Homeownership has doubled in California since the 1960s. But, by some estimates, as many as 15 percent of new homes sold are defective. Welcome to the dark side of the American dream.
Ah, the sweet smell of success. You paid your dues, gave the best years of your life and rose to the top. Now it’s time to kick back and enjoy the view, the silvery surface of some distant lake as seen from, say, the Serrano Country Club in the El Dorado Hills east of Sacramento. Swimming pools, nature trails and an 18-hole championship golf course all within easy access of your palatial $800,000 custom home. Country air perfumed by fragrant wildflowers carpeting the verdant hillocks. It’s the scent of the American dream. Go ahead, breathe it in deeply. You’ve earned it.
Certainly Tom and Pat Heredia earned it. The couple spent their productive years in San Jose, he as a high-tech CEO and she as a United Airlines flight attendant. Shortly after the turn of the century, they decided to retire early. They cashed out, and for half the price they would have paid in San Jose, they purchased a 3,500-square-foot dream home in the Placer County foothills, where they planned to live happily ever after. Little did they know that their fairy tale was about to go seriously sideways.
Their home was finished in September 2001. That’s when the Heredias say their problems really began.
“Once we moved in, we started noticing things were wrong,” Tom Heredia recalled. “Locks were installed upside down. The lights in the bedroom didn’t work. There were cracks in the garage-floor concrete and in the stucco.”
The Heredias soon found themselves in a legal dispute with builder James Plott. Through their attorney, the Heredias hired Jerry Lewis, a Sacramento architect who specializes in investigating so-called construction defects. The list of alleged required repairs Lewis submitted to the El Dorado County Superior Court was lengthy: redo all of the stucco, repair incorrectly installed interior doors and frames, install a vent for the kitchen stove, replace a warped hardwood floor, fix leaks in the tile roof, and on and on.
Plott refused to discuss the case with SN&R. But Plott’s attorney, Mark Hardy, defended his client’s work. “The case went to binding arbitration, and an award was issued,” Hardy said. “The award was certainly less than what the plaintiffs requested.”
For the Heredias, one thing was certain. “Our dream home got very nightmarish,” Tom Heredia said.
Welcome to the dark side of the American dream.
Homeownership long has epitomized the American dream, and today more Americans own homes than ever before. According to the U.S. Census, in the four decades since 1965, the number of American homeowners has more than doubled, from 36 million people to 74 million people. In Sacramento County, the number of homeowners has increased by one-third since 1990, from 223,360 people to 305,779 people. Obviously, this increasing number of owners requires an increasing number of new homes, and there’s the rub: It may be a cliché, but they just don’t build ’em like they used to.
It’s not possible, given the country’s population growth, its insatiable demand for housing and the depletion of its natural resources. The tremendous post-World War II homebuilding boom was achieved by employing methods of mass production more akin to Henry Ford’s Model T than Abe Lincoln’s log cabin. Thanks to rampant deforestation and the decline of readily available quality lumber, builders must depend more on manmade materials that are often inferior to their natural counterparts. According to many industry observers, budget constraints have led to less supervision on job sites, lower wages for non-union journeymen and an overall decline in the pool of skilled labor.
The end result, according to a 2004 investigation by Consumer Reports, is an increasing number of defective homes. The magazine reported that the number of new homes with so-called construction defects may be as high as 15 percent—or 150,000 of the 1 million homes built in 2003. “That’s a huge number,” one consulting engineer told the magazine. “I don’t think many of these houses will last 50 years.”
Sacramento architect Lewis agrees. “Today, residential buildings are essentially disposable structures,” he insisted. “A lot of what’s being used in homebuilding today, the materials and methods, come out of strip [mall] construction, where there’s no point in pretending you’re building something that’s going to last. When you incorporate them into a house that people expect to last for generations, you get into some serious problems.”
Problems such as the Heredias experienced. “The house was a mess,” Lewis said. “There were a number of problems manifest that the builder hadn’t been able to address, a whole host of issues.”
Lewis compares blueprints with completed structures to determine if the plans have been followed, if the proper materials have been used and if the original design itself is sound. “Typically, the kind of projects we’re dealing with are flawed from the beginning,” he said, adding that he’s generally contacted to investigate defects “because something is leaking. Anything that’s letting water in on a wooden structure is trouble over time.”
