Bad drywall still an issue – for investors

Years after the first tainted Chinese drywall was discovered in Southwest Florida homes, investors are continuing to be saddled with the toxic material, this time from homes purchased at foreclosure auctions.

Surging demand from buyers has pushed lenders to rush distressed homes onto the market, many of which were built during the mid-2000s real estate boom, at a time when inexpensive Chinese-made drywall was abundant.

With investors dominating the market, and inventory levels at their lowest points in years, many traditional buyers and baby boomers with cash are turning to risky auctions for their home purchases.

But experts warn that auction bidders could pay dearly if they fail to have pre-closing inspections done on the properties.

In many cases, mitigating Chinese drywall, which consumer advocates and some scientists say causes a raft of property problems and some health issues, could cost tens of thousands of dollars.

"I'm bidding on houses and I keep finding out they have Chinese drywall," said Bob Tarlowski, an investor and contractor who buys and repairs homes in North Port. "After I turn them down, they stay up for bid. The banks don't disclose it, and there's no recourse."

The first shipment of Chinese drywall hit the Sunshine State in 2001, but very few builders in Southwest Florida used it.

But by the height of the region's real estate boom in 2005, U.S.-made drywall was hard to find, and expensive. As a result, the Chinese variety became the material of choice among many builders -- especially in ballooning markets such as Cape Coral, Lehigh Acres and North Port.

An investigation by the Herald-Tribune and the watchdog journalism organization ProPublica found that nearly 7,000 U.S. houses were built with bad drywall, yet enough material was imported to build at least 100,000 homes.

It can cause problems ranging from foul odors to the corrosion of pipes, wiring, air conditioners and appliances.

A federal judge this year approved five class-action settlements that call for Chinese drywall manufacturers and others to pay hundreds of millions of dollars to repair homes in Gulf Coast states damaged by the product.

Still, those familiar with the payouts say many affected homeowners never found out their property was built with the tainted material until it was too late.

Because it takes more than two years on average to process a foreclosure from start to finish in Florida, many homes built with bad drywall are just now being released by the banks.

"There were loads of houses with Chinese drywall problems," said Alan Tannebaum, a Sarasota real estate attorney involved in the drywall settlements. "Even with people in the class-action, there's a good segment that was never reimbursed. They stopped paying their mortgage, the bank foreclosed, and then sold it to investors as is."

Rising risk

That risk has been heightened as inventories have shrunk to decade lows of just three months' worth of supply in Sarasota and Manatee counties.

The thriving market has, in turn, sent investors to foreclosure auctions. Spending activity from investors has spiked 220 percent over the year, with non-banking entities shelling out $108.1 million during the past 12 months to snap up Sarasota and Manatee foreclosures, according to a recent review of auction records by the Herald-Tribune.

While investors often are savvy enough to spot problem drywall, many traditional homebuyers are not.

Experts say the best way to prevent drywall issues after closing is to have a home inspection before buying.

Bypassing an inspection could be costly. In extreme cases, Chinese drywall can cost upwards of $100,000 in home damage to repair, according to the U.S. Consumer Product Safety Commission.

"A lot of times the banks disclose it; a lot of times they don't," said Shannon Moore, broker and owner of Green Lion Realty, which works with investors in North Port and Port Charlotte.

"People don't know what it looks like, what it smells like, or anything. They just think they got a good deal," Moore said.

There are currently 209 homes in Southwest Florida that have been identified as having tainted drywall, county records show.

That figure has held relatively steady over the last few years, as new problems have been offset by work done to gut homes with bad drywall and install new material.

But the problem persists because of the sheer number of foreclosures that continue to cycle through the region's courts. In some cases, homes can sit empty for years before new occupants discover drywall issues.

As a result, some officials fear new foreclosures could bring more homes with bad drywall onto the market.

There were 7,406 properties with a default filing between Sarasota, Manatee and Charlotte counties in the first half of the year, according to RealtyTrac Inc.

Added to that figure, there is a backlog of 14,471 pending foreclosure cases now stuck in local courts -- all of which will likely eventually go to auction.

While there is some help available, it often pales in comparison to the expense to clean up tainted drywall.

"A lot of these homes have been sitting vacant for years," said Brian Loughrey, administrative director for the Sarasota County Property Appraiser's Office. "Somebody will buy it from the bank, see the bad drywall and then ask for the discount."

Under state law, homeowners only pay county tax assessments on their raw land value if they unknowingly purchase a home with tainted drywall.

Buyers can receive a 75 percent discount on their property tax, as well, if they knew the drywall had issues at the time of their purchase.

The majority of Southwest Florida's tainted drywall is in Charlotte County, records show. There are 112 Charlotte residences now receiving the drywall discount. In Sarasota, there are 80 homes and only 17 dwellings in Manatee, according to property records.

"Most of the ones we have left in are in a couple condo projects," Charlotte County Property Appraiser Paul Polk said. "Right now, there are just a few scattered single-family homes that are impacted because a lot of it has been resolved."