Construction Defects
Cracked Houses: What the Boom Built
M.P. McQueen
Robert and Kay Lynn lay in bed shortly after closing on their new home in the Blue Oaks subdivision in Rancho Murieta, Calif., abutting an 18-hole golf course. They were listening to the “pop, pop, pop” of what they thought were acorns falling onto the roof.
The Lynns soon realized those were not acorns dropping on the roof.
“Little did we know it was the house cracking,” says Mrs. Lynn, 67 years old. Mr. Lynn, 68, says they bought the property in 2002 for $357,000 as a weekend home and an investment. The stucco house was moving and shifting, with part of it subtly pitching toward the golf course, resulting in cracks and fissures in the walls, ceiling and floors, the couple says.
Many of their neighbors say they had similar problems. In the Sacramento Valley subdivision of about 250 houses, more than half the residents have reported some type of flaw. The Lynns and dozens of their neighbors last year filed construction-defect lawsuits against the builders, and the lead case is expected to go to trial next week. They are seeking enough money to permanently repair the houses, a figure expected to total millions of dollars.
A spokeswoman for the builders, Reynen & Bardis Development LLC, said they would have no comment pending litigation, but a response the company’s attorneys filed with California Superior Court said time limits for some of the plaintiffs’ claims had run out.
Whatever the outcome of the case, hundreds of thousands of people from California to Georgia say their almost-new homes need costly repairs because of construction defects. The furious pace of home building from the late 1990s through the first half of the 2000s contributed to a surge in defects, experts say. It caused shortages of both skilled construction workers and quality materials. Many municipalities also fell behind inspecting and certifying new homes.
At the height of the boom in 2005, more than two million houses were built in the U.S., according to the National Association of Home Builders, a trade group. Criterium Engineers, a national building-inspection firm, estimates that 17% of newly constructed houses built in 2006 had at least two significant defects, up from 15% in 2003.
Residential construction-defect claims filed with insurance companies in the current housing slump have been receding, “but the ones that are being filed are pretty severe in terms of the total damage alleged,” says Paul Amirata, vice president of claims for Axa Insurance Co. in New York, a unit of AXA SA.
James Wadhams, a Nevada lobbyist who represents builders and insurers, says homeowners are filing lawsuits mainly because home inspectors and attorneys are “prospecting” in new subdivisions. Like California, Texas and Florida, Nevada experienced a surge in construction-defect claims in recent years.
Because of tumbling real-estate values, those stuck with faulty houses say repairs often cost more than the homes are now worth. Many say they can’t refinance their mortgages or sell, and they have no equity to leverage for repairs.
Defects are also a concern for those shopping for a home. Owners generally are required to disclose housing defects to potential buyers. Buyers of new homes should scrutinize purchase and warranty contracts with a real-estate attorney, with special attention to arbitration clauses and liability releases.
One of the best defenses against buying a defective house is a thorough inspection by a state-licensed building-inspection engineer, experts say.
Charlene Croal, 34, a consultant, says it would cost $228,000 to fix her nearly nine-year-old house in North Branch, Minn., though the house would be valued at only $190,000 today if it were in good condition. Its interior is riddled with mold because of water seepage, partly caused by a faulty roof and poorly installed windows, she says. She and her husband relocated their family of seven because of health problems linked to the mold, says Ms. Croal, who did not name the builder.
Owners of defective properties say they’re finding it even harder to get repairs now because of rising builder bankruptcies. Some builders, especially smaller ones, also carried inadequate liability insurance, construction experts say. Other homeowners say they are hamstrung by mandatory binding arbitration clauses in purchase contracts and new-home warranties, as well as “right to cure” laws, which require homeowners to notify builders and give them a chance to remedy a defect before the homeowners can file a lawsuit. More than 30 states have some type of right-to-cure legislation, according to the home-builders group.
The NAHB says it “strongly supports” the option of using “alternative dispute resolution including mandatory, binding arbitration in consumer contracts,” saying litigation is an inefficient means to resolve construction-defect disputes.
In Rancho Murieta, residents say they just want to save their homes. It turned out that much of Blue Oaks Estates was built on clay soil that expands in the rainy season and contracts in the scorching summers, the builder, Reynen & Bardis, acknowledges. This is damaging the homes’ foundations and subtly twisting the frames, causing homes to slowly pull apart—as evidenced by cracking floors, walls and ceilings, separating gutters, and jammed windows and doors.
At first Reynen & Bardis made numerous attempts to address the problems, repurchasing about 50 houses, and installing new drainage systems and foundation underpinnings on scores of others, the company says. But it stopped making repairs on houses in the subdivision in November 2007, saying it could no longer afford them.
By law in California and many other states, builders are on the hook for certain new home defects for up to 10 years, depending on the circumstances and state laws.
In April 2008, John D. Reynen, co-owner of the firm, filed for personal bankruptcy protection, saying he owed creditors nearly $1 billion. Months later, his partner, Christo Bardis, also filed for personal bankruptcy. The partners had personally guaranteed hundreds of millions in bank loans to buy thousands of acres of land for development from Bakersfield, Calif., to Reno, Nev. None of the business entities of Reynen & Bardis is bankrupt, says a spokeswoman.
Even Rancho Murieta residents whose homes are OK say they are being affected. Michael Yager, 61, a retired real-estate agent and firefighter, says his bank would not refinance his mortgage unless he paid for a $7,000 engineering study certifying the house is structurally sound. Mr. Yager’s home was built later with a different type of foundation and hasn’t had problems.
“It’s given the whole community a bad name,” he says.
Mr. Lynn, a retired bank executive, says losing money on a defective house was worse than losing retirement money in the stock market.
“The one thing that won’t get better is this house, which will always have foundation problems,” he says. “It has driven me from retirement to doing part-time work at the golf course, and I thought I was financially stable for the rest of my life.”
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SOURCE: online.wsj.com