The Real Deal New York

Yaron Hershco’s Lemons by the Sea

United Homes developer in court again for alleged 'one-stop' scheme in Far Rockaway

January 01, 2011
By Sarah Ryley

Yaron Hershco of United Homes
Yaron Hershco of United Homes
Ruthleona Clement — a black pharmaceutical auditor with a soft-spoken, professional demeanor — sat awkwardly across the table from four white lawyers wearing expensive suits and glimmering watches in a Brooklyn U.S. District courtroom last November.

Unable to afford an attorney, Clement, 31, is representing herself in a lawsuit against all of their clients — chiefly United Homes, most known as a pioneering luxury developer in Downtown Brooklyn. The suit alleges that United Homes’ owner, Yaron “Ron” Hershco, along with her lenders, appraisers and attorney, operated a “one-stop” shop that Clement claims preyed on her ethnicity and inexperience to defraud her into buying an overpriced, lemon home in Far Rockaway, Queens.

United Homes has been one of the most prolific home builders and renovators in New York City over the last two decades, although with dozens of subsidiaries, an exact count of its transactions is nearly impossible. Hershco, an Israeli immigrant, started his real estate business in the 1990s flipping homes he renovated in the outer boroughs and made millions, which he used to build hundreds of new outer-borough homes aimed at middle-income buyers, like the one Clement bought. Then he moved up to erecting luxury towers in places like Downtown Brooklyn, Long Island City and Long Beach. (Click here or scroll down to the bottom of the page for a closer look at Hershco’s projects.)

While his Far Rockaway development has not, until now, received much scrutiny, this is not the first time Hershco has come under fire.

Clement’s legal claims, filed in May, are almost identical to — and in some cases completely lifted from — six still-pending lawsuits filed between 2004 and 2005 against Hershco and a group of attorneys, mortgagers and appraisers alleging that they worked in collusion to flip shoddily renovated homes to inexperienced minority homebuyers at an average markup of $160,000.

At the courthouse in November after her hearing, Clement recalled how excited she was in 2005 when she slipped the keys for her brand-new seaside home into her mother’s birthday card. She was the first in her family to own a home, and it would rescue the two from the rough South Bronx neighborhood where they had lived for decades.

But their new dream neighborhood, wistfully named “Lewmay by the Sea,” quickly devolved into a nightmare for Clement and many of her neighbors.

Field of foreclosures

Seventy-five percent of the 135 two- and three-family townhouses that United Homes’ subsidiaries sold in the Far Rockaway neighborhood between 2003 and 2007 have already been auctioned or have a foreclosure filing against them, according to an analysis by The Real Deal using data provided by PropertyShark.

Hershco declined to comment for this article, only saying on the record that he didn’t know there were so many foreclosures at Lewmay. Hershco’s defense attorney, Robert P. Johnson, who is representing him in both the Clement case and the earlier flipping cases, declined to respond to specific allegations, but said all of them are without merit. “I think at the end of the day we’ll prevail,” he said.

Meanwhile, Clement said that “most of the original homeowners are no longer there.

“Early on, I met with the original homeowners several times. We tried to establish an association to deal with certain group issues” like beautifying the front gardens and backyard, she continued. “But as the months progressed, we started noticing that there were more serious issues to deal with, like the structural integrity of the homes, mortgage documents and real estate documents, and issues that didn’t make sense.”

Clement, who paid $614,000 for her sand-colored three-family home, said she’s making what payments she can into an escrow account while the lawsuit is pending.

But at least 16 similarly priced homes on her short street have already been auctioned, and were resold for between $225,000 and $325,000.

As the original homeowners disappeared or were unable to rent their apartments, Lewmay by the Sea became filled with tenants who overwhelmingly told The Real Deal they are paying their rent with the help of Section 8 housing subsidy vouchers.

Sand castles

Although the Lewmay by the Sea homes are relatively new, many are already falling apart. Every block has boarded-up windows, padlocks on battered doorways, and dented façades revealing Styrofoam underneath.

Ellery Queen — struggling to keep the $479,000, two-family home he bought in Lewmay with his newlywed wife Madea in 2005 — pointed under his crawlspace to a broomstick that he said a United Homes repairman used to prop up his sagging kitchen floor five years ago after he first moved in.

Across from Clement’s home on Lewmay Road is a block of townhouses with the vinyl siding almost completely blown off, revealing the bright yellow Georgia Pacific wrapping beneath.

Shaquanna Williams, a tenant under the Section 8 program living in one of the few dozen townhouses not in foreclosure, and several other residents, told The Real Deal that some walls lack insulation, making it impossible to sleep in certain bedrooms during the winter.

Other residents of Hershco’s projects have complained about lack of insulation, like Miles and Lisa McDale of Brooklyn, plaintiffs in one of the flipping cases, who claim they were told they would have to purchase insulation themselves if they wanted it installed because it was “too costly.”

