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When the House Isn’t Ready

Reprinted fromThe Washington Post

By Sandra Fleishman, The Washington Post

Sonali Arya’s builder promised to settle on her new house in Gaithersburg on Oct. 31, but during the walk-through that day, Arya said, she couldn’t believe how far from finished the place appeared. The heating system was not working properly, the builder had forgotten to build the deck, pieces of molding “kept falling off” and the house had no phone, no cable and no mailbox, recalls the 26-year-old social worker.

“It was horrible,” Arya said. “It was just shocking. We had nine pages of notes, and the house looked like it was literally falling apart. . . . I almost cried.”

Arya’s situation was more complicated than many, but offers a basic lesson for new-home buyers: A new house doesn’t have to be perfect — and often isn’t — when the builder turns it over.

A house, for example, does not have to have landscaping, a driveway, a mailbox or phone or cable service to be “substantially complete,” as required for settlement by most sales contracts and local laws.

Most buyers probably think of punch-lists, which tally the items that still need fixing at the final walk-through, as a rundown of minor items. But they can include big-ticket things, such as a deck or grading, that are not critical to a move-in. Punch-lists can run from a dozen items to more than 100 these days, builders said.

But buyers and builders can disagree about what should be ready at settlement, according to real estate lawyers and consumer advocates. And that not only can cause confusion at settlement but can lead to lost tempers and possible lawsuits.

Among Arya’s complications was whether the house was substantially complete without heat. Also, one of her complaints was that the builder was pressing her to settle. These days, it is more common to hear that builders are delaying settlements because of bad weather and incredible demand, rather than speeding them up.

Despite the complications, Arya’s problems seem to have been resolved happily. She said she was ultimately satisfied when her builder agreed to delay settlement for a week and corrected “99.5 percent” of the problems.

While builders in general say that they are meeting legal requirements for settlement and for warranties that fixes will be made if necessary after settlement, some consumer advocates say the process is just too skewed toward the builder.

“If a buyer approaching settlement is too demanding or uppity, the builder will simply give them their deposit back and sell the house to someone else at a higher price,” said Beau Brincefield, a lawyer from Alexandria.

“Builder contracts are uniformly unconscionable . . . because virtually every builder contract I see takes away from the purchaser almost every conceivable right that the purchaser would want to have,” he said.

Builders and other experts say consumers can have unrealistic expectations about the condition a house will be in at closing. “From the customer’s point of view, a house may not seem ready” at settlement, “but from a contractual perspective, it is,” said Louis Genuario Jr., president of the Northern Virginia Building Industry Association and co-owner of Genuario Cos. in Alexandria.

Genuario said his firm does two walk-throughs with buyers and usually whittles the punch-list down to “10 or 15 items that we either can’t complete because they’re not available or they’re just cosmetic things” or they are items “that we couldn’t do because of the weather.”

Most standard contracts give the builder extra time in case of bad weather, labor shortages or material shortages because those things are outside the builder’s control.

“Any builder’s contract will have a provision where the builder isn’t responsible for delays no matter how they’re caused,” Gaithersburg settlement lawyer Jim Savitz said. “Most contracts provide for somewhere in the neighborhood of one to two years for them to complete the work without liability.”

But that does not mean new-home buyers should expect a bad experience, Savitz said.

While “they’re often shocked to see how many things still have to be done” during the walk-through that occurs several days to a week before settlement, “the punch-out crews routinely come in during the last week and take care of a significant number of items,” Savitz said.

David N. Crump, director of legal research for the National Association of Home Builders, says buyers need to make sure they read and understand the terms of their sales contract so they will understand how the process works. Most contracts say settlement will occur when the house is substantially complete and ready for a certificate of occupancy from the local permitting agency, said Crump.

While the contract may set a time frame or date for completion, it will “also provide for reasons that that date may be changed,” he said.

“Builders want to close the house as badly as the customer does,” said Carol Smith, author of “Building Your Own Home: An Insider’s Guide” and nine other books and a consultant to home builders and buyers. Because builders have to pay construction loans when they come due, any delays can cut into profits.

But Smith said delays can happen despite builders’ best intentions. The subdivision superintendent may “just not be adept at scheduling,” she said. The construction boss may not line up subcontractors in a timely fashion or be quick to rejuggle them when weather intervenes and schedules slip.

Genuario said being rushed to settlement, as the Aryas claim they were, is unusual. “Typically it’s hard to hold new buyers off,” he said.

But, other privately owned builders claim that large national companies sometimes do push buyers to close so the firms can make sales quotas. And they say sales staff might put pressure on buyers to settle by the end of a month or at the end of the fiscal year to get bonuses tied to quotas.

“National companies are more likely to press for closings because they have stockholders and parent companies that are very numbers driven,” said Craig Havenner, president of Christopher Cos., a privately owned Fairfax developer-builder. “If they tell their stockholders that they are going to close a certain number by a certain date, they are very driven to do that.”

However, Jim Williams, executive vice president of the Northern Virginia Building Industry Association, said he has “never heard of a case where a buyer was pressured to settle or forced to settle.”

He said, “Every salesperson has a sales target they would like to achieve. But . . . most builders wouldn’t close a house just to meet a quota.”

Arya contends that her builder, Ryland Homes, wanted her and her husband to settle on Oct. 31, despite the problems she had listed because the sales staff was trying to make a quota.

Arya said she refused to settle despite promises from Ryland sales staff that most items would be fixed shortly. Instead, the first-time buyer set out to determine her rights, but continued to press for completion quickly. Her apartment lease would expire Nov. 15. “We were running out of time,” she said.

After a round of calls to higher-ups at Ryland and at consumer agencies, the couple settled a week after the original date. Sonali Arya credits Bob Rademacher, Ryland’s local vice president of sales and marketing, with turning her experience around. “The house had improved 99.5 percent” by the day of the rescheduled closing, said Arya.

