August 19, 2015
Donald Trump is in the Condominium Business but he does not trust Owner Associations
Donald Trump’s colorful background in the business of condominium development speaks volumes about two topics: (1) his track record as a real estate developer, and (2) the weaknesses of the community association model of real estate ownership. There are many commentators writing about the political nuances of Trump’s 2016 presidential campaign. Words of Conveyance is not a political blog. Instead, this post focuses upon a recent federal lawsuit involving the Trump Organization that illustrates a few risks in condominium ownership. Donald Trump is in the condominium business but he does not trust owner associations. As it turns out, Mr. Trump litigates in a similar way to his political campaigning.
Jacqueline Goldberg is a Certified Public Accountant who has invested over $10 million in real estate rental properties. A Trump-controlled developer made condominiums available in the Trump Tower in Chicago, Illinois. The Chicago Trump Tower’s 92 stories enclosed 486 residential units and 339 hotel condominium units. In 2006, Ms. Goldberg signed contracts to purchase two hotel condominium units as investments. Their prices were over $1.2 million and over $971,000, respectively.
The marketing materials used Mr. Trump’s personal brand to illustrate his personal involvement as an established, famous and successful developer. The Chicago Trump Tower advertised luxury amenities including a 60,000 square foot health club, concierge, laundry, garage, meeting rooms, ballrooms with 30 foot ceilings, storage areas, and an executive lounge as common areas of the condominium association. Since this was a hotel condominium, these common areas would be income generating assets and not merely perks available to owners or their tenants. The declaration is the essential document that defines these respective property rights of different owners in the association. This document defines which real estate elements are exclusively or commonly owned.
While the hotel condominium units in the Trump Tower were more expensive than most detached single family dwellings, Ms. Goldberg’s purchase contracts had some language that would make many real estate people nauseous. The agreements provided that the, “[s]eller reserves the right, its sole and absolute discretion, to modify the Condominium Documents.” The Condominium Documents include the declaration, bylaws and floor plans. The purchase contract only required Ms. Goldberg’s approval to change the Condominium Documents when specifically required by law. Her risk was that the contract language gave Trump the unilateral authority to change the material terms of the deal.
After signing the purchase agreements, Ms. Goldberg learned that the Trump Organization made subsequent changes to the Declaration, removing the health club, concierge, laundry, meeting rooms, ballrooms, storage areas and executive lounge from the association’s common areas. Perceiving a “bait- and-switch,” Ms. Goldberg refused to go to closing on the sale of the two units.
When the Trump Organization refused to return her $516,000 earnest money deposits, Ms. Goldberg filed a lawsuit. The principal theory of her case was that the developer defrauded her by including the later-removed elements in the original package while never intending to keep them as common elements of the hotel condominium association. In his defense, Mr. Trump insisted that the association could not be trusted with management of these elements of a mixed-use development:
Mr. Trump, a self-described “expert” on condominium developments, testified that based on his experience, he went into the Trump Tower project aware that “it can be very difficult” for a condominium board to manage function rooms, ballrooms, and food/beverage operations. Mr. Trump explained that, as a general matter, condominium associations “can change their mind,” “fire managers,” “do lots of different things to create tremendous turmoil,” and “really ruin the operation very easily.” He further explained that if a condominium association fired a manager, “[i]t could become a disaster.” This “has happened before, many times, where condo boards are involved and they can’t make a decision, they can’t hire a manager, and the whole thing goes to hell.” This may affect not only the stability and profitability of the building, but also the Trump Organization.
Mr. Trump argued that these elements were originally included as common elements only as an oversight. When he later figured this out, he transferred them over to one of his companies in order to prevent some association board of directors from ruining the Trump Tower for everyone. To anyone unfamiliar with Mr. Trump’s personal bravado, these comments would sound outrageous. How can a developer strong-arm luxury, income generating amenities away from a group of unit owners in the name of “protecting property values” against the incompetence of their neighbors? Yet, in Goldberg’s case, this argument worked. Trump won the 2013 jury trial in the U.S. District Court for the Northern District of Illinois. Goldberg then appealed to the Seventh Circuit Court of Appeals. Judge Richard Posner, a well-known federal appeals court judge, wrote a June 10, 2014 opinion affirming the trial court decision. He had some interesting observations about this case:
- “She signed with her eyes open.” Goldberg was an experienced real estate investor who should have understood the risks of signing the contracts with the “change clause.” The Court declined to paternalistically rewrite these contracts or condominium instruments made between these sophisticated investors. We know from the first Republican 2016 presidential debate that Mr. Trump’s businesses declared bankruptcy four times in order to discharge real estate loans. Given Mr. Trump’s business practices and what was spelled out in the contracts, the Trump Tower units were speculative investments.
- “He is not infallible.” What is to be made of Mr. Trump’s decision to change the condominium instruments after Ms. Goldberg signed the agreements? Judge Posner observed that, “Donald Trump is of course a highly experienced real estate developer, but he is not infallible – he has had many successes in the real estate business but also failures.” Given Judge Posner’s reputation for use of a wry sense of humor in carefully written judicial opinions, one cannot help but believe that the Court had Mr. Trump’s bombastic style in mind here. Trump’s current presidential ambitions enhance the irony.
- No Real Expectation of Profit. For Ms. Goldberg’s securities laws claims to prevail, there must have been an expectation of profits from the disputed common elements. Judge Posner observed that Ms. Goldberg’s share of the projected profits would have been so small that her share of the annual maintenance fees would have been adjusted by at most 3%. He was not persuaded that the amounts in controversy were more than speculation.
For most people, opportunities to invest in condominium units do not involve the complex issues found in a Trump Tower. However, even commonplace initial purchases of units from a residential condominium developer involve substantial risks. One cannot conduct home inspections for properties that have not yet been built. The developer (or some other investor) may enjoy an oppressive supermajority vote in the governance of the owners’ association. There may be ambiguity in the Condominium Documents. Since seasoned investors like Jackie Goldberg experienced heartburn, there’s all the more reason for others to have advisors help them navigate such an investment. In a post-trial interview with the Chicago Tribune, Goldberg said she felt good about “exposing” Trump and offered this advice for anyone going into business with him: “Read the contract.”
As a presidential candidate, Mr. Trump lacks political electoral experience. However, the Goldberg case shows that Mr. Trump does have a governance background within his real estate dominion. Industry people espouse that community associations are “mini-governments” that alleviate the burdens on cities and counties while permitting neighborhoods to enjoy autonomy on how things are run on democratic principles. If condominium associations are indeed analogous to political democracy, what does Ms. Goldberg’s case say about how a Trump White House would treat other organs of government?
Case Citations:
Goldberg v. 401 North Wabash Venture LLC, 755 F.3d 456 (7th Cir. 2014)
Goldberg v. 401 North Wabash Venture LLC, 904 F. Supp. 2d 820 (N.D. Ill. 2012)
Photo Credits:
July 3, 2015
Do Your Association’s Parking Rules Pass the Smell Test?
There are few property rights as unappreciated as the privilege to park. For nine years, I lived in a condominium where the association’s parking lot did not have enough physical spaces for all of the permitted vehicles. If you came home late, you might have to park on the street several blocks away, even if you had a parking decal. The property manager arranged to tow all vehicles without a permit or guest pass after a certain hour in the evening. You didn’t want to run the risk of having to hitch a ride down to the towing company and “bail” your car out. I relied upon that small sticker in the rear window of my car every night.
An association’s parking rules effect the owners’ essential right to access one’s property. This means that whoever enforces community parking restrictions makes quality of life decisions for everyone. In many communities, the number of parking spaces permitted to a condominium unit defines the number of adults who can conveniently use it. If street parking is not readily available, guest passes define whether or not an owner can entertain anyone at their home. An association’s parking rules enforce someone’s vision for the character of the development. Residential associations typically refuse to issue parking permits for commercial vehicles. Commercial condominium associations may use parking restrictions to restrict undesired industrial uses.
