I had a weird moment today where two things I’ve been working on — a story about short sales, and the unfinished construction stuff we were looking at last week — collided.

Remember that half-built Leucadia subdivision called Nantucket I wrote about in 2008?

Somebody bought a home there last month at a foreclosure auction for $810,000, and apparently didn’t know that the city of Encinitas has not granted the property a certificate of occupancy, meaning no one can live there. Homes sold at trustee’s sale — usually auctioned off on the courthouse steps — are sold as-is without any of the disclosures you would get if you went to buy a house from a normal seller.

It’s a big risk. This case yields a good look at why you should do everything you can to research the property you’re planning to buy.

This house has provided us a good case study for a lot of the trouble in the market — and the lessons keep coming. The development provided a kind of snapshot of market trouble in some upper-end areas and of the damage sustained by one of the region’s most prominent homebuilders.

Now it shows the pitfalls for the second wave — the buyers or investors who snap up what looks like a good bargain but may carry some lingering issues.

The Nantucket subdivision is in coastal Encinitas. When I went to visit in 2008, eight brand new, $2 million, luxury, 4,000-plus-square-foot homes were sitting next door to what was supposed to be phase two of the Barratt American project. Instead, there were half-finished, papered-up houses, weeds and some empty foundation slabs, surrounded by a chain-link fence.

There was a short sale in the subdivision, a house listed for $1.2 million even though the owners had a $1.5 million mortgage. A group of investors had purchased the house but couldn’t afford to pay the mortgage when Barratt stopped leasing it from them to use as the development’s model house.

But they couldn’t just simply sell it, because it didn’t have a certificate of occupancy, remember?

Here’s a bit of the back story:

When Barratt submitted plans to build the luxury development, the company signed an agreement with the city of Encinitas to build two price-restricted affordable homes, for sale or rent to a household earning 50 percent or less of the area median income. For a family of five, that’s $44,600.

To make sure they followed through on that deal, the city withheld one certificate of occupancy from the development, meaning Barratt couldn’t sell that one house until it built the affordable unit.

The city told me in December 2008 it was working with the parties to resolve the situation.

Realtor John Kline spent 16 months trying to sell this house. He fought the city over this issue for months. Ultimately, the owners gave up and let the house fall all the way into foreclosure.

The bank repossessed the house, and it went to trustee’s sale. Kline thought he’d heard the end of it.

On Feb. 4, Little Point LLC purchased the house for $810,000, according to public records — paying less than half what the investors had initially hoped to sell the house for.

About a month ago, Kline got a phone call from someone who said he was the new owner. The man on the phone said he understood Kline knew some things about the Nantucket house.

He told Kline he’d paid $807,000 cash for the house at the auction, but had learned later that the house doesn’t have the certificate of occupancy.

He asked Kline what his chances were of persuading the city to grant the certificate.

“I told him, ‘Slim to none,’” Kline said. “He said, ‘You’re making me sick. I’m so sick to my stomach. I feel like I’m going to throw up.’”

Kline didn’t catch the owner’s name. I left a message for the person listed in state business records for the Little Point group, but didn’t hear back this afternoon.

“I guess it’s buyer beware when you buy a foreclosure,” Kline said. “Even the sophisticated ones — this guy had $800,000 cash! He just put $800,000 into a dark hole, thinking he got a smoking deal.”


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