Unhappy Homebuyers & New Home Warranties

Unhappy homebuyers face double whammy

Twists in state laws and consumer-hostile warranties make it doubly hard for owners to fix construction defects. Here’s how to protect yourself when your new home is not up to snuff.

By Marilyn Lewis of MSN Real Estate

Few thrills compare to the joy of moving into a brand-new home. Few nightmares match tales of misery told by homeowners who have tried and failed to get builders to repair problems in a new home. And as concerns about hidden defects grow, homeowners are finding it increasingly difficult to get builders and insurance companies to stand behind their products.

Traditionally, a good builder gives customers a year — and many states require it — to report and let them fix any problems with new homes. Many builders do this willingly. But an increase in construction-defect lawsuits has resulted in rate hikes in builders’ insurance. Now, consumer advocates say builders are under pressure from insurers not to respond to homebuyers’ reports of problems unless a lawsuit is filed.

A builder who acknowledges liability under "right-to-cure" laws risks losing insurance coverage, says William F. Cloran, a Portland, Ore., attorney who has represented both builders and consumers in defect arbitrations and lawsuits. Thirty-one states have these laws, which prevent owners from filing lawsuits before following a prescribed complaint procedure. In theory, right-to-cure laws encourage both sides to settle disputes out of court and give a builder the chance to fix problems before getting sued.

In fact, the laws just complicate things and put a bigger burden on consumers and builders to meet precise deadlines and amass lots of documentation, says Carol Smith, author of "Building Your Home: An Insider’s Guide."

Cloran says insurers hide behind these laws and "take the position that they don’t have a claim and they’re not going to part with money until a suit is filed."

Double whammy
Step two in the double whammy for consumers is the growth of new-home warranties with provisions that make it much harder for consumers to sue. Warranties typically require homebuyers — who often neglect reading the fine print on their contracts when they buy — to settle complaints through private arbitration and waive the right to trial.

Advocates of arbitration say it’s fair, quick and less expensive. But with many of the private arbitrators depending on builders and insurers for repeat business, it’s hard for a homebuyer to get a fair shake, according to Consumers Union, publisher of Consumer Reports, and other consumer advocates.

Some warranties even specify that the insurance company representing the builder can choose the arbitrator, says Nancy Seats, national president of Homeowners Against Deficient Dwellings, a volunteer group of homeowners with construction-defect complaints. There’s no public record to document the arbitration process, so complaints or judgments against a builder are not visible to prospective customers trying to research the builder’s track record.

When claims do go to court, settlements are typically confidential, further limiting public access to the track records of problem builders. In Seats’ experience, even when a consumer wins an arbitration judgment, the award is unlikely to cover all the costs involved — and in some cases the loser has to pay all costs for both parties, she says.

Arbitration costs vary greatly. An arbitrator who is an attorney or engineer charges $2,000 to $3,000 a day (usually split by both parties). Add your own attorney’s fees and expert-witness fees and your case can easily run $5,000 to $10,000, Cloran says. Consumers who sign a warranty waiving the right to a trial cannot, in most cases, challenge an arbitrator’s decision.

The ‘warranty bouquet’
New homes come with a “bouquet of warranties” of various durations and from many sources, Smith says in "Building Your Home: An Insider’s Guide." You can avoid problems by studying all warranties carefully before signing a contract to build. (State laws may add certain provisions.)

In addition to warranties on appliances and products used in your home, there are three kinds of warranties on the house itself. The one with the strongest consumer protection provisions will typically prevail in court, Smith says:

Implied warranties, based on state laws and case law, aren’t written out but may be invoked in a court dispute. These assure a homeowner the right to a home fit for habitation. Builders also must meet local and state building codes, manufacturer installation instructions and their own specifications for materials to be used.

Builder limited warranties. About 90% of builders give buyers a written commitment to stand behind the materials and workmanship in new construction, usually for a year. A "builder-backed" warranty usually means that the builder pays for any repairs or that the builder is self-insured, Smith says. She estimates that 8% to 10% of new homes have problems serious enough to be called "defects"; in 2004, Consumer Reports put that at 15%. The limited warranty includes three types of coverage:

• Materials and workmanship coverage, the most frequently used part of a warranty, usually lasts a year. It guarantees that a builder and subcontractors installed materials correctly and that the materials will hold up to normal use. An incorrectly installed window, for example, or a leaky faucet, is covered. A broken window or faucet that’s your fault, though, is not covered. Most complaints are over relatively minor fixes — a garage door that makes a funny noise, a cabinet door that won’t close correctly.
• Systems coverage usually lasts a year and includes the parts of the heating, plumbing, air-  conditioning and electrical wiring behind the walls — the pipes but not the toilet, for example.
• Structural coverage may last from one to 10 years and protects against problems in the load-bearing portions of the home — the walls, the floors, the roof trusses and foundation but not, for example, the shingles. Only about 2% of new homes ever suffer structural damage, Smith says.

Insured warranty policies often are purchased by a builder from an insurance company, giving the builder additional protection from claims. These may also extend the length of your warranty. Policies give the homeowner recourse if the builder can’t or won’t fix a problem. The cost is included in the price of your home.

The responsibility is yours
Each warranty spells out the procedures and deadlines for making a claim. You need to follow these to the letter. It’s your responsibility to read and follow all the instructions you’re given on maintaining the home. Just like with a new car warranty, your failure to do the proper maintenance — cleaning gutters, for example, or changing furnace filters — could void your new home warranty.

A warranty also defines standards under which the home is insured, and these may be different from your personal standards. For example, Smith says, if your driveway develops a fine crack and the warranty says, "We cover cracking in cement that’s one-quarter inch or more," that’s the standard. You may want a new driveway, but the warranty doesn’t provide for it.

A builder may, on occasion, go above and beyond the warranty standard, but you can’t count on it. Also, disputes can develop over gray areas, because not every eventuality can be spelled out ahead of time. That’s why, Smith says, it’s so important to carefully research your builder, choosing someone with integrity, a strong reputation and a track record of customer satisfaction.

This story was submitted by one of our readers and originally appeared HERE

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