A Dream Home Becomes a Nightmare

With their first child on the way, Stuart Crampton and his wife Violeta Roman were looking for a place to call their own.

In early 2011, they thought they had found it – a three-bedroom rowhouse on the northern fringe of Columbia Heights, the type of house that would offer the space they wanted for their growing family and a chance to move into a neighborhood that had emerged as one of D.C.'s hottest.

The 100-year-old house had been fully gutted and renovated, with new bamboo floors, a finished basement that could easily double as a play area or bedroom for visiting family, an open-concept kitchen and living room on the main floor, and a new deck off of the rear of the house.

On March 24 of that year, they signed the final paperwork for 1367 Perry Place NW. They paid $540,000.

“We signed on the dotted line after doing a home inspection, and we were real excited to start in the new house,” says Crampton, 38, who works for the federal government. “We did have a lot of optimism, we were thrilled. The whole dream house idea, that’s what we were pursuing, and happy to live in D.C.”

Their first few months in the house were uneventful and content. In a photograph taken in May — a month before their daughter was born — Crampton sits beside Roman in their living room. He’s reading the Mayo Clinic’s “Guide to a Healthy Pregnancy,” and jokingly has a mug propped on her pregnant belly.

But things started taking a turn in August.

“There was this bizarre earthquake that happened in the D.C. area. Out on the porch, the front porch, the casing for the porch kind of fell down partly a good three feet, kind of came detached from the roof line. We were like, ‘OK, the earthquake did some damage,’” says Crampton.

They called their insurance company, but an agent who came to inspect the damage had bad news.

“He said, ‘Oh, I’m sorry, this can’t be covered.’ And we said, ‘What do you mean this can’t be covered? An earthquake just hit.’ And he said, ‘No, this isn’t from the earthquake, this is from neglect. This is all rot in here, this is all rotten wood,’” recalls Crampton. “We were sitting there scratching our heads, ‘How does our new house have rotten wood in the porch?’”

Such questions would lead them down a path of mounting problems with the house, a multimillion-dollar lawsuit against the developer and contractor responsible for it, and questions about how well D.C. has regulated the renovation of old properties during the city’s boom times.

And as they struggle to find answers, the house on Perry Place now stands empty.

A flipper’s habitat

Their story is a cautionary tale of home-buying in a hot real estate market, one in which developers quickly snatch up residential properties, renovate and sell them — often at a healthy profit. It’s also emblematic of a practice that has quickly spread in D.C. and elsewhere as real estate developers try to cash in on the city’s growth. In the nation’s capital, it’s happening too quickly for the city’s under-resourced regulatory agencies to keep up with, say some experts.

While many reputable developers and builders in D.C. call the process “renovating” or “rehabbing,” the practice of fixing up old, often dilapidated houses and reselling them at a profit is now more widely known as “flipping” — a term popularized by TV shows like HGTV’s Flip or Flop and Flipping the Block.

With home prices low during the waning years of the recession — and with D.C.’s population ticking up and its reputation as a staid government town being chipped away by the vibrancy of an emerging bar and restaurant scene — developers started purchasing single-family homes in emerging neighborhoods like Columbia Heights, the H Street NE corridor, Bloomingdale and Petworth.

“It seems like house flipping came late to Washington, D.C. It started in Phoenix and in some areas of California first, because prices hit bottom first in those areas. In D.C. there's been this window of opportunity between low-priced housing stock and really high price appreciation over the past two years,” says Nela Richardson, the chief economist at Redfin, a national real estate brokerage.

In Columbia Heights — a neighborhood that has seen an influx of white residents in recent years — home prices continued falling in the late years of the recession, offering well-capitalized buyers a chance to get in relatively cheaply. According to data from Zillow, median home sale prices in Columbia Heights fell from $420,000 in December 2008 to $381,000 a year later, and slowly started ticking up in 2010. They increased steadily from 2012 on.

Established developers say that as the real estate market recovered after the recession, new players entered the trade, many of them having little prior experience and hoping to make money quickly.

A market for ‘less than perfect’

The rowhouse at 1367 Perry Place NW was purchased for $280,000 on Aug. 31, 2010, by Real Manor ZLK, a limited-liability corporation (LLC) controlled by Jay Gulati, a Maryland-based developer.

