Giving Condo Owners Up to 10 Years to File Suit Cuts Homeownership Rate, Study Finds
By David Holtzman
CoStar News
July 24, 2024 | 11:33 AM
In California’s high priced real estate market, condominiums can be a more affordable alternative for first-time buyers than single-family houses. But a new report finds a shortage of new condos stems partly because a state law gives condo owners up to 10 years to sue developers over construction defects.
The report from the Terner Center for Housing and Innovation at the University of California at Berkeley faults a law state legislatorspassed in 2002 giving owners up to a decade after they buy condos to file claims against developers or contractors over problems with the unit. The 10-year time limit has led to higher insurance costs, discouraging development, according to the report.
The law was meant to address a gap in consumer protection caused by a California Supreme Court ruling, also in 2002, that said homeowners couldn’t sue builders over defects that had not yet caused actual damage. The law creating the 10-year time limit made it clear that they could.
Condo construction peaked in 2006 in four major California markets — Los Angeles, San Diego, San Francisco and San Jose — before the Great Recession and has yet to recover. For example, there were more than 30,000 new condo starts in buildings of five or more units in Los Angeles and Orange counties in 2006, but fewer than 5,000 starts in 2022.
“Developers have pointed to construction defect liability laws as a key factor in their decision to pursue rental instead of ownership multifamily development,” according to the report. California’s homeownership rate fell from 50% in 2000 to 44% in 2021.
The report recommends thatCalifornia rewrite its liability law to strike a balance between protecting consumers and stimulating development. Another recommendation is for the state to reduce the number of years owners have to file claims and require mediation before allowing a lawsuit.
California could also require condo builders to contribute to a warranty program, a model used in New Jersey, to resolve defect issues without resorting to litigation, according to the report.If builders don’t address defects promptly, the state could pay for them with warranty program funds.
The California Department of Consumer Affairs, which enforces the construction defect liability law, pointed out to CoStar News in an email that the state law is called the Right to Repair Act, because it enables owners to permit developers or contractors to fix defects and avoid litigation.
But that rarely happens, because attorneys encourage condo associations to sue rather than work with builders to resolve problems, Michael Lane, state policy director for the San Francisco Bay Area Planning and Urban Research Association, told CoStar News in an interview. Another problem, he said, is that many larger builders accept lawsuits as a cost of doing business and see the state law as a way to minimize competition from smaller builders.
Lane’s group supported Senate Bill 1470 in the most recent California General Assembly session, which would have required owners to give contractors a chance to repair defects before resorting to litigation. The bill failed to advance out of the Senate Judiciary Committee due to opposition from the advocacy group Consumer Attorneys of California, Lane said.
“We worked with some builders who work in multiple states and smaller builders who would like to get into condos, to allow a good-faith effort to repair damage first,” he said.
The California Affordable Housing Development Association, California Building Industry Association and Consumer Attorneys of California did not immediately respond to requests for comment.
The 10-year limit covers major defects involving foundations as well as non-structural issues such as nail pops in drywall and bubbling paint, according to the Terner Center’s report. Condo associations frequently file claims on behalf of multiple owners for defects, and attorneys tend to encourage owners to settle rather than allow developers or contractors to fix defects,the report found.The settlements drive up contractors’ insurance costs, increasing the cost of construction, prompting development of luxury projects rather than more affordable options.
While the average value of a single-family home in Los Angeles and Orange counties was close to $1.2 million in 2022, the value of a condo was hardly a bargain at more than $700,000, according to data the Terner Center collected from the U.S. Census. The lack of condo production could have helped inflate condo prices, report co-author Muhammad Alameldin, a Terner Center policy associate,told CoStar News.
(Posted with permission by CoStar)