“I feel the need….the need for speed”
-Maverick from Top Gun
I am not a lawyer these days and I don’t play one on TV. I must advise you to consult with your own counsel before making your decisions. The following article is drawn from my legal experience and days in the corporate real estate game there are some clear rules of the road to stay focused on THE objective: make a profit!
I thought I would kick off the discussion on how to avoid lawyering up…and I would love to hear your experience on this subject as well. My overall point is: velocity is key.
Lawyers and litigation can stop your momentum!
The following are six tips you can use to avoid legal trouble, keep your momentum going, and save you a lot of money (and trouble) in the process.
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1. Do Your Due Diligence
The first step is to do your due diligence on the other party. Are they Vexatious? (The fancy word for one who sues too much!)
Many jurisdictions (other than your sister/cousin’s in the boonies, of course) have online access to court records. A quick check is great to let you know if they sue or get sued a lot. A general or sub contractor who is a defendant in a lot of cases is a bad sign in my book.
Sometimes we can be fooled by the Eddie Haskells of the world who are smooth talkers but don’t back up what they say. An easy online check is a quick way to check that out.
Do you know anyone who has dealt with the other party? What was their experience?
Tenant screening is so important. If you have ever gotten sideways with a tenant sometimes it’s your own fault for not screening. Been there…done that.
2. Cost Benefit Analysis always:
Litigation is expensive.
Litigation is draining for most people. In my book nobody really wins if it gets that far. Sometimes it’s better to take a small loss than chase pennies with dollars. A great example in my opinion is chasing a tenant for breaking a lease. Depending on the circumstances…it may be far better to let them get on down the road. I believe any amount less than a thousand dollars, for sure, is cost inefficient to chase. A judgment call for sure.
Does the other side have deeper pockets? This can be unfortunate downside of our legal system. The other side can create a very formidable journey by employing a fleet of starving lawyers with nothing better to do than make you hate life. Consider this factor always.
3. Form Contracts/Entity Documents?
A state pre-approved sales contract from the real estate association is likely all you will need in most cases when it comes to a single family purchase. Your degree of experience and comfort should be included in your analysis here, however. Other parties to the deal will likely keep you from making a drastic error (usually your lender and/or home inspector).
When it comes to a commercial deal – a great real estate lawyer can be worth their weight in gold. Particularly if you are moving up into the commercial world from single family investing.
When it comes to raising private money or group investing: proceed with extreme caution. It is actually way too easy to violate securities laws. Again, working with counsel in this arena can save way more than the expense.
Entity documents are tricky too. The tax implications involved can be dramatically different if you choose the wrong vehicle. It’s probably cost beneficial to have competent tax advice on your proposed vehicle choice – dependent on your proposed business model.
4. Make Your Word as Good as Gold!
I believe this one is a very important one to adopt. In the long run, I believe violating this rule does catch up with everyone. Some investment bankers on Wall Street will probably mock me for saying so….but I would argue that without this principle – a free market economy is doomed.
5. Exercise Win-Win Thinking:
If you negotiate in good faith, you will be on the road to never seeing the inside of a court room. If you are trying to fix a problem for the other side even if you make a low ball offer you are still out to add value. I believe if you have a reputation for one-sided negotiating it will eventually come back to bite you.
Placing yourself in the other’s shoes can help resolve a lot of issues when a dispute arises. I believe working diligently to fix a problem with someone is the key to maintaining a stellar reputation. Some times someone is just plain unreasonable, but when your side is heard on how you attempted to resolve it – the truth is always your friend.
6. Use Binding Arbitration Wherever Possible!
Outside of residential leases, it is my belief you should always seek to include this. With due respect to the hard-working judges and jury’s out there: sometimes they just don’t understand complex business transactions. Remove that risk by including arbitration in your agreements as much as allowed by law.
When All Else Fails: Go for the Throat!
Sometimes you get in a spot where you are dealing with someone just plain crazy or unjust; sometimes you will have no choice. I believe in that rare case – find the most un-liked lawyer in your city and go no holds barred. By this point – you have tried to be reasonable.
Overall, I look forward to learning others thoughts and experiences on the pro’s and cons of lawyering up! What do you think??
Photo: Joe Gratz