The right to park at one’s property is easy to take for granted until threatened. If a HOA suspends privileges for a rule violation, the owner may be able to live without access to the pool, gym or party room. If the condominium documents allow revocation of parking permits for a violation, then this presents a greater threat to the resident. At a community association conference I attended this year, managers discussed whether it is feasible to enforce parking rules by using jersey walls to barricade owner’s garages!
Given the fundamental nature of the right of access, it is no surprise that landmark court decisions concerning community associations arise out of parking disputes. In 1982, the Supreme Court of Virginia decided Unit Owners Association of BuildAmerica-1 v. Gillman. BuildAmerica-1 was a commercial condominium consisting of a large industrial structure containing warehouse or garage condominium units. Undesignated parking spaces surrounded the building.
Harry & Saundra Gillman purchased space in BuildAmerica-1 for their trash collection business. After a few years, some of their neighbors complained about the odor of the Gillman’s trash trucks. The Association fined the Gillmans. They sought to force them to relocate by forbidding them from parking their trucks. A commercial condominium development can have the character of any number of office or industrial uses. Who wins when different owners have competing visions for a commercial condominium association? To the Supreme Court of Virginia, the answer lay with one of the fundamental, yet controversial, doctrines of community association law: The governing documents (covenants, declarations, bylaws) comprise a contract to which the owners are parties. A “covenant” is a legal agreement. Some homeowners’ rights advocates argue that boards, attorneys and managers abuse this doctrine by insisting that individual owners “agreed” to whatever policies and practices the association adopts. It is my opinion that the “contract” theory can actually help owners. How is this? A contract has the effect of limiting the scope of the rights and responsibilities of the parties. This can cut both ways, limiting the authority of the Association while also defining its affirmative duties to the owners. The “contract” is not each and every rule, regulation, decision, resolution or policy adopted or enforced by the Association and its agents. An owner can only be charged with such contractual obligations as are reflected in the declarations, covenants, bylaws, amendments that the owner is put on notice of in county land records and disclosed at the sale. Those documents are typically prepared by the developer’s lawyers. The governing documents are usually drafted to protect the developer and to be palatable to the initial investors at the sale. This means that often these documents don’t speak to the owner vs. association disputes that arise after the developer is out of the picture. Usually these disputes are about legislative amendments or Board-adopted regulations.
In Gillman, the Board adopted regulations forbidding owners from bringing more than three trucks onto the parking area weighing more than 10,000 pounds each. This rule was not a provision in the governing documents. So how are Virginia courts supposed to view the Board’s rules & regulations that are not in the covenants recorded in land records? In Gillman, the Supreme Court of Virginia set forth several very important standards:
- Rules Must be Reasonable. This is not a subjective test but one based on context.
- Rules Cannot Be Arbitrary or Capricious.
- Rules Must Not Violate a Fundamental Right. Does the rule violate the constitution or statutes?
- Rules Must Serve a Legitimate Purpose. The covenants should set out the fundamental character of the development (residential, industrial, office, mixed use, etc.) to provide some guidance as to the ostensible purpose of the Association’s existence. The issue of “legitimate purpose” has become more complicated now that many local governments mandate an association as part of the permitting process. If the Association has no other purpose than to fulfill a City or County ordinance, does this affect a Board rulemaking authority?
- Rules Must be Reasonably Applied. This includes uniform application to all owners fairly.
- The Board of Directors Must Not Abuse its Discretion.
The Supreme Court of Virginia affirmed the Circuit Court of Fairfax County’s decision to set aside the Association’s fine against the Gillmans. It reversed the Circuit Court’s decision to order the Gillmans to wash the trash trucks. Since the Gillmans prevailed, the Supreme Court set aside the award of attorney’s fees against them.
