Descriptions of “vintage,” “refurbished” and “pre-owned” can persuade a decision toward some purchases—cars, computers, that perfect James Dean-era leather jacket—but for Chicagoland homebuyers, the allure of shiny and new is often too hard to ignore. Moving into a brand-new building or even a gut rehab certainly has its benefits, but there are also plenty of downsides to buying new units. Smart buyers brush up on these potential pitfalls before finding themselves in a money pit. And if it’s too late for that, then there are certain courses of action that can help recoup some losses.
At the height of the real estate boom in the mid-2000s, developers built quickly to keep pace with demand. That was good for eager buyers—and not so good for eager buyers. “A lot of developers weren’t necessarily qualified for building and were just throwing buildings up,” says Brawley Reishman, president of Transproperties Management, a condo association management firm in Chicago. Reishman says that the speedy delivery led to some sketchy oversight. “So now you have buildings that have problems, whereas if oversight was more controlled and growth was a bit slower, you wouldn’t have the problems.”
The most common problems involve “building envelope performance,” explains Kami Farahmandpour, principal of Building Technology Consultants. Primarily, this means water leakage—something that’s not necessarily detectable at showings. It might be due to flashing that’s left unfinished at roofs, parapet walls, and windows; downspouts incorrectly tied into sewer lines; or problems with flooding in lower units and basements.
A thorough pre-sale inspection should catch some of these things, but doesn’t always. For instance, sometimes a condo building’s roof isn’t easily accessible or the developer of the new building purposefully prevents access to avoid discovery of problems, Reishman notes.
While water penetration typically poses the most expensive issues to correct, there are other big ones including deficient heating and cooling systems, faulty wiring, improper insulation, and even code violations. Despite violating building codes, some developers have been able to secure occupancy permits and pass inspections, Farahmandpour says.
Another nationwide issue concerns Chinese drywall. More than 2,100 U.S. homeowners have filed federal suits claiming their homes were damaged or ruined by defective drywall that gives off noxious odors and chemicals that can corrode wiring, plumbing and heating equipment. Most of the plaintiffs resided in the South, although a few instances have been reported in the Midwest.
With hundreds of sheets of drawings to review by a permit official—who rarely has a structural engineering background—errors may be missed. Plus, the inspecting authorities simply can’t be looking over the contractors’ shoulders all the time, so in-field missteps or shortcuts can happen as well. “You can’t rely on the building officials to catch mistakes,” Farahmandpour says.
The other thing buyers should remember is that the code is only the bare minimum, while industry standards may be more valuable. “For instance, they don’t say your building shouldn’t leak for the first 20 years—it’s just the industry standards.”
From Better to Worse?
Those industry standards have, indeed, improved over the decades of building in Chicago. “There have been a lot of technological advancements,” says Philip Renouf, president of the engineering consulting company Klein & Hoffman. For example, materials have gotten lighter, windows more energy-efficient, and electricity capacity higher. On the flip side, two major aspects seem to have declined overall: system redundancy and workmanship.
In the past, particularly during Chicago’s Roaring 1920s and ‘30s, sturdy residential bungalows were built with inherent backup systems. “Modern buildings aren’t as robust and don’t have as much redundancy and can present problems much earlier,” says Klein & Hoffman CEO Jon Boyd. The “forgiving” construction methods back then entailed masonry that was about a foot thick. “Water could enter the brick, stone or terra cotta exterior, and you still had 8 or 9 inches behind it,” Renouf explains. “[Those] buildings have been sustained by and large, needing just localized repairs, rarely showing systemic problems.”
Today’s more energy-efficient construction methods may save money on heating and air-conditioning and save on the developer’s material fees, but long-term resilience of the building suffers. Water could get beyond the initial surface and there’d be nothing in place to hold it back.
With many developers looking for ways to cut costs, they may also cut corners. Whereas older buildings go through general wear and tear, “with new buildings you don’t know where the developers have taken shortcuts, and these issues reveal themselves in surprising ways,” Reishman explains. It’s harder to prepare for problems when you don’t know what they are.
Farahmandpour says part of the culprit is the “developer delivery method.” Consider the 1960s high-rise residential structures along Lake Shore Drive: “The owner was going to own the building for a long time,” Farahmandpour says. Not only did he have a vested interest, but he knew he’d be responsible for long-term maintenance. To get the best product, the owner hired an architect, took the drawings to a contractor and then kept the architect on board to make sure everything was built correctly. “In the developer delivery method, you don’t have the three entities working together,” Farahmandpour says. Instead, the developer hires an architect to design a building that will sell fast and that’s inexpensive. “So a lot is put into aesthetics, but no one cares what goes on the roof or in the walls,” he explains. The contractor takes it from there with little to no collaboration with the architect, and with the developer frequently asking, “What else can you do to make it even cheaper,” a practice that’s referred to in the industry as “value engineering.”
