The Importance of Structural Warranties for Build to Rent Investors

Home builders, real estate investors, and property managers have accelerated their engagement with the Build to Rent (BTR) market, for several reasons.

  • The BTR community housing market could be worth billions of dollars.
  • Single-family homes are in short supply despite crushing demand.
  • Affordability challenges make single-family rentals and rent communities a more realistic path to enjoying the perks of living in a single-family home.

An important obligation builders and investors must consider is providing a structural warranty. As the industry leader in structural warranty administration, 2-10 Home Buyers Warranty (2-10 HBW) is here to help you understand how a structural warranty helps reduce risks and enhances value in the BTR market.

We’ll start by explaining how a structural warranty can reduce risks for investors in the BTR market. Then, we’ll explain what a structural warranty is, what it does, and common causes of structural defects. 

How a structural warranty affects investor decisions regarding BTR

Managing risks and protecting the investment are critical to success. Strong investors will undoubtedly work with responsible builders as they engage the BTR market (and some builders may even build and hold their own homes as lessors). A structural warranty can help manage risks while protecting investments and exit strategies. Here’s how.

1. Protecting against long-tail liabilities 

Many BTR communities include hundreds of houses. This can be problematic for builders and investors because the average cost of a single structural defect may range between $75,000 and $125,000. That cost doesn’t include the time it could take to find the right experts to address the issues promptly and correctly, which may affect exit strategies.

A structural warranty could vastly reduce those long-tail risks, provide access to the right experts to mitigate issues, and strengthen the pursuit of a timely exit strategy.

2. Providing risk-management solutions

Unforeseen losses from inherent structural risks can devastate or prevent future success. A robust risk-management strategy is crucial to success in the BTR market.

In many instances, the nuances and risks of the BTR market are much different than those of the commercial or multifamily building market. Construction types, engineering methodologies, and strategies for addressing problems may be different from what many investors are used to. Additionally, many of those risks are more likely to become the responsibility of the investor, more so than in other building markets.

By joining a reputable third-party structural warranty program, investors can minimize exposure to risks and maximize access to local experts. This could be an important factor in a successful BTR strategy due to the vast differences in elements like local soils and building oversight expectations.

Additionally, reputable structural warranty administrators offer Claims Administration support. Because the warranty administrator’s reinsurer takes on the liability for structural defects, it’s crucial that the administrator works with the foremost local experts to address issues.

This local expert support not only reduces risks but also handles every aspect of the structural claim process, from finding the right contactors who can address issues to managing coordination.

3. Offering third-party validation and reputational strength

An important element of successful BTR strategies is third-party validation. In fact, according to Zonda, “83% of [millennials] who had already purchased a new-build home said they would recommend it to their friends.”

Many potential participants in the BTR market are older millennials looking to grow their families. Since BTR homes are a subset of the new-build industry, it’s safe to say that many potential renters will rely on the validation of their own cohort (i.e., other renters) when deciding whether to choose rental communities as their path to a dwelling.

Key to providing a positive experience is offering not only desirable amenities but also peace of mind in the quality of the home’s structure. A third-party structural warranty can provide this peace of mind because the administrator supplements the builder and investor’s claim of quality with a neutral “seal of approval.” That’s because builders must meet certain requirements to enroll their builds into a reputable structural warranty program.

Additionally, third-party validation often enhances reputations. Adam Aronson, CEO of Arrowsight, has noted:

While it’s common for brand managers or internal employees to speak positively about features and benefits[,] third-party validation is what really provides confidence and accountability to companies and consumers to fully commit to spending their money. . . . Nothing you say about yourself will have as much impact as what others say on your behalf.

A third-party structural warranty can tell potential clients, “Yes, this is a high-quality build,” while providing the full-scale support investors need should an unexpected defect arise. This is a strong reason why investors should consider a trusted structural warranty program.

What is a structural warranty?

A structural warranty is a written agreement that helps mitigate risks for builders and investors related to structural defects in newly bult homes. It covers defects to the load-bearing elements of the home, including the foundation system.

What does a typical structural warranty do?

In a typical structural warranty agreement, the home builder guarantees that their newly built homes will be free from qualified structural defects for a certain period, which varies by state but is often 10 years. 

Structural warranties protect interested parties against structural defects that arise after they’ve finished building, which may not be apparent until many years after the sale of the home. They can also align incentives between builders and investors.

Finally, a structural warranty from a reputable administrator provides access to local experts in structural defect causes and solutions, which can address the issues of costliness and time consumption inherent to dealing with structural defects. 

How common are structural defects?

Structural defects are more common than most people realize. In parts of the United States that have expansive soils, such as Texas and the Southeast, 25% of all homes may experience some form of structural distress over their lifetime. Up to 5% may sustain major structural damages.

And even builders with an excellent history of no structural defect claims can suffer. Approximately 56% of structural claims come from home builders who had never had a claim against them before.

Primary cause of structural defects and damage

Soil movement is the primary cause of structural defects and damage, accounting for more than 80% of all damage. And even with the best engineering and most careful contractors, anyone can face expensive, time-consuming problems because soil movement is uncontrollable and unpredictable.

The problem of soil movement

Because the movement underneath the home’s foundation is not uniform, it can cause serious damage to the home.

There are two types of soil movement that damage homes: heave and settlement. Active soils cover more than 50% of the US and are responsible for more property damage to homes than floods, earthquakes, hurricanes, and tornadoes combined.

For example, clay in active soil expands when exposed to moisture and contracts when conditions are dry. These changes occur regularly as season and drought conditions change. In other words, soil movement can cause costly structural defects that may be difficult and time-consuming for investors to address, which could inject further risks into investments. 

A reputable structural warranty can help mitigate those risks.

Is a third-party structural warranty valuable for BTR investors?

Indeed, a third-party structural warranty is valuable for BTR investors. 

  • It can protect investments and exit strategies from the costliness and time consumption unexpected structural defects cause. 
  • It can provide investors access to local experts who have proven solutions to address structural defects timely.
  • It’s often noticeably more inexpensive than the costs investors are used to in commercial real estate coverage.

As investors engage the BTR market, it’s crucial for them to work with experts who can protect their profits, promote their quality, and plan for the future by controlling what’s behind them. With a reputable third-party structural warranty, investors can reduce the time they spend considering and addressing potential structural issues, which could provide more time to create long-term investment strategies in the BTR market.

This article is for informational purposes only and does not constitute legal or financial advice. Please consult with your attorney and/or financial planner for legal and financial advice.