Often he works in conjunction with Vince Bartels, a contractor with 20 years of experience who performs “destructive testing” on various components to determine if they’ve been assembled correctly. Bartels bores through walls and floors like a doctor performing a biopsy on a cancer patient, exposing layers of stucco, plywood sheathing, foam insulation and wallboard, searching for the lesion that has allowed water to penetrate the structure. Bartels has seen a lot of sick houses in his time.
“There’s not a project built today that we couldn’t go through and find something wrong with it,” he said. “They’re building our future work right now.”
Construction defects can be found throughout the economic spectrum, from high-end McMansions like the Heredias’ to affordable apartment complexes such as West Capitol Courtyard in West Sacramento, which hired Lewis and Bartels to investigate alleged defects and recommend necessary repairs in its lawsuit against the complex’s designer and developer.
Completed in 1995, West Capitol Courtyard consists of eight two-story residential buildings containing 40 apartments and one two-story mixed-use structure, Building J, with commercial spaces housing a Togo’s fast-food restaurant and a Head Start day-care center on the ground floor and six apartments upstairs. The complex, owned by nonprofit affordable-housing developer West Sacramento Housing Development Corp., first began experiencing water-infiltration problems in 1996, according to the lawsuit.
The developer, Rameria Partners, headed by general partners Peter Geremia and Daniel Ramos (the partnership has since dissolved), repaired the leaks and other deficiencies in 1997, but the nonprofit group claims the leaks reappeared in 2001. Unable to resolve the issue with Rameria, West Sacramento Housing Development Corp. filed suit in Yolo County Superior Court.
“The way [Building J] was constructed causes it to leak from the second story of the building into the commercial spaces below,” complained Charley Learned, the corporation’s executive director. The findings of Lewis’ investigation filed in the case support this allegation. “We’ve been through three winters of this thing. It leaks; the staff scramble around to fix it. You can imagine if one of those walls fell and hit one of those kids.”
But Ramos vehemently defends Rameria Partners’ work on the apartment complex. “The buildings we built were good,” he said. “We used a good architect, a good contractor and good subcontractors. [The plaintiffs] went beyond the scope of what the problem was.”
What began as a leak, Ramos said, became a flood of alleged defects as the plaintiffs “went in and started tearing the place apart,” looking for every last potential flaw. In court documents, Ramos, Geremia, architect Dean Unger and all of the co-defendants named in the suit deny any responsibility for the defects listed in the complaint, a standard maneuver in construction-defects cases.
Building J’s alleged construction defects are typical of what Lewis and Bartels say they find on a regular basis. For example, according to Lewis’ investigation, the slope of the exterior decks on Building J’s second story fails to provide adequate drainage, contributing to the water-infiltration issues in the ground-floor spaces. Lewis and Bartels recently encountered the same problem in a Citrus Heights condominium. A dozen decks were sloped incorrectly, causing severe water damage to the building. “The decks were leaking like sieves into the living rooms,” Bartels said. One of his employees barely tapped one deck’s 4-inch-by-12-inch support beam with a hammer handle, and the handle pushed right through the decayed wood.
“You can track all of these issues down to the money,” Bartels said, citing the intense competition between different developers, material suppliers and subcontractors. “You can track it through the whole process. It’s a vicious circle.”
Indeed, money seems to be the root of all defects. Design flaws crop up because, as Lewis noted, “you don’t make a lot of money drawing tract houses.” Good supervision doesn’t come cheap, so lack of oversight is another frequently occurring theme. “More and more homes are being built by large builders who don’t supervise their workforce,” he said. “With low-bid subcontractors, the typical guy working is getting paid by the piece, to get as much done as possible in a given workday.” Lots of incentive for quantity and none for quality.
“The pride of ‘I’m putting my name on this’ doesn’t exist anymore,” added Bartels. “In this business, you really do get what you pay for.”
Nowhere is that statement more true than with the materials the builder chooses to use in the construction of a new home. Fifty years ago, the wood used for structural sheathing was real wood, 1-inch-by-6-inch slats nailed by hand to the frame. By the 1960s, structurally inferior plywood had taken real wood’s place, and a decade later, an even more inferior composite material known as hardboard replaced plywood.
