Housing steals: Protecting buyers from building defects

Portland Business Journal
Friday, April 18, 2008
BY DEAN ALDRICH, ALDRICH LAW OFFICE

The current surplus of unsold new residential properties can be good news for buyers.

Many builders and developers with excess inventory of homes, townhomes, and condominiums are reducing prices, offering special incentives, and even holding auctions.

However, buyers in this market must tread lightly, because the opportunity comes with increased risk. The property may have rested vacant for some time, may need maintenance, may have ongoing (but undiscovered) problems, or may have been finished haphazardly.

The developer or builder, and subcontractors, may be out of business or financially unstable, or the property may be sold by a party other than the builder or developer.

The sale contract may contain language to limit the buyer's rights if the property turns out to contain construction defects. The cost to repair these defects unfortunately can easily outweigh any discounts obtained in the purchase price. Litigation to seek reimbursement of these unforeseen repair costs is expensive and time consuming.

Overlaying and amplifying these concerns is the recent movement in the building and insurance industries to limit buyers' rights and disclaim builders' responsibilities for construction defects.

We haven't gone back to the age of "caveat emptor" with respect to residential properties, nor do I think we will. However, when obtaining a new residential property as a home or an investment in this market, buyers should take precaution before closing the deal, and be knowledgeable regarding the steps in resolving problems that are discovered after closing.

What can you do to protect yourself in advance? If you later have a problem with your new residential property, what are your options?

BEFORE SALE: DO YOUR HOMEWORK

• Read the contract ... carefully: Know the terms of the deal by simply reading the contract. Pay extra attention to inspection provisions, warranty language (which can also be recorded on the title to the property), warranties that are to be provided by third-party companies, "as-is" clauses, disclaimers, timing requirements for a claim, dispute resolution procedures, and the like. It may be prudent to see a lawyer -- don't assume that some of these provisions may not apply, or be illegal (even though they may). As noted above, there have been increasing attempts to limit buyers' rights and disclaim developers/builders' responsibilities in contracts for new homes and condominiums.

Familiarize yourself with your rights before signing, and don't be afraid to request changes. Builders/developers might be reluctant to alter the terms of their deal, but this is a buyer's market. Take advantage of this situation to avoid getting caught later.

• Inspect the property: Besides reading the contract, be sure to inspect the home thoroughly. Yes, even a new home should be inspected. Take the time to do it yourself, but also hire professional inspectors. A "whole-home" inspector will look at everything from the crawlspace to the roof, but also consider hiring an "envelope" expert to take a closer look at the exterior envelope of the building (roof, siding, decks, and windows).

However, this can be impossible regarding condominiums. Condos can involve many units (aside from the one being purchased), buildings, and related elements.

If your builder refuses to address any problems you find, move on. There are too many properties on the market right now to buy one with potential problems.

• Know the property's history: Oregon law does not require a builder to provide a seller's disclosure form on a new home, and condominium laws are similar. Thus, it's up to you to discover the information you want to know. Were there problems during the construction? Leaks or water damage? Repairs? Drainage issues?

Were there previous failed sales, and if so, why? Have there been problems with other properties in the same development?

For condominiums, is there a home owners association and is it funded appropriately? Are there special assessments on the horizon for repairs or maintenance? If a home or unit has sat for awhile unoccupied, was it heated during that time? Get the answers in writing.

• Know the developer or builder: Do some research. Check on previous claims. Check on financial stability. Check on insurance. Check on reputation.

AFTER CLOSING: FIXING PROBLEMS

Problems can happen after closing, regardless of a buyer's care and negotiations in purchasing a property. Hidden and significant defects can be discovered; damage can occur. Representations regarding the construction can turn out to be wrong. Promises can be broken. The builder/developer can refuse to correct the problems despite warranty language, or provide mere "Band-Aid" repairs.

Fixing problems when they reach this stage involves a multi-step approach. Timing can be an issue to legally preserve your claim, depending on the circumstances, so a lawyer should be consulted.

• Identify the scope of the problem and the repair: Many defect problems can be difficult to identify, and may involve different elements of the building. Independent experts need to evaluate the problem and determine the scope of repair. Independent repair bids should also be obtained.
• Provide legal notice to the developer or builder: Oregon law requires that notice be given to a contractor prior to instituting legal action or arbitration against the builder. The notice needs to identify the problem, and include any available reports and repair bids. The notice has certain legal requirements to be effective, and preserves legal timing limitations that may otherwise apply. Again, a lawyer should be consulted in providing this notice.
• Resolving the claim through litigation or arbitration: If the developer or builder does not fix or resolve problems after receiving the legal notice, the process must move to a binding format to provide resolution. The contract may provide for arbitration, or litigation may be more appropriate.
• Resolving the claim through the CCB: Under certain circumstances, the claim may also be resolved through the Construction Contractors Board. In today's market, the opportunities are plentiful, but take a few simple steps to avoid the pitfalls, and know your rights if there is a problem with your new home.