A Construction Lawyer’s Five Tips for Potential Purchasers Looking to Buy a New Home

March 3, 2015

Purchasing a home is often the largest investment any person will make in their life.  Yet, the majority of Americans do more research when buying a car than they do when purchasing a home.  Most potential purchasers enter into binding agreements to buy houses with very little understanding about the terms of the sales agreement, the property they are purchasing or the company they are doing business with.  Below are five things that every potential purchaser should consider before signing a contract to buy a new home, condominium, or townhome.

        1. Beware of Fly-by-Night Builders and the American Nightmare of Home Ownership

Most potential homeowners have not heard the horror stories of when the “American Dream” of home ownership becomes the “American Nightmare” instead.  Usually the “American Nightmare” can be characterized by a community replete with shoddy construction and a “fly-by-night” builder who picked up and left the community before it was even complete.  Many of these builders do not purchase adequate insurance and some even purchase insurance that provides no coverage for the type of work they are performing.  In these worst case scenarios, homeowners are left with defective homes and no legal recourse as the builders have no assets and no insurance.  Advice:  Avoid the “American Nightmare” of home ownership by doing basic due diligence up front.  Research the builder to ensure they are reputable, in-business and licensed.  Inquire whether they carry adequate liability insurance.  Most reputable builders and general contractors are licensed, bonded and carry plenty of insurance to protect themselves.

        2. Are you purchasing a quality built product and how can you be sure?

Builders constructing new homes are required to adhere to the building code.  The building code is the minimum standard of construction for quality, structural integrity, safety, and the ability to resist the elements (rain, snow, wind, sun, etc.).  In addition, builders are required to submit their building plans to the local municipality for approval prior to construction.  After they are approved, builders are required to follow the approved plans in constructing the homes. Advice:  Make sure the purchase contract warrants that the homes were: (1) built in compliance with the local building code and (2) built in compliance with city-approved building plans.  If these provisions are not included, ask to amend the contract.  Homeowners should be very skeptical of any builder who refuses to promise these minimum conditions that it has a legal obligation to perform anyway. 

        3. What can you do to legally protect yourself in the event that your home does have construction problems? 

In Colorado and Minnesota, homeowners can file lawsuits against any of the parties responsible for the construction within six (CO) or ten (MN) years from the date the home is substantially complete [1].   Homeowners must also file any claim within two years from the date that the owner discovered or should have discovered the physical manifestation of the problem such as a roof leak. However, a homeowner’s right to sue can be significantly affected by the terms of the sales agreement.  For example, the sales agreement may require that any construction dispute be submitted to binding arbitration where a private arbiter (who can charge as much as $400 per hour) hears the evidence and renders a decision instead of a jury.  This can be prohibitively expensive, especially if the homeowner needs to hire an attorney.  Advice:  Read the arbitration agreement carefully and consider the following:

• Who will pay for the arbitration expenses?  Do the parties share the expenses equally?
• Does the agreement contain a clause that allows the prevailing party to be reimbursed for its expenses?  Does the clause allow the prevailing party to be reimbursed for the attorneys’ fees incurred in the case?
• Does the agreement specify which arbitration service will hear the dispute?  Consider looking up the arbitration service to ensure its reputation and integrity as a neutral decision-maker.
• Consider negotiating this portion of the agreement with your builder or even striking the provision entirely in the contract.

        4. Is the home part of an HOA? If yes, what will your obligations be as a member of the community?

Most condominiums or townhomes for sale are part of a common interest community that is typically governed by a homeowners association.  Potential purchasers must understand that purchasing a home in a common interest community comes with certain obligations that are defined in the community’s governing documents.  Advice:  Make sure you review the governing documents prior to closing and understand what your obligations are.  For example, what is the monthly assessment?  What are the maintenance obligations and how are those duties divided up between the owners and the HOA?  What types of covenant restrictions exist on your use of the property?  Are there rental restrictions? All of these are important considerations that potential homeowners do not want to learn about after-the-fact. 

        5. Beware of multi-family communities that have no HOA

It is becoming increasingly popular for builders to develop multi-family condominium or townhome communities with no homeowners association.  Some speculate that builders are trying to avoid litigation instituted by the HOA.  Another explanation is that developers want to market to consumers who don’t want to be part of an HOA.  Regardless, multi-family communities without HOA’s are not free from problems.  Advice:  If you are looking to purchase a condominium or townhome in a community without an HOA, consider carefully what obligations you might still owe under the contract.  For example, if the units are attached to each other, who is responsible for maintaining the exterior portions of the buildings?  What if each building has five townhomes under a single roof?  Who is responsible for inspecting and maintaining that roof?  How will the owners budget for and ultimately fund replacing the roof after it reaches its useful life of 25-30 years?  Who makes budgetary decisions regarding landscape maintenance, snow removal, mowing, etc.?  If you are not careful, you could find yourself in a community without the means to function properly. 

[1] See previous article discussing statute of limitations and repose for more information:

• CO: http://bensonpc.com/blog/post/what-every-homeowner-should-know-about-colorados-statutes-of-limitations
• MN: http://cdlawblog.com/2012/06/27/an-overview-of-minnesota-statutes-of-limitation-and-repose-in-construction-defect-lawsuits/