Complicating matters further is the increasing complexity of structures and the decreasing expertise of construction laborers. “Five years ago, building systems were a lot simpler and workmen were in construction probably all their lives,” Farahmandpour explains.
Now, we have hundreds of different systems that all handle water and air penetration differently. “The more different material types on an exterior cladding interfacing, the more challenges you have to make a building watertight,” says Renouf.
And there’s another thing: “We’re more environmentally conscious.” Why is that a bad thing? Because the additional insulation that lowers our electricity bills can also raise the risk of condensation. “More insulation creates more differential temperature between exterior and interior,” Farahmandpour explains. If the workmanship is done well, it can work, but there’s so much room for error—accidentally or not—that it often doesn’t.
Looking at the Law
There are state and municipal construction codes that regulate building, but, as mentioned, unscrupulous developers sometimes thumb their noses at these codes, knowing that the chances at getting caught are low. “Especially in high-rise buildings, the contractors can get away with a lot because they’re out 20, 30, 40 stories up and trying to get it done quickly because the developer is trying to get people in so he can get his money and get the hell out of there,” Renouf says. When problems present themselves later, the finger-pointing begins, but it can be hard to catch the culprit.
Because a unit owner in a new building purchases from the developer, most of the blame falls to the developer who can quickly make himself scarce. For each project, developers typically create a separate LLC, which they dissolve after the units are sold off. “How much success can you have if a LLC is dissolved?” Reishman points out.
Next in line in the blame game are the general contractor and his subcontractors, says Jason Orth, a principal with Buffalo Grove law firm Kovitz Shifrin Nesbit. They may claim they built it according to the plans or change-orders. “But a lot of times, that is not a valid argument, because the actual work does not meet the standards,” Orth says. Another party carrying some blame is the initial board of directors, which is appointed by the developer prior to turnover. “What we argue is that this initial board of directors had a duty to inspect the work of the developer, contractor and subs, and make warranty claims based on defects that they would have found if they were doing the inspections properly,” Orth explains. The problem lies in this board’s conflict of interest, because its loyalty is naturally to the developer.
Plans of Attack
The key to successful litigation against a developer: “Act as quickly as possible so you can get [developers] involved and put their creditors on notice,” Orth says. You have three years for a consumer fraud claim, four on matters related to construction defects—which starts when you discover the problem—and five years when an issue is associated with fraud. “If you sign your contract today and you find out in three years something that was said was fraudulent, you’d have five years from that day,” explains Rick Kessler, a litigation specialist at McDonald Hopkins LLC in Chicago. Orth also brings up a statute of repose, which states that for construction defects, the party has to find the issue within 10 years of the date of turnover.
Farahmandpour advises owners at new-construction buildings to implement a transitional study once the association management has been turned over from the developer. “Bring in an architect or engineering firm and have them go through the building,” he says. At this point, any common-element problems could be taken up with the developer—or handled by the association before they become bigger problems. Sometimes a unit owner will experience leaks, but not tell anyone else for years and then, after other residents come forward complaining, realize that the leaks are symptoms of a deeper flaw within the building as a whole.
When an association considers litigation, it’s important to first diagnose the problem. This means discussing the issue early on. Even if you discover the problem early and make a claim, you might not get much in return, according to Orth, because in this economy, developers disappear, and contractors and subs go belly-up, financially. “There could be situations where you spend thousands of dollars to get a judgment and you might win the case, but you can’t collect, and that doesn’t serve the ultimate purpose.” Still, don’t rule it out. Orth says his firm presents a board and association with the cost of pursuing a lawsuit and the likelihood of seeing a return.
Avoid the Situation
Before signing on the dotted line, a little due diligence can go a long way. The information isn’t going to fall from heaven, Kessler warns. “Most often, when someone buys a residence, it’s one of the largest purchases of their lives and too often they treat it as if they’re buying a hot dog from a street vendor,” Kessler says, adding, “I would venture if anyone did their due diligence on the street vendor, the street vendor would never do business.”
“Educate yourself as much as possible,” says Farahmandpour. That might entail researching what other buildings the developer has built, what the quality is and any problems; and doing a search with the secretary of state’s office to see if the developer is being sued for anything in Illinois or beyond.
At your walk-through before closing, look for visual signs of defects: mold, concrete on the exterior that’s discolored, wood flooring that’s buckled, water stains at the ceiling or floor or around any windows or doors, and musty smells. And another thing: buyers should be aware of their surroundings, the experts say. For example, does the unit have a roof terrace directly above you that could be susceptible to leakage? If so, a potential problem could be in the offing. In general, “You need to be informed; you can’t be enamored,” Kessler cautions.
It may all seem like overkill but it’s definitely a buyer-beware situation. Don’t be wooed by the fancy façade just to discover that it’s all skin deep.
Elisa Drake is a freelance writer and a frequent contributor to The Chicagoland Cooperator.