What are your risk of a tenant suing you?

Question

Do you know how much you could lose in a lawsuit from a tenant? Are you personally protected if a tenant has "a good case" against you?

Nathan Gesner · Answer

The best way to avoid losses? Know the law, obey the law, treat people honestly and fairly.

That will protect you far more than any LLC or insurance policy or attorney.

Erik W. · Answer

Liability risk management for me involves an "onion layered" approach.

Layer 1: Know the law, follow the law.

Layer 2: Respond promptly and professionally to legitimate repair requests.

Layer 3: Properties held in Limited Liability Company

Layer 4: Carry adequate liability insurance. Net worth +$1 million for good measure.**

If all 4 of those fail, then and only then are my personal assets exposed.

** My business law Prof did a unit on tortes and according to her there is less than 1/10th of 1% chance any private business person will be involved in, much less lose, a law suit costing more than $50,000. Her opinion of course, but the point is those mega-bucks lawsuits are RARE, often get SETTLED, and only happen when you commit egregious acts of negligence over a prolonged period.

I am aggressive but fair regarding security deposits. We agree up front what is/is not "normal wear and tear." It's in the lease and on the move-in property inspection. Been a land lord since 2005 and only had one security deposit disputed informally (i.e. someone said it wasn't fair) over a carpet cleaning fee. It's in the lease... "Tenant agrees that the cost of professionally cleaning carpets will be paid out of security deposit at move-out, unless tenant hires and pays for a professional cleaner approved by land lord." I copied and mailed that section to the former tenant. Never heard another word. I refuse to eat cleaning and actual damages as the "cost of doing business." I give the place in move-in ready condition: we agree in the lease I get it back that way, unless something just wears out from normal use.

People get sued over things they SAY, so I don't SAY much. Keep communication logs in writing. Text and email are great for these, although I limit text to short and simple messages. Such as "Rent?" when they are late. Or "Can we do the repair Friday at 9 AM?"

When people ask about a rental, I refer them to our company website where we spell everything out so everyone gets the same information about the unit, the criteria to rent from us, etc.

Applications are processed according to a set of written criteria. Anyone who wants to apply is welcome to apply. I never try to tell them they should or should not apply.

When denying an application, I don't give a specific reason unless required by law. For example, if denied due to credit report, I must send the info for them to get the obligatory free credit report. If they press me for reasons, "For more info, please mail a self-addressed, stamped envelope to PO Box 123, Anywhere Town USA. Allow 4-6 weeks for response." They know the reason...they just want to argue. Don't argue. Redirect. I have never received a letter requesting more info. They know why.

K.I.S.S.

Steve Vaughan · Answer

This.

In addition, I am always generous with deposit refunds. Tie goes to the tenant. Not worth having someone hate you and think of ways to get you over a couple hundred bucks or whatever.

The fear and LLC talk is off the hook on here. Ask yourself if the person recommending over- sophisticating rental houses benefits by setting them up for you.

Nathan Gesner · Answer

@Ryan Mullin keep in mind the Landlord is responsible for the actions of the PM. I knew a guy that owned an apartment complex in California for over 30 years. He always used a property manager. About five years ago, his Landlord was sued for violating Fair Housing and the owners were named in the suit even though they had no direct involvement. They paid almost $300,000 in attorney fees, lost the case, and had to sell the property to satisfy the judgment.

Handing responsibility to someone else doesn't exonerate you from responsibility.

Weston Couch · Answer

@Ryan Mullin @Erik Whiting @Nathan G. @Jay Hinrichs @Steve Vaughan Looks like there's a lot of reasonable and good thinking here, but I think it's easy to oversimplify protecting yourself legally, especially if you start small and grow. The best model for an investor with just one or two properties probably isn't the best for someone with 10-20, or more. In general, the more properties, the more risk. While big dollar lawsuits that insurance won't cover may be rare, I've seen through my own experience working with HUD just how devastating they can be, even for larger investors. When I sit down with clients I will always discuss (1) their personal assets, (2) what their current investments portfolio and other business ventures are, and (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. I often break it down into the "five pillars" of protecting your assets.

The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments - these simple steps will help you prevent lawsuits before they even occur.

The second pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.

The third pillar applies after you have good insurance You need to protect yourself from what insurance doesn't cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property they can't touch you or the other properties. There are several ways to achieve this though, and you can check out this article to learn more.

The fourth pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.

The fifth pillar is owning everything anonymously. If people don't know what you own, then they are less likely to sue. People don't sue people that qualify for food stamps. This anonymity can be accomplished for free by using Trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner still, it doesn't matter because you are not the owner. The trust and the LLC are the owner of the asset/real estate, so even in the scenario that they guess, they guess wrong.

Now of course, when you're just starting out, it may not be ideal to abide by all these pillars of asset protection because they do cost some money to put in place, but as your real estate portfolio grows, the value of these principles goes through the roof. You could spend 10+ years building a 30 property portfolio for example and lose half of the properties in one lawsuit if they're not structured appropriately and you run into that 300k settlement.

Steve Vaughan · Answer

Great, now we get the same copy and paste message from more than one offerer of sophisticated and expensive programs out of Austin.

Are we an investor or just plugging our program?

Jay Hinrichs · Answer

not much unless your a slumlord.. but anyone can sue anyone.. most tenants don't have the money to engage in litigation.

Jay Hinrichs · Answer

these are great commandments to follow.. stuff can happen but so can a dual bird strike causing catastrophic engine failure and a landing in the HUDSON river.

for me personally with 3 decades of owing rentals and hundreds of them.. only issues I ever have are squabbles over deposits. and of course me suing the tenant not the other way around. That's by far the greater risk.. bad tenant.. not bad landlord.

John Chapman · Answer

Gotta agree with @Steve Vaughan. I'll also add that the junk sales pitch I see coming out of Austin lawyers on "asset" protection is ridiculous for 99% of BP. I say this as someone who literally sues people for a living. A number of years ago, I was involved in a lawsuit against an apartment complex over a dead child and my firm won. (Hint: insurance, not LLC or some other ridiculous form of entity/offshore trust covered the judgment and as far as I know the place is still around.)

Nathan Gesner · Answer

@Steve Vaughan exactly. My policy is that I generally do not charge a tenant unless I have sufficient, documented evidence to win my case in court. I document heavily with pictures and video, usually 150+ pictures for the typical 3bed/2bath house. I do this before and after occupancy so there's a clear picture of what occurred during tenancy.

Since starting this process eight years ago, I've charged thousands of tenants and not one has sued me. I've only had a couple contest a particular charge and only one actually filed a formal complaint and provided evidence that I had missed.

What are your risk of a tenant suing you?

What are your risk of a tenant suing you?

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