And tenants at 133 Water Street, a silvery luxury rental that Hershco built in 2007 next to the Manhattan Bridge in Dumbo, also complained on their blog about lack of insulation. “The baby’s room was freezing, so we got a carpet and just had the heat on almost all of the time,” former tenant Marisa Marmella told The Real Deal.

Leaking also seems to be a problem. Instantly upon moving in, Clement said in her lawsuit that she had to pour money into fixing roofs and skylights that leaked after every rain, and to insulate the pipes so they wouldn’t burst in the winter.

Other Lewmay tenants complained about similar leaking, and all six of the flipping plaintiffs complained of leaking or flooding. In 2008, a buyer at the luxury Toy Factory loft conversion in Downtown Brooklyn, Philip Henn, sued a United Homes subsidiary for flooding so bad that he said it made his floors buckle.

Drowning underwater
For all the defects Clement and the Queens buyers complain about, they still want to hang on to their homes.

Chief among Clement’s allegations is that she was pushed into signing two mortgages that she could never realistically repay, given that her $4,824 monthly payments on the home exceeded her $3,000 monthly income at the time.

She claims First United originated the two mortgages under a “no income, no asset” program, meaning that her income was not stated anywhere on the loan application, and was not even considered when underwriting the loans.

“This was a very common practice and it is egregious, though not illegal,” said Jennifer Murphy, director of lender servicer relations at the Center for New York City Neighborhoods, which provides foreclosure counseling. Clement claims First United’s mortgage broker assured her that she would be able to make the monthly payments by getting $1,800 in rent on each of the other two apartments in her townhouse and that, given the market’s favorably low interest rates, she’d have no problem refinancing in five years.

Instead, Clement, who is seeking monetary damages from the parties she is suing, said she’s only been able to get one tenant to pay $1,300.

First United has not responded to the lawsuit.

Of course, many argue that homeowners are also accountable for their purchases.

“Anybody who signs a document knowing that they’re going to owe more money than they can possibly pay, there is some element of personal responsibility,” said Rick Sharga, senior vice president of RealtyTrac, which aggregates foreclosure data.

“That said, I think the roles of the parties in these relationships had historically been, typically, that it’s the lender’s responsibility to say no. There’s some real questions as to how these loans were presented to these people,” he added.

The whole process, from seeing United Homes’ “We Make Dreams Come True” subway advertisement featuring a smiling black couple, all the way to the deed signing, took only two weeks, said Clement. That was thanks to the persistence of the broker, appraiser, mortgage broker and attorney, whom she claimed on closing day “rushed her to sign the documents, telling her it was getting late and that another party was waiting outside.”

Sara Manaugh, an attorney for South Brooklyn Legal Services representing the plaintiffs in the flipping lawsuits, explained that a lawyer plays a crucial role in a one-stop scheme by assuring that the buyer doesn’t get independent, sound legal advice that might derail the transaction.

Manaugh said in her cases, the appraisers’ and lenders’ cooperation was also necessary to justify the huge markups on the property, and to facilitate the sale. But the secondary mortgage market, in which those “inflated” mortgages were promptly sold, was the linchpin to the whole scheme.

The secondary market was “selling mortgage-backed securities at such a clip, and they needed more loans to be able to supply the investors,” she said. “There was a lot of demand for these kind of securities, so they basically funded originating lenders to lend money to people who couldn’t afford to repay their loans, and you know that’s kind of how the whole process got out of hand.”

Fred and Orlean Ogle, who bought a two-family house in the Lewmay development for $375,000, also signed two mortgages through First United that had monthly payments exceeding their income.

According to documents they provided to The Real Deal, their monthly payments on the mortgages totaled $3,100 per month, despite their “good-faith estimate” that pegged the payments at $2,805 per month. Their combined income at the time of purchase was $2,800 per month.

Fred Ogle, 58, said the rent at their former home, an apartment on Gates Avenue in Bed-Stuy, was $650 per month.

He said they were also told they could make up the difference by renting their upstairs unit, but they couldn’t find a tenant on the open market to pay what they needed, and they said their Section 8 tenant threatened Orlean. So they turned the bottom floor into a day care that she now runs, and they live on the top floor.

Ogle said she didn’t trust the attorney United Homes provided for them, who was also named in three of the flipping lawsuits.

“There were certain things he was supposed to be defending us on that he wasn’t, like getting us a lower interest rate,” she said. “But we didn’t know he was working for them.”

Ogle admitted, “Both of us were ignorant of buying a house, but we wanted to get the house so bad.”

Like the Ogles, Clement admitted that she ignored her reservations because she was so excited about getting a new house in time for her mother’s birthday.

“At this point in my career, I probably wouldn’t have made the same mistake, but I was young and still taking classes then,” Clement said.

Although it’s admittedly outside of her purview taking on a complicated legal case, Clement said she will continue to fight, but hopes an attorney will offer to represent her pro bono.

The South Brooklyn Legal Services team denied her request to join the group in the six flipping lawsuits because of differences in the allegations, such as the location and time frame, and the fact that Clement’s house was new construction. The other six plaintiffs’ homes were renovations, said Manaugh.

