Raise your hand if you like being in court. Anyone? Anyone? Bueller? In all seriousness, you’d be hard pressed to find someone who enjoys court unless they work in law. And even then, they might not. One of the most stressful, taxing positions to find yourself in is when you’re being sued.
For real estate investors, legal pitfalls are many and varied. While a lot of lawsuits come against landlords or managers first, it certainly doesn’t mean the owner will be unaffected or not sued themselves.
Avoiding lawsuits isn’t as easy as we’d like it to be. Real estate arguably has the highest liability risk, so doing things right is key to protecting yourself and your investment.
3 Common Legal Pitfalls for Real Estate Investors...And How to Avoid Them
Liability: Unclear or Nonexistent Contracts
As a real estate investor, you’re going to be dealing with a lot of contracts. From the lease agreement for tenants to deals and work-for-hire contracts (such as remodeling, contracting, maintenance, and so on) to sellers and buyers, there’s a lot to go wrong. When these contracts fail to be as clear and thorough as possible, particularly when it comes to the lease agreement, there’s room for that lack of clarity and coverage to be exploited for a lawsuit. What happens when you run into an issue that your lease agreement doesn’t anticipate? A good deal simply isn’t built on a handshake anymore.
Solution: Take the Time to Do it Right
Never use a free contract template you found on the Internet. If you expect a contract to maximize protection and be favorable without being unfair, you’ve got to take the time out to draft one yourself. What makes a good contract? Leave no room for interpretation. Keep the language simple and professional, not needlessly complicated or intimidating. The more difficult a contract is to decipher, the more likely it is to be broken and the less likely it will hold up in court.
Avoid making your contract one-sided; any extreme unfairness can also turn the jury against you in the event of a dispute. Remember, too, to take into consideration your local laws. You lease agreement may seem good, but if it’s at odds with tenant landlord law, it doesn’t matter.
When drafting any legally binding document, real estate investors would do well to consult an attorney in the field. Having a solidly developed, thorough legal document is worth the time and cost.
Liability: Property Negligence
There are a lot of things that can go wrong with real estate that can be blamed on negligence. Granted, a lot of things can be claimed as negligence that aren’t actually true cases of negligence. Example: a tenant trying to sue for slipping and falling on the property during icy weather in a state where shoveling is not required of management by law.
Unattended maintenance issues are more common sources of negligence claims, but this truly depends on if the tenant made management aware of these problems. But can you back that up in court if the tenant claims they notified them of the issue?
Negligence lawsuits can get dicey, as they are less tied to something as cut-and-dry as a contract. But there’s certainly room to mitigate risk.
Solution: Employ Reputable Property Management & Be Proactive
Number one: always employ a property manager that you trust. Find companies and individuals who have good reputations and work well with you and your properties. Don’t be afraid to let anyone lesser go. Property management can make or break an investment property and they are absolutely essential to your success.
Beyond that, remember to anticipate issues. Be proactive. That means ensuring routine inspections happen, documenting property damages and issues before move-in and after move-out, and getting documentation of any maintenance requests in writing somewhere.
It means hiring good people for maintenance who will do the job right rather than employed a quick-fix. Again, much of these falls to the property management...so get good property management.
In an ideal world, evictions don’t have to happen. The best we can hope for is that evictions go smoothly. Unfortunately, that’s not always the case and investors are still prone to truly screw up when it comes to getting a tenant out. Whether it’s shutting off utilities to force a tenant out (illegal), removing their property from the premises (also illegal), or evicting based on discrimination (again, illegal), the court won’t be siding in your favor.
Solution: Know the Law & Use A Great Legal Team
The best way to avoid eviction-related lawsuits is twofold. One: work eviction details into your lease agreement, and the circumstances that would warrant an eviction. Two: know your local laws. Personal property disposal, the Fair Housing Act, tenant landlord law, so on and so forth. Know how many days notice your state demands you give. The more you’re acquainted with the law, the more protected your investments are.