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Section 2. Why you may be out of luck if you buy a defective house no matter what the contract says. True stories from all over the country

"The upshot of all this is the fact that regardless of the area of the country, shoddy construction goes on all the time right next to excellent construction."
Robert Irwin, Tips and Traps When Buying a Home, McGraw-Hill, 1990.


What happened to us and our house may be one of the worst individual cases on record, but defective residential construction happens all over the country.

The problem is not as widely appreciated as it should be. No author has taken it upon himself or herself to publish the dark side of home building, the obverse of Tracy Kidder's best selling book House. That book chronicles, from concept to move-in, the construction of one single-family home in Massachusetts. Everything went well because the builders were good. That is what everyone hopes for but, unfortunately, it doesn't always happen. Surprisingly, however, I may be the only author who has chronicled what happens when the builders are bad.

Although defective construction is a common and widespread problem, it is generally under reported at the national level. There is no national clearinghouse for residential construction disasters, even those that go to trial. Lawyers searching a legal data base for cases involving residential construction would not find ours, because it was not appealed. Only appellate cases are published and therefore retrievable by computer search. (If you know of a specific case you can obtain a copy of the written opinion where the trial took place.)

The information is out there, but it is widely scattered among: hundreds of local newspaper articles, thousands of individual civil lawsuits, the minutes of state legislatures and the U.S. Congress, and the file cabinets of home warranty companies.

I have only reviewed a small fraction of this material, but it is enough to discover a constant theme: if the builder won't fix a major construction problem, the homeowner is out of luck. When the builder reneges the result is aggravation and despair, and often financial hardship. There is no "lemon law" to protect buyers of defective homes. In truth, the American consumer has more protection when buying a refrigerator or television than a new home.

Some Explanations

There are several explanations for this sad situation.

  • First, houses are built by people who are unlicensed in many states, and unregulated in all states. Builders will protest that they are highly regulated, but in fact regulations that exist are so often breached with impunity that they provide no meaningful protection for the homebuyer. About licensing for contractors, William Marchiony wrote in The New House Buyer's Guide:

    It is interesting to note that some states, even though they require the licensing of General Contractors, do so only to collect additional state revenue! One would think that if they go to the trouble of setting up the licensing process, they would go the rest of the way and require examinations to test the competency and monitor the ethical conduct of their licensees.

    In truth, virtually anyone can call himself a contractor and build a house for sale; a license, when it is required, is a mere formality. There are no tests of competency, financial solvency, or even literacy. If the builder is incompetent in structural matters there is no one to stop him or make him correct mistakes once they are made.

  • Second, many local builders are undercapitalized. They build the next house with profit from the last one. Although several large firms build homes nationwide, custom-construction is usually handled by local contractors, and most of them cannot afford expensive mistakes. When confronted with a construction disaster the local builder may reason that his best course is simply to ignore the complaint (unless he is of unusual integrity). If he is sued and loses in court he can always file bankruptcy, a common practice among builders when they are legally challenged. For most builders bankruptcy is nothing more than a temporary inconvenience until they restructure and come back under a new name. Meanwhile, the home owner has lost everything and has no chance of collecting any legal judgment.

  • A third reason buyers of defective homes are often out of luck has to do with the nature of the defects. Significant construction problems are seldom functional. Mechanical, electrical, and plumbing systems invariably work in new houses or, if defective, they are apt to be fixed before the homeowner takes possession. Most construction horror stories come from people who, like us, can live in their defective dwelling.

    The major disputed problem is usually a structural or design flaw such as sloping floors, bowing walls, a leaky roof or an inadequate foundation. In this situation it is all too easy to dispute a homeowner's complaints ("optical illusion" is what we were told about obviously sloping floors), or blame some other party. It's harder for a builder to argue if something plainly doesn't work; a functional problem will usually be fixed, even if the homeowner has to do it himself. (On occasion during our ordeal someone would comment: "Well, you're living in the house so it can't be that bad," or "The plumbing's working so what are you worried about?")

    But if the floors slope or the walls bow or the basement floods or the roof leaks, the builder can dawdle or deny the problem or just blame someone else. Meanwhile the house will be unsalable because of the defects, and the homeowner will see his equity evaporate. Find a major defect that the builder won't fix, and you will find yourself out of luck.

"Cancer Wrapped in Ribbons and Lace"

The home horror stories getting told to the judge

An article under this headline in the September 6, 1987, Atlanta Journal and Constitution, listed several major residential construction disasters in the Atlanta area, including a

$700,000 house [with] hardwood floors that buckled as a result of improper drainage, sagging ceilings caused by roof leaks, unsafe wiring in the attic...

The article went on to note:

Horror stories have not become the norm but they are increasing in metropolitan Atlanta... Generally, lawsuits involve more expensive homes and cases involving more than $10,000 in repair costs.

Attorney Anthony Kirkland, who has handled construction cases in several metro counties said, "When [people] buy a $100,000 house and things are not right, they find out they have to hire experts - an architect, appraiser, builder, etc. - to testify on what is wrong." That cost scares them away from litigation, he added.

Jeff Pope, an independent Atlanta house inspector who specializes in luxury homes and properties involved in litigation, is zealous in ferreting out defects that he says can prove to be "cancer wrapped in ribbons and lace." Even in the most expensive homes, he said, builders sometimes put in low grade or defective wood where it will be covered by finishing materials.

...increasingly, brokers and their agents are encouraging homebuyers to hire private inspectors to check properties, thus relieving some of their liability...

A related story on the same date told of a metropolitan Atlanta couple whose $145,000 home was defectively built in such a way that

the weight of the house was not properly distributed on its foundation and...joists were of inferior quality or had been damaged during construction.

When their homeowners insurance coverage expired at the end of the first year in their house, they were unable to obtain liability insurance on the house and got structural insurance only through an expensive high-risk policy from a pool of insurance companies.

Last month they moved out of the house when their builder...bought the house back from them as part of a $176,000 settlement of the lawsuit in which they alleged fraud and a house "unsafe to live in." The settlement was reached the day before the case was to go to trial.

Most purchasers of a seriously defective new home are not so lucky as that Atlanta couple. From the Cleveland Plain Dealer, April 3, 1989:

When the [Homeowners] decided in 1986 to build their dream home, they never thought they would be caught in a battle with their builder. But the family said that since...contracting to build their home, they had had so many problems they couldn't enjoy the house.

Highland Heights, where the [Homeowners] live, last year revoked the builder's license...because of residents' complaints about the firm.

"We want our house fixed," [Mr. Homeowner] said. "We just want our children to be able to enjoy what we worked so hard for." [Mr. Homeowner] said he filed suit last month in Cuyahoga County Common Pleas Court as a last resort. The suit seeks the money to repair the home and punitive damages.

"They're not willing to negotiate," the builder said. "They're lying. These people are not reasonable."

Later in this Cleveland article the builder's attorney is quoted:

"People expect perfection in a home, and there is no builder in the world that can build a perfect home."

Homeowners become emotional and are bound to have small disputes with a builder, he said.

"On a big-ticket purchase like a home, there's always going to be some disputes," he said. "To build a home and have a dispute with the builder is not at all uncommon."

Anyone Can Become a Victim

"Not at all uncommon." A euphemism for "more common than you think." A nightmare with defective construction can happen to anyone, wealthy or middle class, working or retired, married or single. A retired Methodist minister and his wife bought their dream home in the mountains of North Carolina for $90,000. According to a newsletter published in 1991 by the North Carolina Homeowners Association,

When [the minister and his wife] noticed cracks and bulges in the walls and defects in the flooring, the dream home became their worst nightmare. They found that the house had no footings beneath it and was literally falling off the mountain. They were forced to sell the house for $10,000, the value of the lot alone. They sued the realty company, the original homeowner, and the builder. They lost in trial court. The North Carolina courts did not hold the builder responsible for failing to put a proper foundation under the house. The couple lost $30,000 in lawyer fees and court costs in addition to the $80,000 on the defective house. Those unfortunates who buy a defective house in North Carolina are stuck with it. It's "buyer beware" on the most important investment of your life.

The following is from a January 31, 1992 news release about CBS sportscaster and Superbowl announcer John Madden's multi-million dollar home.

Madden Sues As Home Cracks Up

John Madden, former Oakland Raiders Coach and current football commentator on television, has filed suit claiming his $4.5 million home is riddled with problems. Madden and his wife...claim their 6-year-old home in the exclusive Blackhawk, Calif. community has cracks in the foundation, masonry, doorjambs, interior walls, ceilings and kitchen counters, according to the lawsuit. The suit names 11 contractors, financial firms and others in addition to the Blackhawk Corp. and four related companies. The lawsuit seeks reimbursement of $1.5 million, plus the cost of repairing the house. Exact cost of those repairs has not been determined.

An unusual group of unhappy homeowners was profiled in a Baltimore Sun article that appeared March 2, 1992.

Nuns, contractor in legal tussle over construction

Sister ------- M. is accustomed to putting her faith in God.

But for the next several weeks, she also will be putting her faith in Henry H. Lewis Contractors, Inc.

The Owings Mills-based firm is racing to complete a $3.7 million motherhouse for Sister M. and the religious order she heads, Mission Helpers of the Sacred Heart.

The rush is on because the nuns fired their previous contractor twice and are counting on Lewis to help them meet a March 23 deadline for leaving their current home...

The nuns say construction delays and building defects by the first contractor prevented them from moving into the new building. The contractor, --- Builders Inc., says the nuns wanted perfection and interfered with the construction causing the delays.

Now, it's up to a three member arbitration panel to judge who's right.

"They're suing us. We're suing them," said Sister M. "To be quite honest, we were first-time builders and women and nuns on top of that. They must have thought we didn't know what we were doing."

"We trusted," Sister M. said. "We trusted that the [original] contractors were looking out for us, and they weren't. We've been living out of boxes for eight months now because we thought our building would be finished. We get ready to move and think we're going to move and then we don't move. It's psychological torture. Mental anguish."

...An attorney for [the nuns' original builders] said the firm "bent over backward to satisfy the sisters but to no avail."

"They're nuns," he said. I believe because of their lack of construction experience...and the nature of what they are all about, they are probably impossible to please."

The Baltimore article goes on to detail the exact nature of the construction disputes. Two things are abundantly clear from this story. The nuns' motherhouse was originally designed and/or constructed in a sloppy and unprofessional manner (pictures show this); and, the nuns are blamed for the problems.

Now we turn to a young doctor and his wife, who contracted to build an expensive new home in a Detroit suburb. After they moved in, he wrote an article about their house-building experience. The article was published in the January 20, 1992 issue of Medical Economics, under the headline: Build your own home? I've got three words of advice. Don't do it.

What prompted this doctor to such a feverish pitch of advice? He starts the article with words that seem to leave the door ajar for people who would build their own house.

We know now that building is not for us nor for most people. But if you're going to do it, take charge. It's your house and your money, so don't let the "experts" tell you what you want.

Under headings such as "The fiasco starts with the architect," "Construction delays become the norm," and "It takes four months to get 92 new windows," he details unending frustration with an unreliable architect, incompetent builders, and contracts and promises that practically everyone breaks. He finally had to dump his original builder and architect, and hire new ones.

The story is brief but the message is universal: expect lots of mistakes and much misfortune unless you hire or deal with the right people. The unhappy author doesn't state the total cost overrun on the house or their outlay for legal fees, but implies it was a bundle. This sadder but wiser doctor ends his article with advice even more pessimistic than my own:

If a gorgeous lot or a freshly cleared subdivision beckons to you to build your own home, remember my three words. "Don't do it."

In January 1992 a housewife from Maryland wrote me a long, sad letter, detailing the "terror" of a defective new house that both the builder and the homeowner warranty company refused to fix. Included with the letter was an April 17, 1989 article about their plight, from The Frederick Post.

[The couple] noticed that draperies and pictures hung crooked no matter how they turned them after they moved into their new modular house.

As the couple and their three daughters settled [in their new home] in October 1987, their list of cosmetic and structural problems grew surprisingly long...Since then, the family has been battling the builder of their home. Meanwhile, Frederick County [Maryland] officials have halted all building permits for the company, and, in addition, the state Attorney General's office is considering legal action.

...[The couple] found serious structural faults which appeared to be at the root of the cosmetic problems...Their basement lacks the proper number of columns; exterior siding was not secured properly, and one section of the house seems to be leaning toward the street, they say.

"You might say we goofed a little bit, but then again those are modular homes," [official] admitted, saying that his department made a mistake in granting an occupancy permit for the home.

The consumer protection division of the Maryland Attorney General's office has been working on the case for several months, as investigator with the Attorney General's consumer protection division said, "My that [the building company] should replace the house."

This was in April 1989. The next three years proved to be an unrelenting nightmare for the homeowners. Their trial date was postponed several times, and they suffered a change in attorneys. Their first attorney sued them for legal fees even though he had taken the case on a contingency basis. To make matters worse, the husband of the woman who wrote me, a career military officer, was transferred out of state. She was unable to join him because they could not sell their house in its defective condition; like most people, they don't have the money to own two houses.

In January 1992 she wrote me:

We had a hydraulic jack supporting the middle of our house for about 2 years. One day the jack failed and the 6 x 6 post above it fell over onto the basement floor. I wouldn't let the kids into the basement for a long time after that.

...The persecution doesn't seem to end and faceless corporate entities Greed! What is the best way to productively deal with something like this? It isn't just robbing us of our money, but our time, our dreams, our happiness, everything. It's hard to see around it when we're trapped in this cage.

Another Maryland couple was profiled in an article titled "Joys And Perils Of That Unbuilt House," Changing Times Magazine, June 1990.

Buying a not-yet-built home isn't like buying an existing one. It's harder.

[Homeowners] learned that lesson almost four years ago, when they entered into a contract to build a four-bedroom colonial in Gambrills, Md. The house took 18 months to complete, almost three times longer than average. Two years after [they] moved in, they are still trying to get the house finished to their liking. At one point, the list of items they thought their builder should fix was a full page long. Some items were minor...but many, like a persistent water-line leak, were major. Cedar siding damaged during construction was replaced with unstained boards. They had to completely resod the lawn...

And [these people] are smart buyers. She's a real estate agent; he works for a large developer. But the couple say today that they bought because of the location of the development and without investigation. The builder, they have learned, has a reputation for slighting follow-up repairs. And being in a booming market, [they] knew the builder could easily resell the house if they broke their contract. So they hung on, but not without permanently altering their view of the process. Says [Mrs. Homeowner]: "I would never buy another new home."

A doctor, a media star, a retired minister, a housewife, a real estate agent, a group of nuns -- all with the same problem. Are they all so stupid that they don't know how to buy or contract for a properly-constructed house? Of course not. They are a microcosm of all the innocent victims of defective residential construction in this country. Anyone can be become a victim. From Maine to California, from Alaska to Hawaii, everyone is at risk when building or buying a new house. Including you.

Where Are The Inspectors?

Every buyer of a defective new home asks the same question: how did my house pass inspection? Most inspectors are local government employees, hired by the city or town to assure that new construction is fit for occupancy. When the house passes inspection the homebuyer is given an official 'occupancy permit'. Yet defective houses houses not built in accordance with local building codes commonly pass inspection.

How does this happen? There are several reasons, and they vary from place to place, indeed from house to house. Proceeding from the most benign to the criminal, reasons defective houses pass inspection include the following:

  1. The defects are hidden so that no typical house inspector could expect to find them on a routine inspection. The defects only become apparent over time, after the homeowners have moved in.
  2. The inspector is overworked. Because of a large number of new houses, and an inadequate number of inspectors, each inspector only has time to check basic systems, e.g., electrical, heating, and plumbing. The inspector does the best job he can in a limited amount of time.
  3. The inspector is not competent for the task. He has no special knowledge about house construction and doesn't know what to look for, so he misses obvious defects.
  4. The inspector is lazy; he signs off on the house without actually inspecting it.
  5. The inspector moonlights for the builder when not working for the community. Depending on local laws, this `extra work' may or may not be illegal. Regardless, the inspector is not about to bite the hand that feeds him.
  6. The inspector is under pressure from his superiors to either approve a house or risk losing his job. The inspection department functions as a "rubber stamp" for the local builders.
  7. The inspector knows the house is defective, but is paid by the builder or developer to lie and issue a permit.

One would like to think that the only reason defective houses pass inspection is number 1. Unfortunately, that is not so. In fact, considering all the cases that have come to my attention, hidden defects those that cannot be uncovered on a final, thorough inspection is probably the least common reason. A far more prevalent reason, it seems, is that inspectors just don't have the expertise, or are not given enough time, to do an adequate job.

A review of the problem in North Carolina appeared in the Charlotte Observer on March 17, 1990. After detailing cases of defective construction that had passed inspection, the article noted:

In each of the examples given in this story, local inspectors approved the new houses for occupancy...[The chief building inspector for Charlotte said] his building inspectors must check about three houses an hour a house every 20 minutes, not including travel time between houses. "We feel we're doing adequate inspections," he said. "We'd prefer to have more time, obviously."

When inspectors find code violations in a house they've already approved, there's usually little they can do. A few local governments deny builders new permits until they correct code violations.

But most local governments will issue permits to a builder even if he or she has code violations on other houses. It takes an ordinance passed by the local council or commissioners to allow inspectors to withhold permits until other code problems are fixed.

It is not clear why the inspector quoted in this article feels his men can do an adequate job in only 20 minutes. In any case, according to James R. Parker, President of the North Carolina Homeowners Association, the law in his state actually requires an inspector to "make as many inspections as necessary to ensure compliance with the state building code." Mr. Parker notes that "Inspectors might feel as if they must inspect a home in a certain time frame (because of political pressure), but State law dictates that they take as much time as required to adequately perform that inspection."

A realistic appraisal of the consequences of short inspection times was provided in an Atlanta Journal and Constitution article from September 6, 1987:

County building officials don't claim to be doing an adequate job. Given the large number of inspections, [the] chief residential inspector in Cobb County said his five full-time and one part-time inspectors "are allowed about 10 minutes per call." For instance on one day late in August the inspectors averaged 27 inspections each. The Southern Building Code Congress, whose uniform codes are followed in Cobb and other metro counties, recommends a maximum workload of 12 to 14 inspections per day.