The Aryas’ experience was atypical, according to local builders, because a basic requirement for occupancy, the heating system, was not operating.

Ryland spokeswoman Melissa Bailey said the system had previously worked and that a certificate of occupancy had been issued before Oct. 31. Bailey said that when the system did not operate properly at the walk-through, the company offered to postpone. Bailey said the company could not get the contractor back to fix the system before settlement.

Arya and Bailey disagree about the offer to postpone and about whether the staff was attempting to meet a quota.

Bailey said the company does not have quotas that would drive closings of homes before they are ready. “At Ryland we absolutely do not put pressure on people to close before the house is ready,” she said. Doing so “would only end up causing more problems down the line.”

Settlement delays, rather than rushed closings, are the rule these days, according to local new-house market researcher Debbie Rosenstein. Builders are being stretched by bad weather and strong demand.

“People have been missing their settlements since time immemorial, and this year is no different,” said Rosenstein. But she notes that 2003 has been the wettest year since 1982. “It’s just been wet all the time,” she said.

The NVBIA’s Williams says delivery times have been creeping up in recent years because of the high volume of sales and the weather. While a typical house used to take about four months to complete, this year’s bad weather has led to deliveries after six or seven months, he said.

In 2001, when sales first exploded, delivery took as much as 13 months, he said.

Christopher Cos.’ standard contracts now set delivery within 18 months of signing, to cover possible delays, said Havenner. The contracts also give the purchaser the right to a refund of the deposit if that deadline is not met.

The company is delivering homes “well within that time frame,” generally within a year, Havenner said. But he noted that “homes sold in July haven’t been started yet.”

The sales contract lays out the boundaries when it comes to locking in a buyer or a builder to any terms, including a settlement date, said Crump, director of legal research for the national home builders group.

Reasons for a delay in settlement could include bad weather, labor strikes, material shortages, problems with permits, “or whatever else might make it impossible to turn over the house for occupancy on a date certain,” he said.

He recommends that buyers have a lawyer look over the sales contract before signing because “every contract may have different provisions.”

As with any contract, he said, the buyer has the right to demand changes in the contract. But, he said, the builder may or may not accept them.

A big problem, said lawyer Savitz, is that people just do not read their contracts. “My preaching is to make sure that they actually understand what they’ve agreed to. It sounds simple, but it’s not,” he said.

For instance, said Kensington lawyer Andrew Fitzgerald, builders’ contracts may promise a design or lot “similar” to the model home, “but your definition of what’s similar, say what you consider a similar room size, may not be the same as theirs.”

The same goes for a buyer’s definition of “substantially complete,” said Fitzgerald. The biggest disputes “seem to be over unfinished landscaping, grading and driveways,” he said.

While builders may say that they could not finish those items because the ground was too wet or cold and will generally promise to complete the work as soon as possible, buyers sometimes see those items as essential, said Fitzgerald.

But most jurisdictions routinely allow builders to deliver new houses without driveways, lawns and decks because of weather conditions, say builders. And in the winter, said Havenner, a working air conditioning system is not required either.

Because deliveries slip, author Smith recommends adding two weeks to a builder’s estimate and creating a backup plan. That means waiting an extra month to give notice to a landlord, or writing a leaseback option into the sales contract on your current home.

“There’s no reason to add stress,” she said.

Wendy Shapiro, a Montgomery County real estate agent who is buying a new house in Olney from Greentree Homes, said she is not stressing over her upcoming settlement. Though the builder had originally promised an October or November delivery, she said she was not surprised when the date slipped to Dec. 31.

“Most everyone knows that you’re not going to get the house when they tell you,” said Shapiro. “Those that purchased in May figured you’d be lucky if you were in by December.”

Because Shapiro and her husband have sold their townhouse expecting a Dec. 31 delivery, she said “there will be an issue” if the date slips again. Her first hope would be to “renegotiate the contract” with the buyers of her current house to allow the family to rent it back for a longer period of time. Still, she predicted, her family will probably end up having “to put everything in storage.”

She said, “The builders are doing the best they can. We see them out here at seven in the morning and at seven in the evening, so you have to assume there isn’t anything more that they can do.”

Lawyer Savitz said it is “not uncommon . . . for builders to threaten to sell to someone else” if a buyer objects to delays in settlement or finds problems and demands fixes before going to settlement. But “typically it’s going to take longer to resell the house than to just fix it, so the builder usually makes some accommodation,” he said.

Lawyer Brincefield said, however, that buyers have “no leverage” in negotiating contracts or in getting accommodations at settlement because of the hot housing market.

Because house prices are increasing so dramatically from when the sales contract is signed to when settlement occurs, builders can easily afford to give back a deposit if a customer squawks, Brincefield said.

“If the buyer doesn’t like it, the builder could care less because there are people standing in line to buy,” he said.

While contracts may not require a builder to do more than refund a deposit if a settlement falls through, the standard sales agreements generally provide for buyers to pay a carrying charge or to cover the builder’s interest costs if the buyer misses the settlement date for any reason.

Builder Havenner said a defaulting buyer generally loses only his deposit, but on a rare occasion could be charged for “specific performance damages” on the contract.

If a buyer has a hardship such as being called to military service, “we’ll let them out and give them the money back,” Havenner said.

Builders says they will also typically work with buyers who qualified for a house when they signed the contract but have lost ground financially because interest rates rose while construction slipped.

But “if a person misrepresents themselves as far as their financial situation, we have no qualms about keeping the deposit,” said Havenner. “If we have built a home and have an investment of hundreds of thousands of dollars, it could be a real economic burden to us” to carry the costs beyond the expected date.

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