Gulati is the son of Ripudaman Gulati, who is also involved in real estate in D.C. He has twice been sued over housing conditions at two of the low-income residential properties he owned in the city, and in 2000 pleaded guilty to improperly disposing of 110 bags of asbestos during the renovation of one of his properties.

Jay Gulati’s LLC also purchased more than a dozen homes in Columbia Heights and Petworth — many located only blocks from one another — and quickly flipped them, selling them for prices that regularly exceeded $500,000. Gulati also used a number of other LLCs to purchase homes throughout the city. All his LLCs are registered at his $2 million, 5,000-square-foot home in Potomac, a tony suburb in Montgomery County.

In 2013, a Redfin analysis found that the average gain in D.C. in the difference between the purchase and sales price from a flipped home was $104,100. While some cities in California — where there was a more significant drop in home values during the recession — posted higher average gains, two D.C. neighborhoods — Petworth and Brookland — led the nation in gains, at $312,400 and $271,900, respectively.

The profit potential on sales of flipped homes in many emerging D.C. neighborhoods has attracted investors and developers from outside the city, like Gulati. That, says one local developer, can carry risks for homebuyers.

“The District has had a strong housing market, and whenever there’s a real strength in the housing market or whenever there’s a great amount of demand for properties, that means that properties that maybe don’t have everything done appropriately move and sell. It allows for work that’s less than perfect to sometimes slide through the cracks,” says Bo Menkiti, owner of the Brookland-based Menkiti Group, which sells and redevelops property in the region.

That can mean homes where aesthetics trump quality, where new drywall and hardwood floors mask serious flaws. And while it can be hard to judge just how extensive the problem is — some developers say it’s only a small number of players — one longtime builder says that there are plenty of examples of poorly flipped homes.

“What I do see is substantial,” says Ethan Landis, a builder and member of the D.C. Department of Consumer and Regulatory Affairs’ Construction Code Coordinating Board. The board works on updates to the city’s building code, and Landis' own firm, Landis Architects/Builders, has uncovered — and fixed — problems at flipped homes.

Even worse, Landis says, is that unless problems are caught before a sale is finalized, they can dog the new owners for years to come. “I can say that when someone buys a poorly renovated home," he says, "they’re in for a world of hurt.”

A toxic investment

After Crampton and Roman discovered the rot in their porch, the problems quickly added up for the couple, who welcomed a daughter, Ama, to the family in June 2011.

Their basement periodically flooded. They attributed it to an incorrectly graded area behind the house — where the new deck had been built — that caused water to pool by the basement door during storms.

The house was also cold during the winter months, so much so that they had to move their daughter back into their master bedroom because she kept getting sick.

“We had some insulation people come in, and they confirmed that behind the shiny new drywall was empty as an eggshell, no insulation behind the drywall, none in the ceilings, none anywhere. So that’s what was making the house so cold, that and the defective HVAC system,” he says. Insulation is required under the city's building code.

They also suffered another flood in the basement, this one caused by pipe they say was blocked by construction debris. Sewage backed up into the basement and onto the carpet.

While addressing that issue, they discovered what Crampton says was the most disconcerting problem with the house.

“When they removed the carpeting to get rid of all the sewage-soaked carpeting, there were some funny looking tiles on the floor of the basement. Somebody had mentioned to us, ‘Those tiles look a little odd, you probably need to get those tested, especially with everything else you’re finding in your house,’” he remembers.

“So we had an environmental hygienist come in and test the tiles, these old tiles, and sure enough, there were asbestos-containing materials. And it’s not just that they contained asbestos, the tiles were, they looked like half of the room of tiles had been jack-hammered and there were pockmarks, so it looked like they had been disturbed and then concealed,” he says.

They also discovered that the basement bedroom and one of the two bedrooms on the second floor did not have the needed egress windows to qualify as bedrooms according to city regulations, meaning that if Crampton and Roman were to resell the house, they would have to list it as a one-bedroom property.

All of these problems emerged even though the couple had hired a home inspector to look at the property before they bought it. While the inspector did identify a number of small issues that Crampton and Roman asked the seller to correct, there was little that could be done to find the larger flaws — many of which were concealed by drywall and carpeting.

Trying to fix those problems only created more. When Crampton hired a company to insulate the house, the material it used didn’t cure properly and leached noxious gases.

