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Cliff Hockley, CPM
President, Bluestone & Hockley Real Estate Services
Believe it or not, as a real estate investor, litigation lurks just around the corner.
Imagine that your tenants stole your light bulbs from the carports then used them for their lighting needs. Now mother in law comes to visit, she trips and falls on the front step, and low and behold she sues you for the broken back, pain and suffering and lack of consortium. You of course carry insurance, but bear in mind that you can’t have this happen all too often, otherwise the insurance companies will cancel your policy. And for those of you that don’t know, there is a national database they all subscribe to, and they share information. So just canceling and running to another insurance company will not take care of your troubles.
Let’s look at another scenario. You have been paying your on-site manager free rent and a little cash. It works out to a minimum wage of about 20 hours per week, you on the other hand have them work for 40 hours. You pay them, but after a year they quit, go to an attorney and demand back wages. She sues you and you find yourself in big trouble because you did not track their hours. You don’t know if they get paid overtime, regular time, and vacation time… need I say more.
You own an investment property that has an oil tank and a popcorn ceiling. To clean it up for sale, you think that a buyer might not want the tank or the popcorn ceiling. Being the proactive landlord, you hire Robert and his friends to take down the ceiling and brocade it in a great new pattern. You also hire Jim’s Tank to pull the leaking heating oil tank. Five weeks later you are ready to put the property on the market and tell a potential buyer that you have removed the tank and cleaned up the ceilings. Unfortunately this investor is with the Department of Environmental Quality and he orders a level one inspection. Once he digs into your property he finds out that the asbestos popcorn ceiling was thrown in the local landfill and that your oil tank leaked big-time. He shrugs his shoulders and tells you he won’t buy and reports you to the state agencies. Your troubles have just begun.
You’re a developer in the construction trades and your realtor finds you just the best infill site, totally flat with utilities right to the front door. It is the perfect site to build your office building. You dust off your plans, and file them with the city. They return them to you and mark them up. You don’t understand why they are making the hallways so wide, the bathrooms so big and they even are asking you to build a ramp to get into the building. You figure they are going to send a blind inspector to look at your property anyway, so you ignore their notes and build away, figuring what they don’t know won’t hurt them. You don’t call an inspector until it is completed, so that he can’t make you change anything. He shows up in a wheel chair, and says.” You know this building is not handicapped accessible. I am going to red tag it.” The next day you get slapped with a lawsuit claiming your property does not comply with the national ADA requirements.
You own an office building that uses air conditioning to cool the building down in the summer and a furnace to heat it up in the summer. Your major air intakes are on the roof, but your building is squeezed between two others that have restaurants and all of the restaurant exhaust is being circulated in your building. The tenants complain of headaches and nausea. You ignore it, until you get a letter from their attorney telling you that they are moving out.
The 500,000 square feet shopping center you own is the prettiest in town. Everything is new. New asphalt, new roof, new doors, new lights, a state of the art facility with video cameras to make everyone feel safe. Unfortunately you were cheap. These cameras are fakes. You are not even monitoring the system and sure enough, in the first week purses are stolen, visitors are attacked and you are faced with the specter of an ambulance chaser attorney. What do you do?
Your attorney calls and says that he is tired of defending you. You are not paying enough attention to your real estate investments and if you don’t start being proactive now he will never be able to help you out again. Now what do you do?
You need to realize that as a landlord you are responsible to the tenants for not only a safe and healthy work/living environment but you are also responsible as an employer of on-site staff and for things you cannot control, such as natural disasters. You need to continually be paying attention. You need to read trade journals, join associations of other investors, and maybe even hire a property manager that is staying on top of all of the liability issues. You need to have insurance, to protect you from accidental bad decisions, and you need to hire the right attorney. Visit your properties. If it does not feel right to you, or you wouldn’t work/live in that environment, you need to plan changes to protect yourself and your investments. So be prepared and proactive, litigation is lurking around the corner.
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