Business Management

Tips & Tricks From an Attorney: Here’s How I’d Protect My Real Estate Assets

Expertise: Business Management, Personal Finance
80 Articles Written
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Disclaimer: The following is meant for informational purposes and is not legal advice. For information pertaining to your specific legal situation, please be sure to consult your attorney.

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Real estate asset protection is a favorite strategy used by rich real estate investors. The rich don't take the same risks you do; they use the law to their maximum advantage. It's not sleazy, it's using the rules available to your maximum advantage. The most underutilized tool is an effective contract.

Below, I'll show you one little used trick to create maximum leverage in a lawsuit—and the most effective way to protect yourself should one ever result.

A highly effective tool that many don’t use is a contract with terms that favor you when a deal goes sideways and litigation could result. We don’t want litigation to actually happen because it is expensive—what we do want is a contract that gives us huge amounts of leverage to get the settlement we want quickly.

To protect yourself from lawsuit—and to protect yourself even in the event you need to sue someone (YES, suing someone does put you at risk)—you will want to use an LLC. The rich use LLCs.

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Have the Remedy in the Contract

If the remedy is spelled out in the document, then you don’t have to rely on complicated legal matters for your remedy. If you’re buying real estate and the deal goes bad, do you want the property or do you want money?

If you want the property, you need a provision for “specific performance.” Otherwise, what you’re left with is a suit for “damages” and money. The bad part about “damages” is you have to prove how much you have been harmed.

Related: Landlords: The 6 Best Ways to Minimize Your Chances of a Lawsuit

Unless you were getting a killing on the property compared to the comps in the area, how do you show how much money losing the deal cost you? The solution to this problem is known as “liquidated damages.” This is a clause that specifically states the amount of damages in the case of breach of the contract (i.e., the other side backs out).

For example, the contract could say if the seller refuses to execute the sale after the buyer obtains financing for the deal, then the seller is liable for a liquidated damages amount of $40,000. Note that this should be one sided to your favor so that only the buyer has these rights. This gives you leverage over the seller since they know they have much to lose instead of having hope of low damages being determined by the court.

Some people say the seller will balk at this type of clause—and they likely will. But you can counter by asking them, “Do you have any intention in backing out of this deal after I put in thousands of dollars’ worth of man hours and hard cash? No? Well, this clause is to ensure that you won’t and gives me confidence to know you’re serious about moving forward.”

At the very least, this opens the door to a negotiation about what amount of liquidated damages are agreeable between you two. If litigation does result, your future attorney will kiss you.

When a Deal Goes Bad, You Should Be Prepared for the Lawsuit

Even if you don't believe anyone would ever sue you for any reason and you are 100 percent sure, you will still want an LLC for protection. You may not be sued, but you will need to sue someone. When you sue someone else, you put yourself at risk.

In the United States, the prevailing party, which may be the other party, can be awarded attorney fees. You would be surprised to find out that the damages could be only $1, but since the other side prevailed, they get $30,000 in attorney fees. If you sue someone, it could come back to bite you.

How Does the LLC Help?

The LLC acts as the plaintiff to the lawsuit instead of you personally. Since the LLC is the plaintiff, if there is an award for attorney fees or other damages, then they can only look to the LLC. The cost to file a new LLC is MUCH cheaper than the cost of paying off a judgment.

Also, remember that if a judgment is ever filed against you, then it appears on your credit report, harming your score. Since we are in the borrowing business to leverage our hard dollars with those from the bank, this hurts our bottom line.

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Related: 7 Tips to Keep Landlords Free From Costly Tenant Lawsuits

What Does This Mean Practically?

You should never buy a property, hire a contractor, or talk to anyone—your operating shell LLC should. The operating shell LLC is an LLC that has no assets and is the face of your business dealings.

You can only sue someone that you interact with, either in contract or communication. So, if you want to insulate yourself from lawsuits, then you have to act through a business entity. How do you do this? Create an LLC that owns little to no assets and acts as a shell. Since that LLC made all of the communications and entered into the contracts, then that is the only entity that they can come after.

When a lawsuit happens, what do we care? Our worst case scenario is that we wind up the LLC (i.e., destroy it) and start a new one. It’s not a sketchy thing to do, it’s using the laws that exist to our advantage.

The elephant in the room usually regards when the LLC isn’t effective and the court says  you have “pierced the corporate veil.” I don’t care about piercing the corporate veil. I anticipate that as a possibility when I use an operating shell LLC. Even if the court were to “pierce the veil” of my operating shell LLC, the worst case scenarios is that they can attack me personally. Guess what? I don’t own anything; my separate asset holding LLC does.

Rich people don’t own assets, and their operating shell LLCs don’t own assets, either. Under this type of legal strategy, even if they are able to pull every legal trick, the worst thing that someone can do is harm a credit score. The reality is that nobody spends the cash to hurt you when they know they’re not getting anything in return; lawsuits are a business.

[Disclaimer: The following is meant for informational purposes and is not legal advice. For information pertaining to your specific legal situation, please be sure to consult your attorney.]

How do you protect your assets?

Leave a comment below, and let’s talk!

Scott Royal Smith is an asset protection attorney and long-time real estate investor. His law firm, Royal Legal Solutions, helps thousands of real est...
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    Brandon Lashley from The Woodlands, TX
    Replied over 1 year ago
    It’s articles like this that make me realize that paying a little extra for a lawyer is money well spent.
    Marie D.
    Replied over 1 year ago
    I’m looking for attorneys and accountants that specialize in real estate investments in the South Florida area. Any recommendations would be greatly appreciated. Thanks.
    Andrew Bonner Property Manager from San Jose, CA
    Replied over 1 year ago
    Scott- This article was fantastic. It provided great insight and, while I always believe in using an attorney, it’s great to know what you want before speaking to one. One big question I have asked numerous attorneys about is how best to tie up a property without being on the hook for the property. Some have said options, some have said contingencies, others say LOI (which I disagree with). How would you recommend an investor tie up a property so then can begin speaking to partners and making sure its the right investment? Thanks, Andrew
    Salvador Carlton Investor from Lancaster, CA
    Replied over 1 year ago
    Thank you Scott for this article and conversations from everyone. I live and work in CA. We also have investment properties here and created an LLC ($800 per year). However, during my research and attending some investors seminars, it was suggested to build an LLC in Nevada. The structure was somewhat similar to what Jason had mentioned. Of course the cost to set up such was over $11K along with Trust built for each property. I talked to my CPA and he basically laugh and said that he would love my business as he would probably have to spend a day per property. Obviously I didn’t go with the Nevada set up but it has been something I have been pondering. You mentioned a Series LLC and I guess the Nevada one might be the same set up. I guess my questions are should I close the CA LLC and move to a Series LLC? Does Nevada has that set up? I don’t own a residence in Nevada nor do I own anything in Delaware which I am not sure if that is a requirement. Are we looking less than the 11K they were trying to charge me?
    Raj Singhania
    Replied 10 months ago
    So it is like you have a operational LLC which has bought the properties on your behalf?So it protects the person