How I Survived Getting Sued — and How You Can, Too [Video!]

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I hate to break the news to you, but if you are in this business of real estate investing for long enough, it is inevitable that you WILL get sued. Sorry, but it is the reality of the situation! Between me and my company, we have gotten sued a handful of times over the years. While this is not fun to deal with, it is a part of this business. The best thing you can do as a real estate investor is properly protect and effectively prepare yourself for if and when you get sued.

Related: BP Podcast 109: You Will Get Sued. Here’s How To Survive with Attorney Scott Smith

In today’s video, I share a few ways to mitigate the impact of being sued, which include:

  1. Having a strong insurance policy in place
  2. Documenting all issues (we call them work orders)
  3. Being named as additionally insured by sub-contractors

I hope these tips help prepare you and lessen the impact of being sued!

I would love to get some discussion going! Anything I am missing? What have you learned as a result of being sued in this business?

Thanks for watching!

About Author

Matt Faircloth

In 2005, Matt founded The DeRosa Group along with his wife, Elizabeth. At the time, the two person company owned and managed two assets – a single family home and a duplex. Over the last nine years, they have grown the company to a 12 person team owning and managing over five million dollars in residential and commercial assets throughout the central NJ and Philadelphia area. One of DeRosa’s mantras is “to make money while making a difference.”

15 Comments

  1. Alex Franks

    Awesome , yes I was warned once. Easy way to tell you are doing good and your now a big company and making money.

    I said ( How ) he said you will get sued…Never made sense until a few years ago.

    So great information , and thank you for the post

    Have a great weekend

  2. Matt, another great video!

    16+ years and I have not been sued…knock on wood, but as my business continues to grow, I’m sure there will be a time, so thanks for the warning!

    In regard to slipping on ice, I have my tenants remove snow and ice from the walkways. I tell them that if someone falls on the ice, due to them not honoring their promise (they get reduced rent for doing it and it is in writing) then they could be held accountable. It helps get them to do it, but I still have to get on them, because of course they want the rent discount for doing nothing!

    • Matt Faircloth

      Hey James,
      Thanks for the comment. According to the law of averages, you have lots of lawsuits in your future! Make sure those premiums are paid up! Just kidding of course. Better safe than sorry I’m sure.
      We actually have all our single family home tenants shovel their own snow and cut their own grass per their lease. if they don’t do it, we will do it for them and send them a bill, and it’s spelled out in their lease that way.
      We also own multi-families, and I’ve never went with the discount option for doing the shoveling and landscaping. We typically do it with our team. All my slip and falls have happened at our multis, two of which were our own tenants believe it or not. Perhaps it just because there is more common area to slip on, or because there is just more walking traffic, but our multis have always been the slip and fall sites.
      Matt

  3. Derrick H.

    I used to be an insurance agent and trust me and I know exactly what you’re referring too. An umbrella policy is the best for any investor. Also I separate LLC for some properties. To avoid an “attack” on the corporation.

    • Matt Faircloth

      hey Derrick,
      I’m glad you jumped in, I was hoping an insurance agent was going to comment on this! I don’t do LLC compartmentalization for my properties for liability but I do have many LLCs because they have different ownership and investors involved. I’m curious if you have seen the benefits of holding each property in a different LLC, if that’s what you are reffering to. I’ve heard of others doing this for liability also but it seems cumbersome as you grow in size.
      Let me know your thoughts, and if others are out there that have some input please chime in!
      Matt

      • Soh Tanaka

        The truth is it’s not that bad to have multiple LLCs. You have a little more to do during the tax time, but that’s only once a year. When you want to purchase something, you have to pull out the right credit card from your wallet, depending on which LLC you are using for, but you have to pull out a card anyway no matter what. You have to have a different book for each LLC, but it’s not an extra entry or anything. You just have to choose the right one. I’m sure you know the above already, as you own multiple LLCs. Since you got sued multiple times, it sounds like it’s wise to use LLC as an asset protection also, as that is the purpose of LLC!

        • Matt Faircloth

          Hi Soh,
          As you said, having multiple LLC’s is not that bad. I don’t even use multiple credit cards, LOL. I just charge everything on one card and reconcile the bill at the end of the month. I do it that way for some other expenses also.
          I only separate things by LLC for ownership reasons, not for liability protection. We have partnerships with investors so each investment partnership has a separate company. That’s the only reason I use separate LLCs, if it wasn’t for that I probably would have fewer LLC’s and LP’s.
          Of course there is the risk of a lawsuit “piercing the corporate veil” meaning coming after you personally or trying to attach their claim to other pieces of real estate owned by your or the company. These are real risks but I think they are marginal at best. The thing is, to get to that point they would have to go through the coverage offering from your insurance company and claim that their damages exceeded that amount.
          I’m going to go out on a limb here. Most personal injury attorneys are lazy and are going to go after the easy money, which is a quick payout from your insurance company. They are looking for a quick settlement and are not going to bother with your personal assets or other pieces of real estate.
          With that said, I am fine with a nice beefy liability insurance policy on each property and an umbrella policy above that. The attorneys are not going to bother beyond that, at least that’s my humble opinion.
          Matt

      • Derrick H.

        If I can tell you the stories I had to deal with as a claims adjuster your head will spend. I recommend to ANYONE who grows in Real Estate investing to learn more about Insurance especially Property & Casualty. I form an LLC for Rental properties in Bundles. No More than 5 per LLC. That way if I were to be sued it will be under that Bundle. SOH is right in regards to the ONCE a year pprwrk., but it’s worth it.

  4. Brad Hines

    I’m always fascinated by the legal structure of most property investors. I’m curious if the method of structuring your ownership has any play in this. Suppose I have an umbrella corporation, and then 5 properties. If I have an umbrella LLC, and all the other properties are insulated within their own respective LLC’s. Say there is a problem with LLC #4. Can I cull this particular property from the umbrella and keep my other corporations intact?

    • Matt Faircloth

      Hey Brad,
      This is an interesting structure theoretically but I don’t see it as necessary. They way I am reading your suggested structure, you would have each property in an individual LLC and then have that LLC owned or managed by anther “umbrella” LLC, which is owned by you. Correct?
      I don’t think having another LLC layer is going to save you anything on asset protection or piercing the corporate veil (see my comment above).
      I have heard of people using multiple layers of entities but that is to avoid capital gains tax. I have a friend that has a consulting business, they do something like this. As most of my income comes from real estate holdings which doesn’t show much taxable income after depreciation, I don’t have that problem.
      Matt

    • Adam Dravininkas

      Our LLCs are structured as you suggest. This is more for tax purposes. For instance, LLCs A, B, and C are owned by our holding company LLC H (H for holding, I’m so creative). So LLCs A, B, and C are all single member (single owner) LLCs listing only LLC H as the single member. Then for tax purposes, A, B, and C pass through all their income to H which removes any requirement for separate returns for A, B, or C. We file a return for H and we file personally, listing H earnings. If an LLC is a single member (single owner) LLC, then it’s considered only a pass through for taxes. However, if an LLC has multiple members listed as owners, you have to file taxes for that LLC separately.

      I don’t know about the liability side of having a structure as we do. They may be able to attack the holding company. But we have liability coverage on all properties as well as an umbrella policy to cover ourselves.

      • Matt Faircloth

        Hey Adam,
        Good point, a single member LLC is a pass through with no return required. Why have LLC H at all then, why not just pass it back to your personally? As you said the suit will most likely come back through the LLC corporate veil anyway.
        Matt

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