All Forum Posts by: Doug Cobb

Ive heard some very intelligent comments on here, especially by all the lawyers, and I've heard some suspect opinions that seem to be masquerading as objective facts.

First some big government types seem to be saying things that are counter to the research I have done. LLC's were set up first and foremost as specifically personal liability protection not some taxation simplification device as far as what I'm reading from various sources.

  The second typical statement I hear is "you don't need liability protection, just a good umbrella policy" or the even more naive "just be a good landlord and you wont get sued.  Tell the landlord who lost all his money to lawsuits involving a water heater set too high, an irresponsible contractor with insufficient bond, or any other situation and contingency a "good and ethical" landlord cant anticipate in the ambit and scope of all possible liability impugned by a disgruntled or aggrieved tenant.  Also as the lawyers have pointed out, if the insurance company can find a technicality of getting out of paying out 3 million dollars on a liability suit do you think they may avail themselves of that option or rather just pay the 3 million because they really would rather have your $28 dollars a month policy payment?

Sorry if I don't have the faith some of you true believers do in the court system as to being the best arbitrator of determining what is "fair" and putting myself in a position to be reliant on their determination of my punishment rather then proactively protecting myself from their judgement.  Obviously anyone who isn't being a hypocrite would like that option for themselves if not for others.

@Seth Mosley , I agree with @Bill Gulley who are both experienced guys and didn't keep what they built simply because of entity structures. I'm in the same camp.  It's funny, the question of "to entity or not to entity" is one of the most asked questions on BP and the pro-entity crowd is typically dominated by folks that have bought between 0 and 10 properties in their investing career. The experienced investors are usually the ones saying that entities are most likely unnecessary. Coincidence??

I've made my opinion known many times but I'm happy to chime in again.  Let me begin by saying that I have entities. I don't have entities for asset protection, however. I have them for legitimate business purposes--to segregate groups of investors, varying ownership percentages between myself and my partners, and for branding.

I know that Bill and Jay have been lucky (good?) enough to have not been sued so if you have followed this thread this long you might believe that the "you will get sued" statement is untrue. I'll present the other side of that story. I believe that if you do enough of this for long enough it's most likely a matter of time. You will get sued. SO WHAT?!?!  It's a reality of business.

I've been in this business for 25 years. Bought over 700 properties. Owned over a thousand doors and currently around 500 or so (not counting interior doors, LOL).  So my exposure is high. My personally-owned rentals are just that--owned personally, as in my own name. Remember that my entity owned properties are for a business purpose?  That's why. Not saying that what's right for me is right for you, nor am I saying that it's right for me (I could be wrong) but it's worked out fine.  I have lots of insurance.

I've been sued several times. I can think of seven times off the top of my head. There may be more but I don't remember for sure. Why not?  Because they obviously didn't make a big enough impression on me to even matter. 

Let's talk about those suits. Two were in small claims court by tenant plaintiffs. Both tenants lost. Cost of defense: some wasted time showing up to court.  Another one of the suits was a guy I sold a flip to who claimed that my contractor didn't do something correctly.  It was true, but the homeowner wouldn't allow the contractor back in to fix it--he wanted to shake us down for $5K in small claims court. We offered him $1,500 in lieu of the contractor making the repair but he wouldn't take the money. In court the judge ruled in his favor and awarded him $1,500--so we lost but won.  

Three suits were cases where I bought a house on the courthouse steps at a foreclosure auction and the foreclosed-out homeowner sued their lender for botching the foreclosure and me for quiet title, misrepresentation (for evicting them when I didn't own the home that I paid for), and fraud (for what? Signing over a cashier's check?).  I won all three cases. One cost $30K to defend (settled with the lender rather early-they refunded my money, I gave them the house, and they paid me a bit for my trouble), one cost $20-30K (don't remember exactly but it got thrown out of court before trial) and the third cost over $170K and counting (this one went to trial, I won but now the idiot is taking it to the Court of Appeals so I'll be continuing to pay for who knows how long). In addition to those defense costs I'm out over $100K in holding costs for houses I couldn't sell during the litigation (the third one going on 4-1/2 years).  

