Real Estate Investing For Dummies
Book image
Explore Book Buy On Amazon
Many people get into the world of rental real estate without knowing how much risk they’re exposed to just by owning real estate. You may read stories in the newspaper about lawsuits against deep-pocket defendants without much personal concern, but it’s a reality check when you’re suddenly considered to be the one with those deep pockets.

real estate risk management ©bleakstar/

Real estate investment property owners need a plan to minimize risks because they’re frequent targets of those who suffer a personal injury or whose property is damaged. But those aren’t the only lawsuits targeting rental property owners. Many studies have shown that real estate rental property owners are sued more than any other single type of business entity.

In a recent but troubling trend, some legal advisors are encouraging residents to file lawsuits claiming that their rental unit is not habitable. Some of the more unscrupulous tenant rights attorneys and organizations even discourage their clients from first contacting the rental property owner for needed repairs and maintenance, instead preferring to file complaints with governmental agencies and then use such reports to bolster their claims when seeking damages such as rent abatement and personal injury claims. The primary targets seem to be self-managed properties or management companies that do not have a strong track record of excellent maintenance and detailed documentation.

Robert has served as an expert witness in over 2,000 litigation matters throughout the country involving all types of real estate for over 25 years. Lawsuits filed against property owners and management companies seem to be recession proof. But, in addition to proper maintenance and repairs and excellent customer service for tenants, he does have one specific recommendation that will inoculate you from many of these less legitimate lawsuits — eliminate or cap the “prevailing party” attorney fee clause in your lease or rental agreement. Property owners like this clause as they envision collecting their legal fees and costs when evicting tenants for nonpayment. But tenant rights attorneys see this as an opportunity for them to get even a minor judgment against a property owner or their management company and then be able to collect huge legal fees and costs. So, take Robert’s advice and simply eliminate the attorney fee clause or at least cap the prevailing party to not exceed $1,000 or $2,000. You will have removed a tempting incentive for aggressive legal sharks looking for an opportunity to turn a “small claims” case into a major lawsuit with the potential of six-figure legal fees and costs.

You can take steps to reduce and control your risk. Consider the following suggestions as preventive actions to minimize the potential of being named in a lawsuit:
  • Regularly inspect the property as part of a thorough maintenance program. One of the easiest ways to minimize the potential of being named in a lawsuit is to routinely inspect your property and correct any noted deficiencies, such as health or safety problems. Be sure to comply with all advance notice of entry requirements and access limitation laws before going into the rental unit or going onto the tenants’ exclusive exterior areas. Make and retain copies of your inspections and document that all items were promptly and professionally addressed. If possible, see if your tenant will sign off on the completion of any work done so you will have proof that at least at that time the tenant was satisfied with the condition of his rental unit.
  • Listen to and address tenant complaints. Be open and responsive to feedback from your tenants and others expressing concerns and consistently require tenant maintenance and repair requests to be in writing, even if you write it down for them and have them sign. Always obtain written permission to enter the rental unit and carefully document any issues where the tenants make complaints, but then make access to address the problems difficult or delayed. A track record of quick response to complaints, with the proper documentation (paper-trail) to prove your timeliness, is the best defense if you find yourself defending a claim or lawsuit alleging uninhabitable conditions, an injury, or property damage due to your negligence.
  • Transfer the risk to others. Transferring risk from the owner and property manager to the vendor or supplier is sound policy for managing and minimizing risk. You can do this contractually by only using licensed and qualified contractors and suppliers who provide their own insurance coverage. Require that they provide written evidence that they have proper insurance coverage in place naming you individually and the legal entity that actually holds title to your investment property as an additional insured prior to performing work or providing materials. If you use a management company to handle the property management for you, make sure that they require insurance declaration forms from all vendors and suppliers documenting $1 million minimum coverage limits prior to doing any work or even making deliveries to your property. Have a file for hard copies of the insurance declarations with a tickler system to make sure that this important insurance coverage does not get canceled or lapse due to nonrenewal or nonpayment.
  • Remove certain risks or never allow them in the first place. For example, many owners and managers of residential properties have removed diving boards and pool slides. Commercial property owners have restricted access to the roofs of their buildings with emergency door hardware (which may sound an alarm but still allows roof access in case of an emergency).

Although you can minimize your risks by taking some of these steps, you can’t eliminate all risks completely, and that’s why you need proper insurance coverage. Insurance is a vital element in a risk-management program.

About This Article

This article is from the book:

About the book authors:

Eric Tyson, MBA, is a renowned finance counselor, syndicated columnist, and author of numerous bestselling financial titles.

Tony Martin, B.Comm, is a nationally-recognized personal finance, speaker, commentator, columnist, management trainer, and communications consultant. He is the co-author of Personal Finance For Canadians For Dummies.

Laurence C. Harmon, JD, is the CEO of HARMONLAW LLC, specializing in apartment-related legal and property management consulting.

Robert S. Griswold, MBA, MSBA, is a successful real estate investor and property manager with a large portfolio of residential and commercial rental properties.

This article can be found in the category: