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Section 4. How to prevent a nightmare from developing with your new home
Yet the dream of building one's custom home goes on. It should go on. You should know that when you bring together sound information and knowledge, the risks can be managed and your custom dream home can become a reality.
Charles J. Daniels, Dream House, Real House. The Adventure of Planning and Building a Custom House, Macmillan Publishing Co., 1989.
By taking a few deliberate steps you can safeguard the integrity and value of your new house or condominium. The emotional, legal, and financial nightmare many new-home buyers experience can be prevented.
Be forewarned. You will likely meet resistance as you try to protect yourself. Your builder, architect, developer, real estate agent anyone you depend on may protest as you try to protect yourself legally and financially. They may say you are too cautious, too suspicious, not trusting enough, or they may fall back on their 'reputation' for honesty and integrity. If so, run the other way. It is your home that needs protection, not theirs.
The builder, especially, may even refuse to do business with you. If so, count yourself lucky. Don't make the mistake of assuming there is only one lot, one location, one opportunity for you. Your friends may say you're foolish, that Builder X constructs solid houses with no major problems. But remember: past performance is no guarantee of future quality. In truth, most builders merely subcontract out their work, often to the lowest bidders. If the builder refuses to make himself financially and legally responsible for the construction of your home, go elsewhere. Unless you protect yourself ahead of time YOU CAN ONLY LOSE IF YOUR HOUSE IS BUILT DEFECTIVELY.
You must act to protect yourself against major construction and design mistakes. Furthermore, you must ensure that defects will be fixed if, despite all your precautions, they do show up. In this chapter I will make some definite recommendations on how to protect yourself. (Some of these recommendations, such as thorough house inspection by an independent inspector and engineer, and a healthy wariness toward real estate agents, apply equally well to purchasing a used home.)
First, let me answer a question that might concern some readers: Who am I to make these recommendations? I am not a lawyer, builder, architect, engineer, accountant, real estate agent, or developer. I am not even a businesswoman. By profession I am a psychiatrist, and this book was written in my spare time. How can a full time psychiatrist possibly have the expertise to advise you, the potential home buyer? I have three responses to this most legitimate question.
1) I've been there. Unless people have experienced the agony of defective construction, the futility of litigation against irresponsible business people, they are unlikely to realize how bad things can get when buying a new house (or, for that matter, a used one).
2) I have dealt with numerous other victims, read their stories, talked to them on the phone. And I have treated several of them professionally, for depression and anxiety arising from a defective house. I've seen couples on the brink of divorce, grown men cry in my office, people openly contemplate suicide because the house of their dreams has turned into an unrelieved nightmare.
And I've learned that the consequences of defective construction are the same everywhere. When people buy a defective house and can't get it fixed, the scenario is strikingly similar. (This scenario assumes the builder has not skipped town, something that has happened to many unlucky homebuyers.) Typically, the builder first denies that construction problems in your house exist (our obviously sloping floors were called an "optical illusion"). As the homeowners continue to complain, the builder, instead of dealing forthrightly with the problems, begins to externalize and blame others: "I only do what my architect tells me." "It's not my fault but the fault of the plumber/electrician/ mason/roofer."
When the mistakes are not corrected the builder finally blames the homeowner, criticizing her [usually her] for "blowing the problems out of all proportion," a phrase much favored by builders caught in their mistakes. Or: "She's very picky. Nothing pleases her." This kind of defensive posturing first denial, then blaming other workmen, then blaming the homeowner protects the builder from feeling any guilt or discomfort about his mistakes.
Finally, the homeowners hire a lawyer because they have no other rational choice. At this point the builder also goes to his attorney, convinced the homeowners are being unreasonable. From there, it is (sadly) downhill, as the builder's attorney throws up roadblocks to any resolution. The homeowners suffer delays, denials and, all too often, calumny. They are apt to be vilified in legal-sounding letters (as we were). Instead of properly investigating the complaints and working to achieve a resolution, the builder spends money to fight the homeowners. (Not infrequently, once the homeowners file a lawsuit the builder will countersue, in order to intimidate them.)
The emotional consequences of this scenario are predictable for the homeowners: depression, anger, despair, a sense of loss. In my first book I described this experience as "the material equivalent of rape." That has turned out to be a most appropriate description.
The fact that this experience is so similar everywhere means there are basic steps anyone can take to protect their investment and avoid the horrors of a legal fight. The universality of this experience also answers another frequently-asked question: Aren't every state's laws different, and doesn't that make advice in one state invalid in another?
Well, I am not a lawyer but I do know this: states may have different statutes about house construction and contracts and builder's warranties, but the result is the same all over. The buyer of defective construction is, in practical and financial terms, unprotected by the law if the builder reneges. There is no state law that protects the home buyer without that person first expending an enormous sum for legal and experts fees, money which cannot be recovered. Indeed, no matter what contracts have been signed, there is no law in the land designed to fairly compensate the purchaser of defective residential construction.
3) All the professionals involved in selling real estate (new or used) have a vested interest different from yours. The real estate agent, builder, developer, banker and architect all want to sell houses, not warn you of how to prevent defects and litigation. They want you to be happy with your purchase, of course, but rarely will they advise how to protect yourself in the event of problems. Why? Because they don't want to admit that problems might occur.
The professionals know that, after you take title to the house or condo, they have your money and are practically immune from your complaints. Yes, immune. After title transfers you have given up all leverage to make anyone follow through on promises or guarantees. From that point onward, you cannot achieve redress without also inflicting great harm on yourself and expending thousands of dollars.
To properly warn is to needlessly scare away potential customers. The people in a position to profit only have to sell you that new house or condominium once. They don't care about your repeat business because you are not expected to ever buy another new house, at least not from the same people. That is one reason why you'll find no information from the building or real estate industry about the risks inherent in buying a new house, and why you will almost never hear a real estate agent or builder or developer advising you to hire an independent inspector before purchasing new construction.
To professionals on the selling end, nothing can go wrong, nothing should go wrong, and you have nothing to worry about. They will advise you to insure against fire and theft and earthquake and perhaps even flood in some areas, but never against manmade disaster faulty design and construction.
When things go right these professionals are some of the nicest people you'll ever meet. But if things go wrong in a major way, you are apt to encounter a "drop dead" attitude from the same people who were all smiles when they took your money. You only have to experience this once to see what I mean.
So a psychiatrist who only wanted a decently-constructed house in which to live and raise her family has, by default, become an advisor on how to protect your investment in a new home. Professionals in law, architecture, construction, and real estate might be amused by my avocation, but just remember this: My husband and I (as have countless others) hired a professional contract lawyer to help protect our investment. We (and countless others) had a professional, licensed builder construct our house. We (and countless others) used the services of a licensed architect. We (and countless others) had faith that professionals would know how to design, build, and contractually guarantee for us a well-built house. But in the end the work of these professionals was so very, very bad, that in fact it was unprofessional. As a result we (as have countless others) lost a lot of money and incurred a lot of aggravation. Don't let this happen to you. It is caveat emptor all the way.
1. CHECK OUT EVERYONE: BUILDER, DEVELOPER, ARCHITECT. You're not buying a piece of land and a house; you're buying a builder. More to the point, you're buying a builder's reputation.
--Joys and Perils of That Unbuilt House. Changing Times Magazine, June 1990, pages 41-49.
Very often you will be dealing with local individuals who only build in your area. In fact, the higher priced the house the more likely the builder is self employed and not working for a large firm. Whether your house is constructed by such local people or by a national firm means nothing in terms of quality. You need to thoroughly check out the people you are dealing with in any situation.
There were three defendants in our case, all self-employed. The architect and builder were shown to be incompetent in the design and construction of our house, respectively. All three men lacked integrity, but the architect and developer were particularly bad; they lied to newspaper reporters to in an attempt to resell the defective house.
In the very beginning, of course, we started out cautiously, making what we thought were all the right moves. We had no inkling whatsoever of the trap we were entering. Just how did two hard working professionals get hooked up with three no-good people in the construction of their $350,000 dream house? Easy. We were not careful enough.
We wanted a particular lot so we took what came with it: the developer owner, and his architect and builder. We did not investigate these people except in the most cursory way. We assumed the developer was honest simply because a) he was rich and lived in a high class suburb nearby, b) we were moving next door to his son, and c) his grandchildren and our kids were in the same schools. We actually thought this set of circumstances conferred some type of protection on our deal. Why, we figured, would this nice rich man want to cheat us?
We also assumed the builder and architect were competent, mainly because they were building the house next door, for the developer's son. My husband and I talked about the circumstances, analyzed them repeatedly, and just assumed everything would be OK. Given the same set of circumstances, you might have reached the same conclusions.
Well, we were fooled. You cannot assume anything in an area as important as building or buying your new home. Inspect not just look at other homes your builder, developer or architect have built or designed. Demand references. Dig for information, then check it out. Call people. We didn't check out these men, demand references, or even talk to other business contacts. Such investigation might still not have uncovered their incompetency, or the developer's flagrant dishonesty in our deal, but we didn't think to ask. Like countless other naive home buyers with busy schedules, we assumed, for what turned out to be all the wrong reasons, that we were dealing with competent and fair-minded people.
How do you do it? How do you check out builders, architects, developers? Some advisors recommend you call the Better Business Bureau to inquire about a particular builder or developer. This is a common sense first step but not apt to be all that helpful, for several reasons: 1) builders construct houses under many different names; Joe Blow may have several complaints registered under ABC Construction but none under XYZ Homebuilders, the company you are contracting with; 2) serious complaints usually don't go to the BBB (ours didn't), but instead to a lawyer or arbitrator; 3) the form required to file a complaint is long and cumbersome, and many people just don't bother registering their complaints; 4) the BBB is a business-supported organization, not a consumer-supported one. Its primary goal is to protect legitimate businessmen from the fallout of bad businessmen, not to protect the consumer. While one hopes that the BBB's primary goal meshes with consumer protection, keep in mind that the BBB was set up to protect businesses, not consumers. In short, don't rely on any business-supported agency when checking out your builder. You need to be your own sleuth.
After it became apparent that our house was defective, the builder, when asked by potential clients about his other houses, did not disclose that he had built any homes on our street (he built three, all defective to some degree; ours was by far the worst). A prudent homebuyer who learned what he built for us would think twice before doing business with him.
I recommend you ask your prospective builder for the names of people who have bought his last five houses. Repeatedly emphasize that you want his last five. Not his best five, his first five, or five good ones, but the last five. Tell him all you want are the names, and the phone numbers or addresses. If he balks, or says he doesn't remember, or makes some other flimsy excuse, walk. If he refuses on the grounds he doesn't want to invade the privacy of his customers, be skeptical. Good builders give references all the time. If he gives you the addresses but no phone numbers, you can easily get the phone numbers from the city directory. If the phone number is unlisted, go to the door during daylight hours and knock. Or, write a letter to the homeowner, giving your phone number and asking the person to please call you.
People who bought a house from the builder will level with you, good or bad. If you hear five good recommendations, you've likely found a good builder. If you encounter any seriously disgruntled homeowner, try to get the complete story about what happened. If you are satisfied the builder acted properly there may be no cause for alarm. But what if you discover that two of the last five home buyers are suing the builder! Won't you be happy you called? Whatever you find, if there is doubt don't proceed. It's not worth it.
One last recommendation. On principle, don't use a friend or relative to build your house. Any non-business relationship you have with the builder will compromise your alternatives if things go wrong.
2. CHECK OUT THE COMPANY. What goes for the individual, self-employed builder goes for the large company as well. Many houses in the mid- and lower-price ranges are built by large regional or national construction companies. These firms can't possibly construct every house with uniform high quality, especially since they are dependent on the vagaries of local workmen. Don't get caught with the worst of their output.
Below is a table listing eight publicly traded home-building companies. Note that even the largest companies are tiny compared to the auto giants, and you are probably unfamiliar with them. The largest U.S. builder of single family homes is Centex Corporation, which trades on the New York Stock Exchange (CTX).
The number of homes sold by Centex in 1990, 7862, represents less than half of one percent of all the new homes sold that year. All seven companies together built less than two percent of the 1,100,000 new homes sold in 1990.
Contrast these companies with General Motors, which sold 2,470,000 cars in the U.S. in 1991, or approximately 28% of the U.S. market, and had 1991 worldwide revenues of $123 billion dollars. GM can afford to back up its cars with uniform guarantees. Do the large home builders, woefully tiny by comparison, back up their houses, and if so, exactly how? You need to find out.
In the recent recession many large companies actually went under, including U.S. Home, the country's eighth largest home builder at the time it filed for bankruptcy in April 1991. If you buy a home from a large company that goes bankrupt, you have little chance of collecting on any claim. You become, in effect, another creditor. This, of course, is equally true with small local companies, which are much more likely to file for bankruptcy than a large corporation. In either case you are out of luck. That is one more reason why you should not assume you are fully protected by the builder's guarantee.
What if you know a company is financially healthy? That information may be helpful if you are investing in the company, but is of little value if you are buying one of its houses. Ignore the value of the company's stock, corporate reports, or glowing accounts from salesmen when making your decision to buy a house. Such information means nothing about your house's quality. The company may be solid in its balance sheet but weak in building houses in your area, on your street. As with the self-employed builder, you cannot assume that a large company built your house well, or that the company will be responsive if there is a major screw up.
Elsewhere in this book are articles about lawsuits against some of the major publicly-held companies. All large companies have been sued by homeowners at one time or other. Because these large companies build so many houses, and lawsuits against them sometimes involve many homeowners in one subdivision, you are more apt to read about them in the newspaper than when a single family sues over one house.
Publicity about lawsuits against these large companies should not scare you away; it merely demonstrates that you have to be careful no matter who you buy your house from, a corporate giant or Joe the local builder. No data exist on the subject, but it is possible that the large companies have a better track record in building quality homes than do the small, local builders.
Ask the salesman for names of people in your area who have recently bought houses from the company. This information may be harder to obtain than from a strictly local builder. If possible, though, look at other houses built by the same corporation in which people are currently living. Equally important, talk to the occupants. You want to know about any complaints and, in particular, how the company responded to those complaints. If all you hear are positive word-of-mouth recommendations from other home buyers, that is reassuring, but it doesn't guarantee your house's integrity, especially if the previous buyers are in another community. Your new house may be constructed by people newly hired by the company. Or it may be in a new subdivision built on improperly-drained swamp land. Or the local house inspector may be just a little too lax for this particular project. Check things out! Assume nothing. (If the house is already built, at least follow the advice in Recommendation 8.)
3. MAKE SURE "THEY" ARE INSURED. "They" is anyone signing your contract, or who could conceivably be sued for problems relating to your new home. Insurance should cover defects found after you move in. Many builders and architects are not insured. Architects as professionals can buy malpractice insurance similar in nature to what most doctors carry. Our architect, in casual conversation when we began the design process, told us he was insured. Two years later, when sued, he had no insurance. He either lied or dropped his policy soon after we talked with him.
Our builder was insured, but we believe the architect's lack of insurance proved a major stumbling block to any settlement. The builder's insurance company blamed the architect for 90% of the problems and the latter, having no coverage, could not possibly agree to pay for all the repairs. If both men had been insured it seems more likely our house would have been fixed and a trial avoided.
If our developer had been insured it is even less likely there would have been a trial. Lacking any insurance, the developer perversely denied all responsibility. It seems unlikely that an insurance company would have exposed itself to the risk of recision when our only contract was with the developer.
You need to get in writing that the builder, developer (large or small), or architect is insured and that the insurance will stay in force through the completion of your project. This may be impossible to enforce, but it is nonetheless a good idea.
The other major issue regarding insurance is collectability. You cannot collect from someone who is bankrupt. If the responsible people don't have proper insurance, and you cannot unequivocally cover the project with some other type of structural insurance policy (see No. 6), in my opinion you should avoid the
deal. It's not worth the risk. Go elsewhere with your business, even if elsewhere is more expensive.
4. HIRE A GOOD REAL ESTATE LAWYER. There are many aspects of any real estate transaction that might require the services of an attorney. Mortgage departments of banks usually handle much of this work, such as arranging for title search and title insurance, and I have not found an attorney absolutely necessary when buying a used house. Remember this, however: the real estate agent represents the seller, not the buyer. When you buy a used house through a real estate agent you have no one representing your interests.
In some states (including Ohio) real estate agents are required by law to have the buyer sign a statement that he/she understands the agent represents the seller. If you have any questions of a legal nature, or any doubts about the transaction, you should consult a lawyer.
In any case, I emphatically recommend that you not buy a new house without first consulting a lawyer. Whereas with a used house the seller is moving for some personal reason (new job, bigger house, retirement), the only reason for selling a new house is to generate a profit. It is you against a seasoned businessman. If a real estate agent is involved it is you against two seasoned business people. Without a good lawyer you don't have much chance of redress if any conflict arises (with a bad lawyer you have no chance at all).
Here is a worst-case scenario of what can happen when buyer- without-lawyer meets builder-without-scruples. From an article in the Spartanburg Herald, April 24, 1992:
The article points out how the couple paid the builder $103,000 for the house in four installments, and how the builder turned over only a small part of these funds to the bank. At the time of the article the bank was trying to decide if the couple would be evicted from their home because the builder had not paid the loan. The article also notes:
Having your own attorney will at least reduce the risk of outright fraud, but you need to be protected from far more than that. If you don't already have an attorney expert in real estate transactions, lean toward a member of a sizable law firm, where backup legal help will be available if needed. Do not hire a novice attorney when building a new home. We paid almost $1000 to our contract attorney, yet our contract left us no recourse except protracted and enormously expensive litigation.
Don't use a friend or relative, or any lawyer who ever represented the people you're doing business with. Ditto for the law firm. Do everything possible to make sure your attorney and law firm have no conflicts of interest. You should also not use any attorney recommended by your real estate agent or builder. The attorney may do business with the real estate company, or be a friend of the agent or builder. If events turn nasty your lawyer may end up with a conflict. Assume there will be problems, and that you will need your lawyer 100% on your side.
Tell the lawyer you want to be fully protected from the worst: a builder who skips town without finishing your house and leaves you with unpaid subcontractor's bills; or a structurally-defective house that the builder refuses to fix; or a legal judgment against a bankrupt builder. He will say that guaranteed protection from all the worst case scenarios is impossible, which is probably true. Tell him to do his best. As a test, give him a copy of Crumbling Dreams and ask him to review this section. I can't tell you what a `correct response' should be, but if you believe the advice in this chapter is worthwhile, you should be able to tell by the lawyer's attitude toward the book if he's the right counsel for you.
As an example of what a good real estate lawyer can do for you, consider the following. In some states it is possible for unpaid subcontractors (plumbers, electricians, etc.) to put a lien on your house after you have moved in and fully paid the builder. In this situation the subcontractors are unpaid by the builder, not by you, but the lien is against your house, not the builder's. In theory, your homeowner's insurance policy or title insurance policy should protect against this problem, but they usually do not; in fact, such insurance policies may specifically exclude the payment of so-called mechanics' liens. Quoting a Washington Post article from March 18, 1991 titled, "Bills Unpaid by Builder Burden Va. Homeowners,"
Chances are, you would never think to ask about mechanics' lien coverage. Why should you? If you paid the builder for your house, how can the plumber he hired for the job come after you for an unpaid bill? But, in some states, unpaid subcontractors can put a lien on your house. If that happens, you cannot sell or refinance your home until these mechanics' liens are fully paid.
Let's face it. Nothing is risk free, least of all building or buying a new house. But a good lawyer will know how to help protect you from the worst. If your lawyer is put off by your concerns, or seems inexperienced in the area of local real estate law, you should obviously look for another attorney.