[The chief inspector] of Fulton county is trying to hire 10 inspectors that are needed to get the department to the bare minimum of performance. With inspectors averaging almost 11 inspections per day, he noted, "there is not enough time to do the best we can do."

Inadequate inspections is a nationwide problem with new construction. And the results are devastating everywhere. The following excerpts are from a 1989 story in the Ft. Lauderdale News (italics added):

[Homeowner] said that when his home was completed in June 1987, he was obligated under his contract to close on the property because the building department had issued a certificate of occupancy...The certificate was issued despite a list he compiled of 17 noticeable flaws... [Homeowner] blames [Builder] for a poor construction job and the city's building department...for issuing a certificate of occupancy without checking to see if the house was fit to live in. [The building inspector] did not return repeated calls from the Fort Lauderdale News and Sun Sentinel.

Among the problems: an uneven tile roof, a kitchen floor that had flooded, a garage that floods every time it rains, a crack along one side of the outside wall, a crooked inside wall and a ruined $5,000 black awning streaked with white paint.

An independent company hired by [Homeowner] last year inspected the property and issued a report detailing 38 flaws that would take $56,370 to repair.

Another article in the Ft. Lauderdale Sun-Sentinel, from August 9, 1989, discussed the structural problems in some houses that are sinking because they were built over a canal filled with rubbish (italics added).

No one can explain why the canal was allowed to be filled with rubbish or how a developer was able to build homes there. [Homeowner] said the problems at his home greatly increased in 1976, when an 11-acre lake about 50 yards away was dredged... Now the same developer...wants to dredge the lake again...Residents...said that if the town grants another dredging permit, their homes will be destroyed.

[Homeowner] said he spent $25,000 to repair the home. He raised the back end by a foot and poured 46 truckloads of fill into the back yard to even it out.

After discovering that the homes were built on a landfill he sued the town for issuing the building permits, but the suit was thrown out of court. It was determined that the town followed procedures in effect at the time.

Can inspectors who pass on defective construction be held legally responsible? No. Homeowners are unprotected because local governments, and their representatives, are immune from lawsuits over defective construction. Housing inspectors who let pass defective construction may be criticized or embarrassed, or on occasion even fired, but that's as far as it goes; they and the local government are legally protected by the doctrine of "sovereign immunity." Lawsuits like the one quoted above are routinely "thrown out of court."

From an article in the Richmond Times-Dispatch, February 22, 1992, reporting on defective construction in that area of Virginia.

Owners Demanding Better Inspections

...And in Chesterfield County, several homeowners with cracked foundations are baffled because, they say, the same county inspection system that didn't protect them is now protecting the builders who put up their homes. Their houses were give a certificate of occupancy, the county's seal of approval.

Builders can use that "CO" as proof that everything was done right, even in cases where independent engineers have found code violations that were missed by the county inspectors. The homeowners say they've been left holding the bag.

Are there conflicts of interest among inspectors? You have to wonder. The following excerpts are from an editorial in the Frederick Post (Maryland), May 14, 1991:

...Some county employees inspectors may have been moonlighting. That doesn't sound too bad, because a lot of county employees, trying to make ends meet, get part-time jobs. But according to one Frederick County commissioner, the inspectors who are moonlighting are working in the very industry in which they are inspecting.

Now this is kind of hard to believe. Can we assume that someone goes out to inspect a construction site, for example, says it's wonderful, and then we discover that the same person is also working on that site? It would be like the inspector is inspecting his own work. Bet it passes inspection.

...County inspectors should not also be working for the very people they are inspecting. Period.

Do some inspectors sign off on houses without actually inspecting them? Apparently so. An example of that practice came to light in a large lawsuit filed by a group of 34 California homeowners.


One might think that builders and developers are more responsive to a large condominium project, where dozens of homeowners can generate more clout than just one. That is not necessarily so. There seem to be just as many horror stories from condominium owners as from owners of single family dwellings. The following is from the Miami Herald, February 18, 1990.

Condominium owners want builder to pay for repairs

Tired of an unsettled dispute with a developer over what they claim are construction defects in their condominium near Hallandale, a group of owners took their protest to the streets.

They put up a sign on the grounds of the 88-unit condominium, telling the world about their woes.

"I want to go further," said [one unit owner]. "I think we should picket."

...other condo owners detailed numerous problems: leaks in ceilings, rotting garage doors, cracks in doorways, sloping bathtubs, peeling pain and beige facades that turned dark because they weren't treated for mildew.

"It's been a financial hardship," said [homeowner], who has been living at the condo since it opened in 1986. "We're a young couple and we bought new so we wouldn't have all these things."

Condo board president...said, "We've had to assess our people twice already because we could not live with the problems. Buildings that were a year and a half old looked like they were 50 years old."

The Miami Herald article goes on to mention how there have been "two years of negotiations" and "the attorneys are dealing with it."

The July 15, 1990 Ft. Lauderdale Sun-Sentinel published a page one article headlined

Condo industry crumbling

The door is slamming shut on the carefree lifestyle at many South Florida condos.

Mismanagement, shoddy construction and lax regulation threaten to cost condominium boards thousands of dollars and are prompting a spate of lawsuits and foreclosures.

The article goes on to document the thousands of condominium complaints filed each year in South Florida, most based on shoddy construction. Many condominium owners in that part of the country are experiencing the same aggravations and nightmarish expenses we had with our single-family home.

South Florida has been riddled with complaints about condominium construction. In the last few years hardly a month goes by without some article in a South Florida newspaper pointing out the nightmares of defective construction. The following article appeared in the Ft. Lauderdale Sun-Sentinel, May 24, 1991.

Homeowners file suit

Eighty homeowners in the [Development] community in south Dade County filed suit against [----] Homes on Thursday, charging that the company used untreated wood and non-galvinized steel in the construction of their homes during the late 1980s.

The suit, which alleges breach of contract, breach of warranty and negligence was filed in Dade Circuit Court. Ervin Gonzalez, lawyer for the plaintiffs, estimated that damages could reach as much as $25,000 per home.

He said [the company], recently ranked 16th in a survey of the nation's largest builders, offered to repair porches in a few of the affected homes but left other repairs related to rust and wood rot to the responsibility of homeowners.

Construction problems with condominiums are not confined to South Florida, of course. From the Denver Post, October 9, 1989 (reporting a problem in Aurora, Colorado):

A builder who built a cluster of condos a decade ago that still produces complaints of shoddy workmanship from unit owners is facing those angry owners in a zoning dispute over whether he should be allowed to build again before settling those grievances. Since 1979, residents of the [----- Condos] have struggled with flooded basements, peeling paint and crumbling retaining walls in the 33-unit project by [Builder].

"We've been fighting with the builder since the day we moved in," said the president of the homeowner's association. "I feel like he owes us something. He should either buy the units back from us or get them so they're impervious to water."

The Aurora, Colorado article goes on to detail the dispute with the builder. As in most disputes we've heard or read about, the builder denies responsibility. But so does the community. The article quotes the Aurora building inspector:

"I can verify that that roof is put on the way the city-approved drawing says. But the uniform building code does not cover workmanship. The builders come in and they build strictly minimum standards."

The Seville Place Fiasco

Perhaps no situation has been more frustrating for condominium owners, or received more media attention, than Seville Place in North Dade, Florida, just northwest of Miami. Seville Place has been the subject of several TV documentaries, countless newspaper and magazine articles, and at least one Congressional Hearing. What exactly happened at Seville Place?

Seville Place is a condominium project of "tropical, fruit-colored townhomes" constructed between 1986 and 1989. The homes cost between $70,000 and $90,000, and many of the mortgages were backed by the Federal Housing Authority. Seventy of the units were built by Hoffman Homes of Itasca, Illinois, and most of these were guaranteed by the Homeowners Warranty Corporation, a builder-sponsored company that issues structural insurance on new houses and condominiums. HOW issued a "10-year warranty on the units."

Shortly after the owners took possession, many defects began appearing: leaky roofs, walls disconnected to the slab floors, water pouring out of electrical outlets, etc. Several detailed inspections were made of the entire structure, including one by the Dade County Commissioners. Their finding: "The walls are not sufficiently strong to support the upper stories in a stiff wind." In other words, the units were not built to withstand south Florida hurricanes and therefore, by local building standards, were considered unsafe to inhabit! The homeowners were ordered to fix the problem or face eviction. The story has played heavily in the South Florida newspapers. The following is from a Ft. Lauderdale newspaper, May 24, 1992.


...As hurricane season approaches, residents find themselves in housing that falls well below local hurricane standards. And the county [Dade] has ordered the homes demolished.

Now, young professional couples find themselves in the middle of a legal quagmire, living in homes that are both unsafe and impossible to sell.

Instead of building on their equity, they find themselves spending their life savings trying to salvage something from a real estate nightmare.

