Most people hate asking for help. A lot of us like to think that we’re independent enough to figure out most things on our own through conducting online research and reading books. So when it comes to real estate investing deals, we often think that we can handle all of the legal issues by ourselves instead of paying money for a lawyer.
Sorry to break it to you…but you CANNOT have this mindset if you want to be a successful real estate investor. Real estate lawyers protect your assets and ensure that you won’t lose a significant part of your finances. As ordinary people without legal training, we just aren’t able to understand legalese like a lawyer, who has extensive education in the law.
John Smith, an experienced real estate investor who’s owned a successful rental real estate business for over 12 years, breaks down exactly why it’s important to establish a relationship with a real estate lawyer BEFORE you do anything in the real estate investing industry. Throughout his experience, he’s seen some crazy horror stories and knows all of the easy mistakes investors make with legal issues. Read on!
Always have a real estate lawyer.
One of the first things any real estate investor should do is go find a real estate lawyer. Before you look at houses, before you even think about starting deals, go make a relationship with a real estate lawyer. Get to know that person, and let them help you setup your company. The relationship should be developed enough so that when you actually need them, they will help you immediately.
You can say, “Hey I got a house under contract, I’d like you to review this contract” and they will usually turn it around within a day or so. Always have a lawyer to review your contracts. Most people assume that they can skip the review because they won’t hit any potholes along the way. This is dangerous. Get a real estate lawyer.
Just make sure to establish a relationship with a real estate lawyer. You don’t have to necessarily put them on retainer or give them any money up front. Just make sure they know who you are so that when you need them, you can call them up and turn around something easily and quickly.
Finding a real estate lawyer
Talk to your friends and to people who are also in real estate investing. In my experiences, word of mouth recommendations is by far the best way to find a good lawyer. If you don’t have any connections to talk to, just pick up a phone book and start calling various real estate lawyers.
Find somebody you’re comfortable with. You don’t want somebody who you suspect will cheat you or charge you an outrageous amount of money. Also, cost is a factor. There are cheap real estate lawyers, and then there are very expensive real estate lawyers. I’ve dealt with both. You get what you pay for with some, but some of the expensive ones charge unnecessarily.
Never play your own lawyer.
A number of people try to play lawyers to save costs. Yes, lawyers are expensive…
but they save you tons of money down the road.
Consider these five questions before you decide to play your own lawyer. If you answer no to any of these, you really shouldn’t be playing your own lawyer…
#1 Did you go to four years of college in pre-law and then another two to three years in law school and then take the bar exam?
Probably not, right? 🙂
#2 Are you familiar with all of the current federal, state, and local laws governing real estate transactions?
You have to be current on those because they are constantly changing.
#3 Are you an expert with contracts and legalese?
If you’ve ever read a contract, there are some terms and descriptions in there that is confusing to most people. You almost always need to know legal jargon.
#4 Are you an expert in liability law and did you set up your company in contracts so that you’re not personally liable?
When you’re doing real estate and you’re interacting with people, there is a level of liability in our rental businesses. If somebody got hurt on one of our properties and we didn’t have our company structure set up, that person can personally sue me and take everything I have.
#5 Are you familiar with years of case history that most real estate law is based on?
Most people don’t realize that most written laws in the U.S. are not necessarily black and white. There’s so much gray area. You have lawsuits and cases in civil law where a judge sits and hears both sides and gives his opinion and then determines the outcome of the case. This one case decision sets the precedent for future cases. You need to know that case decision – you have to be able to say in court, “Back in 1967, Joe Bob sued Billy Bob because of a house, and the judge ruled in Billy Bob’s favor. From now on, this sets a precedent that helps my side of this case.”
If you’re not familiar with past cases, you will miss out on easy wins and you need to place your trust in a lawyer instead.
If you said no to any of those questions, you need an actual lawyer. Sometimes I dealt with things by myself, but when I used a lawyer, I felt so much better and covered. Normally when I did things myself, I’m not sure everything I’m doing is correct or efficient and I’m pretty much just winging it. Lawyers make your life as a real estate investor so much easier and so much more secure.
Still not convinced you should get a real estate lawyer? Well…
Reasons to get a real estate lawyer
#1 Security
With rental contracts, we would always have a lawyer provide a rental contract. The State of Texas actually has a standard one that you can use. Our lawyer normally would use that with a few things added in. Truthfully, most states have a standard contract you can grab. But always have a lawyer review it.
