I was inspired to write this post by an article over on Passive Income MD in which the author wrote about some lessons learned regarding real estate investing. While I don’t own any rental property or have any direct experience with real estate investing, Mama and Papa SRGO sure do. So I want to take a moment to share with you guys some of the lessons I learned from their recent drama-filled story.
My parents officially retired from the work world in 2010, which was the year I started residency. They were still living in our house in Southern California at the time while I was in Chicago for training. My sister lives in Texas, so they were thinking of moving there to be closer to her while renting out our old home. “Sure,” I said. “Whatever you guys want to do.” And that they did. So they packed up most of their belongings, enlisted the help of a family friend to be the property manager, and moved on to the wide open spaces of Texas.
Status Quo… Oh No!
Things were going along without a hitch for the first few years. They were receiving monthly cash flow in the form of rental payments and living the good, retired life on a government pension. I graduated residency and got married, all the while keeping in touch with them over the years. About six months ago they came and visited Random Gal and I. We were catching up on things and talking over some glasses of wine and beer, when all of a sudden my mom says, “Oh by the way, we’re getting sued.”
The Story of Getting Served
Naturally, my first response was, “What are you talking about?” Apparently the tenants of our old home in SoCal owned a couple of dogs. Said dogs escaped from the house and were roaming the neighborhood. While roaming they decided to attack someone who was walking their dog on the street. The incident actually occurred several blocks from our house and not on our property or lot. The first thing I asked my parents was if they had a specific stipulation in the lease that no pets are allowed. They did, so I wondered why they were being sued rather than the dog owners. Well, it turns out the dog owners were initially named in the lawsuit, at which point they requested a public defender. Not too long after that, the case was dropped against the tenant and my parents were then named in the suit. “Hold up,” I said. “That doesn’t make any sense.” Now my expertise is in medicine and not law, but shouldn’t the “no pet” stipulation in the rental contract make my parents not liable? And what’s up with dropping the case against the tenant after they hired a public defender? Does that mean they didn’t have enough money to hire an attorney? I don’t like to assume things (because it makes an ASS out of U and ME), but that sounds like maybe the plaintiff (or their lawyer) figured that they wouldn’t be able to get any sort of settlement from the renter, so they decided to drop that like it was hot and go after the property owners instead.
Anyway, I find out that my parents were getting sued for the amount of $250,000. They do have liability insurance for the home as well as umbrella insurance, but for what amount I’m not sure. My mother, being my mother, had no intention of going gently into that good night. Rather, my parents decided to hire an attorney and were prepared to fight for what’s right. In my conversations with them, it seemed as if their attorney was giving them good advice. He said that most likely the case wouldn’t make it to court, and if it did it would be a weak one against my parents. Of course there was always the option of settling, but that wasn’t really an option for my mom. So they decided to go forward with the case.
The litigation process went on for several months. During that time, my parents were advised to protect as many of their assets as they could “just in case.” Their lawyer said that their retirement savings and pensions were safe from any judgement, so they just had to focus on their other accounts such as savings, checking, and taxable account. They didn’t have too much in their savings and checking accounts as they were primarily living off of a pension, however they did own several hundred shares of stocks, which they ended up gifting to me and my sister. One other option suggested by their attorney was to file for bankruptcy, which my folks decided not to do. And of course they were at risk of losing the house, which my parents didn’t really care about since they hadn’t lived there in several years and weren’t planning on moving back.
For a while I didn’t know what was going to happen with the case. In my mind I felt that the suit against my parents wouldn’t be won by the plaintiff if it actually made it to court and that it would eventually be dropped. But after a few months it was still ongoing. I thought to myself, “Oh my gosh, is this really going to make it all the way to trial?” Well, not that long ago (January 11 to be exact) I got a call from the folks. They told me that they received an email from the plaintiff’s lawyer saying that a request for “dismissal with prejudice” was filed with the court. I kind of had an idea of what that meant, but I asked my friend Wikipedia just to be sure. It essentially means that the case was dismissed, is forever over, and not subject to further action, which means the plaintiff cannot bring any other lawsuits based on the claim. Victory! But in all honesty I didn’t think the case had any merit to begin with, and I was a little disappointed that the plaintiff and their attorney had taken it as far as they did.
So what about the property manager? Where was he in all of this? Because I figured if the tenant wasn’t going to be sued then the next one on the hook would have been the property manager. I’m not sure why he wasn’t sued. In fact, he may have known about the dogs all this time but decided not to do anything about it. My parents mentioned that, in a conversation with him, he let it slip that “the dogs seemed nice.” Either way, it ended up causing a strain in their relationship, and I for one think a little bit less of him for letting my parents catch all of the heat when legally they were not at fault. It’s kind of sad, too, because he’s one my dad’s old Navy buddies and our families pretty much grew up together.
Some Lessons From the Folks
In the end, things went the way that I thought they should have. But it could have easily ended up poorly for my parents. They’ve taught me a number of life lessons, mainly by living their lives a certain way and setting a good example for me and my sister. This recent legal extravaganza was no different and further added to my life education. Here are some things I would take away from this experience.
Make sure your lease/contract is air-tight and rock-solid
While this may seem like a no-brainer, I can see how some things might fall through the cracks and not end up on your rental agreement. The “no pets” clause on their lease pretty much saved my parents’ behinds. Here is a good list of ten terms to include in your rental agreement. You also want to be sure that the terms of your lease are compliant with all relevant laws, such as health and safety codes and anti-discrimination laws.
Choose the right tenant
It goes without saying that the right tenant can make or break a rental property. You want a tenant who is responsible, employed with a stable job, who will make their payments on time, and who will likely renew their leases. Coming up with a set of written selection criteria might be helpful in terms of evaluating each applicant consistently and fairly. After all, you don’t want to face any discrimination lawsuits when choosing between potential tenants.
Enlist the help of a qualified property management company
If you can’t physically manage the property yourself, or if you decide you don’t want to, then you’ll need to find a property manager. This ended up being a big issue in the case of my parents. I’m not sure if our family friend manages properties as a side business on his own, but my folks may have been better served by going with a professional management group instead. Much like with tenants, you want to do your homework on any prospective property managers. Some things you may want to look in to:
- Licenses: Make sure all the their licenses are current and in good standing.
- Insurance: The company should have appropriate insurance coverage, such as general liability and automobile liability.
- Credentials: Find out if your property manager has additional credentials, such as a CPM (Certified Property Manager) designation.
Protect yourself and your assets
Let’s face it. If you own rental property or are a landlord, you’re at risk of getting sued. That’s just how it is. There are some things you can do to minimize your risk. For example, you (or your property manager) can regularly inspect the property and address any potential maintenance issues or safety concerns. You also want to have appropriate insurance coverage, particularly if you are going to be the landlord and property manager. Your insurance should be a comprehensive policy that also includes liability insurance. An umbrella policy may also be a good idea in terms of increasing your liability protection.
You may do everything right… and still get sued
My parents did everything correctly, other than perhaps go with a professional property management company, and still ended up getting sued. The same goes for medicine. You can do everything by the book, follow treatment guidelines and the “standard of care” and still get named in a lawsuit. See the above point… protect yourself and your assets.
While I don’t have any rental properties at the moment, I was planning on expanding into that asset class once my student loans are all paid up. After going through this experience with my parents, I’ll be sure to carry these lessons along with me.
Readers, do you have any other thoughts or lessons to add? I would love to hear from you, especially those with experience in owning and managing rental properties. Comment below!