine.