10 Things Builders Won't Tell You

by Wall Street Journal "Smart Money Magazine" staff, 08/11/2009
Source: http://www.smartmoney.com/spending/for-the-home/10-things-your-home-builder-wont-tell-you/

1. “I’ll build your house on marshmallow.”

Population growth and urban sprawl mean there’s not much residential land left in many areas these days-and what there is may not be ideal. Shortly after John Duffy and his family moved into their $234,000 home in Highlands Ranch, Colo., long cracks started showing up in the walls and the porch started pulling away from the house. After badgering his builder for the soil report, Duffy learned his lot was a hot spot for potential swell. (Writer Homes, the builder, was ordered to pay Duffy $544,000. John Palmeri, Writer’s attorney, says the company offered to fix the Duffys’ house, but “they were bent on going to court.”)

The Duffy family isn’t alone. In fact, a number of homes today are being built on “expansive soil” - earth that swells when it rains-without adequate safeguards. How common is the practice? About 50 percent of homes in Southern California are built on expansive soil, according to Patrick Catalano, founder of The Law Firm of Catalano and Catalano in San Francisco and San Diego, which specializes in real estate and construction defect litigation.

[HOT: Working with the Texas Society of Professional Engineers, we got legislation passed to require professional engineering of slab foundations for homes built on expansive soils.]

But soil isn’t the only issue when it comes to shoddy construction. In October 2007, four hillside homes built in La Jolla, Calif., slipped off their foundations, burying two other dwellings in an alley below, after a landslide that damaged some 111 homes. Catalano, who’s representing the owners of 25 of these homes, says that in about 20 percent of cases, the home builder is at fault, since the landslide occurred within 10 years of the home being built. (These cases are pending.)

2. “I won’t just cut corners-I’ll sever them.”

Substandard work has always existed in home building, but the collapse of the housing market and the increased costs of construction are making the problem worse, says Jonathan Alpert, a retired Tampa, Fla., attorney who represented homebuyers. Alpert says he’s handled cases in which builders didn’t seal roofs, in which two-inch concrete slabs have been used instead of the four-inch slabs specified, and in which sewage pipes have been cross-connected to drinking-water pipes.

In some cases, builders are skipping steps dictated by municipal building codes. In one Sarasota, Fla., gated community called Turtle Rock, four families cut open their houses in 1998 to ferret out the source of some mold growth. What they found, in addition to wet lumber, were several code violations, including missing hurricane straps, which are steel plates that tie the wood frame together and to the concrete base. Says Brian Stirling, the structural engineer hired by the homeowners to investigate, “If we’d had a strong storm, they would have had some serious problems.” Like what? “Like losing their top floor.” In 1999 the builder, U.S. Home, agreed to buy back the four houses and said it would make county-supervised repairs on 12 others in the subdivision. “We dispute the extent of the problems,” says the builder’s attorney, Fred Zinober. But by settling the case, he says, “U.S. Home did the right thing.”

“It used to be during the housing boom that builders were cutting corners because they were putting things up as quickly as they could stand,” Alpert says. Now the issues are inflationary pressures on builders and the need to increase profits. “The cost per square foot for construction is actually increasing while home prices are decreasing,” Alpert says, “so that’s putting pressure on builders to cut corners.”

3. “This is a rogue’s industry.”

Given how complicated it is to build a home, and how serious the implications are if it’s done incorrectly, you might expect home builders to answer to rigorous regulatory authority. Think again. According to the most recent survey by the National Association of State Contractors Licensing Agencies, only 18 of the association’s 27 member states regulate home builders. And of those member states that do regulate, only 15 require any kind of exam-Arizona and Maryland being two of them-and only 13 require on-the-job experience. Two states, Louisiana and Utah, have continuing-education requirements, but they’re the exception.

But greater regulation comes with a price. “Red tape and compliance issues add cost to building a new home,” says Carlos Gutierrez, assistant staff vice president for the National Association of Home Builders (NAHB). “And that cost is inevitably passed on to the consumer in the form of a higher-priced home.” While he acknowledges that some regulation of the industry is necessary, even welcome, Gutierrez adds that “at a time when affordable housing continues to be a crisis nationwide, governments ought to be careful not to overregulate.”

HOT: NAHB cites this common battle cry, "It would add to the cost of a new home," for anything they don't like. Like many industry associations, NAHB primarily serves the interests of the members who fund most of the organization: big volume builders. NAHB does not speak for all builders, or arguably even most of them. Many of the reputable builders we've spoken to are frustrated having to compete with contractors who submit low-ball bids and cut corners with substandard materials and shoddy work. This "silent majority" of good builders favor strong regulatory oversight, because they know it will help to weed out the bad builders, help restore the declining reputation of their industry, and improve their earning potential.

4. “Public inspectors won’t catch my shoddy work.”

Max Curtis, a Livermore, Calif., private home inspector, says he hears it all the time from his home-buying clients: “Their builder tells them, ‘Why do you need your own inspector? This has been signed off on by the municipal building department.’”

Sure, the public inspector is required to check out your new house, but only to ascertain that it’s built to code-essentially, that it’s safe to live in-not that it is well constructed. “They’re just looking to see if that wall is up and painted,” says Dwayne Jones, a Memphis builder.

And sometimes they don’t even do that well. On one inspection, Curtis found 64 items that the municipal inspector had missed, including a gas water heater lacking flues (without which the heater may leak poisonous carbon monoxide). Bottom line: Don’t rely solely on the word of a public inspector; hire your own person to inspect the building as well.

HOT: Inspectors who are overworked, lazy or dishonest can miss (or conceal) shoddy work. Unless they are licensed and face losing their ability to work, their loyalty is to those who hire them: municipalities or builders themselves. Too many municipalities stress growth over safety. Growth feeds the tax base and increases the political power of elected officials, so there's often an incentive to overlook building code violations. In Texas, counties don't have rule-making authority, so they can't enact tougher building codes and inspection requirements even if they want to.

5. “Your warranty may be worthless.”

Many home builders tout 10-year warranties as protection against future problems. But these warranties are often extremely limited in coverage, particularly after the second year. “It gives people a false sense of security,” says Brent Lemon, a Dallas attorney who represents homebuyers. “Most of these basically require that the house fall down on top of you before they kick in.” Consider the warranty offered by Denver, Colo.-based Home Buyers Warranty. It lists 71 exclusions and, like many, states that the home must be “unsafe, unsanitary, or otherwise unlivable” to get structural defect coverage. Em Fluhr, the warranty company’s CEO, says, “If [homebuyers] detect any worsening of the situation, they can submit another claim.”

The root of the problem with warranties is that builders characterize them too broadly when they say they’ll help protect homeowners in a structural problem, says Anne Stark, a Dallas attorney specializing in homebuyer complaints. “Structural-defect coverage often covers only catastrophic failure,” Stark says. “Builders will say you’ve got a great warranty, but then you wake up in the third year with cracks all over your house and you call the warranty company and they say, ‘Sorry, it’s not a structural failure.’”

Some states, like Texas, are aiming to alleviate the problem: In 2003 it created the Texas Residential Construction Commission to help builders resolve disputes without litigation. “We require a warranty whether the builder wants to give it or not, and that warranty needs to meet the minimum level of state standards,” says Duane Waddill, executive director of the TRCC. “Even if the builder goes bankrupt, the buyer has additional protection.”

HOT: Duane Waddill is incorrect and makes it sound like the requirement to meet minimum state warranty standards was a good thing. It was not. The TRCC replaced the implied warranty of habitability with illusory standards with many exemptions that made them nearly worthless. The TRCC warranty standards often made things far worse for consumers by removing builder accountability and forcing disputes into binding arbitration.

By taking on the $35 Billion Texas homebuilding lobbyists and convincing lawmakers to abolish the TRCC, we restored the implied warranty. To make sure you don't lose the protection of that warranty, we strongly advise against signing any 3rd party warranty agreement that the builder presents to you. At least have a good real estate attorney check it out, because many "free" warranties that builders offer as a gift to you are designed primarily to shield them from accountability.

6. “Once you move in, you’ll never see me again.”

Even before Denise Burton and her husband closed on their Glendale, Ariz., home, they knew there were problems. Their walls weren’t plumb, for example, and there was no framing behind one. Worried about losing their low interest rate, they moved in anyway, with a promise from the builder, Diamond Key Homes, that everything would be fixed once they got in.

It didn’t happen. Burton says she made at least a dozen calls to the Phoenix-based builder over a four-month period and sent letters and faxes. Mostly, she says, she was ignored. And when the builder did send workers to her house, Burton says, “they’d make it worse.” It took a year for the builder to finally make all the proper fixes, she says-and that was only after the state agency that regulates contractors, acting on Burton’s complaint, temporarily revoked Diamond Key’s license. (Diamond Key declined to comment and has since been acquired by another company.)

Indeed, it’s one of the ironies of building a house. During construction, you can’t wait to finally get all those construction workers out of your sight. But “once the home is built,” says Jason Clark, a consumer advocate focused on home-building issues, “you can’t find the builder with a Texas posse.”

HOT: We've found that most builders will return for simple, cosmetic repairs during the first month or year after closing the sale, but they often refuse to repair major defects.

7. “Good luck going after me.”

Buried in nearly every home-purchase contract is a clause that reads something like this: “Any dispute that arises between the builder and the purchaser will be decided in binding arbitration.” Most buyers sign on the dotted line, not knowing that they have just waived their right to take their builder to court. “Arbitration is being sneaked into those contracts, and nobody knows what it means until it’s too late,” says Dennis K. Drake, a San Antonio attorney who represents homebuyers.

What’s wrong with arbitration? Well, for starters, arbitrators are less likely than juries to award treble damages-or three times the amount they lost-say construction-industry attorneys. Also, though arbitration costs have significantly declined in recent years, it’s still expensive. First there’s the filing fee-which, for a homebuyer’s claim under $75,000, is $375, if administered through the American Arbitration Association (AAA)-plus the added expense of a lawyer. Often, “it’s so prohibitively expensive that consumers may find they just don’t want to pursue a claim,” says Drake.

In addition, construction-industry attorneys say that the fact that builders are the “repeat customers” in arbitration means there’s a greater chance they’ll be favored. If a builder regularly nominates the American Arbitration Association, for example, that builder may be in front of AAA 10 to 12 times a year, versus the homeowner’s one time. For that reason, some construction-industry attorneys recommend using retired judges or arbitrators instead.

“The builders do put arbitration clauses in their contracts, but it’s the homeowner that files the complaints,” says Robert Meade, senior vice president of the American Arbitration Association. “We get 130,000 cases a year, and less than 300 of those are homeowner cases, so the dollar amount is meaningless to us.”

8. “Your home won’t look like the ones we toured.”

It’s easy to be impressed with the model home your builder shows you. Who wouldn’t love the lush curtains and intricate crown moldings? Unfortunately, the house you buy may not have the same flourish or feel as the model. Few decorative touches are standard, and builders are notorious for using sneaky design tricks to make model homes more attractive, such as putting in scaled-down furniture to make rooms look bigger.

Maria Lo Bianco, a buyers’ broker in Springfield, Va., admits to playing this game in her previous job as a builder’s marketing executive. “If I know it’s a small foyer, my challenge is to get the buyer’s eye off it so he has no idea how small it is-until he goes to settlement and can’t fit his furniture,” she says. “If the dining room is visible from the foyer, I might do an exotic color design there and leave the foyer plain.” Showing a home in its best light is one thing, but some practices are downright deceitful. Builders, for example, will often plant grass where the driveway would go to make the lawn look bigger, according to Alan Fields, coauthor of Your New House.

Bottom line: “If you think you’re getting the model home,” advises Tim Carter, a builder and syndicated columnist, “you’d better be writing down language in the contract that says it’s going to be exactly like the model.”

HOT: Builders have learned where to cut corners and where not to. Marble entries, textured walls with rounded corners and crown molding, and granite counter tops with Moën faucets imply quality, but what's behind the walls or under the concrete foundation?

9. “I haven’t budgeted enough for decent light fixtures.”

It sounds like a reasonable practice-rather than specifying every item for a house, a builder will set cost allowances for things such as light fixtures or carpeting. That way the buyer gets to pick out what he wants. The trouble is, many builders use allowances as a bidding strategy, lowballing the cost to keep the total price down and land the contract.

When author Fields and his wife bought their house back in 1990, he says their builder gave them a $500 allowance for all their light fixtures. That sounded great-until “we walked into the store and were just floored by the prices,” he says. The couple shopped for discounts but still ended up spending double that amount on lighting.

Jones, the Memphis builder, says that lowball allowances are common in his region. Today the usual range is roughly $1,000 to $1,500 for light fixtures in a three-bedroom house, but the real bill is probably going to be more than double that. “And that’s for cookie-cutter fixtures,” Jones says.

10. “You may wind up seeing double.”

It’s no surprise that if you buy a tract house, you’ll eventually come across a carbon copy, probably in your own neighborhood. But you don’t expect that to happen when you’ve ponied up for an “exclusive” design. Nonetheless, “we see ‘custom builders’ offering standard floor plans on their websites all of the time,” says Ralph Hudson, owner of Florida-based American Builders Network, a resource for consumers looking to connect with home builders. “So often the exteriors and elevation are the same, but the interior is slightly modified.”

In most cases, if an architect makes an exclusive design for a home, that design is licensed to the builder and the builder has the right to use the design for one specific project and nothing beyond that, explains Jay Stephens, vice president and general counsel at the American Institute of Architects. If that builder turns around and executes that design for other houses down the road, legal recourse is warranted: “If a design is copyrighted, you’ll ultimately have to bring it to court,” says Gutierrez of NAHB.

Though difficult, it is possible to take preventative measures. If a homeowner has a contract directly with an architect, Stephens suggests asking him to include a clause that states that the design will not be replicated.

11. Protect Yourself - HOT offers its own "10 Things to Know to protect yourself and your new home investment."

READER COMMENTS:

Posted By: Brokerblogger
My builder delivered a "Cleaner Upper" and a "Fixer Upper" because he legally was able to do that. Probably other tract home builders also have a "Substatial Completion" clause in their "Agreement of Sale" that basically says they can deliver an unfinished house (e.g. = "exterior concrete, driveways, final grading and exterior painting") as long as the house has an "occupancy permit" issued by "the local building authority", or "when the Home is otherwise habitable". The builder decides when the house is "habitable"! My "Settlement" clause says: "If we agree to allow You to postpone Settlement, You agree to pay Us an amount equal to one-thirteenth of 1% of the Purchase Price for each day that Settlement is postponed." So, while the builder agrees to "complete unfinished work" ASAP, they decide what "ASAP" actually means! We got many excuses why some things took so long. For details of our one year of aggivation with much of our time wasted before all 100 problems got fixed, see http://www.brokerblogger.com

Posted by: emtyn1
I really have forgotten how I learned this, whether it was during my brief real estate career or when I paid to have my ductwork cleaned. My children had allergies, so after we were in the house several years, we paid to have the ductwork vacuumed out. When you buy a new house, you have this illusion of getting something pristine, top to bottom--with clean air ducts. Not so. During the course of construction all kinds of dust, dirt, sawdust, and whatever gets in the air ducts. A pissed off construction worker could throw his lunch trash in there for all you know. This is not cleaned out for your benefit by the builder before you move in. If you want clean air ducts, you better pay a separate contractor to do it.

