How to Avoid Lawsuits
Once a real estate investor has built up a nice portfolio of rental properties, they can relax and enjoy passive income. If they are clever, they put a competent management company in place to deal with tenant problems. The one thing all property owners need to continue to worry about is the potential of a lawsuit.
America is the most litigious country in the world. Above the Law, notes there are 15 million lawsuits filed each year and about $251 billion in tort costs. Americans spend more on civil litigation than any other developed country in the world. The amount spent each year is almost twice as much as Americans spend on new cars.
If you are a real estate owner of any substance the question is not if you will be sued, only when you will be sued. Umbrella insurance can cover the costs of this problem, but the premiums are expensive.
Lawsuit Avoidance Tactics
One thing helpful to include in any rental contract or lease is a mediation and arbitration clause. This alternative dispute resolution process avoids the higher costs of civil litigation and legal defense.
Mediation
Mediation is a voluntary process, used by reasonable parties to settle a dispute. The professional mediator listens to both sides, discusses options openly with both parties separately, meets together with all parties to see if the issues can be resolved, and then issues a professional opinion letter.
Binding Arbitration
Binding arbitration is similar to a legal procedure in a civil court case. The professional arbitrator may be a seasoned lawyer or even a retired judge. The parties present evidence supporting their position and the arbitrator makes a ruling on the case. The parties agree in advance to accept the ruling of the arbitrator. Usually this procedure ends the dispute with a resolution. A civil lawsuit may still occur, if any of the parties claim the arbitration procedures were not followed correctly.
Holding Title to the Property in Another Country
In a civil lawsuit, the owners of the property are sued. If the owners are a company or trust registered in a country other than America, it makes it much more difficult to sue them. Sophisticated real estate investors use offshore trusts to hold the ownership of properties. They prefer countries that do not have any requirement to disclose the names of the owners publicly.
If you have an interest in exploring this method of making yourself lawsuit proof, consult with a qualified professional with a good reputation of long standing, because there are many scammers that are active in the offshore arena.
Additionally, be careful about the implications for any financing of the property because it is much more difficult to get financing for a property in America if the owner is foreign. Moreover, changing the title to foreign ownership may trigger call provisions in the existing loan(s) on the property.
Maintain Good Tenant Relations
The best way to avoid most problems is to select tenants carefully and take the extra step to maintain good relations. Be friendly with the tenants. When things need repair, have them fixed promptly. A little of that good old Texas kindness goes a long way to reduce the chance of lawsuits.
Summary
Lawsuits are an almost unavoidable phenomenon in real estate investing and property ownership. Frivolous lawsuits are the most annoying because they waste time and cost money. Allocating a portion of any profits to be held back in a legal defense reserve fund is an excellent strategy for the long-term real estate investor.