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03/02/09: Honoring A New Home Warranty

HOUSING COUNSEL

By Benny L. Kass

Q: We purchased a new home in December, 2007. We timely submitted our one year punch list to the home builder via written letter and phone calls and have received no response. What should our next step be to have our home warranty honored?

A: Read the warranty document you received when you first bought the house. You want to make sure that the items on your punch list are, in fact, covered under the builder’s warranty. For example, some items may be covered under the manufacturer’s warranty program – such as roofing, siding or air conditioning. For these items, you should direct your complaint directly to the manufacturer.

Next, you have to determine if your builder is still in business. In today’s economic climate, new residential sales are sluggish and many home builders have either closed shop or filed for bankruptcy protection.

According to a press release issued last week jointly by the Census Bureau and the Department of Housing and Urban Development (HUD), sales of new one-family homes in January, 2009, was 10.2 percent below the December, 2008 rate, and 48.2 percent below the rate for January, 2008.

If your builder is in the bankruptcy courts, you will have to file a proof of claim with that court. The form (called B-10) is available on the internet (www.uscourts.gov/bankruptcycourts) or from the local federal bankruptcy court. While you can do this on your own, bankruptcy is a highly specialized area of law, and it would make sense to retain a bankruptcy attorney to assist you.

You cannot just tell the court that your floors slant, or that every time you take a shower you hear knocking (called “water hammer). You will need to obtain at least two estimates from licensed contractors, indicating the cost to repair your punch-list items. Those estimates (copies not originals) are to be attached to your proof of claim.

Filing form B-10 does not guarantee that you will get any money from the builder. There is a priority as to how any assets are to be distributed, and secured creditors (the builder’s lender) will most likely be ahead of your claim.

In many situations, it may be quicker – and cheaper – for you to make the repairs on your own and not rely on what the bankruptcy court may ultimately decide about your claim.

If the builder is not in bankruptcy, you may want to discuss your concerns with your neighbors. They may have similar concerns. Although it is always tempting to “go it alone” so that you will be first in line, in numbers there is strength. If the builder recognizes that a large number of his homeowners have joined together to fight him, you may get a positive response.

You should also consider filing a complaint with the appropriate state and local governments. In Montgomery County, Maryland, for example, there is a very effective Office of Consumer Protection. In other jurisdictions you will have to go to the State Attorney General’s office with your concerns.

Builders need the cooperation of these state and local governments. Whether their issues involve zoning, construction permits or environmental matters, a builder does not want to be labeled as one who does not honor its warranty obligations. Governments can – and have – impose conditions on builders: correct the punch-list items on the last job you did or we will not allow you to build anything more in our jurisdiction.

And if all else fails, you have the right to file suit against the builder. But litigation is always expensive, time-consuming and uncertain. You don’t want to pay a lawyer $10,000 in legal fees only to get a court judgment of $7500. So once again, it might be in your best interest to correct the problems yourself and consider your financial loss another aspect of the current economy.

If you are a potential new home buyer, there are many things you should do before you sign that real estate sales contract. This is a strong buyer’s market, so many of the issues that builders previously rejected are now back on the table.

– obtain a copy of the builder’s warranty in advance of signing the sales contract, and review it carefully. If you have any questions, consult your real estate attorney or financial advisor.

– insist that you have your own independent building inspector periodically visit the house during construction. Although some builders will object, from past experience such a process assists both the homebuyer as well as the builder. You will have to pay for these inspections, but the cost is generally well worth it. It is better to discover problems and defects while the house is under construction than after you take title.

– insist that the builder escrow some money – say $5,000 – to cover any warranty or punch list items. Builders generally object to this because they claim that they will never get the money back. To solve their concerns, a carefully drawn escrow agreement should be entered into, spelling out all terms and conditions and when and how the moneys will be used.

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Washington, D.C. 20036-5596
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