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!

General Contractor Release of Lien

If you have a general contractor or any subcontractors working on your property, you might want to ensure that they sign a Release of Lien form when they receive payment in full for their services. This will prevent some unwanted surprises should they decide to lien your property with a mechanics or contractor lien for failure to pay for services. Contractors have up to 90 days following the last date of work to file such a lien against your property for which work was performed.

Here is a sample release of lien form:

General Liability Release of Claims

I, ________________________________, for and in consideration of the payment to me of $_________, the receipt and sufficiency of which is hereby acknowledged, do hereby release and forever discharge _______________________________________, their agents, employees, successors and assigns, and their respective heirs, personal representatives, affiliates, successors and assigns, and any and all persons, firms or corporations liable or who might be claimed to be liable, whether or not herein named, form any and all claims, demands, damages, actions, causes of action or suits of any kind or nature whatsoever, whether known or unknown, fixed or contingent, which I now have or may hereafter have or claim to have, as a result of or in any way relating to the follosing:

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It is understood and agreed that this payment is made and received in full and complete settlement and satisfaction of the aforesaid actios, causes of action, claims and demands: that this Release contains the entire agreement between the parties; and that the terms of this Agreement are contractual and not merely a recital. Furthermore, this Release shall be binding upon the undersigned, and his respective heirs, executors, administrators, personal representatives, successors and assigns. This Release shall be subject to and governed by the laws of the State of Washington.

This Release has been read and fully understood by the undersigned and has been explained to me.

Executed this _________day of _________________, 20__.

Signed: _________________________________________________

Printed Name: ___________________________________________

This is not considered to be legal advice as I am not an attorney, and you should always consult your own legal counsel for guidance on legal matters.

Happy Investing!

Investing with Others

If you will be investing with a partner, here are a few tips to guide your agreements:

• Be sure to get it in writing and reviewed by an attorney.
• Negotiate for the worst case scenario.
• If they say you don't need an attorney... RUN!
• Do your due diligence on both your project AND your partner.
• If they say you need to make an immediate decision, watch out!

EVERY joint venture, partnership agreement should be discussed with an attorney first. Better safe than sorry. Ask me how I know....

Happy Investing!

Clean Title

Many Brokers in our state will order a title commitment at the time of listing a property for sale. That is a very good practice. However, if you as a broker are not aware that the minute that you receive that title commitment that it is out of date, you may be in for a great surprise. Title commitments are living breathing documents and may change after they are published. A story will illustrate my point.

Our office was asked to assist a seller to remove an easement from their property. It was not a short sale. It was merely a normal purchase and sale and the seller agreed to eliminate a burdening easement from their property prior to closing. The Listing Broker referred them to our office. Life was good.

The sellers walked in armed with a title commitment in hand giving us the information we needed to start the necessary actions to eliminate that easement from the title.  However, upon seeing that title commitment, my assistant asked for  copy and immediately called the title officer at the title company that issued the commitment and asked whether that title commitment was current and sought a “date-down supplemental” from that title company for which the company promptly provided that necessary information by fax to our office.

As I was reviewing the information provided by my assistant, I discovered a number of interesting things:

A.      The title commitment that the seller brought in was dated about 7 months earlier and had been replaced by a new commitment two months ago.

B.      There had been a series of supplementals eliminating certain matters from even the new updated title commitment.

Upon review, (even before I walked in to meet the seller whom I had never met before), I was surprised to see that Title Exception Paragraph 5, which was the paragraph containing the easement, was eliminated by a Supplemental!

I asked my assistant to tell the sellers I would be delayed as I needed to talk with the title officer at that title company. To cut to the chase, the title company independently had discovered that the pesky easement, that was going to be the source of our engagement, had expired according to its terms and they had eliminated that easement as an exception to the title.

As I walked into the meeting with the seller, I had to inform them that they had wasted a trip to our office as the matter of the easement had already been eliminated by the title company. They were, of course, pleased. However, they were also a bit distraught as their broker had received a copy of that title update literally a month earlier and they had not been advised.

WHAT HAPPENED? The Broker received it, but did not read it and, as a result, his seller expended useless time and effort.

More importantly, what would have happened if WE had not obtained an updated title commitment? We may have started doing a whole heck of a lot of work and the seller may have spent a lot of money uselessly.

PRACTICE POINTER:  Whenever you receive a title report that isn’t fresh out of examining, call the title officer whose name is on the commitment and get a date-down supplemental and ask to be included in the distribution of any further updates. It is just good practice.

Happy Investing!
Today's blog courtesy of McFerran & Burns

Liability Release Form

What is a general liability release of claims form, and why would an investor need one?

A general liability release form is used  when final payment is given to a partner, investor or contractor, and basically is an acknowledgement that work has been completed or services rendered. It states that payment has been made in full. In exchange, the contractor or signer is prevented from bringing suit or a claim for unpaid compensation against the investor.

Let me state for the record that I am not an attorney, and I am not licensed to practice law. I have provided a general liability release form below as an example of something that may be useful in dealing with anyone who has just completed an agreement for professional services. You would be well-advised to consult your own attorney before using a form like this for your own purposes.

(You do have a good real estate attorney, don't you?)

General Liability Release of Claims

I, ________________________________, for and in consideration of the payment to me of $_________, the receipt and sufficiency of which is hereby acknowledged, do hereby release and forever discharge _______________________________________, their agents, employees, successors and assigns, and their respective heirs, personal representatives, affiliates, successors and assigns, and any and all persons, firms or corporations liable or who might be claimed to be liable, whether or not herein named, form any and all claims, demands, damages, actions, causes of action or suits of any kind or nature whatsoever, whether known or unknown, fixed or contingent, which I now have or may hereafter have or claim to have, as a result of or in any way relating to the following:

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It is understood and agreed that this payment is made and received in full and complete settlement and satisfaction of the aforesaid actions, causes of action, claims and demands: that this Release contains the entire agreement between the parties; and that the terms of this Agreement are contractual and not merely a recital. Furthermore, this Release shall be binding upon the undersigned, and his respective heirs, executors, administrators, personal representatives, successors and assigns. This Release shall be subject to and governed by the laws of the State of Washington.

This Release has been read and fully understood by the undersigned and has been explained to me.

All parties should then sign and date.

Happy Investing!

Legal Protection for Real Estate

Do Buyers or Sellers need an attorney review on their real estate purchase agreements? or Are the MLS forms sufficient to protect them in real estate transactions?

Many parties to a real estate transaction like to rely on "standard" MLS forms to protect their interests. In fact, the NWMLS has on-staff legal counsel to review and draft all of its paperwork to ensure consistency with state and federal laws. Staff attempts to develop forms that are "neutral" with respect to the interests of either Buyer or Seller.

But what kind of legal protection do these forms really provide?

Check out this online video to get one perspective on this issue:
 
http://www.youtube.com/watch?v=AfXIhAgbZsQ



Every real estate investor ought to have a sharp real estate attorney as part of their team. As a real estate professional, I rely on services like Legal Shield (formerly Pre-Paid Legal) to advise me on numerous legal issues that come up regularly in the course of my work.

It is the prudent thing to do.

Happy Investing!