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Lawsuits on pace with building boom
This series was prepared by the Globe Spotlight Team: Editor Walter V. Robinson, reporters Matt Carroll, Sacha Pfeiffer, and Michael Rezendes, and photographer John Tlumacki. This article was written by Rezendes. Last of four parts, 5/2/01
PALMDALE, Calif. -- The first time a lawyer came through the Marquis subdivision here at the edge of the ever-expanding Los Angeles suburbs, Richard Stavis told his wife he wanted nothing to do with a lawsuit against KB Home.
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WBZ-TV reporter Ron Sanders and photographer Tom Rehkamp joined in the Globe investigation. Watch their reports on RealVideo.
PART ONE
1. Check and re-check references. Don't just trust a builder's Web site or brochures. Contact past customers, especially buyers who have owned their homes for several years, to see how satisfied they are with the quality of the workmanship -- and how the builder handled post-closing problems. Major builders have Web sites that extol their work, but also look for sites maintained by dissatisfied customers.
The Globe Spotlight Team would like to hear from readers willing to share their experiences -- or thoughts -- about new home construction. The Spotlight telephone number is (617) 929-3208. Confidential messages about new home construction and other issues can also be left at (617) 929-7483. You can email Spotlight at spotlight@globe.com.
''I'm not one of those people who will sue for the sake of suing,'' he said.
But that was before clay tiles started falling off the Stavis roof. Before cracks began appearing in the exterior stucco. Before windows started leaking, and a previously repaired crack in the concrete slab under the home's first floor reopened.
So now, the Stavis household and 40 other families in the subdivision are suing KB, a leading national builder, formerly known as Kaufman and Broad, that has been a target of consumer complaints for more than two decades.
The battle is especially fierce now, at the close of a decade-long building boom marked by a dramatic increase in construction defects. Indeed, the Council of Better Business Bureaus alone says consumer complaints against home builders more than doubled during the 1990s -- from 2,300 in 1990 to more than 5,000 in 1998.
Even as that happened, the Globe Spotlight Team found that state and federal agencies largely abandoned oversight of the industry, placing an unfair burden on local building departments that often find themselves overwhelmed by the numbers of new homes they must inspect. This is especially true in areas where large home-building companies are constructing hundreds of houses at a time.
The result: Home buyers making one of the most emotional and expensive decisions of their lives often find they have nowhere to turn but the courts when faced with construction defects or deceptive builders who misrepresent their products. And lawyers handling construction-defect cases -- especially in larger building-boom states such as Nevada, Arizona, and California -- say business has never been better.
''There's been an explosion in construction-defect litigation, particularly in the West,'' said Christopher P. Ruiz, a San Diego attorney and construction-defects specialist representing homeowners and builders for the last 20 years. ''It's very clear to me that the industry as a whole hasn't addressed the issue because the problem just gets bigger and bigger.''
As for one of Ruiz's former legal targets, KB Home, a spokesman refused to discuss any lawsuits filed against the company.
Earlier this week, the Globe Spotlight Team reported that even at the luxury end of the production home-building market, customers routinely complain about shoddy workmanship, the use of second-rate building materials, and unresponsive customer service operations.
Among other things, the Globe reported that Toll Brothers, the nation's largest luxury home builder and a major presence in Massachusetts, has alienated customers in subdivisions throughout the country, some with construction defects so serious that Toll has bought back their homes.
Moreover, a review of construction-defect lawsuits across the country shows that the rising number of consumer complaints against home builders runs the economic gamut, from starter homes typically offered by KB Home and other builders to the elegantly designed offerings from Toll.
''We see very high-end homes -- homes that cost a million-plus -- that have some of the same defects a $200,000 starter home would have,'' said Alexander Robertson, a construction-defects attorney in Southern California. ''The price tag of a house doesn't correlate to the quality of construction, unfortunately.''
Of course, many new home buyers can't afford to hire lawyers on their own, and are unable to stake legal claims against deceptive or negligent builders without attorneys who will work on a contingency basis. And those who believe they are prepared for the expense of private legal help often are in for a shock.
Stan and Eunice Kozikowski, owners of a troubled Toll Brothers home in Franklin, Mass., have battled the company over construction problems for 12 years and just recently received an offer from Toll to buy it back. But the day after Toll made the offer, the Kozikowskis's Boston attorney, J. Albert Johnson, asked them to sign a contingency fee arrangement giving 1Johnson one-third of the estimated $500,000 Toll would have paid for their home. The Kozikowskis refused. Soon thereafter, they rejected Toll's offer as well.
Johnson said yesterday that the request for one third of the total was an inadvertent error. A month later, an agreement with a much lower percentage was signed.
Meanwhile, even those with the time, money, and inclination to hire lawyers and go to court often find they're handcuffed by mandatory arbitration clauses written into many purchase and sale agreements and warranties -- including those offered by Toll Brothers in Massachusetts and other states.
Mandatory arbitration, which forces a home buyer to present claims to a third party, rather than a judge and jury, has become a primary target for home buyer advocates across the country. They say that without greater government oversight of builders, the courts are often an unhappy buyer's only effective recourse.