How did this happen? Again, quoting local newspapers:

The design flaw, the result of mathematical miscalculations, left the walls unsafe in winds stronger than 80 mph...Building and zoning official Ron Szep said the county relies largely on a self-inspection system by engineers selected by a developer. But in this case, that system wasn't enough.

...The Dade Board of Rules and Appeals recently rewrote the portion of the South Florida Building Code covering special inspectors like the one hired to oversee construction of Seville Place. But Florida legislators say more needs to be done on the federal level to ensure that FHA-backed projects like Seville Place are properly inspected during construction.

"This project should never have been signed off on," said U.S. Rep Larry Smith, D-Hollywood.

Meanwhile, according to articles in the Miami Herald, the cost to properly reinforce the units was $1.7 million. Obviously the homeowners were in no position to pay this amount. What about their HOW policy, which had warranted to repair structural defects? HOW refused to make the repairs, arguing that "the defect was not covered because no actual damage had occurred."

A lawsuit was filed against HOW, and the homeowners began incurring thousands of dollars in legal fees, $200,000 by the time of settlement according to one newspaper article. The case garnered media attention because of the number of families involved, the Dade County eviction order, the apparent refusal of the insurer to make good on its policy and, not least, because several prominent politicians became involved. In 1991 Congress held a hearing on the government's responsibility insofar as the structurally-defective property was backed by FHA-guaranteed mortgages. Several Seville Place home owners testified.

Faced with intense media pressure, and direct intervention by Senators Connie Mack and Robert Graham of Florida, an out-of-court settlement was finally reached in late 1991. Although terms of the agreement were not publicly disclosed, an attorney for the Seville Place homeowners was quoted as saying "the money will be sufficient to repair all 70 townhouses."

That this experience was a nightmare for the condo owners is apparent just from their public statements. Before and after the settlement, some homeowners were quoted in news stories.

"The systems of controls failed. It was a full melt-down."

"To many of us, this was our life savings. Now we cannot legally transfer title. Some people have had to turn down job offers to move."

One of the Seville Place homeowners active in the case wrote the following letter to the Miami Herald (published over his name on December 7, 1991).

I am one of the homeowners who took a very active role in getting the message across of the enormous tragedy that was being played out with 70 innocent homeowners. I was invited to testify in Washington, D.C. before a congressional subcommittee on Banking, Housing and Urban Affairs.

Throughout this nightmare I learned a lot about politicians and what they can do to help a cause. After writing dozens of letters to county, state, and federal politicians, I soon realized the meaning of lip service. Most politicians turned the other way and ran as fast as they could.

However, there were some exceptions. The two most vocal and active were Metro Commissioner Mary Collins and U.S. Senator Connie Mack.

...Senator Mack, who made two visits to inspect the homes, was also fully dedicated to solving the Seville Place nightmare. He has introduced legislation to prevent such a tragedy from happening to other homeowners.

These two very dedicated individuals did the job that they were elected to do: help taxpayers in their times of need. Other political figures who helped us are U.S. Senator Robert Graham, U.S. Rep. Larry Smith, and State Rep. Rudy Garcia. All others, including those in the Metro Commission, did absolutely nothing to help Seville Place's innocent victims.

Quite a letter. You can sense the frustration, the rage this man and his fellow condo owners felt during their long ordeal. But consider the facts in this case. Dozens of homeowners. A major lawsuit. Intense publicity. A hearing before the U.S. Congress. Active intervention by several high ranking politicians. Only then was there a settlement.

What chance does the average condominium owner have of making builders and insurers correct structural defects, if the defects don't draw much attention of the press and politicians? I can tell you. Very little.

What About Homeowner Warranties?

Many builders offer third party warranties for new construction. The oldest of these policies is issued by the Home Owner's Warranty Corp. (HOW), of Arlington, VA. HOW was one of the defendants in the Seville Place litigation.

In the early 1970s Congress was considering regulating home builders because of numerous complaints about construction defects. In response, HOW was set up by the National Association of Home Builders in 1974 to "insure American home- buyers against defects in their new homes and also against any negative consequences form the bankruptcy of the builder who put it up" (Mayer 1978).

HOW is one of three nationwide companies offering builder-sponsored new-home warranties. The two others are Residential Warranty Corp. of Harrisburg, PA and Home Buyers Warranty of Denver, the nation's largest such company.

Builder-offered warranties supposedly insure against structural defects discovered within the new house's first 10 years. The policies can only be purchased through the builder, and the cost is passed on to the homeowner (either directly or built into the cost of the home). We had never heard of such policies when we built our house, as none of the local builders in our area seemed to offer them. When we did learn of their existence, it was long after our case had gone to court. Why, we wondered, didn't our builder offer us this policy? At first we thought such a policy would have protected us from the nightmare of litigation that ensued. Now, we're not so sure.

It turns out that HOW and similar policies often do not recognize or pay for major structural mistakes. In the last few years it has become apparent that these insurance policies are very limited, and that the companies behind them might refuse to honor what, to the homeowner, looks like a legitimate claim. As a result, there have been numerous lawsuits against the companies that issue the warranties.

The cases of the Maryland family and of Florida's Seville Place Condominiums are but two of several involving home warranty companies that have recently received publicity. A few other well-publicized cases deserve mention, from Texas, Virginia, and Washington. In 1990 a jury in San Antonio ordered Homeowners Warranty Corp. to pay a homeowner $483,000 for a home that was falling apart because of a crack in the foundation. Of this amount, $325,000 was for punitive damages, something almost unheard of in the annals of construction litigation.

In September 1991 a Virginia federal appeals court handed down a ruling ordering Home Buyers Warranty to abide by an earlier arbitrator's award of $206,605 for a McLean, VA couple whose new house was structurally defective. According to a story in the Washington Post (H. Jane Lehman, "Home Warranty Policies Coming Under Attack," November 5, 1991), "the foundation was designed for a one-story house, not the three stories actually built atop it." The couple living in the house had achieved some notoriety because of a huge hole they had dug in their front yard. The hole was necessary in order to

fix the foundation when neither the builder nor their homeowner's warranty company responded to an engineer's report that found that the front of the house was in danger of collapsing because of the inadequately built foundation.

...Ultimately [the couple] prevailed, winning a $206,605 federal appeals court judgment this month against Denver-based National Home Insurance Co., the insurer behind their Home Buyers warranty (HBW) coverage. The award covered the [couple's] hefty bill for the 1989 foundation repairs, which they paid themselves pending the outcome of their fight with HBW.

[This couple's] case is one of a growing number of lawsuits that have filed across the country against companies offering 10-year warranties against faulty home construction. The suits have accused the insurance firms of deceptive trade practices, fraud and racketeering in refusing to honor what the homeowners contend are legitimate claims.

A year ago, the American Trial Lawyers Association formed a litigation group to compare notes on the homeowner warranty cases. While plaintiffs' attorneys see a pattern of failure within the warranty industry to honor its legal obligations, officials for the companies contend that the suits are indicative of widespread misunderstanding as to what the warranties actually cover.

Perhaps the most incredible home warranty case I've come across involves a couple in Bellevue, Washington. Their $250,000 HOW-insured new home developed a crack in the garage floor shortly after they moved in. According to an article on homeowners warranties in Kiplinger's Personal Finance Magazine ("Homeowners warranties: Cracks in the coverage," April 1992), the builder patched the crack, but it reappeared. The builder patched it again. When the crack appeared once more, the builder told the couple to turn to their HOW policy for further repairs. Even though two teams of engineers pronounced the crack a major structural defect, HOW said the crack didn't qualify as a major defect under the policy. When that crack widened and others appeared, the couple sued HOW. Ultimately the city of Bellevue condemned the house and the couple had to move out. What exactly was the problem? According to the article, <

[The house] had been built on uncompacted fill dirt, and there were no footings or steel reinforcements in the poured-concrete foundation. Some of the pilings for the garage were either sitting on dirt or, as [homeowner] describes it, "just hanging in midair."

...Three days before the start of the trial in state superior court, HOW signed an agreement to pay for fixing the house and to cover all out-of-pocket expenses. HOW signed a construction contract and a HOW-approved contractor was in the process of tearing down part of the house when HOW decided it didn't like the size of the price tag and reneged on its agreement to pay. Now the couple are suing HOW in federal court with a tab for legal fees and repairs running close to $1.2 million.

The Kiplinger article goes on to discuss problems with homeowner warranties in general.

Homeowners who have taken warranty companies to court have also discovered that there's little screening of builders and few controls on construction quality: HOW had only 12 people nationwide to review more than one million homes last year. Adding to homeowners misery are what the Department of Housing and Urban Development has called the unreasonable delays and hardball tactics of the warranty companies in responding to claims.

...The bottom line, says Ernie F. Roberts, a Cornell University law professor, is that the warranties are not intended to protect consumers. They're designed to protect builders from open-ended liability.

Another review of the situation appeared in the Wall Street Journal September 19, 1991, in an article by Milo Geyelin:

"Home Buyer-Warranty Firm Cases Rise."

With buyers of new homes turning increasingly to insurers to protect them against shoddy construction, plaintiffs lawyers are raising concern about whether policyholders have been getting their money's worth.

