May 09, 2005

The Cost of Being Right

During the construction of a new subdivision a few years ago, a regional homebuilder promised 22 very unlucky homebuyers that, for an additional $3,000, they could have their house on a man-made lake. Over time, the “lake” turned into a marsh-like area that attracted insects and had a strong obnoxious odor.

Not surprisingly, the homeowners were very upset with the situation and eventually sought legal action against the homebuilder. During a deposition a few years ago, the sales representative who sold the houses admitted to unintentionally misrepresenting to the buyers what the waterway would be like—the sales rep was apparently not told that the waterway would contain plants even though the plat map for the area showed that the body of water was designated as a conservation area with vegetation to cover 80% of the area.

For the past 4 years, the homebuilder has been fighting the homeowners claims because the plat map included the details for the lake. This is despite the admission by the sales rep that the buyers were misled during the sales process. While I don’t question the homebuilders right to fight the homeowners claims or the strength of their legal case, I do question the wisdom of spending money on lawyers and incurring the market damage that has undoubtedly occurred as these 22 homeowners have told friends and acquaintances about their experience over $66,000.

To put the market damage in context, research has shown that negative word of mouth alone will influence 5% of people from buying a product they otherwise would have bought. A very unhappy customer will tell upwards of 20 people about their negative experience. Put another way, the potential market damage for this homebuilder of an event like this one might lead 22 potential customers who might have bought from you to go to the competition. At an average sales price of $150,000, that’s $3.3 million in lost revenue with a potential $330,000 negative impact on the bottom line.

The argument that the homebuilder could make for not resolving the customer’s claims in this case is three-fold: 1) the buyer should have read the contract and supporting documents carefully; 2) given the current strength of the real estate market, the market damage is minimal because of the excess of demand over supply; and 3) the appreciation in home prices has more than compensated the homebuyer for the problems they have endured. These arguments, while both rationale and legal, fail to address the emotional aspects of the situation for the buyer and provide no opportunity for closure.

If the real estate market continues to remain strong, perhaps the market damage over time will be minimal. But are you prepared to take the risk that these homeowners will eventually forget about the situation and stop telling their friends and acquaintances about it by the time the market softens?

Poll

What would you have done if you were the builder? Nothing. Let the buyer beware. Apologized to the buyer and made them aware of their financial gains in excess of the $3,000. Refunded $1,500 to each buyer given that both the builder and the buyer made mistakes. Refunded $3,000 to each buyer in return for dropping the suit and remaining silent about the issue. View Results

Poll

Who was most at fault in this situation? The salesperson for misleading the customers. The builder for not providing sufficient information to salespeople and customers. The customer for not thoroughly reading the documents. View Results

Posted by Greg Robinson at 11:01 AM | Comments (2)