Pursuing Legal Action Over a Home’s Defects Can Be Risky

It didn’t take very long for the buyers of a Sherman Oaks home to realize they had a problem. Last fall after they moved in, a crack in the foundation came to their attention. The whole house, in fact, started slanting down a hill.

The buyers had inspected the property but the defects had been temporarily covered up by a contractor who worked for the sellers, recalled Bruce M. Lorman, the buyers’ attorney. He wrote a letter threatening to sue the seller and others if the problem wasn’t fixed. The letter worked. Most of the $50,000 cost of repairing the home was paid for by the seller, the seller’s real estate agent and the contractor who covered up the problem in the foundation, Lorman said.

Lorman employed a similar strategy for clients who bought a new home in Van Nuys with hardwood floors that started to buckle almost as soon as the owners moved in. The home builder was sent a letter telling him to inspect the problem or else he would be sued. He eventually came around and decided to make the buyers’ requested repairs.

In many ways, these buyers were lucky. They were able to avoid litigation and still get problems fixed at their recently purchased residences.

“I never have a hard and fast rule about how to approach a situation,” Lorman said. Sometimes it’s better to start with a letter to the seller’s agent and other times it may be better to start with a phone call. “Sometimes hiring an attorney makes the situation easier to resolve, sometimes it makes it harder,” Lorman said.

But first you need to learn as much about the problem with the house as possible. It is essential to hire an inspector, adjuster or contractor to look at the problem and make a written report, said Kelton Lee Gibson, a partner in the Ventura law firm of Myers, Widders, Gibson and Long. Also, the buyer should take photos, keep notes and make a videotape, Gibson advised.

Gibson also advises clients to carefully review their purchase contract. In some contracts, sellers make some warranties about the condition of a property. In other cases, a property may be sold “as-is.” But California law requires the seller to disclose certain defects, such as the property’s location in a flood hazard or designated earthquake zone, and various other health, safety and structural problems.

Real estate brokers too have an obligation to disclose any type of problem with a property that a reasonable buyer would want to know. If the proper disclosures aren’t made, the buyer may have the basis for a lawsuit to recover damages, to rescind the sale and possibly to collect punitive damages.

Builders have additional liabilities. New housing that is mass-produced has an implied warranty imposed by courts that a house will be fit for its intended purpose. Buyers have up to 10 years to assert certain claims. A buyer has up to 10 years from when the home was built to recover for defects that are not easily observable. The statute of limitations in California for obvious defects is four years.

Only about 10% of all construction-defect cases get to court, however. Most cases are either settled privately or through mediation or arbitration. (Hiring a mediator or arbitrator can cost $75 to $250 an hour.) The settlement money that gets paid out often comes from insurance companies, which have the deep pockets.

Just because a buyer has a solid construction-defect claim doesn’t mean that it will be cheap or easy to pursue, Gibson said. Hiring an attorney can cost $350 an hour, or up to about 40% of any legal settlement with the seller and seller’s agent.

Disappointed buyers who sue a home seller may even find that a lawsuit does more harm than good, said Carl Stevens, managing partner at law firm Stevens, Kramer, Averbuck & Harris in West Los Angeles. Stevens recently represented the sellers of an older home who were sued for not disclosing termite damage and that certain remodeling was done without a building permit. After nearly three years of legal wrangling, the buyer lost more than just the lawsuit.

The purchase contract stated that in the event of a lawsuit, the loser had to pay the winner’s legal expenses. So now the buyer faces a total legal bill of $285,000: a stunning $135,000 legal tab from the sellers, and another $150,000 for the sellers’ insurance company. On top of all that, the buyer has had to pay similar fees to his own attorneys. The buyer is appealing the case.

Other possibilities are for an aggrieved buyer to sue his own property inspector, or the inspector’s insurance company, and possibly file suit against the seller’s current homeowner’s insurer.

But this legal trend on the part of many buyers has many real estate brokerage firms worried. Jon Douglas Co. is one of several companies that encourages its clients to sell their homes “as-is,” instead of making any warranties about the condition of the property. About 90% of the properties Jon Douglas lists for sale do not offer any seller warranties. “We’re selling property that’s used and has defects,” said Bernice Ross, executive director of training for Jon Douglas in West Los Angeles. “It is unrealistic to expect a home to be perfect.”

When a home is sold by a mortgage lender or through a probate sale, the home is almost always sold “as-is,” Ross said. Her company realized that “as-is” sales result in much less litigation and that’s to the benefit of sellers and their agents, she said.

Jon Douglas also encourages buyers to hire inspectors with so-called errors and omissions insurance, Ross said. If a problem is discovered after the buyer has moved in, she said, the buyer can then pursue the inspection company and its insurance company.

Besides selling homes “as-is,” some sellers are seeking to minimize their personal liability by taking out a special insurance policy for the sale. Homeowners Marketing Services, based in Hollywood, Fla., started a year ago to offer the first insurance policy for sellers--known as the Home Seller’s Liability Plan. For less than $30, sellers get up to $25,000 of coverage for up to six months. Additional coverage is available at a higher cost.

About 250,000 of these policies have been sold nationwide in the last year, said Alan N. Pyles, president of HMS of the Mid-Atlantic States.

The insurance is packaged with membership in the Homeowners Assn. of America and it is offered by calling (800) 733-1515 and through selected real estate brokerage companies in the San Fernando Valley and Ventura County.

The policy doesn’t cover everything, conceded Pyles, “but it’s a source of relief for the seller.”