“The various composites are much more susceptible to water damage,” Lewis said. “As long as it stays dry, it stays pretty strong.” But once hardboard gets wet, it warps and buckles and deteriorates. That’s a problem in an industry that now works year-round, rain or shine. “I used to talk about hardboard siding holding water like a sponge, but that’s not fair to sponges,” he said. “Sponges dry out quicker.” Hardboard’s limitations eventually led to a nationwide class-action lawsuit against one of its leading manufacturers, Weyerhaeuser. The Washington-state-based lumber giant settled the suit in 2000. Nevertheless, Bartels claimed, “I still see it going up on projects!”
Much more common on construction sites nowadays is oriented strand board, or OSB. Made in sheets like plywood, OSB resembles a mosaic of jagged wood chips pressed and glued together, which is essentially what it is. Although marginally better than hardboard, it’s inferior to plywood in both strength and water resistance. It also happens to be cheaper, and replacing plywood with OSB can result in as much as a $2,000 savings in the construction cost of the average single-family home. That may not sound like much, but on a 500-home development project, the builder would save $1 million.
Lewis, however, remains unimpressed with the savings. He’s seen more than his share of moldy, warped and waterlogged OSB lately and thinks the material may not be around for long. “Hardboard siding got sued off the market,” he said. “I think OSB is going to be the same way.” On both the Heredias’ residence and West Capitol Courtyard, Lewis recommended replacement of all the water-damaged OSB with plywood, a significant and costly undertaking.
More often than not, perceived advances in construction technique turn out to be double-edged. Consider the nail gun, for instance. It allows a single carpenter to do the work formerly done by a half-dozen men. However, there’s no “feel” with a nail gun; if you miss the stud and leave an open hole in a shingle or other waterproof layer, it’s hard to tell. The rain comes in through the hole(s), and if the home is one of those new energy-efficient ones with airtight double-paned vinyl windows, you might as well be living in a Petri dish—the perfect environment for growing mold, another common element in construction-defect lawsuits.
Other advances that were designed to save time but can wind up costing money are so-called one-step stucco systems. Traditionally, stucco is applied in at least three separate coats, each cured separately. The new method applies one coat of stucco at half the traditional thickness and then adds a coat of texture. It works, if it’s done correctly. On Tom and Pat Heredia’s El Dorado Hills dream home, Lewis’ investigation alleged that the stucco wasn’t done correctly. “There’s so little room for error [with one-coat stucco], I don’t think you can meet it,” Lewis said. In his report to the court, Lewis recommended completely replacing the exterior with three-step stucco.
Encounter just a few of these potential construction defects together on a single home or project, and the cost of damages quickly snowballs. The Heredias faced a repair bill for hundreds of thousands of dollars in alleged damages to their home. It could take more than $1 million to straighten out the alleged defects at West Capitol Courtyard.
“It’s always going to cost more to fix something than it would to do it right the first time,” Bartels said. “The people who pay the price are the consumers. The cost gets passed on.”
Cause and defect
Bartels will get no argument on that score from Geremia, although they might differ on the source of the cost being passed on to homebuyers. Geremia, one of the defendants in the West Capitol Courtyard case, is now one of the principals in Sacramento-based St. Anton Partners LLC, one of the largest developers of apartment complexes and condominiums in Northern California. Although he would not comment on the lawsuit, he admits he’s no fan of construction-defect litigation.
“I think the state of construction-defect litigation in California is outrageously out of control,” Geremia said. “If you’re the developer or builder of a multi-family project, you can expect to be sued on every project. What’s happening is the cost to insure to fight litigation on the back end is passed on to the buyer.”
St. Anton Partners builds approximately 1,000 new apartment units annually. Geremia estimates that insurance adds $30,000 to the price per unit, approximately 6 percent to 8 percent of his average construction costs of $375,000 to $500,000. He blames this additional cost on “overzealous attorneys who put pressure on homeowner associations or property-management companies” to file lawsuits.
California’s condominium market boomed in the 1980s before crashing heavily in the 1990s. “Construction-defect litigation has been blamed for destroying the condominium market,” write Roger Dunstan and Jennifer Swenson in a 1999 California Research Bureau (CRB) report on the topic for the Legislature. “Part of the argument, most often made by builders, is that the board members of condominium homeowner associations are easily persuaded by attorneys to file construction defect actions.”
