6 steps to protect your business when completing unfinished houses or neighborhoods

If you’re considering completing unfinished houses or unfinished neighborhoods, here are six steps you should take to protect yourself, courtesy of Jeffrey D. Masters, litigation partner and co-chair of the Development Risk Management Practice Group at the law firm Cox Castle & Nicholson, LLP in Los Angeles:

1. Do your due diligence so you know exactly what you are acquiring. This should include: A. Title review. For example, was there a foreclosure and did the foreclosure wipe out prior mechanics’ liens?; B. Physical review. You need to do a thorough quality assurance inspection to determine the quality of the prior work and the extent and cost of any needed corrections. This is especially important if the homes have been exposed to the elements for an extended period of time or if there have been code changes since the house was started. To assure objectivity, Masters recommends using an independent, third-party company to do the inspections. C. Documentation review. You need to know if all the necessary entitlements and permits are in place and still valid. Are there tract map conditions that need to be satisfied? For example, if the original development agreement called for building a school or a fire station, are you obligated to honor that? Are there boundary conditions or easements you need to know about? 
2. Perform QA inspections during construction as a double check on the trades’ quality of work. 
3. Obtain appropriate liability insurance, providing coverage for both new work you perform and for prior work performed by others. Standard, off-the-shelf insurance policies almost certainly will not provide the kind of coverage you need, Masters says.
4. Provide full disclosure to prospective buyers. Market and sell the property as-is, where permitted by state law. Offering a third-party warranty is a good sales strategy.
5. If you’re not selling the house as-is, you need effective long-term customer service and warranty operations, with appropriate staffing and reserves. A major cause of construction defect litigation is real or perceived failures of customer service.
6. Use protective provisions in consumer sales documents, including broad disclosures and alternative dispute resolution (ADR) provisions, such as binding arbitration of disputes. Check state law to see if notice and opportunity to repair statutes apply, which may give you important inspection and repair rights in a construction defect dispute.

For more, see our special report: Finishing partially completed homes — risks versus rewards.