..."The problem with a lot of these warranties is that everyone who buys a house thinks they're covered, and a lot of times they're not," said Marina Corodemus, a plaintiffs' lawyer in Perth Amboy, N.J., who has begun an information exchange network for similar complaints through the Association of Trial Lawyers of America, the national plaintiffs' lawyers group. "Homebuyers end up holding the bag at the point where the builders have bailed out," she said.

Obviously, the worst cases make the newspapers and magazines. But the 'worst case' is what all these homeowners thought they were insured against. Cases like these prompted a 1991 Congressional hearing on the subject, before the House subcommittee on housing and community development. Only a few of the victims gave testimony, and to date no definite legislation has been proposed to remedy the problem. At the hearing Juan Acosta, a deputy assistant secretary of the Housing and Urban Development Department, testified that "warranty companies [often] unreasonably delay claim payments, or claims adjusters use high-pressure tactics."

Regarding one of the victims who attended the hearing, the Washington Post wrote (November 5, 1991): <

...a Fredericksburg [VA] homeowner who observed the hearing, said he, too, has had his share of warranty problems. The roof of his new home of nearly a year has spouted six leaks, the crumbling basement floor floods regularly and the floors are uneven, he said.

[Homeowner] said he rejected HBW's $800 settlement offer because estimates he has received put the repair costs at more than $15,000. "Somebody needs to regulate [the industry] or else we have got to put a stop to it," he said.

After hearing the litany of homeowners' complaints, subcommittee Chairman Henry B. Gonzalez (D-Tex.) said, "I cannot begin to tell you how worrisome and demoralizing all this is."

One attorney experienced in home warranty litigation is Bernard DiMuro, of Alexandria, VA, chairman of a special committee on homeowners warranty litigation of the American Trial Lawyers Association. Mr. DiMuro, who won the $206,605 appeals case, is frequently quoted about home warranty cases. According to a December 29, 1991 column in the Washington Post by Jane Bryant Quinn ("Homeowners Build Case Against Warranty Firms"),

DiMuro has inspected 16 home-warranty complaints filed with the Office of Consumer Affairs in Rockville (MD). He found many homeowners settling for less or just giving up, after months of frustrating correspondence with the insurer.

Just what do these new-home warranties cover? Ms. Quinn's column offers some insight:

Even the 10-year coverage is far more limited than it sounds. You're protected only against defects in load-bearing structures that render the house "unsafe, unsanitary or otherwise unlivable." Translation: To collect, your house practically has to be falling down around you.

Obviously, the warranty companies do not see things the same way as homeowner plaintiffs and their lawyers. From Mr. Geyelin's WSJ article of September 19, 1991:

Terrence Cooke, corporate counsel for Homeowners Warranty, denied that his company or others in the industry attempt in any way to evade their responsibility to pay valid claims. As in any area of insurance, policyholders must read their policies carefully before maintaining that they have a claim, he said...

And a few paragraphs from an article by H. Jane Lehman that appeared in New York Newsday, December 14, 1991:

Terrence S. Cooke, HOW counsel, denied that his company attempts to refuse large claims on flimsy grounds or draw out the process to wear down homeowners. He said the company has paid more than $300 million in claims in 17 years.

The warranty companies acknowledge they take a narrow view of their contractual responsibilities, particularly regarding structural defects. [An attorney] for National Home Insurance, which backs another national program, Home Buyers Warranty, said structural-defects coverage is "designed as catastrophic coverage to cover the worst possibilities" as determined by a company-paid structural engineer.

"As much as HOW might like to write coverage as broadly as some have suggested to cover absolutely anything that goes wrong in a house, the cost of the policy would be thousand of dollars rather than hundreds," Cooke said.

* * *

So there it is. Despite the fact that builder-sponsored policies supposedly cover structural defects, their interpretation (by the company) is very narrow. If you can live in your house, and it is not falling down, the warranty company may not admit a claim. More to the point, structural defects that make your house unsalable may not be covered by these policies. If you buy builder-sponsored structural insurance, you need to be aware of its limitations.

The Law Is Stacked Against You

In the preface to the 1984 edition of his book How to Avoid the Ten Biggest Home-Buying Traps, A.M. Watkins wrote:

A few years ago the United States Senate subcommittee on housing held hearings in Washington, D.C., on the subject of defective housing and what could be done to protect homebuyers from bad houses. [I] was asked to testify. To any experienced observer of the housing industry it seemed as if history were repeating itself, for most of the problems aired at the hearings poor heating, wet basements, shoddy design, and so on were the very same problems that had caused trouble for homebuyers in the past and have continued to cause trouble in the years since. Such problems form a pattern, and the realization of this fact prompted this book.

In a chapter of the book titled "The Vanishing Builder," Mr. Watkins commented:

The vanishing builder usually has little or no fear of the law. The law, in fact, has by and large proved ineffectual with such builders. That means most district attorneys, other public officials or agencies, the FHA, the VA, and anybody else you might think could help. All of these people are by law concerned only with criminal violations. To nail a recalcitrant builder, they need clear evidence of fraud. This is often tough to get, or so they say. As a result, the typical district attorney may listen to your woes sympathetically but in the end give you the rush-off. He's dreadfully sorry, he will say, but it's so darned hard to proved fraud. Patting you on the back in consolation he leads you to the door, he'll say that you'll have to hire a lawyer and take the case to civil court. However, help for home buyers should come soon, since consumer advocates (like Ralph Nader) will almost certainly turn their attention to housing.

Watkins's assessment was true in the early 1980s and is true in the 1990s. And it will be true in the 21st century. Unfortunately, buyers of defective construction are as unprotected by the legal system as they have ever been. While several strong advocates for the rights of homeowners have emerged, the law remains stacked heavily against buyers of defective construction. Why so?

Before answering this question let me digress a bit. This book is mainly about building or buying a new house or condo, but the problems are pretty much the same when repairing or remodeling an existing house. In researching material for this book I repeatedly came across horror stories about people who hired remodelers, plumbers, electricians, roofers, etc., and ended up victimized, swindled, or defrauded of thousands of dollars.

In fact, complaints about home repair and remodeling consistently ranks number one among categories of consumer complaint, as compiled by the government. Year after year many more people repair or remodel their existing homes than buy a new one, and thus more people are exposed to potentially shoddy remodeling than to defective new construction. The problems have reached such endemic proportion that some states are setting up funds to reimburse ripped off homeowners. From the New York Times, March 24, 1991, in a story titled "Recourse for Shoddy Work":

At least five states Arizona, Connecticut, Hawaii, Maryland and Virginia have set up funds that reimburse a consumer who can prove he was victimized by a contractor's ineptitude or bad faith.

...Such plans are needed, several consumer protection officials said, because a homeowner who wins a court battle against a contractor often cannot collect.

Although many of the complaints about home repair and remodeling stem from outright fraud, the vast majority have the same root cause as complaints about defective new construction: bad people doing a bad job. For victims of defective home repair/remodeling and defective new-house construction, the law works or doesn't work the same way. The homeowner victim has no meaningful legal redress.

Why not?

There are two principal reasons why the law is heavily stacked against consumers of defective new construction or repair: First, business contracts are unenforceable without the expenditure of a large amount of money for lawyers and litigation. Second, in any legal action regarding dispute over a contract, either written or implied, the amount awarded or otherwise recouped by the plaintiff will almost never equal the cost of repairs plus the victim's legal expenses. Again, this is true whether you are a victim of defective construction of a new house or defective repair of an existing home.

The July 15, 1990 Ft. Lauderdale Sun-Sentinel article on condominiums, excerpted earlier, points out that:

Even if a condo board sues a developer and wins, it usually cannot force the other side to pay its legal fees, a major cost.

So even if homeowners subject themselves to the tremendous aggravation and expense of filing suit and getting to trial, it is almost impossible to recoup losses or come out financially whole. From the Medical Economics article by the Detroit doctor:

By July we were 11 months into our nine-month construction plan. The contractor ignored our penalty clause, saying it was null because the delays were caused by ourselves and the architect...

Later, after the original contractor, Ace Construction, bowed out, Ace put a lien on the doctor's house for

tens of thousands of dollars in unpaid compensation. We countersued for breach of contract and damages for the additional cost of finishing the house, and the monthly interest payments on the construction loan.

...Two days before the trial, we settled with Ace rather than go to court. We got none of the damages we asked for and had to pay Ace's attorney's fees, as well as our own. But we didn't pay any of Ace's bills.

In this case the building contractor reneged on the contract, then sued for more money. The doctor ended up paying the legal fees for both sides!

The moment you have to resort to the legal system for redress on a contract case, you've lost. Your new house requires another $30,000 to properly finish and Builder X refuses to help? Expect to spend $10,000 before you have any chance of getting Builder X to make any offer whatsoever (if then).

Suppose you learn of your house's defects only after you take possession, that is, after title transfers. Homes in good neighborhoods go up in value. Since it takes years to litigate a major dispute, the value of the home (properly built) would invariably be higher at the time of trial than when it was purchased, yet the law doesn't recognize this fact. It costs a fortune to bring a builder into court; the law doesn't recognize your expenses. It costs money to "prove" defects; the law doesn't care about this either.