One factor complicating the issue, the CRB reports, is that no single compendium of data on condominium construction or defect litigation exists, so it’s difficult to track increases or decreases in either with any accuracy. Nevertheless, the perception that construction-defect cases are on the rise is widespread within the industry.
“Some attorneys do solicit homeowner associations,” said T. Sherman Lewis, regional-construction-practice leader for Hilb Rogal & Hobbs insurance company, one of a handful of carriers left in the state that provide contractor-liability insurance. “They’ll hang notices on the doorknobs like you do for maid service at a hotel.”
“It’s very common in condominiums,” agreed architect Dean Unger, another defendant named in the West Capitol Courtyard suit. “It’s put condominium construction in jeopardy. The last 10 to 20 years, the attorneys have discovered an opportunity with large groups that can pay the fees for the forensic work.”
One reason construction-defect cases tend to involve condominiums or homeowner associations is the high cost of pursuing a lawsuit. The more people involved, the easier it is to bear the brunt of legal and investigative costs. “Litigation is so expensive that for most single-family-home owners it’s out of the question,” explained architect Jerry Lewis. “It can cost $50,000 to $60,000, and not many people can afford that.”
“Most of these people bought into a home, they’re making their payments, they’re on a budget, and that budget assumes everything is going to be fine for the first five to 10 years,” added Eugene Haydu, a Sacramento attorney who frequently works with Lewis on construction-defect cases. “They’re buying into the American dream, and they stretch themselves a little thin. Experts are expensive. It’s pretty daunting to [homeowners]. It’s not Joe Blow contractor they’re going against; it’s the insurance company, and they fight tooth and nail on every case.”
Haydu should know. Before he represented homeowners in construction-defect cases, he was a hired gun for an insurance company. “One of the frustrating aspects of being an attorney for an insurance company is the divided loyalty between client [contractors] and the insurance company,” he said. He switched to representing homeowners after a contractor told him, “You don’t work for me. Quit kidding yourself.”
“I wanted to get out and feel like I was representing real people,” he said.
Although opinions can be sharply divided between the factions involved in litigation, there is some middle ground. “Even developers acknowledge that there were some shoddily constructed projects, especially those built in boom times,” the CRB report confirms. “Plaintiff’s attorneys will acknowledge that some frivolous lawsuits, albeit a small minority, have been brought.”
“I deal with a lot of attorneys, and I think most of them are pretty honest,” said T. Sherman Lewis. “There are builders who have built lousy products, and they do need representation.”
Unger also agrees that some construction has not been up to par, in part because of labor issues and in part because some of the newer materials have failed to hold up over time.
“There’s always that group of developers that are not capable of maintaining a large staff of quality employees,” Unger said. “In competitive bidding for government work, there’s very little opportunity to screen the quality of the labor provided.”
Unger, who served on the state board of architectural examiners in the 1960s, says some firms use “new materials to keep costs down so their product or housing is more affordable. Meeting budgets is a constant challenge.” In his designs, he tries “to stay away from experimenting with new materials. We try to stick with what we know is going to perform over the years from experience.”
Although there is agreement on some issues, litigation by its very nature is acrimonious, and tensions sometimes spill over.
“We’re a charitable organization, so we don’t have the money to wait someone out,” said Learned, the executive director of the West Sacramento Housing Development Corp. “We’re at the mercy of the court and somewhat at the mercy of the defendant. Our lawsuit is with some notable Sacramentans. You’d think they’d want to make this right.”
Ramos and the other defendants in the lawsuit think the West Sacramento Housing Development Corp. needs to be more reasonable and scale down the number of requested repairs. No one is happy that the case is dragging on.
“I’ve been in business 50 years, and I’ve never had a judgment against me,” said Unger. “I’m 77 years old, and it’s really disappointing to wind up my career with something like this.”
Geremia has grown impatient.
“I’ve only been through [construction-defect litigation] twice,” said Geremia. “The first time it was resolved quickly. The thing is, it can all be repaired. There ought to be some way to remedy the situation besides litigation.”
In California, homeowners have up to 10 years after assuming ownership to file suit for construction defects; complaints generally are settled through arbitration. Decisions often split down the middle like Solomon’s baby, said El Dorado attorney Mark Hardy, who is qualified to serve as a special master in arbitration proceedings.