5. INSIST ON THE TIGHTEST CONTRACT FEASIBLE FOR YOUR CIRCUMSTANCES. I don't pretend to tell lawyers how to write a legal contract, nor should you. But every contract should be written as if you will end up in court over it. Judges will ignore your pain and suffering, discount all your expenses, and gloss over lies and verbal assaults made by the builder and his attorney, but they will read the contract. The contract, plus what the experts say, is likely all they will care about in your complaint. This doesn't guarantee a fair decision; remember, the laws in every state favor the builder. But if the contract is well done, you will have a better chance in court than otherwise. Better yet, a clear and unequivocal contract might force a reasonable settlement without having to go to court.
Unfortunately, our contract was so full of holes the developer was able to profit by breaching it. There are clearly some things that should appear in the contract of any prospective new-home buyer that were absent in ours. The whole idea is to ensure the solvency and legal responsibility of the builder, developer, and architect, and to foster resolution of disputes without litigation. Even if the house is properly constructed, you should consult a lawyer for all the myriad financial and legal pitfalls that have nothing to do with defective construction. In the area of new house construction, I recommend the following:
a) Never accept any contract offered by the builder. Even if it seems proper, have it totally rewritten by your attorney. Only then will he think about the meaning and implication of every sentence. If he doesn't think it necessary to re-write the contract, ask him if he agrees with every sentence, and if there is anything that could be construed as ambiguous. About real estate contracts in general, one attorney author wrote:
I cannot implore you strongly enough to read the entire contract, word for word, and to ask your attorney to explain each and every clause in detail. There are no stupid questions. After all, you are buying the home and signing the agreement, not your attorney. Don't let him get away with saying that a clause is "standard." Remember, yours is a custom deal. (Pollan 1988)
b) Have the contract state who is insured, by whom and for what problems. Although it may be unavoidable, you should not take possession of the house unless the insurance is in force.
c) Include a statement regarding financial solvency of the signers. You want to know that the people building your house are not close to bankruptcy. Some attorneys demand a performance bond from the builder. Others stipulate that a fixed portion of the sale proceeds will be kept in escrow for six months after you move in, returnable with interest to the builder if there are no major defects or disputes. A financially shaky builder will never agree to an escrow arrangement. If you and your attorney cannot ensure that the builder is financially sound, go elsewhere. You don't want to deal with someone who can't meet a payroll, let alone fix your house after you move in.
d) Make the signers of the contract responsible for everything: all "improvements" to the property, including house design, foundation, structural integrity, plus any problems arising from water leakage, improper landfill, etc. Those who sign should be unambiguously responsible for anyone you do not personally contract and pay for. (Remember that our builder's insurance company blamed almost everything on the architect, even though the architect was not hired or paid by us. One sentence in our contract stipulating that the developer and builder were fully responsible for anyone they hired might have greatly shortened the litigation process; such a stipulation would have made the architect another subcontractor, instead of an independent and uninsured professional.)
e) For a house you are building, or one that is not yet completed, insert a penalty clause to take effect if the house is not completed on schedule. This will require the builder to pay you a certain amount each day beyond the stipulated date of completion. This clause serves two purposes. First, it gives the builder incentive to finish on time. Second, should you be out of your old house before the new one is finished, it provides funds to pay for rent or for a hotel until you can move in.
f) Make title transfer contingent on satisfactory and independent review by an architect and/or structural engineer that you hire and pay for. If you are also concerned about environmental problems (e.g., radon gas), add an environmental survey as well.
It is mandatory that you and your expert be allowed to visit the building site at any time during construction. Even though you are buying the house, the builder can legally keep you off the premises until close to the date of completion, unless your contract states otherwise.
With the right inspection clauses in your contract, if you discover the house is not built right before you take title the builder should be legally obligated to fix the problem or refund any down payment. Even if your moving plans are disrupted, it is far better to find out about major problems before title transfers than after you own the house.
g) Do not allow the builder to use an occupancy permit as proof that his work is completed. More specifically, your contract should never require you to take possession simply because an occupancy permit has been granted. An occupancy permit guarantees nothing about the structural integrity of your home. And remember, inspectors for a municipality are immune from lawsuits (see Section 2).
At the same time, make sure an occupancy permit is granted before you take possession of the house. Except for rural areas, an occupancy permit is required before you move in, yet some builders sell a house without one. Don't get caught buying a house without a valid occupancy permit.
h) Stipulate binding arbitration for any disputes. Binding arbitration, which you can learn more about from the resources at www.arbitration.com, is where the disputing parties agree to abide by the decision of an expert panel. Both sides get a chance to present their evidence in an informal setting. If there is something truly wrong with your house the arbitrators will determine what has to be done. If the builder is told to fix something, and does not, a legal judgment will be rendered against him. (Binding arbitration is the one clause most lawyers are surprised we didn't have in our contract).