''Mandatory arbitration is the first thing we tell people to watch out for when they're buying a new home,'' said Janet Ahmad, president of HomeOwners for Better Building, a Texas organization battling KB Home over a subdivision where buyers say their houses were built on unstable soil.
Mandatory arbitration clauses have become so prevalent -- one housing activist says up to 80 percent of new home buyers have it in their purchase contracts or warranties -- that last year US Representatives Charles Gonzalez and Ciro Rodriguez, Democrats of Texas, filed legislation that would ban them.
But the bill made little progress and has yet to be refiled this year. And even if the measure were to win approval, it would provide little solace to the vast majority of dissatisfied home buyers -- including many with the money to exercise their right to go to court.
Manuel and Cecelia Bengzon, for example, said they paid $515,000 for a Toll Brothers home in Chester, N.J., in 1994, after company officials had assured them they would be able to build two decks off the back of the house. Later, the Bengzons discovered that local wetland restrictions, which they believe Toll should have known about, prevented the additions.
But the Bengzons felt a lawsuit was out of the question, in part because they were commuting nearly two hours each morning to jobs in Manhattan. ''We were not in a position to pursue anything legally that we weren't happy about,'' said Cecelia Bengzon. ''We just didn't have the time.''
In California, where new subdivisions roll out over the exurban landscape on a near epic scale, home buyers' rights -- including the right to go to court -- have even become a cause celebre.
Earlier this year, Erin Brockovich, the inspiration for the Oscar-winning movie about environmental contamination, told a state legislative committee that construction defects in a home she purchased in 1997 have led to mold infestation that has caused her to suffer facial rashes, headaches, and respiratory ailments.
Brockovich's testimony signaled a flash point in the California battle between buyers and builders that ignited late last year when the state's Supreme Court ruled that homeowners may not sue builders for construction defects unless they can show evidence that a defect has caused additional property damage or personal injury.
Those objecting to the ruling, including the court's chief justice in his dissent, say the decision means that, hypothetically, a homeowner may not sue a builder for faulty wiring until the house either burns because of an elecrical fire, or someone in the home is electrocuted. ''The majority today embraces a ruling that offends both established common law and basic common sense,'' Chief Justice Ronald George wrote.
With or without the right to go to court, dissatisfied homeowners say the lack of oversight from state and federal agencies has left the policing of home builders to understaffed and overworked local building departments that often lack the resources to carefully review architectural plans and inspect new homes.
''There is such a building boom going on, it has been near impossible for inspectors to keep up with the paperwork, much less get out to view buildings as often as they would like,'' said Walter Blair Adams, a Wellesley, Mass., architect and building code consultant retained by the Globe for this series.
Stavis, the KB homeowner here, believes more vigorous oversight of the construction of his house might have prevented errors he suspects were caused by subcontractors who raced to put up his home in wet weather, when building materials can become saturated and damaged.
The problems plaguing the Stavis house -- and the houses of many of his neighbors in the 400-home Marquis subdivision -- also underscore the plight of new home buyers who find their houses falling apart just as the warranties expire.
Stavis, who paid $132,000 for his three-bedroom, two-bathroom home in 1991, said his warranty ran out earlier this year, which helped convince him to join the latest lawsuit filed by Marquis residents against KB Home. ''It's either protect my interest or take the money out of my pocket to fix the problems,'' he said.
Across the street, Lori Rome, who bought her four-bedroom home from the original owner for $125,000 four years ago, appears to be in the same boat. Rome, who has also joined the suit against KB Home, says shoddy construction is at the root of a laundry list of problems, including leaky windows and sliding doors, cracking stucco, falling roof tiles, and a cracked slab that Rome says is responsible for an insect infestation.
And like Stavis, Rome believes that government indifference to builders flouting rules while putting up homes by the hundreds is responsible for a storm of complaints. ''The builders get so big they don't care about what they're building anymore,'' she said. ''They just slap up the homes and move on to the next development and feel they're not accountable.''
Barton Pachino, senior vice president and general counsel for KB Home, declined to answer questions, other than to say, ''the better course is to make no comment on existing litigation. That's our practice.'' When asked to comment about settled cases dating to the 1970s, Pachino would only add, ''That's pretty old stuff, in my view.''
But the ''old stuff'' underscores the company's long-running conflict with its customers -- and with the federal government -- over more than two decades. In 1979, KB Home signed a federal consent order after the Federal Trade Commission accused it of shoddy building practices and false advertising in Illinois.
KB Home made no formal admission of wrongdoing in the case, but in 1991 -- again, without admitting wrongdoing -- it agreed to pay a fine of nearly $600,000 to settle new FTC allegations that it had violated the 1979 order with more sloppy construction in Riverside County, Calif.
Since then, the Los Angeles-based firm has been sued repeatedly in civil actions brought by homeowners. In the Antelope Valley cities of Palmdale, Lancaster, and Rosamond alone, local attorneys say they represent hundreds of owners of KB homes in active litigation against the company.
Some experts say KB Home is neither better nor worse than other builders in the area who construct homes too quickly and too inexpensively in an effort to attract first-time buyers priced out of markets closer to Los Angeles -- where the same two- and three-bedroom houses sell for twice the money.
