5 Simple Reasons to Use Arbitration Instead of Lawyers

by | BiggerPockets.com

Arbitration (from Investopedia dictionary) is defined as:

An informal hearing regarding a dispute. The dispute is judged by a group of people (generally three) who have been selected by an impartial panel. Once a decision has been reached, there is no further appeal process.

Speed is an important aspect to winning in business and real estate investing. Having a step ahead in the game is a key to success.  Litigation is a great way to get mired down.  It is costly in terms of time, money and focus.  Can you imagine the shift in focus when you get served a petition?   Ignoring it is the last thing you want to do – it must be dealt with.

 Disputes, however, are common place. The truth is, confusion over the true nature or expectations of an agreement is often revealed much later than one would like – and sometimes someone’s true colors have surfaced far too late to avoid conflict.

As a consequence, I urge you to consider using binding arbitration in any agreement you enter into where it is allowed by law.   It may not be available in the landlord tenant arena in your state – so as always consult with counsel before acting on my opinion.

So if you are interested in using this approach note the following advantages:

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5 Advantages to Arbitration

1. Speed

In my book, this is one of the most important reasons to use arbitration.  If there is a genuine dispute to the facts of how an outcome should be resolved, arbitration will shave many months or even years it will take to get certainty of the outcome

2.  Subject Matter Experts Deciding Outcome

The parties to the agreement will be in position to identify who shall sit on the panel that will decide the outcome.   With respect to judges and law juries, sometimes the facts are complex in real estate.  Educated subject matter experts can utilized to greatly reduce the risk of a poor decision being made by someone unfamiliar with the subject matter.

3.  Cost Effective

Due to the speed and ability to fast track resolution, hourly billing will be a fraction of what preparation for an execution of litigation.

4.   More Leverage for the Party in the Right

This one is also of huge importance to me.  If you are in the right, the other side will be unable to use court clog as leverage against you.  Deep pocket defendants have used this time honored technique to force less favorable settlements.

5.  Confidentiality

This is another possible benefit.  The ability to resolve disputes away from public scrutiny is sometimes an excellent benefit as well, depending on the situation. As an investor, it’s probably a good idea to keep the nature of your holdings limited to your investors and bankers right?!

Have you used arbitration in your real estate investing? Would you? Leave your comments or questions below!

Photo: Photo Credit: zubrow

About Author

Douglas Dowell

Douglas Dowell J.D. is a commercial and multifamily investor. His blog will focus on legally raising private money, risk mitigation with due diligence and management science. He is also an avid student of success principles with a focus on modeling success factors.


  1. The last thing an investor wants to do is spend their time, emotional energy, and money going to court. We have watched 2 very close friends battle it out just because they knew they were right and didn’t want to give in to the frivolous lawsuit. They both won, and it cost them both dearly.

    The most recent spent 18 months in court battle and $15,000. It was ultimately decided that he was in the right. Those few words cost him 18 months or frustration and aggravation and $15,000.

    Thanks for the great post, Douglas.

    • Thank you Karen,

      It happens way too much unfortunately. I think alternative dispute resolution is a great way to limit the harm of when our ego may be getting in the way.

      Greatest thing I have heard lately that really called me out: we can be right or rich :))

  2. Doug, I agree in principle, but want to take your point a step further. Parties should attempt to mediate before submitting to arbitration. Many contracts, including the CAR Form Purchase Agreement, make mediation mandatory for most aspects of disputes, even though Arbitration is optional. Parties need to read the arbitration provisions carefully before signing. If the opposing party is uncooperative, arbitration can actually take longer to resolve a dispute than going to court, and most courts now make alternative dispute resolution (ADR) mandatory as part of the litigation process, but supervised and enforced by the court, unlike contract arbitration. Another disadvantage of arbitration is that it does not allow a party to file a lis pendens, unless permitted under the contract. Mediation, at least under California law, is strictly confidential. Also, the parties in Mediation can agree to fashion an entirely new solution to resolve the underlying dispute, whereas an arbitrator, like a Judge, can only rule on the issues presented. Adding a Mediation clause to a contract could save you thousands of dollars in legal expenses.

  3. I was recently reading about arbitration, and I was curious to know if anyone has attempted or if it would be legally binding to have an arbitration clause in a residential lease? I know in some states evictions can take a long time if going through the courts directly, but if you had an arbitration clause, could you secure an eviction order any faster? Arbitration may also be helpful when dealing with damage disputes.

    • Hello James,

      You would want to check with an attorney in your state. Some states really from a policy standpoint don’t actually like arbitration in cases where there is a perceived power imbalance between the parties.

  4. Long time reader – 1st time commenter here.

    I don’t know about you folks but here in the UK it is now in the statute books that you cannot proceed with a court case without having used some form of alternative dispute resolution. My own experience is when i had a construction dispute with builders and we ended up in arbitration as the court insists on it. It was way quicker and cheaper for me than a full blown court case and the result i believe the outcome was just as good. I’m not sure outside of the construction industry how well it works but because it was regarding an investment property of mine it might be worth sharing for your UK/European readers.

    Here is some information on the UK arbitration process from the website of the guys who done so well for me http://www.arbicon.co.uk/general/arbicon-construction-arbitration/. Hope it proves useful to someone.


    • Douglas Dowell on

      Hello Ken,

      Generally our alternative dispute resolution is not compulsory in most situations. I think family law courts in the US are much more likely to have that built into the system. Overall, I am in favor of the idea.

      Thanks for the readership!

  5. There is a down side to arbitration. An arbitrator does not have to follow the law or common sense. They are not bound by the normal rules in court. One is totally at the whim of the arbitrator with almost no way to appeal. There are many reasons our country has developed a justice system with checks and balances. Arbitration is beyond the court system.

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