Ideally, the arbitration panel should include three experts, one chosen by you, one by the builder, and the third mutually agreed upon by all parties. Whether the panel includes one, two or three people, none of the arbitrators should be a local contractor or builder, or know your builder socially or professionally. A qualified real estate attorney will be familiar with the proper arbitration process.
The American Arbitration Association provides lists of arbitrators for every aspect of real estate transactions, including home construction. AAA has offices in many cities (check the Yellow Pages in your area). The address and phone number of AAA's national office are listed in the Appendix.
Of all the recommendations I offer in this chapter, mandatory arbitration may be the most controversial. The reason is that many homeowners have been burned by the arbitration process, and wish they had gone to trial instead. Take the case of a Virginia doctor, whose story appeared in Medical Economics,
March 6, 1989.
The physician then details how he ended up with an unfair arbitrator a local builder!
Because of horror stories like this one, many lawyers (as well as others) recommend against mandatory arbitration. However, with a proper arbitration process i.e., a panel of experts who are not local builders or connected with the people in your case in any way the process is bound to be fairer than what this doctor experienced.
The main reason I recommend an arbitration clause is that litigation is extraordinarily expensive and the laws do not allow for reimbursement of legal or experts fees, or for the time you will spend fighting the case. And, winning a legal judgment is no guarantee that you will be paid (see Recommendation No. 10). Yes, a trial and judgment that fully compensate you for repairs, aggravation and expenses would be better than what you are likely to achieve in arbitration. But the former is fantasy, the latter a realistic path to getting your house fixed and minimizing your losses.
The only acceptable substitute for binding arbitration is a contract clause stipulating that the losing side pays legal fees, a stipulation of value only if the signer is insured. If you cannot recover legal costs then go with binding arbitration, as long as the process is fair and impartial. If legal fees are not potentially recoverable, and your lawyer won't include an arbitration clause (or the builder won't sign it), show your lawyer Recommendation No. 10. If your lawyer still disagrees, I recommend against buying the house unless, for some reason, you can be certain it will be (or has been) well-constructed. Otherwise, you are leaving yourself highly vulnerable if things go wrong.
6. TRY TO OBTAIN YOUR OWN INSURANCE POLICY FOR DESIGN AND CONSTRUCTION MISTAKES. As discussed in Section 2, builder-offered policies supposedly insure against structural defects for 10 years, but in fact the policies often do not pay for major structural mistakes. I recommend instead that you search for an alternative warranty, which will no doubt be more expensive than a builder-sponsored policy.
Look for a special one-of-a-kind policy that some insurance companies (not builders) may offer. Traditional homeowners' policies cover fire, theft, etc., and specifically exclude defects of design and workmanship. However, a few large companies (Lloyds of London; Chubb Insurance Companies) will write a new-construction policy in some areas. We did not appreciate the need in 1985 for specific structural insurance. Such insurance might have saved us a fortune and years of heartache.
If you are building or buying a new house, call an insurance broker of any large company and tell him you want a policy so that no matter what is wrong with the house, they will pay to both investigate the problem and to fix it according to local building codes. If such a policy exists, consider buying it, even if there is a large deductible of a few thousand dollars. Make sure the policy will pay to fix defects without you having to prove them in court.
The insurance company might offer such a structural-insurance policy as umbrella coverage on top of the builder's own warranty or the builder-sponsored homeowner's warranty (e.g., the HOW). You will have a much better chance of buying such a unique policy before the house is built or before you take title, because then the insurer can inspect the house while it is being built, or at least before you own it. After you move in, such a policy may be much more difficult to buy. In any case, before you buy any structural insurance policy, including the HOW or similar builder-sponsored insurance, have it reviewed by your attorney.
7. MAKE SURE YOUR NEW HOUSE IS NOT BUILT OVER A TOXIC WASTE DUMP. Love Canal. The name brings to mind homes built over a toxic dump, on land too polluted for human habitation. Of course Love Canal refers to a specific place, a neighborhood of Niagara Falls, NY, where homes were built on land previously used for toxic waste disposal. In the 1970s and 1980s Love Canal homeowners became ill from fumes and toxins invading their homes. After much bitter wrangling and mountains of bad publicity, most of the homes were bought back by the federal or state government.
Toxic homes are more common than most people realize; like bad construction, the problem exists all over the country. The entire town of Times Beach, MO was abandoned in 1983 because tests indicated that highway spraying had left high levels of the poison dioxin in the soil. Buy a home built over a toxic dump and you not only have to worry about loss of equity, but also about your and your family's health.
A couple profiled in Money Magazine ("Home Sweet Toxic Home," June 1992, pages 124-139) bought a $91,000 home in a Savannah, GA subdivision. Defects in the subdivision's 44 houses, such as warped door frames and crooked windows, were ultimately traced by county inspectors to emission of methane gas.
Where did the methane comefrom? Decaying tree stumps, scrap lumber and other debris, dumped in the site a decade earlier, were emitting the gas. Because of the risk of explosion, the entire subdivision was evacuated and the streets sealed off. After investigation 35 of the homes were declared uninhabitable, and the county bought them from the homeowners at fair market value. Nine of the houses including the one owned by the couple profiled in Money were deemed safe to live in.
