Thursday, July 28, 2016

Being Sued

I have heard it said that all real estate investors should expect to be sued at some time during their investing career. It may be that others see real estate investors, landlords and flippers as "rich," and making unreasonable profits. Easy to understand when investors brag about making six figures on a flip, or when landlords raise rents over ten percent in a hot market.

Most of us as investors do not talk about our mistakes, the risks, the volatility of income that are associated with any investment opportunity. Or as a landlord, the costs associated with maintaining a property, vacancy rates or problem tenants.

Outside of small claims court, I have been sued once, and I have filed a suit against someone once. In both cases, I was the prevailing party. Yet in both cases, the expense of litigation was hardly worth the amount of funds collected. Let me give you some examples of these costs (I assure you that your attorney won't).

In the case where I was the plaintiff, I won my case and was awarded a judgment of over $26,000 plus interest. However, I was not awarded attorney fees of over $50,000 that accrued over the course of a two-year litigation process. That's right, my attorney expenses were twice as high as my judgment - and I won my case!

Now I have to go and try to collect on this judgment, on my own. Not as easy as it sounds.

In addition to the loss of funds, this process entailed a lot of time and stress. Real estate gurus will tell you to hire an attorney, and divest yourself of stress. Certainly, it helps to have a legal ally with another perspective to support your case. But every legal paper, court appearance, legal questioning revives the feelings of pain, hurt, deception, frustration and anger. It is not a healthy way to live.

Plus you are spending unproductive time that you could be investing in real estate. There are lost opportunity costs here.

In the other case where I was sued, it was a frivolous, unnecessary ambulance-chasing attempt to extort money. It actually goes to arbitration in another week, and I expect to prevail, as I did in the mediation. However, the plaintiff is penniless, and a counter-suit would be an additional waste of time. So in the mean time, I am racking up tens of thousands of dollars in attorney fees to defend myself. The attorney must be one of those guys working on contingency.

So any profits that might have been available, will be eaten up in attorney fees.

Sadly, we are a litigious society, and I share my experiences here to encourage all investors to protect themselves and find ways to prevent lawsuits in the first place.

Having a property in an LLC is a good way to limit liability in the event you do get sued.

Be sure to pay attention to the numbers whenever you are in a partnership with someone else. Trust, but verify everything to your satisfaction. Be sure you understand finances, accounting, and budgeting. Read through invoices carefully.

Check out any potential partners. Check out any references, referrals, and at the very least do a google search. Be sure to have a legally-drafted partnership agreement.

If you are lending money, it wouldn't hurt to do a background check on your borrower.

Happy Investing!

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