How to protect your real estate assets explained by an asset protection attorney.
The Problem with U.S. Lawsuits Affecting Real Estate Assets
According to Newswire, over 700,000 personal injury lawsuits filed in the U.S. every year amounts to billions of dollars in awards to plaintiffs.
A California law firm warns about the perils of real estate lawsuits over breach of contract, breach of fiduciary duty, boundary disputes, fraud, and other actions.
According to one New York Madison Ave. law firm, real estate, and construction litigation is a national problem.
Forbes recently warned about the high number of lawsuits against small businesses claiming that 36% to 53% of all small businesses get involved with lawsuits in any given year and 90% of all businesses get tangled up in litigation at any given time.
According to the legal website, Nolo.com, a plaintiff winning a lawsuit can file a judgment lien on the debtor’s real properties. But, state homestead laws protect a debtor’s personal home. However, no protections exist for other real properties.
Therefore, judgment liens tie up your non-personal home real estate assets if you lose a lawsuit.
How to Protect Your Real Estate Assets
The best way to learn how to protect your real estate assets comes from experienced attorneys specializing in asset protection.
[Note: The following is only meant for information purposes and not as legal advice. Consult with an experienced asset protection attorney about your specific legal situation.]
Wealthy real estate investors often utilize asset protection strategies to protect their holdings. They apply the laws to their advantage.
It’s not illegal or sleazy to exploit the law to protect your real estate assets.
Use an LLC for Asset Protection
An LLC owns each property, not the investor. If someone slips and falls on one property and sues for personal injury, only the separate LLC becomes the defendant. The investor and the other LLC’s remain protected.
Another benefit of an LLC is that if the investor is personally sued that fact appears on his or her credit report lowering the score. A low score credit report hurts the ability to get loans.
Remember, since your LLC owns the property it’s the LLC hiring contractors, and dealing with everyone about the property.
Using an LLC as an Intermediary
This crafty lawyer recommends setting up another LLC with no assets. Use this LLC to interact with others and enter into contracts. Investors insulate themselves by using an LLC to act as an intermediary (also called a “Shell” company).
The only ones getting sued are those actually buying properties, engaging contractors, and hiring employees. What if a negligent employee causes serious injuries to others? The investor stays out of it. Only the LLC and the employee who caused the injury get sued.
If an intermediary LLC gets sued for a million dollars, simply dissolve it by not paying the annual corporate registration fee. The state declares the LLC as “uncertified” making it legally dead.
Seems sketchy, but perfectly legal.
Always Prepare for Lawsuits
You never know if you end up in a lawsuit. That’s life in the USA. Therefore, always prepare for lawsuits.
Sometimes, you must sue someone as a plaintiff. Use your LLC as the plaintiff.
Personally suing someone puts you at risk. If the defendant wins, the judge may award court costs and his/her attorney fees against you. If you are personally the plaintiff, you must pay the thousands of dollars in attorney fees to the defendant.
Instead, let your LLC start the lawsuit. If the defendant wins only the LLC is at risk. A no assets LLC can’t pay the attorney fees. That’s when you simply dissolve the LLC.
Become Judgment Proof
Some wealthy people don’t own any assets. LLC’s own their businesses, real estate, vehicles, jewelry, artworks, bank accounts, securities (stocks, bonds, commodities), even their gold coins. Known as “Judgment Proof”.
Plaintiff’s lawyers like to take on civil personal injury lawsuits on a “Contingency Fee” basis meaning the lawyer earns a percentage of the judgment collections. But, how do you collect from a judgment-proof defendant who doesn’t own anything? You don’t. That’s why lawyers don’t sue judgment-proof persons.
Include a Remedy in Every Contract
If using LLCs and/or becoming judgment-proof doesn’t appeal to you avoid timely and expensive lawsuits over contract disputes.
Besides personal injuries, business contracts produce many lawsuits. One party fails to do something required in a contract and the other party files a lawsuit. Ask any plaintiff how much time and money it took to file a lawsuit and go to trial. Was it worth it?
Avoid lawsuits by creating contract terms favoring you if the deal goes sideways.
Create a contract giving you large amounts of leverage to quickly settle the potential lawsuit.
Spelling out the remedies for breach of contract or failing to perform in every contract adds protection from lawsuits. The remedy could be mandatory arbitration instead of a lawsuit. Or, a specific amount of monetary damages for certain actions.
The question for investors becomes, “Do you want the property or do you want money?” If it’s the property, include a clause called “Specific Performance” in the contract.
On the other hand, if its money, then the lawsuit only seeks money “Damages”. Although, the tricky part is proving how much “damages” in relation to the actual harm.
How do you prove damages? One way is to compare the current comps to show an increase in value from the purchase price.
Damages specified in an exact amount known as “Liquidated Damages”. For example, if the seller backs out at closing, the liquidated damages may call for a one-time payment of $20,000 or more.
Liquidated damages save time by not having to prove the exact amount of damages. For instance, your contract states that if the seller backs out after you obtain financing, the liquidated damages amount to $50,000.
Sure, the seller may initially refuse to accept such terms. But, everything is open for negotiations.
Ask the seller, “Are you intending to back out of our deal after I spend thousands of dollars in time and money?” If the answer is “no” emphasize the terms of the liquidated damage that makes you confident the seller intends to move forward. Likewise, point out that a lawsuit would cost a lot more than $50,000.
Eventually, negotiations agree upon an acceptable liquidated damages amount for both sides.
How to protect your real estate assets involves:
- Using LLC’s to own every real property;
- Create an LLC with no assets as an intermediary for business deals;
- Always prepare for lawsuits using an LLC;
- Become judgment proof; and
- Include a remedy in every contract.
When using an LLC in a real estate transaction hire an experienced escrow company.
We, at Open Escrow, can help you towards a successful closing even when using an LLC.
Contact Us to find out how we make closings smoother.
Steven Rich, MBA – Guest Blogger
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