The 'lucky' few homeowners with safe houses were told they could move back. Into what? A ghost subdivision. And houses that had lost half their market value. No way, said these homeowners. Instead, they filed lawsuits against the county and the subdivision's developer.
How common is the toxic waste problem for homebuyers? According to the Money article:
What can you do to protect yourself from this nightmare? A lot, depending on how concerned and compulsive you are. Here are a few steps, taken from the Money article and other sources, to make sure your new house is completely safe from toxic wastes.
8. HIRE INDEPENDENT PROFESSIONALS TO REVIEW THE PLANS, THE CONSTRUCTION, AND THE COMPLETED DWELLING. If you follow only one of the recommendations in this chapter, make it this one. If the architect is paid by the builder or developer, by all means obtain independent review of the plans. If the design is being built for the first time, also hire an independent structural engineer to review the plans. Such a move on our part might have uncovered the inadequate steel beams long before they were installed.
One structural engineer, not involved in our case, told us, "architects are trained to draw pretty houses, not build sound ones." This engineer had testified in cases where the architect's design had been defective. He was dismayed at architects' lack of know-how in building a structurally sound house.
Some may differ with this engineer's assessment but in our case, at least, the architect was demonstrably incompetent in the most important area design of the supporting steel beams for the house. In this crucial area he did not consult with a structural engineer. Had he done so, I believe we'd still be living in the house today. (That he proved to be dishonest about his role only added to our difficulty. The engineer may be right about architects' general ignorance of structural matters, but I have always admired the profession and was stunned when our architect lied about his mistakes.)
In any case, don't worry about the minor stuff; too many home buyers worry about scratched floors and not the steel beams underneath them. Too many people concern themselves with the finish of the cabinets and not the supporting walls behind them. If you must worry, worry about the structural integrity of your home. You cannot properly check it out yourself, so don't even try. Hire a professional.
If you are building the house, the earlier in the construction process you have an independent inspection, the better. If you wait until after the foundation is completed, it may already be too late (see case of Mr. and Mrs. F). If you are buying a completed house or condo, make sure you have the house inspected by a qualified engineer before you make any financial commitment. In all cases insist on a written report.
Where do you find the right experts? First, of course, ask your attorney for a recommendation. If he can't recommend the right expert, let your fingers do the walking. Every sizable city has engineers who know how to inspect houses for structural defects. Check the following listings in the Yellow Pages:
Make several phone calls. Tell the person you speak with exactly what you want and ask how they can help. Ask what the charges are and what you can expect for this money. Eventually you will find someone who seems to have the experience you need and is willing and able to inspect your new house or condominium. Make sure they are not friends or relatives of the builder or anyone connected with constructing your house.
Expect to spend 1/4 to 1% of the cost of the dwelling (not counting land) for an independent structural investigation. If done properly, it will be worth every penny. This extra expense will help ensure the proper construction of your home. If you buy the house during construction, try to visit the site a few times with your independent expert. Ask questions. And make sure you obtain written reports from your expert. No matter how you manage supervision of construction, don't depend solely on your own surveillance. I was at the building site almost daily, for all the good it did. However, if you do see something wrong, speak up. The builder will be most receptive before the house is finished. If the builder is unresponsive to your calls or complaints, consider walking away from the deal. This may not be easy, but consider it anyway. Otherwise you may be in store for future headaches.
Just prior to move-in on any new house, have the structure inspected by a seasoned professional who had nothing to do with its construction or design. It's critical that you hire and pay him. NEVER rely on bank or municipal inspectors. Their inspections are a rubber stamp only, a fact that is no secret to anyone who has bought a defective house.
Building codes vary widely across the country, but an occupancy permit from any town or city inspector means the same thing everywhere: the plumbing works and you can move in. Our house was neither designed nor built in accordance with local building codes, but we (and countless other victims of faulty-construction-not-built-to-code) still received an occupancy permit. The title "inspector" for any agent of the bank or municipality is really a misnomer. These people make no attempt, nor do they claim, to inspect for construction, structural, or design defects. And don't forget: the doctrine of sovereign immunity means that neither the municipality nor the inspector can be sued.
9. KEEP DETAILED RECORDS. DOCUMENT EVERYTHING. When it became evident that our builder did not understand the problems with our new house, I began keeping a log of all conversations and interactions with him and his workmen. From the beginning of construction we had saved all the written correspondence about the house (mainly letters and bills), but never dreamed we would end up documenting who said what and when.
If you end up in a dispute, you should expect distortions and alterations of events by the other side. Long before we filed our lawsuit, we realized the builder was distorting the truth about our complaints. At that point (about eight months after we moved in) meticulous documentation became imperative. Subsequently, over a three month period, we wrote four detailed letters to the builder and developer, laying out exactly what the problems were, and how they had not been corrected. These letters served notice that no one could claim ignorance of the problems, or that there was a misunderstanding of our complaints. Along the way we also took numerous pictures of the specific defects.