And suppose you win a judgment? A legal judgment against a builder or developer is not worth much if the defendant cannot or will not pay. He can declare bankruptcy, in which case the homeowner is out of luck. Or the builder can simply ignore the judgment, which will then require the victimized homeowner to incur more legal expenses in an attempt to find and attach assets. Builders who don't pay a legal judgment aren't stupid. Debtors don't go to jail. And chances are you, the luckless plaintiff, won't find many assets to attach.

Certainly if the builder is truly bankrupt we can't fault the law. But in many situations the builder's corporation that constructed the house is bankrupt, and the "bankrupt" builder goes right on building under a different name. The following excerpt is from a November 10, 1991 article in the Los Angeles Times, about shoddy construction around the nation.

...shoddy builders often disband their company and form another one to avoid paying claims on defects which range from dangerous lapses such as undersized electrical wiring and weak foundations to annoying and potentially costly problems such as leaky roofs, cracked tile and uneven framing.

From a December 14, 1991 New York Newsday article, about defective construction in the New York region (italics added):

Unlike home improvement contractors, home builders are not licensed in New York, as they are in New Jersey and Connecticut. There have been unsuccessful attempts in the state Legislature and in the Suffolk County Legislature to require licensing. "Our membership has been opposed to it," said [a NY Builders Association official]. "We prefer the point of sale protection rather than the bureaucracy."

That protection is a state-mandated home warranty law that went into effect in 1989. Under the law, buyers have protection against structural defects for six years...The warranty law has been criticized by consumer advocates who say that a homeowner has little recourse if a builder goes bankrupt or closes the business and incorporates under another name.

From an article in the Raleigh News and Observer, December 15, 1991:

In North Carolina, its a simple matter for a contractor who knows he's about to be sued to drain assets from one company and put them in another, according to Bob Garner, a producer/reporter for North Carolina Public Television in Chapel Hill. Garner, who recently produced a documentary on defective residential construction in this state, says that one thing prospective homeowners can do to protect themselves is check whether their builder has done business under another name.

"Otherwise, you could ask your contractor whether he's had any complaints," Garner said, "and he might respond that ABC Construction Co. has a clean record we've never had a complaint. He may not tell you that three other companies he had were virtually driven out of business. He just goes and gets a contractors's license under another name."

The bottom line: don't be surprised about builders going bankrupt and starting anew to avoid responsibility. In too many jurisdictions the legal system allows such practice to occur with total impunity.

Between a Rock and a Hard Place

If all this sounds dismal, it is. No homeowner in his right mind wants to go through the nightmare of litigation against a builder: experts invading your home; mountains of paper work; dozens of meetings; enormous legal fees; and time taken away from living and working. There is only one reason any sane homeowner sues his builder: he or she has NO OTHER CHOICE. Anyone who thinks otherwise should suffer a defective home built by an uncaring builder.

In the first six months after our nightmare became public, and long before my first book was published, we personally heard from ten local people with construction horror stories of their own. Seven of the ten had already hired lawyers, and had either sued their builder or were about to do so. The other three asked for the name of our attorney. The people who contacted us are just the tip of a large group of oppressed, angry, new-home buyers.

Probably most construction complaints settle without litigation. The builder fixes the problem, or the homeowners accept a substandard repair, or they just give up and make the repairs themselves. None of these options was feasible in our situation. When the builder and architect refused to properly investigate our complaints, we had no rational choice but to call in experts to find out what was wrong. When the experts' reports showed major structural defects we were caught in a legal bind. We could not legally sell the house without disclosure of the reports. With disclosure the house was for all practical purposes unsalable. Yet at no time was there any offer by the defendants to fix our house properly.

Over one million new homes are built each year in the United States (two million in boom times). Why don't we hear more about defective construction? Why is this book just about the only one on the subject in print? Defective construction is certainly more common than would appear from a handful of isolated news articles.

Probably many homeowners don't have the resources to sue their builder all the way through trial. Or a lawsuit is not economically feasible. At the very first meeting our litigator remarked that if the defects cost "only $20,000" to fix, a lawsuit might not be worthwhile. As it turned out, our experts said the defects would cost almost $100,000 to properly fix and a lawsuit was still not worthwhile.

But many homeowners do fight back, and the media are just beginning to pay attention. One article on the subject appeared in the Business Section of the November 10, 1991 Los Angeles Times, a paper with a national audience, by reporter Jube Shiver.

Homeowners Are Going After Shoddy Builders

Complaints about defective construction are on the rise. And more consumers are suing the contractor or even filing fraud charges.

Complaints about housing defects, once mostly confined to builders of low-cost homes in fast-growing suburbs, have spread across the nation in recent months as owners of mid-priced and even luxury houses and condominiums complain of shoddy construction.

Jordan Clark, president of the United Homeowners Assn. in Washington, calls construction defects a "major problem" that has drawn Congress' attention and has sparked homeowner groups from California to Florida to sue inept builders.

In California, until recently the nation's hottest housing market, the state Contractors' License Board says complaints against builders and home repair contractors jumped from 27,500 for the year ended June 30, 1989 to 31,000 in 1991...

...Industry officials say a very small fraction of the 1.1 million homes built each year have significant problems.

Critics say that is because the cost of litigation and the shame of discovering costly defects after living in a house for years prevents most single-family homeowners from suing builders. What's more, shoddy builders often disband their company and form another one to avoid paying claims on defects which range from dangerous lapses such as undersized electrical wiring and weak foundations to annoying an potentially costly problems such as leaky roofs, cracked tile and uneven framing.

...Increasingly, homeowners are pooling financial resources to fight shoddy builders. In hearings in September before the House housing subcommittee, more than 300 homeowners in five states came to Washington to complain about serious construction defects in their new homes...

...Among the largest and most active groups is the 1000 member North Carolina Homeowners Assn., formed 2-1/2 years ago because of all the trouble homeowners in the state have had with builders, said Jim Parker, the group's co-founder and president.

Shiver recounts the plight of individual homeowners in North Carolina ("What I went through with that builder was worse than the hell I went through in Vietnam"), Florida ("I was horrified at the condition of the house") and Virginia. A Virginia woman bought a house with a leaky roof, uneven floors, irregular wall studs and an undersized ceiling support beam. Then her builder went out of business.

She found four other homeowners allegedly victimized by the same builder. They joined together and persuaded authorities to arrest the builder on suspicion of criminal fraud. In exchange for dropping the charges, the Fairfax County prosecutor's office got the man to pay [her] $10,000 of the more than $70,000 she and her husband had spent building their house.

The Situation in North Carolina

Several of the news articles quoted so far have been from North Carolina. In recent years there have been more problems there than perhaps in any other state except Florida. In both states the problems are accentuated by much new construction, the result of an influx of retirees and other newcomers.

The situation in North Carolina reflects the nation as a whole, not only the fact of defective construction, but how the victims are affected and how the builders, regulatory agencies and politicians tend to respond. As already pointed out, there are no statistics on defective construction nationwide, or even in any one state. According to a story in the Charlotte Observer from March 17, 1990:

Nobody knows how many people buy new homes with code violations and then can't get their builder to fix them; there is no central system for counting complaints. The Home Builders Association points out that last year 50,000 homes were built in North Carolina, and the state attorney general's office and the contractors' licensing board received about 250 complaints.

But critics of the state's regulatory system say many complaints go unreported because homeowners don't know who to call or they fear they won't be able to sell their house if they complain publicly.

The consumer section of the Attorney General's office estimates that, in general, only 10% of unhappy consumers report complaints. If that were applied to the home building industry, that would amount to 2,500 complaints in 1989 one complaint for every 20 houses built.

That's five percent of new construction in one state. In the Introduction I estimated the problem at three percent of new construction nationwide, clearly a conservative estimate.

But statistics are faceless. Three percent, five percent one might think it's a small problem. Until you hear from the victims. From the same Charlotte Observer article (italics added):

Homeowners who sue builders may win in court but because of state law, usually can't collect attorney fees. Sometimes homeowners win, but they can't collect money from builders shielded by bankruptcy laws.

"There are adequate protections through the courts and the regulatory board," said...a member of the NC Licensing Board for General Contractors.

That's of little comfort to Mrs. P. of Cary, just outside Raleigh, who bought her two-story, three-bedroom house six years ago for $110,000.

State officials eventually found 10 "plainly visible" code violations, including structural problems. A jury awarded her $16,500, which she hasn't been able to collect from her now-defunct building company.

The contractor is not listed in the telephone book and couldn't be reached for comment.

"To buy a house is everybody's dreams," said Mrs. P., a salesperson for a carpet company. "We had worked all our lives for this house. Then it turned into the biggest nightmare anybody could imagine."

North Carolina deserves special attention because many homeowners are beginning to fight for their rights in organized fashion, through the North Carolina Homeowners Association (NCHA). The NCHA is a grass roots organization that was created because of the large amount of defective construction in that state, and of the perverse way North Carolina's laws have worked against the homeowner victims. NCHA is dedicated to both preventing defective construction and to helping victims.

