In these crazy days, it is critical to start asking the tough questions before you are left with someone else's problem after they go bankrupt!

I am usually the eternal optimist, but this industry has turned me into a realist as well.   I have personally had several major clients get into financial problems as a result of the local real estate and mortgage markets and I hope I am done eating their losses!

For me, it started with a builder that was trying to sell a home for a price over appraised value for so long that he couldn't afford to pay me what he agreed for a lot I sold him.  I acquired a lot, sold it to him with out charging any fees because he agreed to pay me everything when we eventually resold the home.  Oops, I should have recorded that lien on title; but didn't because he needed the bank to have first lien position on the lot. 

Next was when I worked for RE/MAX Mountain West.  I agreed to work for them to help grow their company.  Since they couldn't afford to pay me salary and benefits, he agreed to not charge me an office bill to offset it until he could pay me.  Sounded fair, so I went along for that ride.  That company filed bankruptcy and now the accountants sent me an invoice for $18K for office bills and copies dating back to 2004!  Common sense should dictate that if I was really that far behind, they should have terminated my license or garnished my commission checks.  Instead, they put me on payroll for a while until I quit since I realized how quickly they were sinking and I didn't want my name associated with them when they declared bankruptcy!  I still have nearly $30,000 in unpaid commissions since they bounced my commission checks and payroll checks!  I couldn't think of a bigger insult than to get a call from Randall Lee Smith asking my home address so he could send me a present (which turned out to be the invoice).  He was the one that personally made me the promises and recruited me to join him to help him grow the company.  (oh by they way, he used to my best friend too). 

Then, just last week we finally get a certificate of occupancy for a build job I was representing the builder on so I was expecting to get paid for all the work I did on it.  The builder had kept telling me that he was going to pay me on the next draw, then the next one.  When he does his final reconcilation, it turns out that he somehow lost money on this pre-sold, so there is no money left to pay me now either.  He has turned everything over to his bankruptcy attorney now because he had one of his "spec homes" loan called by the mortgage company setting up a chain reaction of financial collapse.  He had really tried to do the honorable thing and even agreed to collateralize his personal house to get the bank to buy him time.  Even though he had a great reputation as a builder, was financially solvent, and was ethical, this market took him down.  He could have just lost the company, but when he voluntarily pledge his home and personal assets, the benefit if incorporating his building business was gone!  Unfortunately, so will his house, his truck, etc.  The commission check I have worked for over the past 9 months seems trival compared to what the builder is loosing but I doubt my creditors will care to hear my sob story as they look on the first of the month for my checks.

My advice is to play "devil's advocate" and ask yourself, "What happens if your builder or developer or home owner's association goes bankrupt?"  If there is any chance that you could end up the involuntary recipient of their debts or having to pay to defend yourself,  you should get things in writing and figure out how to "assure" or "insure" your position!  Pay for extended/expanded title insurance, get lien releases, get current credit references, get agreements in writing, and most importantly, get yourself covered BEFORE you get exposed!

Now more than ever, do background checks before you buy and have a contingency plan in case things deteriorate!