The Unit Owners Association of BuildAmerica-1 argued that they were a “self-governing community” and a “fully self-governing democracy” whose inherent powers are not limited. The Court rejected this and observed that while the powers of an association are broad, they are limited by statute. Gillman shows that association rules and regulations are not to be treated with the high level of deference owed to statutes or covenants. The only way to invalidate a regulation outside of the procedures in the Bylaws is by court review. If the rule or regulation your Association seeks to enforce violates your property rights contact a qualified attorney. Although the facts and circumstances of each case may result in different outcomes, judicial review may be a breath of fresh air to the prevailing “smell test” being applied within your Association.
Case Citation: Unit Owners Association of BuildAmerica-1 v. Gillman, 223 Va. 752 (1982).
photo credit: Eugene Oregon tow truck via photopin (license)
December 9, 2014
Resolutions for Homeowners Dealing with Construction Defects
A good home provides a safe, comfortable and enjoyable place to live. When a contractor makes mistakes in construction, renovation or repair, the owner or tenant has to live with those defects every day until the problem is resolved. The coming New Year is a good time for homeowners to prioritize addressing contractor defects. In 2015, devise a strategy for relief from construction defects and feel love for your home again.
The key to efficiently realizing a goal is outlining the steps needed to realize it. This gives the owner a “to-do” list that can be tackled step-by-step over time. This may include a warranty claim against the contractor. Many contractors stand by their work and will honor well-founded warranty claims. It’s difficult to build a business from a base of disgruntled former customers. With some contractors, legal assistance may be necessary to obtain relief under a warranty. No two construction defect cases are the same. In each case, the contracts, warranties, physical conditions and defects are different. However, there are strategies that can make the process easier for the homeowner. The following are 7 New Year’s resolutions for homeowners dealing with construction defects:
- Investigate Defects Fully: Examine and photograph the physical appearance of the defects. Obtain copies of the manufacturer’s installation instructions. Research online reviews or other information about the materials used. Wise homeowners focus first on any safety or health concerns. In some cases, taking temporary action to limit future damage may be necessary. Discovering the truth about the defect is a solid foundation for dealing with it.
- Organize Warranty Information. The contractor likely provided contracts, correspondence, warranties and invoices. Usually installers do not warranty the materials used. The warranties for materials may have been provided in the packaging or available from the manufacturer. These items must be reviewed together and can become easily misplaced if not organized.
- Consult Regarding Implied Warranties. Many homeowners are not aware that a written set of terms is not the only way that products and installation may be covered by a warranty. In Virginia, there are certain contractor warranties that arise under operation of law. Consult with a qualified attorney about how coverage may arise under implied or written warranties. Unfortunately, warranties are easily waived if claims are not timely pursued.
- Consult Regarding Obtaining Expert Reports About Defects. In order to fix the defect, ultimately a qualified person will need to do further work on the house. To prove a warranty claim in court, the owner may need an expert witness to testify regarding the breach of duties or the proper figure of damages. Depending on the needs of the case, that expert may be a home inspector, licensed contractor, engineer, tradesperson or professional estimator. Hiring an expert to provide assistance in a lawsuit, reports or court testimony is not like hiring a professional to work on the house. If an expert is being engaged to provide legal support or trial testimony, the owner’s lawyer is the proper representative to work directly with the expert. One of the most important characteristics in retaining an expert in these types of cases is independence. A homeowner is not well served by an inspector or other contractor who will not be able to testify against the interests of the contractor who committed the defects. It’s best to go completely outside of the referral network of the builder.
- Consider Goals for the Property. When a dispute with a contractor erupts, sometimes even smart homeowners may struggle to maintain focus on how the project fits in to their goals for maintaining and developing the property. The homeowner may need to adjust their goals to fit new circumstances.
- Preserve Copies of Contractor’s Representations: If the contractor used intentional concealment, fraud or misrepresentation in the course of selling his services, the owner may have a claim for enhanced damages. Fraud cases are very difficult to prove, and the facts of most cases don’t support them. However, sometimes misrepresentations can be found in e-mail, text message or social media communications. Savvy owners take care to preserve any electronic communications with the contractor’s representatives.