Because of many cases like Mrs. P.'s, the NCHA was instrumental in getting a bill passed in the state legislature to reimburse buyers of defective construction. House Bill 37 provides for reimbursement of repair costs if the buyers win a legal judgment and the builder goes bankrupt.

One of the problems in North Carolina (and perhaps elsewhere) is that, despite the requirement of a license to be a general contractor, the law is frequently skirted or ignored. Contractors can build houses without a license and get away with it. In part, this is due to a loophole in the law that allows contractors to build without a license if the house not counting land and profit come to less than $45,000. From the Charlotte Observer, March 17, 1990:

[Homeowner] thought he was dealing with a licensed builder when he signed a contract in 1987 for a $120,000 house on 2.5 acres outside Chapel Hill.

He was wrong.

State investigators later found the house to have structural problems that [homeowner] has spent $7,000 and hundreds of hours to fix.

His builder skirted the law, according to the NC Licensing board for General contractors, by telling local inspectors that construction would cost $25,000.

...the builder argued that he had not entered into any contracts and did not consider himself a "general contractor."

Earlier I explained why an occupancy permit means nothing about the structural integrity of a new home. In North Carolina the problem has been taken one step further: builders sometimes sell houses without a permit. Here are portions of a letter written by a homeowner to the North Carolina Homeowners Association.

In March of 1990 my husband and I came to Wilmington, NC to build our retirement home...In April of 1990 construction was started. On Nov 1, 1990 [the builder] told us we could move in because all inspections had passed. According to our contract we were to pay the builder as the house progressed and he in turn would pay all the sub-contractors.

After we moved in there were several items to be completed and after completion we would pay the last 3% balance. We waited until April of 1991 for him to complete the house, but he refused. It was about that time that we discovered we did not have a certificate of occupancy. After talking to the county inspectors we discovered that the builder did not comply to certain building codes. The building inspector said the [the builder] was aware of this and that the certificate of occupancy could not be issued until the violations were corrected. The inspector again notified [the builder] but he again ignored the request.

We then hired another contractor to correct the violations at our expense in order to receive the certificate of occupancy. We could not understand how a building contractor could refuse to comply to building codes and not even receive a fine. Nothing was done to this builder.

We still have not had our house completed and we are finding more and more code violations that the county inspector apparently chose to ignore. To top all of this off [the builder] is now suing us for the 3% balance and has put a lien on our house.

After detailing further legal and construction horrors about her house, the homeowner writes:


We have found that North Carolina does not have laws to protect the homeowner or they choose not to enforce them.

How bad can things get in a new home? Two more examples, from different areas of North Carolina, will show you. In the summer of 1991 Mr. and Mrs. F. contracted to build a new home on five wooded acres in Polk County (western North Carolina, near Spartanburg, SC). According to an April 9, 1992 story in The Tryon Daily Bulletin, within a few months the experience turned into a "a full-fledged nightmare."

While the house was under construction the couple discovered evidence of sloppy construction, and discussed the problems with both their builder and the local building inspector. Some of the problems had to do with the structural integrity of the dwelling, like the placement of foundation piles. At this point the house was about 35% complete. Despite all that the homebuyers saw and documented, the building inspector passed on the construction

with flying colors. They were shocked and puzzled. How could a trained inspector have overlooked such obvious flaws? they wondered.

...[They] were not daunted. With the guidance of the North Carolina Homeowners Association, they took steps to resolve their situation. The couple immediately began to document in photos and on video tape everything they felt might be a building code violation in their house.

In addition, the couple asked George Birmingham, a private building consultant with almost 50 years experience as a builder, to evaluate their situation. Birmingham spent hours inspecting the house and his verdict was not good. He enumerated close to 50 problems in his final report including missing or faulty foundation piers and footings, improperly installed shingles, improper truss installation, sloppy masonry and mismatched flue liners.

He concluded his eight page report with the comment: "I am amazed they got the house built this far without a major collapse or failure with this building." In a telephone interview with The Bulletin, he characterized the [couple's] house as "a glaring example of poor workmanship."

In the aggregate, three independent engineering reports showed that the construction failed to meet the plans and specifications of this custom-designed home [and] failed to even meet minimum N.C. building codes. [The couple] say that the builder refused to take responsibility for problems the studies detailed, claiming instead that there was only one corner of the house out of alignment.

The result? The couple felt they had no choice but to halt construction and sue the builder. At that point they were already out $130,000 the cost of the land, part of their construction loan, and legal fees. They sued for breach of contract, fraud and deceptive trade practices. The builder then sued them for work done on the house but not yet paid for.

Not a happy result when building one's dream home. And exactly who is right and who is wrong? How much damage has been done and who is to pay? Those questions, unfortunately, were left for the courts to decide. I say unfortunate, because anyone reading this article and talking to the couple can only conclude they are innocent victims of incredibly sloppy work. They would not risk losing $130,000 unless absolutely convinced their house was constructed improperly, and that the builder's proposed remedy is inadequate.

Then there is the case of Mr. O., of Cary, NC (a suburb of Raleigh), who bought a new house constructed with 28 building code violations! Eventually his complaints led to suspension of the builder's license for a full year but not to repair of his house. His case generated many articles in the local newspapers. From the Cary News, November 9, 1991:

[One] member of the Wake [county] home-builders association who has built homes for 24 years, said the board's decision [to revoke the builder's license] was fair, but far too late for Mr. O.'s sake. I went through his house. "It's probably one of the worst construction jobs I've ever seen. It really is."

Did lifting the builder's license help this homeowner? An editorial on the suspension also appeared in the Cary newspaper.

This week's decision by the N.C. Licensing Board of General Contractors to suspend the license of Cary Builder...was unfortunate because it does nothing to implement changes that appear to be needed in the homebuilding industry.

That there were problems with the house in question has been acknowledged by the builder - that no resolution has occurred also is a fact - and, that the licensing board has too much work and too little time also is evident because the bulk of the case was handled by an administrative law judge at the request of the volunteer board members and their staff.

...As it is, Mr. O.'s house has not been repaired and he says he cannot afford to have it done; [the builder] now has chosen to spend even more money on legal fees to have the case decided by a jury; and, nothing has been resolved.

After reading my first book, Mr. O. wrote me a long letter about his construction nightmare.

Dear Dr. Martin,

I would like to say that I enjoyed reading your book And They Built A Crooked House, but in fact the further along I read the angrier I became. Your book was extremely well written but what angered me was the fact that I could have inserted my name at many places describing the treatment you received upon building your "dream home."

I'm sure you receive many letters from people describing their dream home turned nightmare, so I wouldn't go into great detail about my experiences. I purchased a new 2,800 sq. ft. home in June of 1989 in one of the best developments in North Carolina for $212,000. The builder was held out to be one of the area's finest...

Six months after moving in cracks started developing in the walls of my home. The builder stated "I think there is a pier missing from under this wall." I asked the builder to have a complete structural engineering report done on the home, to which he refused. I then retained my own structural engineer and found (among other things) that:

1. The foundation footings did not comply with the building code.

2. 932 bricks in the foundation were void of mortar in their vertical joints. (The engineer stated that due to the omission of mortar in the joints that the home most probably would collapse in hurricane force winds.)

3. Two load bearing walls were not properly supported.

4. The chimney is not properly supported and is pulling away from the house.

The estimate to repair the foundation alone on this home is $127,000.. The tax assessor did reduce the value [of the home] to $49,000, the cost of the land. I have been denied homeowner's insurance.

After detailing his initial brush with an indifferent legal system in North Carolina, he continues his letter:

I put $67,000 down on this house and my entire life has become ruined by what has happened with this home. I can only hope that other people will read your book before buying a home...The only way that I could have been aware that this home was defective, prior to purchasing it, was to have dug up the foundation which I eventually did.

I joined a group called the N.C. Homeowners Association. This is a group of homeowners whose lives have been devastated by purchasing defective homes. One member...let his defective home in N.C. go into foreclosure and moved to New York.

What was the builder's response to suspension by the North Carolina licensing board? It is outlined in the following article that also appeared in the Cary, N.C. News (italics added).

A state licensing board has suspended the license of a Cary building contractor after finding 28 code violations in a $212,000 house in Cary.

"I think it is the least they could have done, considering the shape that my house is in," said Mr. O., noting that [the builder] can continue to build during the appeal. Mr. O. said a defect found in his home was also in other homes that [the builder] built.

[The builder] said that three engineers inspected the home and, although there are code violations in the house, the building code is not in line with current building practices...He said that the current 119-page code is ambiguous and that the state will replace it next year with a comprehensive 400-page code.

The board's final decision said that the foundation of the house lacked mortar in vertical joints, a code violation. Mr. O. said [the builder] testified in a deposition that "he has built other homes this way and continues to build this way."

Mr. O. said insurance companies refused to issue a policy on the house and real estate agents won't list it for sale.

"Who wants to buy it?" he said. "It can't be sold."

