Negligence and liability lawsuits are common here in the United States. We have all read the headlines about the slip and fall or the hot coffee. As we venture into the world of real estate investing, we need to increase our level of concern over these types of lawsuits. We simply open ourselves up to more risk as we buy properties and grow our businesses. But fear of these lawsuits is not something that should stop you. There are things you can do to protect yourself from these negligence and liability suits, and when you are just starting out, those things need not be very expensive or complicated.
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What Is Negligence and Liability?
Negligence and liability are terms that get thrown around a lot in today’s world, but what do they really mean in a legal sense? Negligence is failing to do something that a reasonable person would be expected to do. Liability refers to the amount of blame or burden someone may have in a particular matter. The terms are related and often go hand in hand.
Negligence can accidental or intentional. You can sneeze, for example, and cause a car wreck You did not mean to cause the wreck, and you could not help sneezing. So, while you were negligent and may be liable or at fault, everyone also understands that accidents happen. Negligence can also be more purposeful and thus the level of fault or blame will rise. You can intentionally run your car into someone, at which point criminal liability may also come into play.
For real estate investors, not cutting the grass, not clearing sidewalks of snow, not repairing a leaky pipe, or simply not performing regular maintenance on your properties are relevant examples of negligence that can lead to liability. How liable you are for that negligence will depend on the circumstances.
- Was the condition that caused the negligence something you knew about?
- Was it something you were informed of?
- Was it the result of your purposeful action or non-action?
- Or was it an accident, something you could not have prevented?
These factors and more will all play into the determination of negligence and liability in court.
Related: Tips & Tricks From an Attorney: Here’s How I’d Protect My Real Estate Assets
6 Ways to Protect Yourself
As I said, fear of negligence and liability lawsuits should not stop you from getting into real estate investing. There are several things that any new real estate investor can and should do to protect themselves and their assets from these types of lawsuits.
1. Think about the worst case scenario.
When you are starting out, think about the worst that can happen. If you got sued and lost everything, what would you lose? Your home perhaps? Maybe a car and some savings? For most folks, that is going to be about it. What is the value of all that stuff?
Whatever it is, this is the level of protection you should begin thinking about. f you have $200,000 in assets, do you need a $10,000,000 insurance policy? Maybe, maybe not. It will in part depend on what allows you to sleep comfortably at night. In any case, thinking about the value of your assets today will get you started in the right direction.
2. Get insurance.
Your first and foremost form of protection is insurance. Let me repeat that. Your first and foremost form of protection is insurance. If anyone tries to tell you anything different, seek new advice. Insurance, especially at first, is what is going to protect you against claims upon your house, car, and savings. It may even pay for a legal defense should the need arise. Get a good liability policy for you, your family, your car, and your properties. Especially focus on your car, as that is where your greatest risk will be. An insurance friend of mind says that everyone carries all of their assets in their trunk. It is true, as one bad sneeze can lead to a lawsuit.
Make sure your coverage limits, especially on your auto insurance, are high enough to cover the value of your assets and more. Update your homeowner’s policy, as it may not cover everything or it may not be enough with your new real estate ventures. Find a good insurance broker who understands the needs of a real estate investor and spend some time with them. Spend more time with them as you grow and expand.
3. Protect yourself with contracts.
You may not realize it, but you can contract liability out. You can make your tenant responsible for yard maintenance or snow removal, for example. Or you can make a contractor responsible for workman’s comp insurance. Having and using good contracts, such as a lease, go a long way towards negligence and liability protection. Always insist on a written lease with tenants. Always insist on a written contract before working with any contractor. Have those contracts reviewed by competent professionals to make sure they will work in your area and in your favor.
4. Keep your mouth shut.
Do not brag about your new real estate ventures. That will just make people jealous and make you sound boastful. Plus, people will think you have lots and lots of money, effectively putting a target on your back. People talk more than you realize. Keep your efforts to yourself.
5. Be kind.
Being kind can go a long way. Do not be the jerk that people want to sue. Treat your tenants, contractors—and everyone else for that matter—fairly and with kindness. Apologize if something is your fault and try to make it right. Being nice may just keep you out of court.
6. Save the LLC for later.
If you are only buying a rental home or two to start, you generally do not need an LLC. You may as you grow, but not yet. Get your business up and running first. Acquire assets to protect, then look at more involved strategies, like LLCs, later on. LLCs cost money to start and maintain. They create extra hassles and paperwork, and no bank is likely going to lend to your LLC at first anyway. Attorneys also know how to find you and pierce the corporate shield if they need to. So focus on getting started first. See if you really like this real estate thing. You can always—and will likely want to—get more complicated later on.
The bottom line is to not worry so much about lawsuits. Sure, they are a concern, but there are steps you can take to protect yourself. Stop asking yourself what if. That only leads to paralysis and inaction. Take the steps mentioned above, then get out there and do it.
Any tips you’d add to this list?
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