Posted by: wcaswell [HOT]
The lesson out of Texas this year is that it's indeed possible to take on powerful lobbyists of ANY industry and win. HOT (www.HomeownersOfTexas.org) did this with no funding, compared with millions spent by the powerful builders' lobby and huge campaign contributions. Bob Perry of Perry Homes, for example, gave over $21M since 2006 to all but six Texas lawmakers and all nine Texas Supreme Court justices. We estimate that at least $500K was spent on attorney fees to draft the bills the builders were pushing this year. We spent nothing, because we had nothing. But we did have in-depth knowledge of the legislative and lobbying process and effective and well-coached witnesses. We also did our homework with problem analysis and solution engineering and introduced workable alternatives that were too good to ignore, thus earning respect of the lawmakers who made the ultimate decision. As for EXPANSIVE SOIL, check out our paper: http://www.homeownersoftexas.org/Soil_Issues.pdf.

Posted by: onlyintexas
Excellent article. This year in Texas it was an overall effort by numerous consumer groups factored in with state representatives who are representating their constituents against homebuilders that brought TRCC down. The timing was right. It is incredible what some of these builders get away with. My builder had a good rating at the BBB. It has been a nightmare while they are protected by that organization as well as TRCC. Go to Homeowners Against Deficeint Dwellings and Homeowners for Better Building for the fulll impact of this story. Many thanks to the reporter for bringing this story to the public's attention. [HOT: It's not clear who posted this comment but, to clarify things, HOT was primarily responsible for taking down the TRCC, and our success was in spite of having to oppose two consumer groups that negotiated with builder lobbyists and supported their bill to extend the agency without understanding how bad the bill was for consumers. HADD was not one of them and supported our work all along.]

Posted by: nancyseats
#7 Good Luck Going After Me is so true. Forced arbitration clauses have caused many a homeowner to end up letting their home go to foreclosure because the builder wins, cost of repair is sometimes nearly half the original cost of the home, and you can't be sure of getting proper repairs.

It should be noted that #5 The Illusory, worthless warranty will also have a forced arbitration clause naming the arbitration company that must be used.

Everyone should call their Representative and Senator's in Washington DC and ask them to support the Arbitration Fairness Act of 2009 that would ban forced arbitration clauses in consumer contracts. These clauses are a license to steal with impunity.

Posted by: emtyn1
When the furnace had to be replaced, the contractor we hired informed us that the insulation around the old one was improperly done. Shouldn't the building inspector's office have found that? The contractor said it left our home at risk of having a fire starting above the furnace. What was above the furnace...my childrens' bedrooms. Lesson learned: hire your own private inspector and do not take possession until your demands are met. You can easily do this if you rent month-to-month somewhere after your previous house is sold. NEVER let a builder have you where you gotta move in because you have no where to go.

Posted by: emtyn1
...oh and we've learned the extra foundation material it would have cost the builder to accommodate the expansive (shrink-swell) soils that could have saved us $10,000+ would have cost him $200.

Posted by: emtyn1
This looks like a pretty GOOD article to me. My husband and I found out the hard way about 'expansive soils'. We thought building code inspectors were supposed to protect us from homes with problems like this. We bought a home in Chesterfield County, VA in the early '80s before building codes were tightened up for this problem. Bad mistake. After two foundation repairs (the first the 10-yr warranty paid for, the second we paid for after our still not-fixed house got more cracks and the warranty company was now belly up), we decided to just stay here. We don't think we could sell our house any way but as is. We also really hate to pass this headache on to someone else. The wonderful builder whose name was mud in this area after more and more of his houses got shrink-swell problems, moved to North Carolina to resume his business. He was formerly a respected builder and even served as president of the local builders association. I would never buy a spec home again, only custom. Those smaller builders have more at stake I think.

Posted by: wcaswell [HOT]
Great article, but I'll comment on points #1 and #5. I represent Homeowners of Texas, a year-old nonprofit that took on the $35 Billion Texas homebuilding lobbyists this year. Working with the Texas Society of Professional Engineers, we got legislation passed to require professional engineering of slab foundations for homes built on expansive soils. And most notably, we got lawmakers to abolish the Texas Residential Construction Commission. Your article quoted TRCC executive director Duane Waddill and described the agency as requiring builders to meet minimum state warranty standards. But those standards replaced the implied warranty of habitability and made things far worse for consumers. Abolishing the TRCC fixed that. We're new and anxious to hear from potential supporters. (www.homeownersoftexas.org)