Viewed from the standpoint of what's right, fair, rational, and proper, this case, like ours and many others, makes no sense to the citizen uninvolved in such matters. Mr. O.'s house is defective. Its construction violated state building codes. The builder disputed these same codes. He was reprimanded by the Licensing Board. The house was unsalable. The builder would not fix it, leaving the homeowner no choice but to fight an expensive and enervating legal battle. Yet the legal system is woefully unable to effect any equitable solution (as Mr. O. makes abundantly clear in other correspondence).

In the world of defective construction what's right, fair and rational is usually of no consequence. In the real world of defective construction, homeowners are caught in a Kafkaesque situation; the bad builders are often rewarded (with profits), and the homeowners are invariably victimized (with legal expenses and loss of property value). This is the real world in North Carolina and everywhere else.

We chose to fight our case all the way to trial instead of give up and, like Mr. O., met up against people who make their own rules, rewrite history, delay, deny, distort. Mr. O. went further, and met even more resistance than we did. Mr. O. generated so much heat about his case that the town of Cary, NC actually referred to him at one point as a "loose cannon" because, he says, "I decided to fight back rather than go into a corner and die." (Mr. O.'s case against the builder eventually settled out of court for an undisclosed sum.)

The North Carolina Homeowners Association publishes a newsletter (see Appendix for address). An edition from the early 1990's quoted me in the lead paragraph.

- - - - - -

North Carolina Homeowners Association

Words can't express what we have been going through. The total frustration coupled with a sense of moral outrage. The sense of loss. The feelings of helplessness. It is the material equivalent of rape. This is how wars start. In a less civilized world...there would be physical violence over this. These irresponsible men have disfigured our home, our lives, our sensibilities.

Dr. Ruth S. Martin

And They Built A Crooked House (1991)

Outrage and Frustration

These powerful words express the despair of a homeowner victimized by fraud, deception, and irresponsibility in the construction of her "dream" home. I need your help to expose and correct serious problems in the residential construction industry in North Carolina. Hundreds of innocent families have been financially and emotionally devastated by the purchase of defective new houses. Without changes, thousands more will suffer a similar fate.

North Carolina's elected representatives passed laws requiring licensing of contractors and establishing minimum safety standards for home construction. THESE LAWS ARE NOT ENFORCED! Local building inspections departments and state regulatory boards ignore serious violations of the building code, first by approving defective houses and then by doing nothing when homeowners are stuck with the results.

Homeowners with defective homes are surprised that they are not protected...

This and other editions of the NCHA newsletter have documented the weaknesses of North Carolina laws, their lack of enforcement, the outright fraud found in many situations, and how the Homeowner's Recovery Fund passed in the state legislature over the fierce opposition of home builders. Because of NCHA's efforts, the specific problems in North Carolina and the reasons behind them are perhaps better documented than in any other state.

Dr. Donald Jacob is one of the strongest voices in the NCHA, although he now lives in New York. Dr. Jacob bought a defective home in North Carolina in 1986, and within two years discovered that the foundation was totally substandard. In his long (and futile) attempt to get the house repaired, he discovered much evidence of fraud and deceit, not just in the erection of his house but in many others. Working with the NCHA, he uncovered and documented the following circumstances in North Carolina.

  • Homes in North Carolina have been approved by local building inspectors despite serious, flagrant Building Code violations. Some licensed building inspectors, engineers and architects are providing North Carolina contractors with documents falsely certifying compliance with the State Building Code. Builders use these documents to deceive unsuspecting homebuyers.
  • The North Carolina courts are lenient in allowing builders to declare bankruptcy and avoid compensating damaged homeowners if they win an award from a jury.
  • The North Carolina construction boom started in the early 1980s. Contractors licenses were handed out not just to builders, but to politicians, salesmen, real estate agents and any local businessmen with access to capital. More dependent upon financial status than knowledge of construction principles, the licensing process did nothing to protect citizens from incompetent contractors.
  • The North Carolina Contractors Licensing Board is funded entirely by fees collected from contractors. Five of the 7 members are contractors. The Board has consistently refused to enforce North Carolina laws related to construction.
  • The North Carolina civil courts have exhibited a peculiar inability to compensate homebuyers damaged by negligent or dishonest construction. Through a technique called corporation folding, North Carolina contractors can change the name of their company every few years and drain all assets from the old company. The courts have refused to use the personal assets of negligent contractors for compensation. Therefore, even if he wins in court, the homeowner can collect no money.

So this is North Carolina, where outraged homeowners are more organized than in any other state. But problems with defective construction and the homeowner's no-win position exist all over the country. Why can't people who buy a seriously defective new house get it fixed?

Why Can't Americans Get Their New House Fixed?

The typical response of builders and developers to this litany of horror stories is something like the following: 'Sure, there are some bad builders out there. But there are bad doctors, too. And bad lawyers, accountants, and car salesmen. Most people who buy a new house are very happy with their home. The incidence of truly bad construction is very small. You are blowing this thing out of all proportion.'

That is the argument. And it completely misses the point. It is a defense against an attack which does not exist. My recitation of these horror stories is not an attack on the construction industry or on home builders in general. I am not trying to reform an industry that is comprised of over 100,000 individual contractors, and whose bad apple builders are scattered among thousands of jurisdictions. My task is far more focused: to help the individual homebuyer protect himself or herself against man-made mistakes and a hostile and unhelpful legal system. For me to argue against the self-serving propaganda of builders and developers would be a futile effort, of no help to anyone.

I have no doubt that the vast majority of builders are both competent and honest. That fact does not help the small but significant number of homeowners who are devastated by bad construction. And devastation is an appropriate term. It is unconscionable for anyone who buys a fully-guaranteed new home to have to go to court because the house was not constructed according to local building codes. It is unconscionable for anyone to lose a fortune because the law allows a builder to sell a defective house, declare bankruptcy and then continue building houses under a new name. It is unconscionable for anyone to be sold a new house that should never have passed inspection.

Lawyers have a term for the situation as it exists with defective construction: res ipsa loquitur, the thing speaks for itself. The fact is, there are thousands of unhappy homebuyers, victims of defective construction. They can be found in every state of the union. The fact is, our system of litigation and laws is not designed to help the victims achieve meaningful redress. If anything, the legal system penalizes the buyer of a defective house because of the enormous cost to litigate and the irrevocable loss of those funds. The fact is, there is no real penalty for dishonest and unethical builders, developers and home inspectors. The fact is, the laws in every state are powerless to make a builder comply with existing building codes, to make a builder fix his mistakes, or even to make a builder pay a legal judgment.

All this is true, but the most crucial fact is that, for the individual homebuyer, the risk of acquiring a structurally defective home can be significantly reduced by taking a few very important steps. After all, the problems occur in something completely man-made. We are not talking about the variables of human disease, or acts of God, or the whims of a judge or jury. There is no way for any given client to always check if his or her doctor or lawyer is doing the right thing. There is a way for every homebuyer to help ensure that his house is being, or has been, constructed properly.

The majority of construction nightmares around the country do not result from outright, intentional fraud (a situation more often found in the home repair business). Fraud in constructing and inspecting new houses does exist, as has been documented in North Carolina and elsewhere, but by and large contractors building a house want and expect things to go right; most cases of defective construction don't start out with a builder intending to cheat the homebuyer.

Defective construction happens, unfortunately, because many builders just don't know how to build a good house or care about the result. They are not only bad builders in the hands-on sense, but also bad managers of craftsmen and subcontractors. No matter how well intentioned they may have been before the project began, the finished house reflects sloppy, careless, and incompetent work.

When a bad builder's construction errors are exposed he is apt to display the traits of bad people: dishonesty, denial, distortion of the truth, outright lying, vindictiveness. He does not accept responsibility and may actually fight the complainers. As a result, the homeowners are left hanging; the more they document the defects, the more likely the builder will ignore the problems.

Homeowners saddled with a seriously defective house often dig a hole for themselves, albeit unwittingly. They thoroughly document the problems yet cannot get them fixed by the people who caused them, and their documentation makes the house unsalable. In desperation, the homeowners call upon the legal system; they hire a lawyer. Unfortunately, from that point the situation almost invariably goes from bad to worse, as the builder also hires a lawyer. Lawyers hired by builders are trained to fight first and settle later. Or fight forever and settle never. Lawyers for builders know that the legal system is on the side of the builders and against the homeowners, and they take every advantage of this fact.

* * *

When spokesmen for the building or real estate industries say that "a very small fraction of the 1.1 million homes built each year have significant problems," what does that mean? Three percent is a "very small fraction," but that represents over 30,000 homebuying families! And if it's 5,000 or 80,000 defective houses each year, so what? The problem only has to happen to you once.

Behind every story I have quoted and these stories are but a tiny sample of the construction nightmares documented year after year is a family full of heartache, disappointment, crumbling dreams. Buy a defective house from an irresponsible builder and you buy a nightmare beyond belief.

The solution as I see it is not to "fix" the industry, for that is impossible, given the huge diversity among both builders and the jurisdictions where they do business. All the housing regulation in the past 50 years has done nothing for buyers of defective houses. The solution the only realistic solution is for you, the consumer of new construction, to become smarter, wiser, tougher.

Section 3 -- A Psychiatrist Looks For Some Answers
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