Construction Defect

Construction defect lawsuits are a huge problem in the development and construction industry.  Most of my experience with this issue has been in California, but I see that Nevada is constantly trying to figure out how to get legislation about the issue right, too.

Here’s what happens.  Developer builds a project…in my case I’ve seen this play out with townhomes, single family residences, and condominiums.  It cuts across all product types.  In California there is something called the ten-year tail.  The developer and/or contractor who builds and sells the units to end users must guarantee their work for ten years after a certificate of occupancy is issued.

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The concept means well.  A house is a big purchase.  Builders should not cut corners and hide shoddy construction.  In my experience I haven’t seen many builders trying to get away with things.  In this business, like any other, most people take pride in their work and show up every day to do their best.  Granted, in the boom times some unqualified people are deployed in the field, and mistakes can be made.  Building homes is complicated.  Building multi-story, multi-family apartments and condominiums is extremely complicated.

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Developers have a “right to repair” in this time frame.  If a defect is discovered, they have an opportunity to fix the problem for the owner.  This can work with a reasonable owner and a reasonable builder.  But ten years is a long time to be on the hook for something and situations change.  A lot of construction companies and developers ceased to exist in much less time than that during the last downturn.

Also, as mentioned previously in my HOA blog, things can get twisted very quickly when defect attorneys can convince an HOA to begin a class action lawsuit on behalf of all the owners of a certain product type.  Insurance has gotten very expense and sometimes cost prohibitive to obtain for this reason in California.  As far as I can tell, defect attorneys solicit HOAs for opportunities to sue builders and developers on behalf of the owners right about  the time a project is seven or eight years old.  Defect attorneys can sell FREE!  FREE! FREE!  They generally agree to work on a contingency with insurance companies and perceived wealthy developers in their bullseye.

Once they can get one unhappy homeowner to convince the HOA it’s a worthy pursuit then it’s off to the races.  Granted, this may often start with real problem.  Water intrusion and mold is a serious issue and that’s often where it starts.  But one problem quickly turns into, “If we’re going to sue, we might as well go for as much as we can.  Let’s find everything!”  The attorneys hire experts who will then de-construct a unit and create a report that shows everything someone might consider was not done perfectly.  The reports I’ve seen show every nail that wasn’t driven all the way in, every piece of flashing that might by ½” short, every place the gutter doesn’t drain as the architect anticipated.

One issue can start it all, but it turns into all-out war over as many issues as the defect attorneys can bring onto the battlefield.  I guess the assumption is that it’s just the insurance company that will pay so it’s OK.  But it drives construction companies out of business having to fight these suits and it makes insurance that much more expensive which ends up in the price of homes.  It’s a very risky part of building and selling homes in California, and I think in many other states as well.

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Homeowner’s Associations are such a mixed-bag when it comes to real estate development.  When a buyer hears HOA it can sometimes communicate a superior product, with lush maintained lawns, sparkling pools surrounded by towel draped chaise lounges, and shiny new fitness equipment always empty and available to help you change your life for the better. 

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HOA may also communicate lengthy Board meetings full of contentious issues, know-it-all Board presidents who like to impose their will on unsuspecting neighbors, and lawn police.

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One of the first questions I hear out of many real estate shoppers when informed the property they’re looking at is part of an HOA is, “How much are the dues?”

Many of the real estate projects I’ve worked on through the years have included HOAs.  The appeal to developers is they can put in that fancy entrance gate and signage, they can include a park with bocce courts and firepits, and they can add the pool/fitness room/men’s and women’s locker/spas and not have to pay for them forever.  The facilities are very attractive in the sales process and many buyers are truly attracted to an amenitized community that will have certain standards enforced on new construction within the community.

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Developers build the amenities, hope to recover the costs with increased sales revenue, and know they can turn the facilities over to HOAs to maintain and manage in the future.  In theory, it’s wonderful.  In reality it can be, too.

But when things go south with the HOA it can tear a community apart and be hunting grounds for construction defect attorneys.

One risk a developer takes with constructing and operating HOA amenities is that sales pace could slow dramatically and leave the developer paying tens or hundreds of thousands in dollars in annual dues for units that have yet to sell.  In California, developers are required to provide financial instruments that guarantee the viability of the HOA until the point when enough units have sold to buyers that the expense of the HOA is not concentrated with the developer.

Another problem HOAs create for developers is they provide a gathering place for buyers to complain about problems with their units.  Developers and builders generally offer warranties on their products and successful developers stand by their product and take pride in what they do because they want to continue doing it.  It’s relatively easy to deal with one buyer and their complaint(s).  When a group of buyers convene in the HOA and share complaints they tend to feed off each other.  Suddenly, an innocent design or construction mistake can transform into the belief that the builder and seller conspired to construct a low-quality product and commit fraud upon their customers.

Next add a construction defect attorney to the mix, who gets paid a percentage of whatever he or she can recover from the developer and their insurance company.  There exists an entire industry based on hijacking HOAs and convincing them to enter lawsuits that cost millions and take years and tear apart many relationships.  There may be ultimately be siding repaired or windows replaced but when the motivation becomes the largest possible legal victory instead of fixing simple construction problems, much is lost along the way.    

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