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Test-Drive Your New Home

Nicholas Yulico

Editor's note: As a special feature for April, TheStreet.com offers a series of 20 stories on everything you need to know about real estate. Today's installment is Part 8.

Waking up to six-foot-long cracks in your new home's ceilings, walls and floors is a frustrating experience. But construction defects are a fact of life in today's real estate market, and many of these problems stem from shoddy workmanship that was overlooked in the recent U.S. housebuilding boom.

Rod Frye learned this the hard way after he purchased his dream lakeside home in Glendale, Ariz., in 2001. Just four months later, during monsoon season, the large cracks started appearing across the property. The issue, he learned, was expansive soil -- a phenomenon that occurs when houses built on clay end up moving along with the earth, causing cracks in a home's structure. Besides Arizona, the issue is a major problem in California and Texas.

Frye, who is the home's third owner, says he ended up suing the builder, Courtland Homes, because the firm denied it was its responsibility to fix the problem.

"They said we were exacerbating the problem by over-watering. The builder didn't seem like they had any interest in helping us," he says. Frye and other members of the community settled the lawsuit with the builder several years later after a trial jury returned an adverse verdict.

In recent years, "there was a lot more poor-quality work from subcontractors," says Richard Gramlich, an attorney with Carmichael & Powell, the firm that represented Frye. Under Arizona law, there is an implied warranty, where a builder is required to build a good and fit home. The warranty applies to the original purchaser and subsequent purchasers like Frye.

Frye is not alone in his gripes. About 17% of new homes constructed last year had significant construction problems, up from 15% in 2003, according to Criterium Engineers, an engineering consulting firm with 65 offices in 35 states.

"On the one hand, we're making our buildings, our homes, more complicated than they used to be," says Alan Mooney, the firm's president. "At the same time, we have a decline in the skills of the people in the field putting these things together."

Mooney says water intrusion has been the biggest residential construction problem over the past decade.

Debbie Pool, a Loveland, Co., homeowner, found herself in this situation a year and a half ago when frozen water pipes burst, sending 337,000 gallons of water flooding into her home over a 10-day period. The walls had not been properly insulated. The house was demolished down to the studs to treat the property for mold. Sixteen months later, it is finally near being fully rebuilt.

While the builder, Lennar(LEN Quote), made and paid for the repairs, Pool says she is still disappointed by the lack of communication and poor customer service. She has been trying for months to get a copy of the mold report from the industrial hygienist that Lennar hired. "Mold is a huge issue. I'm compromised as a seller," she says, explaining that she needs the mold report if she wants to sell her home.

Pool estimates that she has lost about $45,000 from mortgage payments, taxes, insurance, homeowner's fees and lost rental income on the home during this extended reconstruction period.

The local Lennar customer care specialist did not return repeated calls seeking comment from TheStreet.com.

In areas of Florida, where the housing boom fueled a gold rush by speculators and house flippers, defects are becoming a particularly litigious affair, says Scott Konopka, an attorney with Page Mrachek who has represented both consumers and builders on the defect issue.

While some consumers have legitimate complaints about shoddy workmanship, others are looking for an excuse to bail out of their purchase contracts now that housing prices are falling, he says. "There is a glut of housing out there, and builders raced to the finish line" for many communities. "But that doesn't mean that all homes are inadequate."

Mike Morgan, a Florida realtor, says the defect issue in his state has been amplified by the fact that third-party inspectors, and not municipalities, do the primary inspection of new housing communities.

"The housing boom resulted in more homes being built than local inspectors could inspect," Morgan says. "The inspectors the builders hire work for the builders. How many jobs do you think they are going to get if they flunk the homes?" While the local municipality issues the certificate of occupancy, Florida law provides that the local government officials and building code personnel are immune from liability resulting from any defects.

How to Avoid the Problem

Although there's no way to ensure your new home won't have serious defects, there are prudent steps homeowners can take when buying directly from a builder, experts say.

• Get references. Talk to people who own homes the builder constructed at least three years earlier. You want to know how they stand behind their product. The National Academy of Building Inspection Engineers has good resources.
• Review the purchase contract. "A lot are boilerplates prepared by Fortune 500 companies that do not offer any protection to the buyer," says Konopka, the attorney. Make sure the purchase contract specifies that you can recover attorney fees.
• Hire an independent contractor. "We tell all clients buying a home, 'Get an inspection and get a good inspection,'" Morgan, the Florida Realtor, says. Being involved in the building process can prevent issues from popping up later.
• Check your state's laws.. In general, most states require builders to cover the cost of doing permanent repairs on defects. But California and Nevada are considered to be the most consumer-friendly, says Ross Feinberg, an attorney with Feinberg Grant, a firm that specializes in defect litigation. Nevada law provides that the homeowner can recover the cost to repair defects, interest on repairs, reasonable costs for investigation and attorney fees. Plus, if there are structural problems, the owner can recover lost value for the home.
• Communicate with developers. Most states require homeowners to work with their developers on defect issues before filing lawsuits. This arbitration period can take up to six months. "I don't know a homeowner who has ever recovered an adequate amount of money to do repairs on their homes through these mandatory arbitration services," says Nancy Seats, president of Homeowners Against Deficient Dwellings.
• Check for local issues. Expansive soil is a huge problem in Arizona, Texas and California. In Florida, watch out for roof issues that could become a big problem in a hurricane.