The buyers are thrilled to purchase a new construction home. They may be purchasing a spec home that the builder constructed and put on the market. Or it may be a custom home where the buyers worked with the builder to design and customize the home the builder constructed. Either way, the buyers are excited because they have a brand new home all bright and shiny, and they expect everything will be in tip-top condition.
A real estate professional participating in this transaction knows better. Just because it is new construction doesn’t mean everything will be perfect, or in the case of the custom home, that everything will have turned out exactly as contracted and in accordance with the buyer’s vision. New construction can have workmanship, materials or code requirement issues. Real estate professionals working with new construction scenarios cannot be the hero and single-handedly solve the problems of not-so-perfect construction, but being aware of the following pointers will equip them to present alternatives and point the buyer in the right direction.
1. No real estate condition report
Wis. Stat. § 709.01 requires a residential seller to complete a § 709.03 Real Estate Condition Report (RECR) for real estate containing one to four dwelling units. Wis. Stat. Chap.709, however, does not apply to real estate that has not been inhabited, that is, new construction. Accordingly, a buyer typically will not receive a RECR for a new construction home.
2. Licensee inspection and inspection contingency
If the new construction home is a spec home, then the licensee would conduct a reasonably competent and diligent inspection of accessible areas of the structure and the immediately surrounding areas of the property to detect observable material adverse facts. This inspection does not require operation of mechanical equipment, opening doors and panels to access mechanical systems, moving objects, or entry into areas accessible only by ladder or crawling such that there is an unreasonable risk of injury. Should the licensee discover any material adverse facts or information suggesting the possibility thereof, he or she must disclose to the parties in writing.
Although it may seem counter-intuitive to buyers, they should be encouraged to include an inspection contingency in their offer to purchase a new construction spec home because this may be the most effective way to detect if anything is amiss short of living in the home for a few months when the avenues for redress may be more limited.
If the property was a vacant lot when the offer was written, the licensee must still inspect the lot and report any material adverse facts observed although obviously the structure is not present.
The buyer of a custom home also benefits from having a licensed home inspector take a look at the newly constructed home. The inspector is an unbiased yet knowledgeable third-party who may more readily spot the problems: faulty window installation, vents not properly sealed, electrical not to code or missing insulation, to name a few possibilities.
3. Building contract remedies: punch list and dispute resolution
If the new construction is a custom home, the buyer’s contract with the builder may be helpful. The contract may include an opportunity for the buyer to provide a “punch list” of issues requiring attention. Before closing, the builder may walk the buyer through the newly built home and let the buyer point out any defects or imperfections that need to be fixed before moving day. Punch list items may include, for example, disconnected light switches, broken cabinetry, scratches on the wall, a back-ordered bathroom cabinet, an electrical wall receptacle that doesn’t work, missing hardware or trim pieces, a new faucet with a steady drip, or a spot that was missed by the painter.
Once the builder completes the punch list items, there may be another walk-through inspection with the builder to develop a final punch list — the work necessary to complete the job and trigger the final payment to the builder. Defects discovered after that point in time may have to be handled in some other manner such as any warranty or the right to cure process. The building contract may also include alternate dispute resolution measures such as mediation or arbitration.
4. New construction warranties
The state of Wisconsin does not require any standard warranty on spec construction. The offer to purchase for a spec home would determine if there is a warranty and if so, how long it is in effect.
The building contract in the case of the custom home may include warranties. If there are none, however, Wis. Stat. § 706.10(7) does create an implied warranty for a custom built home: “In the absence of an express or necessarily implied provision to the contrary, a conveyance evidencing a transaction under which the grantor undertakes to improve the premises so as to equip them for grantee’s specified use and occupancy, or to procure such improvement under grantor’s direction or control, shall imply a covenant that such improvement shall be performed in a workmanlike manner, and shall be reasonably adequate to equip the premises for such use and occupancy.”
For items that were missed on the punch list or not discovered until after the buyer lived in the home for a few months, a warranty can be an extremely useful. The buyer may discover, for instance, that the windows were installed improperly or that cracks have appeared in the walls or crown molding separated as the home settled. The buyer might consider having a home inspection a month before the warranty expires to catch any last-minute defects and have them addressed before the warranty ends.
5. Builder’s right to cure
The “Right to Cure” law in Wis. Stat. §§ 101.148 and 895.07 establishes a process for resolving construction defect disputes between building contractors and homeowners. Contractors who build or remodel a person’s residence must give the consumer a brochure explaining the procedures that must be followed before suing a contractor or window or door supplier. The brochure includes the following mandatory notice:
“Wisconsin law contains important requirements you must follow before you may file a lawsuit for defective construction against the contractor who constructed your dwelling or completed your remodeling project or against a window or door supplier or manufacturer. Section 895.07 (2) and (3) of the Wisconsin statutes requires you to deliver to the contractor a written notice of any construction conditions you allege are defective before you file your lawsuit, and you must provide your contractor or window or door supplier the opportunity to make an offer to repair or remedy the alleged construction defects. You are not obligated to accept any offer made by the contractor or window or door supplier. All parties are bound by applicable warranty provisions.
The right to cure process involves the following steps to make a claim:
- Notice of claim: At least 90 working days before commencing legal action against a builder or window or door supplier or manufacturer, the buyer must deliver written notice of the alleged defect.
- Contractor’s response: The contractor will have 15 working days, or 25 working days for a defect involving a window or door supplier, to provide the buyer with a written (1) offer to repair or remedy the defect; (2) offer to settle with a monetary payment; (3) combination offer for repairs and money; (4) rejection of the claim stating the reasons therefor; or (5) proposal to inspect the alleged defect or perform necessary testing.
- Buyer’s response: If the contractor rejects the claim, the buyer may bring legal action. The buyer must serve written notice within 15 working days if he or she either accepts or rejects an offer.
- Contractor’s supplemental response: If the buyer rejects the offer, the contractor has 5 working days to provide a written supplemental offer or notice that no additional offer will be made.
- Buyer’s response: If the contractor has provided the claimant written notice that no additional offer will be made, the buyer may begin a lawsuit or other action against the contractor. If the buyer received a supplemental offer, the buyer must respond within 15 working days.
- The owner may repair a construction defect immediately without giving notice if the repair is necessary for health or safety. If the homeowner sues the contractor without following the procedures, the court will dismiss the action.
6. Lawsuits and time frames
The typical construction defect complaint may allege negligence, breach of contract or warranty, strict liability, and fraud or negligent misrepresentation. Recent legislation has shortened the time frames for some of these actions.
Previously, legal action regarding the defective or unsafe condition of an improvement to real estate could not be started more than 10 years after substantial completion of the improvements. Under the newly revised Wis. Stat. § 893.89, which is effective April 5, 2018, a person does not have the right to sue for property damage, personal injury or wrongful death resulting from a deficiency or defect in an improvement to real estate that occurs more than seven years after the substantial completion of the improvement. This includes any deficiency or defect in the design, land surveying, planning, supervision, construction or materials for the improvement to real property. In addition, if a person sustains damages during the period beginning on the first day of the fifth year and ending on the last day of the seventh year after the substantial completion of the improvement to real property, the time for commencing legal action is extended for three years after the date on which the damages occurred.
Also under Wis. Stat. § 893.93, the statute of limitations for relief for fraud had been six years but now has been shortened to three years.
Obviously when it to comes to addressing constructions defects and seeking redress, buyers should consult with their attorneys to review the applicable contract and assess legal strategy.
Resources
WRA Publications
Builder Right to Cure
Debbi Conrad is Senior Attorney and Director of Legal Affairs for the WRA.