MYTHS & FACTS ABOUT CONSTRUCTION DEFECT LAWS IN COLORADO
MYTH: “Colorado’s construction defect statutes are the only reason why condominium developments are not being built today.”
REALITY: There are townhome and condo developments being built in Colorado today—in fact, homebuilders pulled nearly 1,300 permits for townhomes in 2013, a 39% increase over 2012. But there are many other factors impacting condominium development in today’s economy:
- An unstable job market and the economy’s “jobless recovery”
- Tighter lending requirements for homebuyers, especially for FHA loans
- Developments with high pre-sale requirements and deposits before developers can secure construction financing
- Foreclosed homes still languishing on the market, softening the lower-end re-sale housing market
- Income and wage stagnation
- Increasing trends among young singles and couples who prefer the flexibility, amenities and simplicity of renting over purchasing a home and paying a mortgage.
- Younger demographics who are staying single longer (and thus are not a two-income household to support a mortgage), waiting longer to start a family, impacted by changes in the job market, paying off increasingly heavy student debt loads, and are simply delaying entry into the housing market.
There are other localized factors that greatly impact condominium development: outdated or inadequate zoning, local development fees, neighborhood opposition to density, high cost of structured parking, and local affordable housing mandates, among others.
MYTH: “Colorado’s construction defect statutes are too permissive and make Colorado homebuilders and developers easy targets for lawsuits.”
REALITY: Colorado’s time limits for homeowners to make a claim of construction defects are lower and more restrictive than the majority of other states. Colorado’s “statute of repose” time window for homeowners to make a construction defect claim is only 6 years, while nearly half of other states give homeowners 10 years or more to make claim. Indeed, Colorado’s time limits for homeowners to make a claim are among the shortest statutes of limitation and repose in the nation.
MYTH: “All condo projects get sued by their HOA.”
REALITY: This is simply not true—claims for construction defects on housing developments are uncommon events. Colorado state law already requires homeowners to give homebuilder an opportunity to inspect the damage and make an offer to the homeowner to settle or make repairs. Industry experts have estimated before the legislature that 93 percent of construction defect claims are resolved without going to court. And projects that are built with quality and craftsmanship never get sued for construction defects.
MYTH: “Because of construction defect laws, no for-sale attached housing is being built these days.”
REALITY: There are townhome and condo projects underway in the Denver metro area, particularly in proven markets such as Cherry Creek and Downtown Denver, Stapleton and Highland. In fact, homebuilders pulled nearly 1,300 permits for townhomes in 2013, a 39% increase over 2012. Metro Denver’s red-hot apartment market is seeing greater development activity compared to condos and townhomes, but that is due to complex economic forces and the attractiveness of the apartment market for investors and capital, not on Colorado’s laws that protect homeowners from shoddy construction.
MYTH: ”Homeowners Associations and homeowners earn a financial windfall with these lawsuits—there is no downside risk to just filing suit against their homebuilder.”
REALITY: There is no reasonable incentive for a homeowners or a group of homeowners in an HOA to take on the multi-year, costly and disruptive process of pursuing a construction defect claim. HOAs are volunteer entities who get no compensation for the hundreds of volunteer hours and effort of pursuing a construction defect claim. During the lengthy process of construction defect litigation, HOA fees often need to be increased to pay for temporary fixes. And after settlement in a lawsuit, homeowners never are “made whole,” and the repair phase is often very disruptive.
MYTH: “Most construction defect claims are frivolous.”
REALITY: Leaking roofs and ceilings, buckling and cracked foundations, mold in drywall, retaining wall failures, leaking windows, roofs not constructed up to code – these are not frivolous claims. Many times the defects are from builders cutting corners and weak quality-control during construction. Colorado’s construction defect statutes don’t “cause” claims—shoddy construction and poor inspection practices do.
MYTH: “Construction defect laws have made condo prices unaffordable.”
REALITY: The cost of newly constructed condominium projects has trended to higher-cost brackets, but this is due to a myriad of reasons:
- High cost of land, particularly in areas such as downtown Denver, Cherry Creek, Aspen and mountain communities, and Boulder.
- High cost of required parking structures.
- Local affordable housing mandates in some municipalities, including Denver, Boulder, Aspen and other mountain communities. (According to a report compiled by the Downtown Denver Partnership, most condominium projects currently under construction in central Denver have fewer than thirty units, and are therefore are exempt from Denver’s inclusionary housing ordinance.)
- Heightened FHA and mortgage requirements that make pre-sale commitments tougher for low- and moderate-income homebuyers, especially first time homebuyers. Homebuyers in high-income brackets do not face these same lending challenges.
Also, the cost of housing is influenced by a myriad of factors separate from construction defect statutes. The cost of housing has increased in all categories. According to Metrolist, Denver-area home prices hit an all-time record for a November 2013.
MYTH: “There is a deep market for affordable, entry-level condos that is not being met, and construction defect statutes are holding back developers from building for that market.”
REALITY: There are many reasons for condo development’s slow pace in light of Colorado’s current housing rebound. The strong market performance for new apartment communities is attracting more capital from investors. Strict lending guidelines instituted by the FHA after the housing crisis has limited financing for first-time homebuyers—which, in turn, influences supply. Colorado’s employment levels are improving, but job instability, wage and income stagnation, and the workforce’s recent memory of job cuts, furlough days, pay cuts and pay freezes and other disruptive employment events still influence the confidence of buyers and renters in the marketplace. Also, all the factors that influence housing development—from cost of land, construction costs, regulatory requirements and permitting, and consumer confidence—have a heightened impact on the profitability of affordable, entry-level housing, and developers are thus gravitating to more high-end townhome and condo product with higher returns.