In any case, critics note that the company is able to alienate customers with seeming impunity -- absorbing the occasional legal setback with no apparent effect on its bottom line. In 1999, despite its earlier skirmishes with the FTC and more recent battles with unhappy customers, KB Home was the nation's second-largest home builder, with more than 22,000 houses sold and nearly $4 billion in revenue.
The same is true of other leading builders. Michigan-based Pulte, whose building practices have spawned a rash of Web sites sponsored by unhappy customers, was the nation's largest builder of production homes in 1999, with more than 25,000 sold and revenue approaching $4 billion. And Toll Brothers, with an average sale price of $450,000 last year -- double that of its nearest competitor -- saw its stock price spike 86 percent in 2000.
At the same time, financial analysts say builders of production-style subdivisions -- where similar model homes are used repeatedly -- are taking an ever-greater share of the home-building market. Ian Jacobs, who analyzes the industry for Goldman Sachs, says that while smaller builders still dominate the national scene, the nation's 150 largest home builders increased their market share from eight to 18 percent during the 1990s -- a time when new home sales soared from 534,000 a year to 907,000.
Home buyer advocates say the corresponding surge of consumer complaints is easily explained by lax government oversight.
Yet that wasn't always the case. In 1979 Elizabeth Dole, then an FTC commissioner, publicly scolded a Las Vegas convention of home builders for a steep rise in construction defects and mounting consumer rage.
''As home builders you have a choice,'' Dole said. ''Either you can each independently decide to make self-regulation work or you can brace yourself for full-scale, hard-hitting regulation from the government.''
At about the same time, the FTC opened a construction-defects enforcement program and launched a national home buyer survey, which found that 79 percent of consumers experienced construction problems of one sort or another.
''As soon as we announced the results of our study we received literally hundreds of complaints from across the country,'' said Thomas H. Stanton, who was then deputy director of the FTC's Office of Planning Policy.
State officials were also cracking down on new home builders. For example, in Massachusetts, then-Attorney General Francis X. Bellotti's consumer protection division filed a lawsuit against KB Home over an Amesbury development where buyers had reported freezing pipes, sinking foundations, and cabinets that were literally falling off walls.
But Dole's threat to home builders proved to be an empty one. As the rising number of complaints attests, builders have failed to police themselves. And the ''hard-hitting government regulation'' she warned them about never materialized.
In fact, FTC officials now say they are leaving the policing of national building companies to local authorities because of the difficulty the agency would face trying to enforce building codes that differ by locality. And state attorneys general appear to be charting the same course.
Some consumer experts believe the reason for diminished state and federal oversight lies with a change in philosophy. ''The '70s and the early '80s were the heyday of consumer protection,'' said John Montgomery, a Boston attorney who served as head of the state's Consumer Affairs Division under Bellotti. ''There was a consciousness that you don't see now.''
Today, many dissatisfied buyers of newly built homes are either unaware of existing consumer protection laws, or resentful of state and federal officials who do not take complaints seriously.
For instance, James O'Connor, a Toll Brothers homeowner in Bedford, Mass., filed a consumer fraud complaint with Attorney General Thomas F. Reilly's office two years ago, just after Reilly took office. Reilly's office referred the complaint to a local consumer action group, which helped win him a settlement. But O'Connor said officials never investigated whether his case was part of a pattern of behavior by Toll.
In his detailed complaint, O'Connor said that his kitchen was smaller than the one Toll advertised, that the home was built 10 feet closer to the road than plans called for, and that Toll's assurances that he could build an outdoor deck proved worthless because of environmental restrictions that prevented him from constructing any additions.
''The problem is that the state had no teeth,'' O'Connor said. ''You would think the AG's office would have been more sensitive to the question of whether there were fraudulent acts on a larger scale. So they missed the point. At the very least, they should have wondered whether there was a concerted effort to oversell the units and then underbuild them.''
In fact, the Spotlight investigation found that at least seven of O'Connor's neighbors received the same smaller kitchens -- 23 percent smaller than Toll's sales brochure stated. And in Franklin, the Globe found that rooms in at least four homes were also smaller than advertised by Toll.
Ann Donlan, Reilly's press secretary, said the office received more than 90,000 varying consumer complaints last year and is seeking to update its computer system to better identify common themes. ''We cannot represent any individual consumer in an action. But we are looking for patterns,'' she said.
Meanwhile, times may be changing. In Texas, home buyer advocates are pushing a ''home lemon law'' under consideration by the state Legislature. The proposal is fashioned after automotive lemon laws on the books in many states, including Massachusetts, which require manufacturers to either repair defective cars or buy them back.
Yet home buyers and construction experts say that, without more immediate scrutiny of home builders by state and federal regulatory authorities, consumers will remain even worse off than they were in the late 1970s, when Dole sounded her muted alarm.
''If you get a bad toaster you can take it back to the store where you bought it,'' said Richard Gross, a former Massachusetts assistant attorney general. ''But what do you do if you get a new home that's a lemon?''
This story ran on page A01 of the Boston Globe on 5/2/2001.
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