When one North Side Chicago woman drew the first bath in her custom-built home eight years ago, the tub water never rose.
But her anger did.
The woman (who asked that her name not be used) soon realized that her brand-new house in Chicago’s Wrigleyville neighborhood had a plethora of defects far worse than an ill-fitted bathtub stopper.
During the first heavy storm, her 1,000-square-foot basement flooded because of an improperly set drain. One bathroom wall, built on an angle, bowed in the center. On the second floor, seals on two toilets did not adhere and leaked onto the dining room table below. The wood flooring had been poorly sanded and varnished.
Within 12 months, the owner poured thousands of dollars into repairs on the $175,000 home.
Under a standard one-year warranty, the builder would have been liable for making the repairs. But the builder went bankrupt soon after the woman moved in.
She may have been able to minimize her losses if she had taken a few precautions when choosing her builder, signing the contract, during construction and at closing, according to legal experts and home inspectors.
And, as a new-home buyer, you may be able to avoid sinking hundreds of thousands of dollars into a house that acts more like a money pit than a refuge once you understand your rights and how to exercise them.
The goal, of course, is to avoid buying a “lemon” in the first place. But there also are steps you can take if that “perfect” home turns out to be less so.
Step No. 1, experts agree, is to clarify everything upfront.
Before getting involved with a builder, conduct a background check, advises Dan Perlman, a partner in real estate at Katten Muchin & Zavis.
“Ask for the builder’s references, including the names of bankers backing the project,” says attorney Perlman. He said a builder should not be reluctant to identify the construction lender, and that the lender should not hesitate to confirm that a construction loan exists.
If you find that the builder is in financial trouble, that should be a signal to reconsider the deal, advises Robert E. Johnston, executive vice president of the Home Builders Association of Greater Chicago, based in Oak Brook Terrace.
Once the builder passes your credit check, walk around a subdivision he has developed. Johnston suggests knocking on doors and asking residents about the builder.
“There’s no simple way to find out if the builder is doing the right job other than what people he sold homes to will tell you,” says Johnston.
When quizzing the homeowners, Perlman suggests you ask pointed questions, such as: How many items were on the punch list-the list of defects needing correction-that was written up during the final walk-through with the builder before closing? How quickly were the problems identified in the punch list rectified? What was the builder’s attitude while making (or avoiding) the repairs?
These questions are key, because hiring a builder who drags his feet in fixing punch list items is a major frustration for buyers, even if they’re happy with the house overall.
According to Andrew Small, an associate with Katten Muchin & Zavis, “You want, as a buyer, to have that punch list as short as possible, because it means your builder has done a good job.”
Once you decide on who you’ll hire to build your house, determine what each party will be liable for before signing the contract, says David Hoffman, president of Red Seal Development Corp., a residential builder based in Northbrook.
For example, will you or the builder find and hire the subcontractors? Who will arrange for any custom pieces to be built, such as odd-size counters or cabinets? If you want custom items not included in the home price, such as light fixtures, will the builder install them?
These items should be spelled out in writing in the contract.
Builders usually will issue a standard one-year warranty on workmanship and materials.
MCL Development Corp., a real estate development company in Chicago, gives warranty manuals to buyers when they sign the contract.
“It addresses all the likely things that could go wrong with your home over the course of a year,” says Garrison Benson, vice president of MCL. “If you tell people something is going to happen, and it does, they are not as surprised than if you didn’t tell them.”
If, after six months, for instance, a crack less than an eighth of an inch wide appears in the drywall, grouting or caulking, MCL will not repair it. Nor will MCL fix nails that pop out of the plaster walls when wood studs shrink.
Once the warranty runs out, Benson says, “we’re not liable for anything.”
(Of course, other legal issues, such as negligence or fraud, may go beyond the issue of who is responsible for fixing nails that have popped out. And there’s nothing to prevent a disgruntled buyer from suing a builder on those grounds, even after the warranty has expired.)
Some Chicago-area builders offer extended warranties by third-party insurers, such as the Home Owners Warranty Corp., an insurance company for builders based in Arlington, Va. The company sells policies, called Home Owners Warranty (HOW), that extend coverage in the second year against defects in the heating, water and electrical systems, according to Gerry Woody, executive vice president of HOW’s Greater Chicago council, based in Oak Brook Terrace.
HOW warranties are offered only through builders; buyers can’t buy one on their own.
A HOW warranty also will compensate for major structural problems, such as a sinking foundation, from the third to the 10th year, says Woody. But the builder no longer is responsible financially; HOW is.
With HOW warranties, only the house is protected. External features such as landscaping, driveways and swimming pools are not, according to Woody.
In the event that homeowners and developers get into a dispute over whether something is covered by the warranty, HOW will provide mediators from the National Academy of Conciliators, based in Dallas.
“An independent person will meet the home builder and purchaser on site and will determine if the builder is responsible for fixing the problem,” says Woody. If HOW sides with the buyer, the builder can opt for repairing the problem or offer a cash settlement.
In the event a builder goes bust within the first year, HOW still will honor the warranty. Conciliators are called upon to settle these claims, and HOW usually will offer cash rather than doing the repairs, Woody says.
HOW warranties are purchased by builders and cost between $1.84 to $4.10 per $1,000 for the first $200,000 of the home’s value. A lower rate kicks in for a price tag above $200,000.
“The protection stays with the home, no matter how many subsequent purchasers there might be,” says Woody.
Warranties are good for appliances that break and for structural damage that occurs while living in a house.
But what happens when you discover that the 9-foot ceiling you ordered is only 8 feet, or the red bathtub is blue?
When signing contracts, insist that the plans and specifications used to build the home be attached to the contract, says Perlman. Without the blueprint and special-order items bound to the legal document, you will have little recourse if the home you get is not the one you ordered, Small adds.
If items such as carpets, windows and appliances are not what you ordered, your chance to make changes comes before closing while compiling the punch list. Problems that arise after moving in should be put in writing and sent to the developer, suggests Benson.
Another way to use leverage over the builder is to withhold a portion of the builder’s fee, at closing, in an escrow account, according to Chicago lawyer Lloyd Gussis.
“I don’t care if the developer thinks you are the pickiest person,” says Gussis. “While you have your money, they will be more attentive than when they have your money.”
But Gussis cautions that many builders will not allow buyers to withhold money in escrow.
One builder that will not is MCL. “We have a reputation standing behind our product and communities we build,” says MCL’s Benson. “If you don’t trust us, you shouldn’t buy a home from us.”
Trust or not, Small advises buyers to visit the construction site periodically. “You don’t have to be an expert, but you need to know the basic structure of the house and how it compares to what you expected.
“Don’t be afraid to tell the developer, for example, that the hole for the ceiling fan doesn’t look like it’s in the center of the room. It happens all the time.”
