Homebuilder Confidence Surges: Good news for homebuyers?

When the nation’s home builders report growing confidence and increasing sales of new homes, does that make it a good time to buy a new home? The New York Times recently reported that the National Association of Home Builders/Wells Fargo builder sentiment index surged six points this month to 35, the highest reading since March 2007. Newspapers across the country report tight inventory and rising prices. Signs of a rebound are everywhere!

Is this good news for homebuyers? Should consumers rejoice and jump into the market? Can they expect to get a good deal now? Assuming consumers have done their homework on what they can afford, and how stable their income is, they should ask two questions before making an offer on a new home.

Is the house fairly valued in comparison to others like it on the market?
Are they getting a good deal from a reputable builder?

Unfortunately, the recession in the housing market hasn’t improved the way builders treat their customers. You might think that builders would offer more than a free toaster or flat screen TV to sell their houses. Short of being your new best friend, the builder will guarantee your total satisfaction and to fix any problems that arise, right?

Wrong. Once the deal is done and the builder has taken the buyer’s money to start another home, the new buyer is stuck not only with the economics of the new deal, but also with the construction defects and probably a very bad contract as well. Even after a devastating four year recession in the housing market, most builders are back to doing business the same old way they did during the boom years, when they made enormous profits, and often built homes even FEMA would reject.

Back in the bad old days for consumers, prior to 2008, builders couldn’t build fast enough to meet consumer demand. One builder in Washington, Quadrant Homes, claimed to build a home in 54 days. Maybe that was great for Quadrant, but was it equally great for the buyers?

For several years, I travelled frequently to Olympia to ask the legislature to come up with either a warranty on new homes, or to make builders liable for faulty construction. After dozens of hearings and meetings with legislators, the state Senate passed a wonderful warranty bill, but Frank Chopp, the Speaker of the House, refused to permit a vote, and the bill died. Some legislators, such as then Sen. Brian Weinstein, Sen. Rodney Tom, and Rep. Jamie Pedersen pushed the legislation, but couldn’t get past Speaker Chopp.

Today, in 2012, Washington state ranks with third world countries and states like Louisiana and Mississippi when it comes to protecting homebuyers. Builders are not required to provide any form of warranty, not even a 30 day warranty. Further, the state allows anyone who can put up a $12,000 bond to call himself a builder. There is no licensing requirement, and no competency test. Those who practice the art of nail polishing or killing rats have tougher standards than builders. Can you believe that your state legislature thinks it is too burdensome for builders to have to learn the craft of homebuilding, or to provide a warranty? Thanks to the builders’ lobbyists, the State of Washington doesn’t require builders to know the difference between a framing nail and a hang nail.

So, back to 2012 and an improving housing market. Let’s say you are interested in a new home. Typically, you will work with an agent and if you want the house, your agent will write an offer on a Multiple Listing Association form. It will be your offer to buy the house, and if the seller accepts, his agreement to sell it. Whether you pay $300,000 or $3,000,000, chances are you won’t get any promises about the quality of construction or that it complies with building codes. If you’re lucky, you may get a one year warranty against defective construction, but even then you may find the warranty to be virtually worthless, if not worse.

The Great Myths of Homebuying Debunked

Despite what you may have heard, here are some sad truths about home builders. In the absence of a good contract:

Builders don’t have to be licensed
Builders don’t take tests to become builders
Builders don’t have to go to school or apprentice
Builders don’t have to hire experienced or registered contractors
Builders don’t have to follow the approved plans
Builders don’t have to offer warranties
Builders don’t have to allow you to see the house during construction
Builders don’t have to tell you before they change the layout of the house
Builders don’t have to fix any problems
Builders don’t have to refund deposits for changes or custom work

So, now that you understand that most builders will not be your friend, what can you do to level the playing field? First, research the builder and find out whether it has a history of being sued. If two or more buyers have sued the builder before, just walk away. Next, add the following provisions into the purchase and sale agreement.

Builder/Seller represents and warrants that it built the house in accordance and in compliance with all applicable building codes, the permit and the approved plans and specifications.
Builder/Seller represents that the house was constructed in accordance with all relevant industry standards and manufacturer specifications.
Builder/Seller represents that the quality of the house is equal or greater than that of similarly priced homes in the neighborhood.
Builder/Seller agrees that Buyer may have the opportunity to inspect the progress of construction, if the house is still under construction, at convenient times.
Builder/Seller agrees to refund any deposits, earnest money, funds to pay for owner selections of materials, if Builder/Seller refuses to close on the sale or otherwise defaults.
Builder/Seller agrees to repair any structural failings, defects, or damage discovered within six years of the sale, and that such promise to repair may be enforced by any owner of the home within that period.
Builder/Seller agrees that the representations and obligations set forth in this Agreement survive the closing of the transaction, and that any breach shall give rise to a cause of action for negligent misrepresentation.

These are the minimum provisions every homebuyer should get.

Don’t let the new home-buying euphoria deceive you. The rules are still as bad today as ever for a consumer. If you are thinking of buying a new home, call us and we’ll help you with the process.

What could the buyers expect to get during the boom years? A lot of shoddy construction, leaky homes, failed heating systems, and warranties that are useless or worse.

sandy