“That’s the general rule of thumb,” Hardy said. “Neither side is going to get what they want.” The best decision is usually the one that makes “nobody happy.” He said the special master is like a “quasi-judge” with special expertise who “serves as the referee” in arbitration. He gained his expertise through defending developers and builders, including James Plott in the Heredia case.
“[The Heredias] made a whole list of claims, as is typical in construction-defect lawsuits,” recalled Hardy. He noted that another list that can grow long in such cases is the number of subcontractors named as co-defendants, as developers and builders attempt to shift the blame for alleged damages to other parties involved in the construction project. Like most people involved with litigating construction defects, Hardy sees some abuse on both sides of the aisle. Some attorneys do attempt to coerce homeowner associations to file unnecessary suits, he said, adding that “there are certain contractors out there who just don’t take care of business.”
The California Legislature took steps to address these issues by passing Senate Bill 800 in 2002. The bill, drafted by former Senator John Burton, requires owners to notify builders of any defects before filing suit. Once the builder is notified, the clock starts ticking, and builders must address the issues according to a rigid schedule set by the legislation.
“I think it gives the developer more opportunity to file, to work through the system,” said insurance consultant T. Sherman Lewis. On the other hand, some builders may have trouble adhering to the complex deadline schedule. “I’m sure there’s going to be people who won’t make the time requirements.”
At the local government level, county and city building departments enforce only minimum standards that ensure new homes pose no risk of injury or harm to inhabitants. They have neither the ability nor the authority to check for construction defects. “We inspect every structure, but it’s limited to a visual inspection,” said Chuck Iniguez, principal building inspector for the Sacramento County Building Inspection department. “We don’t do forensic or destructive testing. … We are at a disadvantage.”
No matter who’s regulating the show, construction defects are more or less inevitable. In the race to fulfill the American dream for as many people as possible, mistakes are bound to be made. “I just got a case the other day where someone has a sewer main underneath their house,” reported Haydu. The old, inoperative piping didn’t show up on the building plans. “That’s what keeps attorneys busy.”
In an effort to avoid the legal quagmire in which West Capitol Courtyard remains mired, Charley Learned recently invited architect Jerry Lewis to review another apartment complex still under construction. The builders have partnered with West Sacramento Housing Development Corp., and as executive director, Learned asked Lewis to perform a preliminary inspection of the complex before the nonprofit takes over full ownership.
“Based on our experience being in this lawsuit, we want to make sure any other project we’re involved in doesn’t have similar problems,” Learned said.
It turned out to be a shrewd move. Lewis was not impressed with what he found. During a tour of the complex—with an SN&R reporter in tow—he found water pooled up to an inch deep on patio surfaces, unevenly applied stucco with the chicken wire showing and reddish-brown tannin stains throughout the complex—the latter a telltale sign that rain may have penetrated the exterior and saturated the structure’s wood frame.
“When finished stuff is at this level, it doesn’t give me a whole lot of confidence about how the rest of the work has been done,” Lewis said.
The West Sacramento Housing Development Corp. board of directors will weigh the results of Lewis’ completed investigation against the pressing need for affordable housing in West Sacramento. It may not be an easy decision, but it’s better to have all the information now instead of later.
Tom and Pat Heredia can testify to that. They received a monetary award in their case against builder James Plott, but the victory was bittersweet. In arbitration, the special master found in favor of some—but not all—of their claims.
“The arbitrator decided that some of the claims that had been raised by the Heredias were valid, and some of them weren’t, in his opinion,” said Hardy, the attorney who defended Plott. The arbitrator awarded them $200,000 in damages, according to Tom Heredia.
“We got the judgment,” he said. “It was enough to pay Jerry, our lawyer and to fix everything properly. We did get paid. That was the most unbelievable thing about the whole deal.” It was also about as much fun as ants at a picnic. “It was a nightmare. It just sucked the whole thrill right out of it,” he said. “In the end—I’ve got to hand it to my wife—through perseverance, it’s not a bad house.”
Asked what he might do differently if they could start from scratch, Tom Heredia said, “I really think you have to get everything up front and documented. No verbal agreements. No ‘he said, she said.’ The builder could have saved a lot of money. He could have solved all the issues for $70,000.”
Jerry Lewis has a more succinct solution.
“Don’t buy anything made after World War II,” he said wryly.