- Consult with Counsel About Pursuing Claims. Once the case has been properly investigated with the assistance of legal counsel, the homeowner is in the best position to go back to the contractor about the warranty claim and, if necessary, pursue a legal remedy.
Whether a homeowner’s best interests lie in simply fixing the problem on their own or pursuing a legal claim against the contractor depends upon the unique circumstances of the case. Homeowners have the benefit of control over the property where key evidence may be preserved. The New Year is a good time for families to take necessary action to protect their physical, financial and legal aspects of home ownership.
photo credit: ungard via photopin cc (I am not aware of any defects with the house depicted in this photo, which was chosen for its seasonal characteristics)
April 3, 2014
Commercial Leasing: New Developments in Acceleration of Rents
How much unpaid rent can a landlord of a commercial property collect against a tenant who has fallen into default? Arlington attorney John G. Kelly explored this issue in his blog post, Acceleration of Rents: Part 1, How to Ensure It’s Enforceable? Acceleration of Rents provisions typically give the landlord the right, after default by the tenant, to demand the entire balance of the unpaid rent under the lease paid in one lump sum. Without such a term, a Virginia landlord is only entitled to possession of the premises or to collect each rent payment as they become due. The landlord has no duty to mitigate his damages by re-letting the premises unless such is required by the terms of the lease. Kelly’s post shows that although this is a significant issue, there haven’t been many Virginia case opinions guiding landlords, tenants and their advisors. Kelly discusses a 1996 Virginia Circuit Court opinion that acceleration of rents provisions are enforceable unless they constitute a “penalty.” This reflects a concern that a landlord may be unjustly enriched if it receives accelerated rents under the defaulted lease and rents from a new tenant for the same premises. In the country there is an expression, “Pigs get fat, hogs get slaughtered.” As we will see, this principle may carry weight even when there is no affirmative duty to mitigate damages.
In September 2013, a new federal court opinion illustrated how acceleration of rents provisions may be enforced against tenants. A Federal Judge sitting in Lynchburg, Virginia awarded accelerated rents as damages arising from default of a lease of a nursing home property. Landlord Elderberry owned a 90-bed nursing facility in Weber City in Southwest Virginia. Elderberry rented it to ContiniumCare of Weber City, LLC to operate the nursing home. Continium continued to pay rent until March 2012. Three months later, the Virginia Department of Health & Human Services terminated the nursing home’s Medicaid Provider Agreement. Elderberry terminated the lease by letter in August 2012. Continium then vacated the premises. The property required substantial repairs and renovations for further use as a Medicaid facility. In January 2013, Elderberry re-let the premises to Nova, a new nursing home tenant.
The parties litigated this case heavily through extensive motions practice, discovery and a multi-day trial. Today’s blog post focuses on the Court’s interpretation of the acceleration clause provisions in the nursing home lease. The tenant asserted that the acceleration of rent provision was not enforceable because it constituted an impermissible “penalty” above and beyond fair compensation for actual damages.
Elderberry did not have a legal obligation to mitigate its damages. The landlord nonetheless gave the tenant credit for rents already collected from the new tenant and scheduled to be paid in the future for the term of the prior tenant’s lease. In addition to other damages, the Federal District Court awarded Elderberry $278,228.58 in unpaid rent up until the replacement tenant began paying rent and $125,857.04 in shortfall between the two leases. The court observed that the landlord’s efforts to invest its own funds into repairing and remodeling the premises mitigated tenants’ damages and returned it to functional use to Medicaid patients faster.
To secure a new lease, the landlord provided to the new tenant $588,708.60 in working capital above and beyond renovations and replacement furnishings invested in the premises by Elderberry. The defaulting tenants complained that Elderberry would receive a windfall if awarded both this working capital and the rent shortfalls. The Court observed that the landlord is entitled to rent increases under the new lease based on the amount of working capital provided. However, the shortfall is adjusted accordingly to prevent any windfall. The Court found the working capital to be a necessary incentive to a new tenant to take over the space and begin making rent payments mitigating the damages.