Hershco’s housing: A look at how the controversial developer created his real estate fortune

1. Flips
Hershco earned his first windfall in real estate by flipping hundreds of homes he renovated in low-income, outer-borough neighborhoods between the mid-1990s and 2003. Attorneys suing on behalf of six buyers estimated that he sold them at an average of $160,000 more than he paid. Their suit alleges that his company, United Homes, operated a predatory one-stop scheme that used deceptive selling tactics to pressure inexperienced minority first-time homebuyers into purchasing overpriced, lemon renovations. United Homes, they allege, provided buyers with lawyers who were actually working in the interest of the one-stop shop; appraisers who knowingly overappraised; and lenders who approved the inflated mortgages at terms that could never be realistically repaid. Hershco’s attorney, Robert P. Johnson, declined to comment on the cases, besides asserting that they are “without merit.”

2. Lewmay by the Sea
Hershco used his profits to build hundreds of homes aimed at middle-income buyers each year, starting in 2002, in hardscrabble sections of Queens, Brooklyn and the Bronx. One of his higher-profile projects was Lewmay by the Sea, a beachside collection of two- and three-bedroom townhouses in Far Rockaway. An analysis by The Real Deal found that of the 135 new homes he sold at Lewmay by the Sea between 2003 and 2007, at least 75 percent have already either been auctioned or have a foreclosure filing against them, and the neighborhood is in shambles. The siding has almost completely blown off one row of homes, built in 2006, and foreclosures have left multiple vacancies on every block. A lawsuit self-filed by one buyer, Ruthleona Clement, details a purchasing process similar to the one-stop scheme laid out in the six earlier lawsuits. Johnson said Clement’s claims are “totally without merit in law and fact, and we intend to defend this case, and I think at the end of the day we’ll prevail.”

3. Locust Point
Hershco built three McMansions on land that was only zoned for two in the Bronx’s tidy Locust Point neighborhood. Even though the city approved the plans in 2005, it ultimately ordered him to tear down one house and fined him $150,000 for illegally chopping down trees. Another of the homes then remained unfinished for four years, drawing the ire of local politicians. Hershco reportedly complained in a letter that the teardown cost him $500,000 to $600,000 in profits. Last winter, the unfinished home was sold to an investor for $150,000.

4. Toy Factory Lofts
This 56-unit converted toy factory was the first luxury residential project completed in Downtown Brooklyn in 2004, and sold for an average of $575 per square foot. But one angry buyer, Philip Henn, went public with grievances over flooding in his apartment, which he learned was also on a lot line once construction started at the Avalon Fort Greene. His wall-to-wall windows were eventually bricked up.

5. The Meridian
Hershco broke ground on this 36-unit beachfront condominium in 2005, reportedly making it the first building to market apartments for more than $1 million in a newly reinvigorated Long Beach.

6. Oro
When Hershco bought the land for Oro condo with a group of investors in 2005, they were considered trailblazers on a gritty section of Flatbush Avenue. While Oro paved the way for more luxury development sales in the area, it was impacted by the recession. Majority equity investor Greenfield Partners bought out Hershco in 2008. Greenfield said Hershco has not been affiliated with the project in any way since July 2008. In November, PropertyShark listed Oro as the city’s seventh-best-selling building in 2010, with 63 units closed.

Failed plan: The empty lot across the street from Oro had originally been envisioned as its “twin,” with two Hilton-brand hotels and apartments. But Hershco’s plan never materialized because he couldn’t secure construction financing. His bodega had a sign advertising a planned organic market for over a year, but that also never materialized because the bodega owner is on a long-term lease.

7. The Echelon
In 2006, Hershco began building this 54-unit luxury condominium in Long Island City, the first ground-up construction since the formerly industrial neighborhood’s rezoning. He sold roughly 75 percent of the units. The remaining quarter are being rented.

8. 133 Water Street
In 2007, Hershco built this silvery, 52-unit rental tower in Dumbo bordering the Manhattan Bridge. His Water Street Realty Group filed for a technical bankruptcy in February 2009, and he continues to manage the property. Worried tenants started a blog where they complained about the management company’s negligence in responding to high carbon monoxide levels and walls that lacked insulation.

9. Prospect Pl. and St. Marks Ave.
Hershco originally planned to build 25 three-family homes in Brooklyn, but construction stalled and he sold the project for $5.7 million in September.

Donations

While many of Hershco’s projects have been controversial, he has also made a number of sizable charitable donations. Here are some of the biggest:

1. 2590 Atlantic Avenue

Hershco donated an ornate, 19th-century bank building in Brooklyn to the Rush Philanthropic Arts Foundation in 2007, and provided architecture and renovation services.

2. PS 43 Annex

Dismayed by the sight of trailers in the school parking lot right in the middle of his Lewmay by the Sea project, Hershco built an annex for PS 43 to accommodate more students.

3. 3700 Oceanside Road

Hershco donated a building to be used by the Chabad of Oceanside as a Jewish Community Center in Brooklyn.

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