And They Built A Crooked House, by Ruth S. Martin

CHAPTER 35.

How to Protect Yourself When Building
or Buying a 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.


What happened to us should never happen to another new-home buyer. By taking a few cautious steps you can safeguard the integrity and value of your new house. Understand we were not swindled. We did not enter into any shady deal and no one ran away with our money. We simply contracted for a custom-built home and thought we were going about it correctly. We thought we were dealing with competent, honorable men, and that we were legally protected against any major problems. What did we do wrong? We answered this question many times with `What should have been done' scenarios. What if we had used another builder? What if we had hired our own architect? What if..., what if...? Our trial lawyer's answer, after all the facts became known: "You didn't do anything wrong. You were just unlucky."

Bad luck is only part of it. Any problem that is 100% man-made can be prevented. We just didn't know how, and our contract lawyer evidently did not know either. In the final analysis, our bad luck was to enter into a legitimate business deal where practically everyone involved was either incompetent, inept, or lacking in business integrity. If any one of the people involved had done their job properly, or competently, or as promised in writing, our painful experience could have been avoided, or at least greatly ameliorated. We had a lawyer whose contract left unclear the major issue of responsibility; a developer consumed by greed and a vindictive business ethic; and a builder and architect less than competent by anyone's standard. The pain of litigation was every bit as great as the pain of learning we had a defective home. After the facts became known we encountered a defense based on denial, distortion, and intimidation, causing us to incur enormous expense for lawyers and experts.

The emotional, legal, and financial nightmare we experienced can be prevented. Only now too late for us, but not for you do we know how to do it. 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 when you try to truly 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, fine. Count yourself lucky. You have discovered what he is like up front. 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 HE BUILDS YOUR HOUSE DEFECTIVELY.

You must act to protect yourself against construction and design mistakes. You must insure that defects will be fixed if they occur. I strongly recommend the following steps if you build or buy a new home. (Some of these steps, such as thorough house inspection by independent inspectors, apply equally well to purchasing a used home.)

1. CHECK OUT EVERYONE: BUILDER, DEVELOPER, ARCHITECT. Inspect not just look at other homes they built or designed. Demand references. Dig for information, then check it out. After it became apparent that our house was defective, the builder did not disclose to prospective clients that he had built any homes on our street (he built three). A prudent homebuyer who learned what he built for us would think twice before doing business with him. If you find any skeletons in the closet, or 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 if there is doubt, don't proceed. It's not worth it. If your only alternative is to buy a used home, buy it.

2. 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. 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. The other major issue regarding insurance is collectability. You cannot collect from someone who is bankrupt. If the responsible people don't have insurance you should avoid the deal. It's not worth it. Go elsewhere with your business, even if elsewhere is more expensive.

3. FIND A GOOD REAL ESTATE LAWYER. Lean toward a member of an established and sizable law firm, where backup legal help will be available if needed. Ideally, try to find a lawyer who specializes in real estate litigation. When building a new home is not the time to hire a novice attorney. 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 or law firm who ever represented the people you're doing business with (our mistake). Do everything possible to make sure your attorney and law firm have no conflicts. 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 of interest. Assume there will be problems.

4. INSIST ON THE TIGHTEST POSSIBLE CONTRACT. I don't pretend to tell lawyers how to write a legal contract, nor should you (unless you are a contract attorney). However there are clearly some things that should have been in our contract and should appear in the contract of any prospective new-home owner. The whole idea is to assure the solvency and legal responsibility of the builder, developer, and architect, and to minimize future litigation in any dispute. To this end I recommend the following:

