12. LEGAL: MAKING THE TARGET SMALLER
12.1. How To (hopefully) Avoid A Lawsuit:
We live in a very litigious society. People watch the television shows like “Judge Judy,” where everyone sues everyone for any perceived slight, and they come out with a judgement for a million dollars plus.
Unfortunately, the problem of people suing people gets even worse when rental real estate is involved, because there are large sums of money at stake.
I am not an attorney and I am not trying to give you any legal advice in this book. Instead, I want us to use common sense and think about ways we can avoid a lawsuit in the first place.
Lawsuits only occur because one side gets really mad or feels that they have been harmed in one way or another.
In addition, it is extremely unlikely that any lawsuit will occur if the side that is thinking about filing the suit (the plaintiff) comes to the conclusion that the party about to get sued (the defendant) has no assets.
If there is nothing there to sue, the problem tends to go away.
So first, let’s talk about finding ways to keep tenants and neighbors happy in the first place.
Take a realistic look at your property.
If you had a professional home inspection performed, would the inspector write you up for things like failure to provide handrails, loose or torn carpeting, inoperable windows, missing or non-functioning smoke detectors, sub-standard electrical service, open flame heaters or unvented space heaters in a home where children live?
What about the yard? Are there unsafe drops or gullies, are there steps without handrails, will you find untrimmed dead tree limbs or old vehicles or appliances (even refrigerators or freezers) that might be death-traps?
I am not suggesting that only new homes are safe to use for rental property, but I am stating for the record that if you allow obviously unsafe conditions to exist at your property, you are asking for a lawsuit.
The key word to remember here is “reasonable”.
The court will try to determine if you have taken reasonable steps in the past to protect your tenants from harm. If you have, that will weigh in your favor. If you have not, you may find yourself on the losing end of a large dollar award judgement.
12.2. THE ANNUAL SAFETY INSPECTION
I suggest that you conduct an annual SAFETY INSPECTION of every property. You should notify the tenant in writing that the safety technician will be conducting the inspection on such and such a date and time, and that the tenant is encouraged to let you know in advance (in writing) if they have any safety concerns. Then you can be sure to have the technician address those areas.
On a practical note, this is a good time to:
- check the keys and locks for proper operation
- check the smoke detector on each living level
- check for quick egress from each room in case of fire
- check the electrical panel for signs of overload or excess heat
- change the furnace filter look for signs of wear
- cycle the furnace and watch for heat exchanger blow-back
- examine the water heater flame &
- examine the Temp/Pressure relief valve
- check the water heater draft hood for updraft
- check water heater temperature is set under 125 degrees
- check for flammable liquids or rubbish near any heat source
- make a visual inspection for unsafe wiring conditions
- check handrails and stair treads for safety
- examine exterior yard and trees for safety concerns
- check for a fire extinguisher in the kitchen area
- check for persons who are young, elderly or have a disability that might need special care, advice, or help in an emergency situation
- does any part of the premises seem unsafe in other ways?
- check all interior window locks for proper operation
- check exterior lighting after dark for unsafe areas that need light
- check for uneven exterior surfaces, such as walkways or pavement
- check for any additional security or safety concerns the tenant may have
This inspection could be accomplished in about an hour, and a permanent record of the inspection (including time & date stamped pictures) should become a part of the home’s written history.
If you consistently do something like this, it will possibly alert you to a potential problem before it happens, and it might very well keep you out of court in the first place. In addition, even if you do get sued, the fact that this is one of your regular business practices will play very positively.
In my opinion, it is REASONABLE to expect that a landlord who cared about his tenants and his property would do something like this once a year.
In addition, my lease specifies that the tenant is required to test his smoke detectors for proper operation once a week and notify me in writing if it ever malfunctions. Furthermore, I have instructed all my service people to always conduct a smoke detector test anytime they walk into a rental property during the period of occupancy. It is just a matter of our policy.
The second part of preventing a lawsuit is to make it as difficult as possible for the plaintiff or his attorney to find out who the owner is and whether or not he has substantial assets.
Probably the worst thing you can do is to have ownership of the property deeded into your name personally. Then if there is a slip and fall (or worse), the tenant goes to a personal injury attorney for lots of money.
The personal injury attorney immediately checks the public record to see who owns the property (you) and to see what else you might own that could be used to satisfy a huge judgement. He finds that you own six other houses, all with very small mortgages and lots of equity, plus your personal residence, which is free and clear of debt. BINGO! He files suit for ten million dollars, and he knows that if he happens to win in court, he might actually collect.
This is exactly why you should NEVER have any real estate deeded into your own name. Instead, it might make sense for you to consider a Georgia corporation for each individual property.
The Corporation serves the purpose of separating each property into a separate unit, and stops any judgement from spreading to everything you own.
Yes, there are costs to setting up and maintaining these entities, so it’s a good idea to discuss this idea with your attorney and your accountant to make sure it is right for you.
It is beyond the scope of this book to cover the topic of ENTITY SELECTION IN GEORGIA, but we do have resources available for you that you will find extremely helpful. Call John Adams at 404-373-6000 and ask for information about CORPORATIONS and LLCs for REAL ESTATE in GEORGIA.
LAST in the suggestions on how to avoid a lawsuit is one idea that really is vital.
12.3. KEEP YOUR INSURANCE UP TO DATE:
I recommend that you have a policy on each rental house that carries the maximum coverage for personal liability, usually one million dollars.
In addition, I strongly recommend that you carry a PERSONAL UMBRELLA LIABILITY policy for another million dollars. It will probably only cost a few hundred dollars annually, and if you have several houses, it gives you great peace of mind.
You should meet with your insurance agent at least once a year and talk about your coverage and your liability exposure. Too many landlords simply ignore their insurance policy.
These are just some ideas on how to have reasonable business practices, keep a low financial profile, and carry a strong level of insurance.
As always, I strongly recommend that you discuss these ideas with your attorney, and possibly, your accountant for applicability to your situation.
About once a week, I get a call from a landlord who tells me that his insurance carrier has decided to no longer insure rental properties, so who should they call to place coverage?
If you need a recommendation for a property insurance carrier, call my office at 404-373-6000 and tell the person that answers you have an ACTIVE subscription to the LANDLORD SURVIVAL GUIDE and that you need a recommendation.
If your one year subscription has expired, call and renew your subscription, then ask for help!