For any contract that you have to sign, it will help tremendously to have a real estate lawyer review it. You should never sign something you don’t fully understand. When a real estate lawyer reviews the contract, they can make sure you aren’t getting ripped off or that there aren’t any loopholes that will put you or your assets in danger.
#2 Sticky paperwork
Here’s an example. Our company wasn’t able to get loans, so we had to take out loans personally to buy the houses. So our rental houses were in our personal names. This, of course, meant that we had a huge liability. If somebody got hurt, they could come after me personally. So, we decided to wrap all of our houses in a real estate trust and then assigned that trust to our company so that our company was the owner of that trust. This removed me from all liability. But the document to create this trust was about 56 pages. There’s no way that I could have done that myself.
Another example is when I foreclosed on a house that we sold using owner financing. We had a loan and owned the house, but we had a mortgage on the house. We re-sold the house while we still owned it and had a mortgage to somebody else. That’s extremely messy paperwork. We made sure to get a lawyer to do all of that to make sure that if the person we sold the house defaulted, we would get the house back. This led to so many contracts, so many documents.
#3 Surprising title issues
Lawyers can significantly help any title issues you run into. Sometimes you need a lawyer to go hunt down those six removed cousins or figure out why a dead aunt now owns a house. You just need a lawyer to help you sort it all out instead of wasting your own time being confused.
#4 Minimizing damages
The two types of lawsuits I find to be most common in real estate are civil lawsuits and small claims lawsuits. Normally, if the damages are under $5000, you go to small claims court. If it’s over $5000, you go to civil court. Damages can get pretty high, almost unlimited, in civil court. When it comes to small claims court, we’ve represented ourselves pretty often, since the risk of damages was less significant.
Exceptions…
While it’s always better to have a real estate lawyer, there are a couple exceptions I’ve found it easy to manage by myself. But of course, keep this caveat in mind: anything legal is always a risk without a lawyer.
Evictions
Initially, we had a lawyer work out evictions for us, which is what I would recommend when you’re first starting out. However, we learned that evictions are actually pretty simple to do. You just go to the courthouse, file some documents, wait your period of time, and then you’re done. Once we figured out the process for that, we started doing evictions ourselves because we had too many to give each to a lawyer. We eventually had a property management company start doing those for us. You can do small things like evictions since it’s repeatedly cut and dry.
Small Claims Court
Since small claims cases are for damages under $5000, it’s not extremely risky to manage these by yourself.
We’ve represented ourselves 95% of the time but not when we were first starting out, just because it’s confusing when you’re first getting into investing. With small claims, the issues are quite cut and dry as well. Normally we can pretty accurately predict whether we’re going to win or lose. There were never times we were in-between about it. We always saved up our money and just went to court ourselves instead of unnecessarily paying a lawyer.
Example of an Exception
There was a case where my company and I clearly in the wrong. We bought a house—a property that had a main house and an efficient unit in the back. We were renting them out separately, so we should have separately metered those houses. A lot of the houses we previously bought had one electrical meter covering both the front and the back. We separated most of them, but this particular one was going to be about $2500 to do. That was a bit more money than we had in the bank at the time. So we thought that it would be fine not to do it just this one time. Instead of being honest about it, we just charged the main house the electricity. We didn’t tell them that the efficiency unit in the back was also included into that price.
Several years later, the guy living in the main house quit paying the electricity bill, which shut off not only the main house’s power but also the efficiency unit’s power. The person living in the efficiency unit was so confused and went to talk to the guy in the main house. He soon realized that he had been paying for the efficiency unit’s electricity as well as his. So the front house guy came and sued us, which took us to small claims court. He sued us for about $3500 or $4000. Since we were clearly wrong on this, we just went into court ourselves and basically admitted fault and paid the fine.
While evictions and small claims is normally pretty easy to deal with alone, there is a host of other issues that require a lawyer’s eye. There are even some small claims cases where we decided to use a lawyer because we were slightly iffy about what would happen. The point is…it’s almost always better to use a lawyer for complex problems. If you even have to ask yourself, “Can I handle this alone?” the answer is probably no.
Story Time
Having had a rental real estate business for over 12 years, I’ve seen so many crazy cases which perfectly illustrate why a lawyer is NECESSARY to help you as a real estate investor.
Example 1 – The Easy Win
At Texas Tech, we had this pre-law college student renting one of our houses. She decided to go out and put this really nice deck in her backyard. She spent around $4500 on it and didn’t get approval from us at all, even though in our contract it said she had to. After building this deck, she hands us a bill for $4500. We immediately say, “Thanks for putting in a deck, but we aren’t going to pay you back because you didn’t get this approved by us.”
She proceeds to sue us, thinking, “Hey, I’m a pre-law student, so I have a little bit of legal knowledge. I’m going to sue you.” This is one we weren’t exactly sure of, and this was our first time at a small claims court. So we hired our real estate lawyer to help.
We had a standard real estate contract our lawyer had made for us before we started our business. He had actually made us a higher class contract since he used the standard Texas rental agreement and tweaked some things. This is again why I recommend getting a lawyer when you first start your business. You can understand how to create a high quality real estate, or rental agreement.
So, when this fiasco happened, we talked to our lawyer. He looked at the case quickly and immediately pointed to a clause in the contract he had drafted that says that all improvements must be in writing, requested by and approved in writing by the landlord (us). She didn’t do that so we didn’t owe her anything. Because of our lawyer being able to quickly locate the clause, the case was open and shut, done within five minutes. We probably would have won if we had tackled this case by ourselves, but it would have been subject to much more discussion and confusion and time.
Since we won the case, we could have tore the deck down at the student’s expense but we chose to keep it because it was a nice improvement for the house. Win-win.
Lessons to Learn:
- Get a lawyer when you’re first starting out, even for the small stuff. It will give you knowledge so that you can slowly advance to easily doing the black and white issues yourself.
- A lawyer will save you time and always help your chances of winning.
Example 2 – The Big League
This was one of the bigger issues our company ran into. We owner-financed three houses, and one guy bought two of those. He subsequently defaulted, and he also tore up the properties and let them go into disarray. We had to have our lawyers foreclose on him and then we turned around and sued him in civil court for all of the money he didn’t pay us and all of the damage he had caused, either through his neglect or on purpose. That was about $87,000 we were suing for.
For something this big, of course we were not going to do it alone. We didn’t know any of the ins and outs, so we were happy to pay the lawyer. This was a six to seven month process that we had our lawyer engage in, going back and forth with the other guy’s lawyer, going to court, filing all of the documents.
We ended up winning the case. The guy we sued went to jail, so we’re probably never going to get a dime of that money we wanted. Although, we do have a judgement that we can use at some time if we want to try and get more money out of it. But we’ll never get that check for $87, 000.
This is something that most people don’t understand. Even though you might win a judgement, that doesn’t mean somebody will sit down and write you a check right after the judgement if you win. Most cases, you have to work pretty hard to go get your money. A judgement just means that you have the right to take, in our case, $87,000 from that person. Since he’s in jail, we could go spend time, track down his assets, seize his assets, any houses, cars, bank accounts that he has, but we have to go do the work to do that. But we do have a court order that says we can go take them.
If we knew that this guy uses Bank of America, we could go to Bank of America with our judgement and take all of his money. You still have to do work to get your money. We could also technically get a debt collector. They buy about ten cents on the dollar normally.
Lessons to Learn:
- When you win a judgement, you have to work hard to get the money that you won.
- Always, always use a lawyer for the big cases (anything over $5,000). It will save you so much time and money (and stress!).
Example 3 – Safe but Never Sorry
For our third owner-financed house, we ran into a minor issue that had the potential of turning into something worse. One of the clauses in our owner-financing contract is that the person can give back the house. We sold it to a guy who was interested in the house.
He’d probably been living there for about eight years when he came to us and said, “Hey, I need to move out of state, and I don’t want to pay for this house. I can’t take the time to sell it. How about I just give it back to you? I don’t want you to foreclose on me.” We said yes to him.
We went to our lawyer, and he drafted up a transferral deed and a foreclosure document. We then had the house back.
This is a case that seems pretty minor but we definitely would not have done this alone. If we did, we would have dotted our i’s and crossed our t’s and then realized we didn’t properly transfer over ownership and that guy still had some ownership of the house. That could have led to a weird title issue down the road.
Lessons to Learn:
- Think about the futurity factor. While something may seem doable by yourself, ask yourself: will this lead to a bigger problem later on if I do this incorrectly? If the answer is yes, just ask your real estate lawyer for help instead of risking it.
- Understand your shortcomings – remember, you don’t have years of legal training like lawyers do. Lawyers train to help other people – so let them help you!
To sum up…
The best thing you can do for your real estate business, your stress levels, and your finances is establishing a relationship with a real estate lawyer and utilizing that relationship throughout your real estate investing journey. Trust me – I know what it’s like to be hesitant about this. But understand that in the long run, getting legal assistance will always, always pay off in bigger ways than you may realize.