Fearing for their health — and Ama’s — the couple moved out of the house at the end of 2013.

“At the beginning, we were, to be honest, in denial, maybe me especially. I don’t think I wanted to admit to myself that we got taken, that we bought a lemon," Crampton says. "You want to believe that your new house is here to stay, that this was a good investment. It was not."

A multimillion-dollar lawsuit

In March 2014, the couple filed a lawsuit in D.C. Superior Court, alleging that Gulati, seller Sunil Chhabra (who is Gulati’s brother-in-law, and a realtor with Maryland-based A-K Real Estate) and general contractor Michael Crisci perpetrated “fraud and wrongdoing” when they flipped the house. They’ve asked a judge to award them more than $5 million in compensatory damages and $8.5 million in punitive damages.

Gulati, Chhabra and Crisci declined to comment for this story, but lawyers for each responded to emails from WAMU 88.5 to say they all deny the accusations leveled by Crampton and Roman.

The lawsuit claims that Gulati, Chhabra and Crisci engaged in illegal construction on the house, obtaining permits for some basic work, no permits for other work, and in many cases exceeding the scope of the permits they were granted.

Load-bearing walls and beams were removed without the proper permits, the couple alleges, an unpermitted deck was built, required inspections were skirted, and problems that sellers legally have to disclose — such as the age of the roof and presence of lead in the house — were simply not shared with the couple.

Additionally, they say, Crisci, who served as the general contractor for the house, was not licensed to work in the city at the time.

An October 2014 inspection of the house by Delaine Englebert, an illegal-construction inspector at DCRA, confirmed that there were numerous problems. She catalogued three dozen violations, including unpermitted work, unfinished inspections, insufficient fire-blocking throughout the house, new structural beams that are not properly supported, a deck not correctly attached to the home, a failure to insulate the house, and more.

Earlier this year, the couple hired Ethan Landis, the builder, to assess how much it would cost to bring the house up to code.

“We could see there was no insulation put in, we could see that structural members had been removed — walls — that shouldn't have been, we could see that there were all kinds of code violations that normally are concealed and the untrained eye wouldn't see them,” he says.

To make the house livable again, Landis estimated the couple would have to spend $407,000 to correct all the existing deficiencies and code violations.

A real estate expert the couple hired quantified the financial impact in another filing: He said that while the house without defects could be worth up to $573,000 on the open market today, all of the problems had dropped its value to $220,934 – less than what Gulati had purchased it for.

Costs above everything?

In court filings responding to the lawsuit, Gulati and Chhabra’s attorneys say they were not involved in day-to-day decisions on construction in the house, nor were aware of any of the problems that have since been found.

“If the Plaintiffs’ allegations are correct,” wrote Gulati’s lawyer in a September filing, “their damages were caused by the negligent or intentional acts of others.”

That would be Crisci, as well as a permit expediter who Gulati and Chhabra say was hired to pull the proper permits for the work.

For his part, Crisci has denied that he was unlicensed, though DCRA says it has no record of him or his company being licensed to work in the city at the time. He also accuses a number of subcontractors who worked on the house for the problems that resulted. In one filing, Crisci’s attorney says the Virginia-based contractor “did not supervise or oversee the quality of work on the project.” He also says that Crisci “did not inquire into the subcontractors’ licensing, certification, etc.”

But whether or not Gulati, Chhabra and Crisci were aware of the corners that were cut, the problems that later emerged were not limited to Crampton and Roman’s house. The owners of three nearby rowhouses also flipped by Gulati around the same time say they discovered similar problems shortly after buying.

“The developer looks like he cut corners in our house, and did things that were aesthetically pleasing or quick,” says one of the owners, who paid $620,000 for a house that Gulati had originally purchased for $350,000. She asked that she not be identified by name due to concerns with the impact that the revelations could have on her home’s value.

The HVAC system in her home was not properly installed and needed additional work to be made fully functional, the house was not insulated and a gas meter had been illegally moved during construction, leading Washington Gas to turn off gas to the house for three months during the fall and winter.

Another owner also found her house not to be insulated and problems with some plumbing work, and a third says the HVAC had not been properly installed. She also says that she’s had to pay to have the windows of her basement bedroom changed out so they meet the city’s standards for what qualifies as a bedroom, and like Crampton and Roman, she suspects her rear deck was installed without permits.

