Buyer's Remorse in a Down Economy
By Jan Gruen
It's no secret that the building industry has been hard hit by a declining real estate market. With markedly slow sales, there is an abundance of available product, and the value of California homes has decreased. Inarguably, those who bought homes before the downturn now own homes worth considerably less. The result? Home builder attorneys are seeing an increase in defect claims coupled with demands that builders "buy back" their homes. Are these the symptoms of buyer's remorse and a desire to offset economy driven losses?
In times when home values are consistently increasing, buyers with defect claims typically seek monetary compensation to fix their homes. In the absence of serious conditions, owners do not tend to consider selling their increasingly valuable asset back to the builder. In a strong real estate market, the voluntary buy-back concept emerges only where there are severe defects, when a defective home can be repaired and resold without much delay or loss, or in other extreme situations. Under such circumstances, a buy-back may sometimes be preferable to the outcome of litigation. Voluntary buy-backs are accomplished by repurchasing a home at the current market value or at some other fixed point in time, plus any additional reimbursement of reasonable out-of-pocket expenses incurred.
In today's economy, buy-backs are even less attractive to builders who are loath to add more product to their inventory in a very slow moving market. Faced with strong resistance to the voluntary buy-back concept, especially for weak or garden-variety defect claims, some owner-claimants are filing suits and demanding the rescission of their purchase contracts in lieu of more traditional monetary compensation. Armed with laundry lists of claimed defects, some real and some not, the goal is to force builders into a buy-back. These claims are often made years after purchase of the home.
Under the law of rescission, a party to a purchase and sale contract can rescind the contract and return the property where there is proof of fraud or mistake. Given the onerous nature of the remedy, proving the elements necessary to successfully rescind a contract are challenging. Rescission requires the complaining party to prove the intentional withholding of material information that, if known, would have affected their decision to purchase the home (fraud) or the existence of severe defects sufficient to establish that the home was, unbeknownst to the buyer, materially different than that bargained for (mistake).
Strong defenses to rescission exist and make the likelihood of victory even more questionable. Rescission is improper where a buyer: (1) fails to file a timely suit: an aggrieved party has three years from the time they discover, or reasonably should have discovered, the facts constituting the fraud or mistake; (2) waives the right to rescind, having accepted benefits under the agreement with full knowledge of facts warranting rescission; e.g., disclosure; (3) fails to perform obligation(s) under the contract; (4) unreasonably delays in asserting a claim to the prejudice of the seller, e.g., the long-term owner; or (5) seeks unreasonable or non-compensable damages. Other defenses may also apply.
While an aggrieved and victorious party is entitled to recover bona fide non-duplicative losses incurred, not all claimed losses are recoverable. The rescission of a housing contract allows the purchaser to collect only "reasonable" out-of- pocket expenses incurred in the course of the transaction. Such expenses include costs of repairs and improvements, taxes, interest paid to the seller, escrow and closing costs, operating losses during the buyer's maintenance of the property and payments made to reduce existing encumbrances on the property. A credit is then given for the reasonable rental value of the property during occupancy. If the elements of fraud or mistake are met, the battle will necessarily focus on recoverable damages.
Until the real estate market strengthens, I am certain we will continue to see questionable rescission claims brought against builders, as attorneys employ creative remedies to address adverse market conditions. Less certain is the relative success of rescission as a method offsetting decreased property values.
June 2008 Builder Architect Edition Issue