Staying on Top of Trouble

With a can of pink spray paint strapped to his hip, a tape recorder draped around his neck and a 35-millimeter camera in his hand, Steve Skeffington walked through a partially completed condominium looking for trouble.

While inspecting the structure’s skeletal frame, he found it: a one-inch opening in the wall that hadn’t been caulked closed. Skeffington painted a florescent circle around the area and noted the item as needing repair.

It’s unlikely the air hole would have spread fire, but “we’re trying to make sure even the small things that normally get overlooked will be dealt with,” said his supervisor, Eric Llera, who manages the Orange and Los Angeles offices of West Coast Property Consultants.

Builders increasingly are turning to quality watchdogs like Llera not only to make a better product but also to combat the flood of construction-defect lawsuits that have reduced condo construction in the Southland from a torrent to a trickle.

“Attached residential construction will come to a halt if things we’re doing today don’t make a difference in how homes are maintained and perform over the next 10 years,” said Steve Doyle, president of San Diego-based Brookfield Homes.

Such safeguards, however, are not without a price. Doyle spends $3,500 to $6,000 per dwelling on quality controls, such as hiring architects to review the drawings of another firm’s designs, employing inspectors to examine the quality of construction and conducting tours so buyers can see how units are built.

These additional expenses are passed along to buyers, further adding to the rising cost of homeownership. That can be particularly troublesome with condos, whose lower prices make them an attractive option for many first-time buyers.

However, new condo prices have surged nearly 30% over the last decade, to a record median of $181,000 last year. Part of that run-up, experts said, is related to a rapidly shrinking supply.

New condo sales in the Southland fell below the 4,000 mark for the first time ever in 1998 and are down 75% from 10 years ago, as the number of new projects plummeted by a similar amount, according to the Meyers Group, an Irvine real estate research firm that tracks new housing development.

But part of the price surge stems from higher construction, insurance and legal costs relating to the lawsuits.

Thousands of Suits

Several thousand suits by homeowners groups alleging poor workmanship have been filed against builders over the last decade in California. Typically, nine out of 10 cases are settled out of court, with awards ranging from $15,000 to $30,000 per unit. (Of that, lawyers get from 25% to 35% of an award. Once expert-witness fees are subtracted, the individual or the homeowners’ association receives the rest.)

To illustrate how frequently legal battles have been fought, look to San Diego, where 75% of the largest condo projects built between 1982 and 1992 led to litigation, an industry survey found.

Builders acknowledge that some of the lawsuits had merit, but they maintain that lawyers and the courts went too far in handing down awards.

Builders contend that a small group of overzealous lawyers has made a cottage industry out of construction-defect lawsuits.

Since the 1960s, builders have been liable for any defects that cause injury or property damage, regardless of whether the company was found negligent. But it wasn’t until the late 1980s, as land costs soared and condo construction escalated, that defect litigation exploded.

California is one of the few states that allow homeowners a chance to sue a builder for up to 10 years after buying a home. But state law is vague on what constitutes a defect.

And then there’s the matter of figuring out whose fault it is. If a window leaks, there may be four subcontractors whose job involved installation, and all may have different insurers.

Consequently, homeowner suits are costly and time-consuming to litigate. Insurance costs for the building industry soared.

In one study, USC found that a typical insurance policy cost a builder $300,000 and came with a $600,000 deductible, meaning that the builder absorbed the first $900,000 in costs before the coverage took effect.

Those kinds of numbers have some builders questioning whether safeguards such as the use of third-party inspectors will reduce their exposure to lawsuits.

Despite taking added precautions, the industry continues to build only a fraction of what it did a decade ago in Southern California.

“Builders are still scared,” said George Dale, a Los Angeles attorney whose firm has defended construction companies in 1,500 cases over the last decade.

As a condition of buying a home, builders can now have homeowners sign an agreement to resolve disputes through binding arbitration. But for many firms, the risk of constructing low-profit homes still outweighs the gains.

“It is impossible to build a perfect unit,” said Dale, who chairs the California Building Industry Assn.’s task force on construction defects.

One of the most prominent construction-defect lawyers in Southern California, Thomas Miller of Newport Beach, believes that greater oversight probably will result in fewer lawsuits.

Builders using third-party inspectors, he estimated, would “eliminate 90% of the problems.”

“It makes litigation less likely, and when and if a lawsuit happens, it makes the damages less severe,” said Miller, who said he has won more than $250 million in suits against Southern California builders since 1981.

For the first time, Miller is considering whether to sue a condo builder who used private inspectors. “The number of defects aren’t there and the number of errors aren’t as many as we usually see without that person,” he said.

While city inspectors scrutinize projects for safety issues such as inadequate foundations that could crumble during earthquakes, the quality police like Llera also may review the structure, confirming from blueprints that units are properly strapped to the foundation. They also sift through finer details that, if unchecked, can result in serious legal charges.

Llera, a former custom-home builder, knows there may be nothing technically wrong with a wall having an unpatched hole for electrical wiring. But by ignoring such details, builders could find themselves reliving litigation nightmares.

“We’re in there to give the attorneys no fuel for a case,” said Llera, whose firm documents in words and pictures each phase of a construction project. “Every little thing helps.”

When inspecting a sampling of homes, Llera’s company will snap 200 to 300 photographs during each phase of the building process, verifying that windows, roofing and other materials were installed according to the manufacturer’s plans.

They’ll also check to see whether the nails were the right size, were properly spaced and that the right number was used. “If a nail is that much too short,” he said, holding his fingers less than an inch apart, “the wall fails inspection.”

In that case, a report is faxed to the developer and a copy is handed to the site’s top supervisor, who suspends work until repairs are made.

In a canyon of condos, echoing with the sound of hammers pounding and power tools whining, Llera walks through a unit under construction at the Greystone Villas in Irvine.

He points to rubber clamps that prevent pipes from banging against the wood framing when water faucets are turned on or off. Clay pads molded around electrical outlets deaden noise between units. Cast iron pipes silence the sound of water when toilets flush.

“A lot of litigation would have been prevented” if such safeguards has been more commonly used in the past, said Gary Peters, the Irvine project’s supervisor.

Once a project is completed, a builder receives several binders of photos that include a written description of the work depicted during each phase of construction. On the Greystone project, nine volumes of 2-inch-thick notebooks have been filled so far.

Recording on Videotape

Inspectors also may videotape common areas, demonstrating how water systems and other equipment should be maintained and recording the landscape’s condition, said Don Neff, president of La Jolla Pacific Ltd. of Newport Beach, another third-party inspecting service.

“Everybody bemoans litigation, and there are legitimate and spurious examples of poor construction in the past, but it has largely been cleaned up,” Neff said. “On-site quality [improves] with a camera.”

Unlike a public inspector, a private one can bolster a builder’s case in court by testifying as an expert witness. But whether taking extra precautions prevents or limits litigation, as hoped for, is not known because the still-new practice hasn’t yet been tested in court, industry officials said.

But the changes have convinced Brookfield’s Doyle--after months of internal debate--to build condos again.

Lacking a system of safeguards, the company would have been unable to find an insurer for its attached home projects. Now, insurance auditors arrive virtually unannounced at work sites, ensuring that Brookfield maintains a series of checkups, he said.

“We have to make sure we have dotted every I and crossed every T through every step of the process,” Doyle said.

“It doesn’t mean we won’t be sued in the future. But it gives us a better defense against the claims the plaintiff’s attorneys will try to raise,” he said.