In a December 2010 email exchange between Gulati, Chhabra and Crisci that was made available as part of the lawsuit’s discovery process, the three discussed needed repair work on a chimney on another Columbia Heights rowhouse they were flipping. “We can just give it a go. If it comes loose a month from now it can be on the homeowner,” wrote Crisci. “[Y]eahhhh lets (sic) just do our best,” responded Chhabra.

Not all of Gulati’s homes showed such problems, though. The owners of two homes in 16th Street Heights he flipped and sold say they have not had any of the issues Crampton and Roman did since purchasing.

Landis and others say that the root of the problems at the Columbia Heights homes was likely a combination of fast turnaround — Gulati gave Crisci two months to completely gut and renovate the home that was sold to Crampton and Roman — and a desire to cut down on costs.

“Ultimately, one has to assume the motivation is money, that these people know they're selling this home, they hope they'll never be called back and never see the home again, so they don't have any personal or professional integrity to say that, 'This home represents my brand or what my company is committed to building,’” says Landis, who has been working in the region for 25 years.

An October 2010 email from Gulati to Chhabra released through discovery highlights how keeping costs down was an important factor for Gulati.

“So I think the right attitude should not be make the homes perfect and we will get the premium, It should be, let’s spend as little as necessary to get to our price target, we should save what we can save to reduce our expenses. We can’t be worried about losing a few contracts because home inspectors scare off our buyers. Sometimes we are guilty of overreacting to things… We are not doing new construction… we are doing renovations… which means you can save things and work with what you have,” he wrote.

In March, after Crampton and Roman had put an offer on the house, Chhabra expressed frustration with some of the fixes that the couple had asked to be made before closing. “Buyers are getting more annoying by the day,” he wrote to Crisci.

‘Basically a Wild West’

It’s been more than a year since Crampton and Roman filed their lawsuit, and they’re still working their way through mediation and settlement talks.

They’ve been out of their house for 18 months. It is now almost completely gutted, a product of the repeated inspections and assessments they’ve had done and a belief that almost none of the work done by Crisci and the subcontractors is worth keeping.

“You pull together your life savings, you borrow, you invest in your future, in your home, and you want things to be lasting. It’s going to be the nest you raise your kids in and all that," Crampton says. "So then when you find out the people who sold you this house, this nest, did it in a way where they misrepresented and omitted material facts about the safety of the house, I felt, you know, angry, sad and worried about the health aspects."

He has found focus in digging up information on what went wrong — and how it went wrong. Part of the blame, says Crampton, is that DCRA isn’t equipped to enforce the city’s strict building codes.

“What we’ve ended up with in D.C. because of the home renovation boom is basically a Wild West, and you have a lot of flippers, home renovators, developers who, although there are plenty of good ones out there and plenty of them who do rejuvenate the communities and the neighborhoods, there are way too many who are out there just to make a profit without regard to the laws governing safety and health,” he says.

As the legal process drags on, Gulati, Chhabra and Crisci have continued working on different properties.

Crisci has a new contracting company, which is properly licensed with DCRA. And he’s not only working on homes that other developers buy to flip, but he is also purchasing his own D.C. homes to flip and resell.

Gulati runs Westend Development, which he uses to purchase homes and resell them to other developers and builders. People with knowledge of his work say he has largely stopped renovating homes himself. In one example, Gulati purchased a rowhouse on W Street NW in 2013 for $400,000 and resold it a year later to another builder for $875,000. The house is being converted into a three-unit condo building.

Chhabra continues working with Gulati, and also recently established an organization — Pro D.C.’s Future — that he used to lobby against a proposal that would limit the height of pop-up developments in certain residential neighborhoods. (The D.C. Zoning Commission approved the proposal in March.)

They may soon have to answer questions from city regulators about Crampton and Roman’s home, though — DCRA says it is investigating the numerous code violations and the role that Gulati, Chhabra and Crisci may have had in them.

And they aren’t the only developers that have recently come under scrutiny from city regulators. In Part 2, we've got the story of a flipper whose business has caught the attention of D.C.'s attorney general. And in Part 3, we'll examine the D.C. government's ability to keep pace with the industry.