I can't say all this documentation improved our legal outcome, but it did prevent the defendants from blatantly lying after the lawsuit was filed. It is hard for a builder or developer to say he never heard from you when there is proof he received your certified letters!
Keeping the defendants from lying is only one reason to document everything. Another reason is to keep facts and events straight in your own mind. A year or two later, you are not going to remember who came to fix what, or what the builder said when, and that information may one day be valuable. Detailed records will also make it much easier for your lawyer, should you need one, to understand the history of any dispute you have with the builder.
I recommend you keep a dairy about the house from the moment you start to build or decide to buy. The diary need not be extensive, and may consist of only a sentence or two whenever you have a conversation with the builder or his workmen, or when you visit the construction site. "Spoke with Builder X today. He said the foundation's eight footers will be finished next week."
I also recommend you keep every letter and memo received in chronologic order, either in a three-ring binder or scrap book. Finally, I recommend you (or your independent expert) photograph the construction at every opportunity. Date and label each picture.
All of this documentation can be done unobtrusively. You don't have to be obnoxious or sound threatening. Your aim should simply be to document everything about the house so that, if there is ever a dispute, you have the information you need at your fingertips.
10. IF AT ALL POSSIBLE, AVOID GOING TO TRIAL. Avoid going to trial? It must seem strange that you want to build or buy a new house and I'm advising you to keep out of court. That's a little like reading a book on how to play soccer that advises, "avoid going to the hospital."
If you end up with house problems that make you want to haul the builder into court you are, as they say, in deep trouble. That is why I strongly recommend prevention as the first line of defense. The second line is a contract that stipulates binding arbitration against an insured builder. The third line is to do your best to avoid going to court. If you can effect any kind of reasonable settlement, give up the court date. What is a "reasonable settlement" is for you and your attorney to decide, but in the context of civil litigation it will almost always be one where you lose some money.
So why should you avoid trial? Check out anyone victimized by defective construction and you'll find the same aggravations, only different players. Every victim has tales of dishonesty, greed, incompetence, lying, and an appalling lack of integrity. And stories of an indifferent or unfair legal system.
Can you win legally against an irresponsible builder or developer? Can you win financially? What are your chances of coming out ahead, or even whole, by pursuing a lawsuit over defective construction all the way to trial? Unfortunately, your chances are not very good.
In a civil lawsuit your goal is basically monetary: money to get your house fixed, or a fair price from the builder to buy it back, or reimbursement for the cost of repairs. You would also like damages for all the aggravation you've encountered but, realistically, you would be satisfied just to recoup your expenses and enough money to get the house properly fixed. Legally, your case seems straightforward. Builder X constructed your house, it is defective in some major and provable way, and you want it repaired or the house bought back at a fair price. Above all, you certainly don't want to lose money on the house.
So you plan to hire a lawyer and sue for redress. Sounds simple enough, right? Wrong. Very, very wrong. It's not for nothing that Builder X has refused to fix your house or has ignored your complaints. He knows you have an uphill legal battle, that the odds are heavily in his favor in any litigation. By refusing to make proper repairs he has said, in effect, "Sue me. See if I care." He probably doesn't. If he is that type of person, he has good reason not to be concerned. Let's look at the steps you must accomplish to achieve proper financial redress in a civil lawsuit against an irresponsible builder or developer. These steps are the same if the builder is or is not insured.
The recommendations made in this chapter are listed on the next page in tabular form, according to whether you are building a new home or buying one already built. I realize they may seem a lot of bother, perhaps more than any hard-working, non-litigious person cares to consider. They won't be easy to implement and, in the aggregate, could add several thousand dollars to the cost of your new home. However, depending on your own circumstances, all of them may not be necessary.
The goal in all cases is simply to protect yourself and ensure a well-built home, not to scare away competent, honest, responsible home builders. Unfortunately you won't know who is competent, honest and responsible ahead of time. Considering the potential added cost and aggravation if your house is built defectively, anything you spend to prevent problems is worthwhile.
There is one sane alternative, of course. Don't mess with a brand new house. Unless you have deep, deep pockets, or special knowledge about house construction, you just might be better off buying a used home. It's already been lived in and there is no developer, builder, or architect to deal with. That doesn't mean there won't be problems, of course, but at least you can't be disappointed by a builder's empty promises and guarantees.
With the purchase of any used home I also recommend you obtain three independent inspections before title transfer: one from a general house inspector, one from a structural engineer, and one from a termite inspector. If the subdivision is new, or the surrounding homes are just a year or two old, you might also want to investigate the land to make sure you're not buying on top of a toxic dump. In any case, you certainly want to avoid the kinds of problems often found with new construction.
It is conceivable that someone who bought a new house, and found it to be defective, is now trying to sell the house after a year or so without proper disclosure (having decided, for obvious reasons, not to fight a legal battle with the builder). Many states are contemplaing mandatory disclosure laws; whatever your state or community's policy is on disclosure of defects, you can never be too careful.
If you find a used house you like, the price is right, and all inspections are satisfactory, buy it!