The final case is one where I bought a house on the courthouse steps and evicted the occupant. She refused to move her stuff out of the house even after the statutory time in which she was allowed to retrieve it. I was entitled to dispose of it but I couldn't morally do it--her whole life was in this almost 3,000 SQFT house. So, I hired a moving company to move everything to storage units. When she reimbursed me for the moving cost I gave her the keys to the storage units. Three hours after giving her the keys to seven storage lockers I get a call from the police--she claimed we stole a pocket watch and all of this other stuff. How could she know that out of all of that stuff there is a missing pocket watch in only three hours when it took a crew of six guys three days to load it is beyond me. She filed suit for theft of over $1.2 million worth of property!  She produced a list of hundreds of items that we alledgedly "stole", and our private investigator found most of the items in the storage units during discovery (the rest of the items didn't exist)--the whole suit is BS but this woman is a serial plaintiff and hired a lawyer who has a a pending license suspension to represent her (birds of a feather...). This one is going to jury trial.

Now for the meat of my point:  All of the properties associated with these suits except one of the tenant claims were owned in an entity. Will someone from the pro-entity crowd please explain to me how having an entity (actually multiple entities) helped me???!!!  Or prevented this??

The practical risk, in my opinion, is not judgments, it's the cost of defense and having an entity does not eliminate the cost of defending yourself from frivolous lawsuits!  If you want to be in this business, you have to live with the fact that you are a target.  

@Bill Gulley has hit the nail on the head.

I am a plaintiff's lawyer here in Texas and I can tell you the issue of asset protection is really, really overblown, at least for the vast majority of SFR investors. The vast majority of personal injury cases (e.g. slip and fall, dog bites, etc.), which is where most claims of liability come from, will never even be close to the standard $1M in liability coverage.

Moreover, here in Texas, most lawyers are smart enough to almost always make a demand within policy limits once enough facts are developed.  (This is true even with wrongful death cases, unless there are extraordinary circumstances.)  The result is that if the insurance company turns down the offer, and the case goes to trial with a verdict in favor of the plaintiff that exceeds policy coverage, it is the insurance company, not the owner, who is on the hook for any excess judgment.  

Another point to consider is that property that is highly mortgaged is worthless to a plaintiff's lawyer.  The mortgage lien trumps an unsecured, judgment creditor's lien.

I also reject the suggestion that an insurance company might not defend an insured based on some nit picky exclusion.  The duty to defend in Texas (and most jurisdictions) is much, much broader than the duty to indemnify, and an insurance company get in big trouble for violating its duty to defend.  I have rarely seen a case where an insurance company has refused to defend if there was any possible basis for coverage.

As a lawyer here in Texas, I can also tell you the bogey man of punitive damages is ridiculously overblown.  They are exceptionally difficult to obtain (there basically has to be overwhelming evidence of an almost evil intent, a paraphrase but that's what it is like in practice).  Moreover, even if you obtain punitive damages, they are very difficult to hold onto on appeal.  (They are often reversed.)  

I also do not understand the claim that Texas has "passed statutes which entice claims that are very lucrative to Plaintiffs."  Texas is one of the most hostile states in the country toward's Plaintiff's claims and has led the way in tort reform.  

I can also say that any decent plaintiff lawyer has zero fear of going against insurance lawyers.  Just as there is a wide variety of talent in the local bar, there is a wide variety of talent in the insurance defense bar.  As far as I'm aware, the insurance defense bar does not hold some vaunted reputation in the legal community.  

I can say with absolute certainty that any decent plaintiff lawyer will prefer to go after an insurance company, not an individual.  It's really hard to collect in Texas and insurance companies at least understand the game of litigation.

Finally, I'm not sure I understand the issue of fraud.  What are you doing to get sued for fraud?  Sure, anyone can sue anyone for "fraud," but in my experience frivolous claims get weeded out relatively quickly and certainly do not expose a defendant to catastrophic liability.

These are just some thoughts off the top of my head.