Construction defects settlement will cost KB Homes millions

By Deborah Goonan, Independent American Communities

According to the Orlando Sentinel, KB Homes, one of Florida’s construction giants, has reached a settlement with the FL Attorney General’s office. According to the report:

At the core of the state’s three-year investigation were construction defects that led to water intrusion, which leads to mold, wood rot and even structural failure, according to the state. In some cases, the builder made the appropriate fixes but in others it ignored problems and failed to inform buyers — all in violation of the Florida Deceptive and Unfair Trade Practices Act.

As a result, one of Central Florida’s leading builders must repair houses that are up to 10 years old and qualify under the terms of the settlement. In addition, the Los Angeles-based builder must provide the Attorney General’s office with $6.5 million, which will help repay homeowners who had to pay for their own repairs. In addition, the company must invest $17 million improving its building methods, training its work crews and using improved building materials.

…

From even before the state launched its investigation, KB Home has spent what now totals more than $71 million to reconstruct and repair damaged residences.

Read more here:

KB Home to settle on statewide construction defects
http://www.orlandosentinel.com/classified/realestate/os-kb-home-settlement-20160215-story.html

Wow, that’s a settlement of $23.5 million, plus the cost to repair homes that have not yet been repaired, plus $71 million already sunk into repair costs.

Is this a fair settlement?

Now let’s compare that to KB Homes earnings for 2015, according to this news release.

KB Home Reports 2015 Fourth Quarter and Full Year Results
Fourth Quarter Revenues Up 24% to $986 Million; Pretax Income Up Significantly to $70 Million

http://investor.kbhome.com/news-releases/news-release-details/kb-home-reports-2015-fourth-quarter-and-full-year-results

Let’s do the math. Total cost to repair damages and make restitution is about $94.5 million ($71 million + $6.5 million + $17 million).

That’s less than 1% of what KB Homes earned in revenue last year. But it’s also 13.5% of reported pretax income for 2015.

That probably won’t please stockholders.

Another factor not investigated or reported: how many of the stucco homes KB built in Central Florida just so happen to be part of a homeowners’ or condo association? Virtually all of them.

A quick search on Google shows 17 HOA communities in the Orlando area alone. Read the descriptions. Every subdivision includes amenities such as walking trails or a tot lot or even a putting green.

Why is this fact relevant?

Think about it. During construction phases in an Association-Governed Residential Community, the developer controls the HOA Board and, thus, the destiny of that community. The developer controlled board also wields considerable control over communications within that community, as well as the sales disclosure process.

So it shouldn’t come as a surprise that, according the AG investigation, KB Homes was not disclosing construction defects to buyers.

Homeowners that make waves and attempt to hold the developer accountable may suddenly find themselves receiving nasty violation letters from the HOA. They may even be fined or otherwise penalized for minor issues.

Neighbors may shun the homeowner that brings media attention to defective homes, accusing that homeowner of scaring buyers away and reducing property values. This is a dynamic we just don’t see in traditional neighborhoods without the collective ownership of (underused) amenities.

I will bet the majority of my readers know at least one homeowner that has had to fight to get a home builder to honor the terms of their warranty. Maybe that homeowner is you.

Developers hold the advantage in construction defect disputes

First of all, most construction defect cases don’t get the attention of the Attorney General. That means the costs of litigation fall to homeowners rather than the state.

In HOAs, construction defects can affect individual homes or common areas or both. Using the example of KB Homes, defective stucco could have been applied to individual homes, townhouses with a common interest in the exterior structure, or on the community club house. Therefore, a homeowner might be involved in two separate construction defect disputes with a developer!

And let’s not forget that mega home builders have the backing of major insurance companies and a cadre of attorneys to defend their interests in cases of defective construction. These civil suits are complex and drag on for years. During that time, most homeowners and associations are forced to make repairs, in the hopes that those costs will be reimbursed in the future.

More often than not, homeowners don’t receive full restitution, especially when you consider the exorbitant legal fees. Construction defect cases are often taken on a contingency basis, but, in the end, the attorneys get their substantial cut of any settlement. I’ve read many reports and discussion forums on this topic. When homeowners or associations prevail, they might only walk away with about half of the money needed to fully repair poor construction and related damages.

And a growing number of developers are now inserting requirements for mandatory binding arbitration into sales agreements and Covenants, Conditions, and Restrictions (CC&Rs). So homeowners may never get their day in court, let alone a jury trial. Furthermore, settlements often remain confidential, so that future home buyers will never know the details of defects and how they were remedied.

There’s no doubt that the existence of an Owners’ Association complicates the resolution of construction defect claims.

Further reading:

(links below are provided for reference only, and do not constitute and endorsement of any organization)

Pros and Cons of Arbitration Vs. Litigation in Construction Disputes

Is Construction Defect Litigation All It’s Cracked Up to Be?

CONSTRUCTION DEFECTS – 12 MOST FREQUENTLY ASKED QUESTIONS

The Hidden Dangers of Construction Defect Litigation