Retail leasing attorney Ira Meislik observes in his blog that the modern trend is for courts to interpret leases less like land conveyances and increasingly like commercial contracts. See his 2012 post, How Much Can a Landlord Collect from an Evicted Tenant? Elderberry illustrates how even in “land conveyance” states like Virginia, reasonable efforts to mitigate damages can facilitate the collection of the balance of accelerated rents. Avoiding unnecessary windfalls is a principle that underlies both mitigation of damages and the prohibition against penalty provisions in leases. In this case, the landlord re-let the premises before trial but after filing suit against the tenants. Like in many cases, the facts continued to develop after the lawsuit began. By adjusting their trial strategy to give a re-letting credit, Elderberry avoided asking for damages that tenants could easily argue were a windfall and hence a penalty. It is not clear whether Elderberry will actually collect all or even some of this judgment, but they did avoid getting “slaughtered” at trial.
The Defendants appealed the Western District of Virginia’s award of damages, and as of this blog post the Elderberry case is now on appeal before the U.S. Court of Appeals for the Fourth Circuit.
photo credit: pcopros via photopin cc (photo of a Lodge in Scott County, Virginia [same county where Weber City is situated]. Does not depict premises discussed in blog post)
January 13, 2014
Reel Property: Hitchcock’s Skin Game
A working-class family is wrongfully evicted from their rental homes and may lose their jobs. A neighboring landowner and his shrewd agent try to stop the sharp-dealing landlord from destroying property values with industrial air pollution. Can they successfully escalate conflict without unintended fallout?
This is the subject of Alfred Hitchcock’s early film, “The Skin Game” (1931). The Skin Game is based on a play by John Galsworthy, a British lawyer who found a second career as a writer. Mr. Hillcrist (C.V. France) is an old-money landowner at odds with Mr. Hornblower (Edmund Gwenn), a nouveau-riche industrialist. Hillcrist objects to Hornblower’s purchase of neighboring pristine countryside for the construction of new smoke-belching factories. The two battle over competing visions for the Deepwater community in a series of increasingly sharp business practices. The Hillcrests’ agent, Mr. Dawker (Edward Chapman) plays an easily overlooked role in this dark comedy.
Jocelyn Codner observes in her blog, The Hitchcock Haul, that The Skin Game speaks to contemporary controversies surrounding land use, fracking and class warfare. Contemporary audiences may identify with the film in additional ways. The Skin Game’s audience remembers the horrors of global war. Worldwide recession brought high unemployment. Fear and desperation hide in the film’s shadowy scenes. These emotions unfold in total war between the neighboring landowners with tragic, unintended consequences. Tenants’ and neighbors’ rights versus job creation.
The aggressive business practices in the movie are frequent, rash and ill-considered. I found myself counting all of the legal claims and defenses that could potentially be brought in Court (this post makes no effort to interpret the facts under 1931 British law). Spoilers follow, but they are 83 years in the making!
- Violation of Covenants. In order to build new factories, Mr. Hornblower violated a covenant he made to Hillcrist when he turned out long-standing residential tenants. In Virginia, that would likely unfold as a contested unlawful detainer (eviction) action. Since the parties did not end up in Court, I assume that the Hillcrists failed to make the covenant legally enforceable.
- Bid Rigging. A mutually coveted parcel of land goes to a public auction. Ominously, the auction house’s lawyer reads the conditions of sale so softly that only the front row can hear. The Hornblowers and Hillcrists bid in concert with their own secret bidding agents to confuse their opponent and hike the price. Hornblower wins. Hitchcock uses quick camera work and multiple angles to build suspense and simulate confusion.
- Fraud. Hornblower’s daughter-in-law Chloe (Phyllis Konstam) has a secret past that includes employment by men to help them secure divorces premised upon adultery. This doesn’t come up much in the era of non-fault divorce, but giving false testimony for hire is sanctionable.