  • Never accept any contract offered by the builder. Even if it seems proper, have it totally rewritten by your attorney. Only then will he or she think about the meaning and implication of every sentence.
  • 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.
  • 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 assure 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.
  • Make the signers of the contract responsible for everything: all "improvements" to the property, including foundation, house design, structural integrity, plus any problems arising from water leakage, improper landfill, etc. Those who sign should be unambiguously responsible for everything and anyone that 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.
  • Make title transfer contingent on satisfactory and independent review by an architect and/or structural engineer. If you are also concerned about environmental problems (e.g. radon gas), add an environmental survey as well. If you discover the house is not built right before you take title, the builder is then legally obligated to fix it or refund any downpayment. Even if your moving plans are disrupted, it is far better to find out about major problems before title transfer than after you own the house.
  • 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.
  • Stipulate binding arbitration for any disputes. Binding arbitration is where the disputing parties agree to abide by the decision of an expert panel, usually consisting of three people. One expert will be yours, one the builder's, and the third will be an impartial expert mutually agreed on. If there is something truly wrong with your house the arbitrators will recommend a remedy; then, whoever is responsible has to fix it, or have a legal judgment rendered against them. (Binding arbitration is the one clause most lawyers are surprised we didn't have in our contract). Binding arbitration is not hassle-free, and there are potential pitfalls. Put in writing that the arbitration process must include three people, only one of whom can be a local builder. A qualified real estate attorney will be familiar with the proper arbitration process. Your lawyer may say that binding arbitration is not a good idea, that it means you give up your right to file suit. So what? Suing is extraordinarily expensive and the laws (in Ohio at least) do not allow for reimbursement of legal fees (or for the time you will spend fighting the case). The only substitute for binding arbitration is a contract stipulation that the losing side pays legal fees. If you cannot recover legal costs then go with binding arbitration, as long as it is available and 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), run the other way. Otherwise you'll be sorry.
5. TRY TO OBTAIN YOUR OWN INSURANCE POLICY FOR DESIGN AND CONSTRUCTION MISTAKES. Many builders offer a `Home Owners Warranty' for new construction. The HOW insures against structural and many other defects discovered in the first year. A HOW can only be purchased through the builder. We had never heard of the HOW when we built our house, and none of the local builders we've talked to seem to offer it. A list of participating builders is available from HOW, Box 1214, Malvern, PA 19355, or by calling 1-800-225-5469. Be careful, however; a HOW (or similar) policy may exclude design mistakes. After all, our builder was insured through a major insurance company and they tried to blame the architect for almost all the defects, making a settlement impossible. Also, according to Kiplinger's Buying and Selling a Home, HOW has no authority to get tough on delinquent builders except by expelling them from the program. An expelled builder can still go on constructing homes unless stopped by local or state regulatory authorities. An alternative warranty is a special one-of-a-kind policy that some companies offer. Traditional homeowners' policies specifically exclude defects of design and workmanship, but a few large companies (Lloyds of London; Chubb Insurance Companies) will write a new-construction policy in some areas. You should certainly look for either the HOW or independent new-home insurance on any new dwelling. We did not appreciate this need in 1985. Such insurance might have saved us a fortune and years of heartache.

6. HIRE INDEPENDENT PROFESSIONALS TO REVIEW THE PLANS, THE CONSTRUCTION, AND THE COMPLETED DWELLING. 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 before they were installed. We strongly recommend hiring an independent professional to monitor the construction process, particularly when the house is being "roughed in." The ideal person is a qualified structural engineer, someone experienced in residential construction. This extra expense will help assure proper construction of your home and is well worth it. Also, 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 independent expert.

No matter how you manage supervision of construction don't depend solely on your own surveillance. I was at the 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, have the house 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 and an occupancy permit from the town or city inspector only means that you can move in. Our house was neither designed nor built in accordance with local building codes but we received an occupancy permit nonetheless. 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 the municipality cannot be sued.


* * *

I realize these recommendations may seem a lot of bother, more than your basically non-litigious self can bear. They won't be easy to implement and in the aggregate could easily 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 is simply to protect yourself and assure a well-built home, not to scare away competent, honest builders. Unfortunately you won't know who is competent and honest ahead of time. Considering the potential added cost and aggravation if your house is built defectively, anything you must spend to prevent problems is worthwhile. There is one sane alternative, of course. Don't mess with a new house. Unless you have deep, deep pockets, 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. Even here we recommend you obtain two independent inspections, one from a general house inspector and one from a structural engineer. If both inspections are satisfactory, you like the house and the price is right, buy it!

-- THE END --


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For more detailed advice about building or buying new home, see Crumbling Dreams: What You Must Know Before Buying or Building a New Home (or Condo), by Ruth S. Martin.

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