- Conspiracy. The Hillcrists’ estate agent, Mr. Dawker discovers Chloe’s past from her former client. Mrs. Hillcrist and Mr. Dawker decide to use the secret to extort Mr. Hornblower into selling them the contested parcel at a loss. The parties anticipated that disclosure of the secret would destroy Chloe’s marriage with the young Hornblower. The consideration of a sale from Hornblower to Hillcrist consisted of both (a) a written contract for cash and (b) a secret unwritten agreement not to reveal Chloe’s past.
- Breach of Contract: Upon pressure by the young Hornblower, Mr. Dawker violates the secret unwritten non-disclosure agreement and likely his fiduciary duties to the Hillcrists.
- Professionalism. In contemporary transactions, one would expect Mr. Dawker to be a licensed real estate agent. His role in the bid rigging and the conspiracy would potentially expose him to disciplinary action by the Real Estate Board.
- Assault. In a fit of rage, Mr. Hornblower throws his hands on Mr. Hillcrist’s neck.
- Defense of Unclean Hands: Although the evicted tenants temporarily get their cottage back, this victory falls flat because of the greater tragedy which brings Mr. Hillcrist remorse. Unclean hands foul the initial nobility of their cause.
Was there a moment when a more trusted advisor, be it a realtor, attorney, or friend, could have helped Hillcrest settle the dispute? The loud passions of the warring families obscure Mr. Dawker’s fateful role as agent in the “Skin Game.” In the final scene, loggers chop down one of the Hillcrists’ oldest trees. What goes around, comes around.
December 27, 2013
Client Relationships for the Custom Home Builder in 2014
In the past year or so, demand outpaced supply in the Northern Virginia real estate market. Many home builders and tradesmen went out of business in 2008-2009, creating a shortage of home builders. For home buyers, a custom home offers the prospect of owning a made-to-order dream home. For the builder, the custom home business brings rewards as well. These include the pricing of a premium product and working closely with buyers to help them fulfill their dreams. These dreams bear the legal complexity of contracting for the sale of something that does not yet exist. For the buyer, this is the biggest consumer purchase of their life. They rightly take pride of ownership in the project. This blog post identifies a few key issues from the perspective of the custom builder for the New Year:
- Liability Shield. You stand behind your work and want to keep your customers happy. This is how business grows. At the same time, you owe it to yourself and your family to protect your personal assets and credit. Customers expect that they will be doing business with a company. By incorporating or forming an LLC prior to making contracts, custom builders can exercise reasonable control of the exposure of their own credit and assets. Communications and agreements with customers should clarify the seller’s identity.
- Choosing the Customer. Prospective customers are likely talking to other builders or realtors. If a prospect reminds you too much of a previous problem customer, she may not be a good fit for your business. The wrong customer may distract you away from your more deserving customers and prospects. Consult with legal counsel if anti-discrimination or fair credit laws may apply.
- Written Agreements. Use an attorney-prepared written contract prepared for the particular type of project and state law. It may not be necessary to have a “new” form for each job. However, a realtor form for the sale of homes in Maryland won’t work well for a custom home in Virginia.
- Customer Service. Always have someone available to handle customer inquiries, at least during normal business hours. Buyers of custom homes tend to visit the site frequently and have questions. They feel a tremendous amount of financial and emotional investment in the project.
- Project Control. Don’t allow the consumer to directly supervise your subcontractors on the job site. An excited buyer may want to go outside his contract with you and hire his own tradesman to install items on property they don’t yet own. No car dealer would allow a shopper to take an auto to a body shop for a custom paint job during an extended test drive. The custom home builders do themselves and the customer a favor by anointing a manager or site supervisor to “face” with the client.
- Happy Endings. Take walk through inspections, punch lists and closings as an opportunity to communicate with the buyer and wrap things up effectively.
Home builders unfairly have a reputation for being unresponsive or inflexible with their customers. More often, custom builders struggle with being too accommodating with the demands of buyers. Most of all, custom home buyers expect the builder to provide them with personal leadership and advice. Attention to the legal aspects of your customer relationships is a critical element of entrepreneurial creativity and leadership.
