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How My Client’s Strategy Avoided a Lawsuit

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This article does not constitute legal advice. We recommend you seek the counsel of an attorney familiar with your specific situation and market to ensure you make the best decisions within your real estate business.

Regular readers will know that I specialize in asset protection, and I have written extensively about the subject. You can read all about my favorite tools, like the series LLC, anonymous trusts, and much more here on Bigger Pockets and elsewhere online. But these concepts can seem intimidating and abstract without some real-world examples of how powerful they are in action.

Today, I’m going to tell you a success story about a real client of mine. Though I’ve changed her name to protect her confidentiality, this is a true story. She followed my advice to the letter and created a rock-solid asset protection plan. By making use of the recommended tools, she was able to save herself from a lengthy, messy, and beyond expensive lawsuit.

The Best Asset Protection Starts With Being Informed

It’s my hope that you’ll be able to use some of this information to begin building yourself an asset protection strategy, if you haven’t already done so. The first step in this process is making sure you have all the information you need.

Related: Landlords: The 6 Best Ways to Minimize Your Chances of a Lawsuit

Now mind you, not all information is created equal. I love YouTube as much as the next guy, but part of the problem with having all of the awesome technology most of us take for granted is the fact that there are self-proclaimed “experts” on nearly every subject. Usually, these people pass themselves off as gurus, but have little education, no credentials, and minimal if any real-world experience to be deserving of expert status. This is just the reality of having wonderful tools like the internet: some people are going to learn just enough information to be dangerous. And sadly, those who know the least often know it the loudest. This is the case with all sorts of subjects, and asset protection and real estate investments are no exception.

You may have even gotten some bad advice from well-meaning “experts,” or even professionals with legitimate credentials who simply don’t specialize in this area. In the case of asset protection, bad advice can be expensive. Many a YouTube guru or financial planner who isn’t thoroughly informed will tell you that insurance is all you need to protect yourself. This couldn’t be further from the truth.

Insurance certainly has its uses, but it won’t protect you from most lawsuits. To understand how proper asset protection does protect you from lawsuits, let’s take a look at the anatomy of this particular case.

Anatomy of a Lawsuit: They Aren’t All About Fraud

When most people think of lawsuits, they think of them as a natural consequence of deceptive or fraudulent behavior. However, my practice has shown me that almost all of them begin as simple misunderstandings. I’ll let my client Sally Cohen’s case serve as an example.  Sally is such a nice lady that she gave me permission to talk about her case to help other investors, and I’ve changed her name to protect her privacy. Anyway, Sally had just purchased herself a town-home on the cheap and was beginning to renovate it. Because she was planning to later rent or sell the town-home, she installed some new plumbing in the bathroom and a couple of other areas in hopes of increasing the property’s value.

Related: 7 Tips to Keep Landlords Free From Costly Tenant Lawsuits

When the time came for her to sell the property, Sally told her buyer about the upgrades she had made. When he was touring the home, they were standing in the bathroom and the buyer asked which plumbing she had replaced, her answer was simple: “All of it.” Satisfied with that answer, the buyer went ahead and purchased the home from Sally.

A few months clicked by, and suddenly, a leak sprung up in the bathroom. The damage was bad, and ultimately ran up a bill in the thousands. The buyer, understandably upset, was livid. He threatened to sue, because he had interpreted “all of it” to mean literally all of the plumbing in the entire house.

Nobody was intending to be fraudulent. It was simply a misunderstanding based on language.  And because the buyer interpreted Sally’s action as fraud, there isn’t an insurance policy in the world that would have covered these damages.

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How Sally’s Asset Protection Plan Saved Her

This lawsuit had the potential to go very sideways, but fortunately, Sally Cohen is a rather smart lady. She had worked successfully as a real estate agent for seven years before getting the courage to purchase her first investment property: a townhouse in downtown Austin, Texas. Thanks to her experience in real estate, she knew the importance of asset protection for safeguarding her investment. So before she even bought the townhouse, she consulted with me about setting up an asset protection plan.

Her plan involved placing the town-home in an LLC, which protected her personally from a liability nightmare. She used the series LLC structure, which meant that the home itself was in its own individual LLC. She owned two other properties, each of which had its own series. While the total value of these assets is rather high, the use of this structure protected her unrelated assets.

The other cog in her plan was an anonymous trust, which functioned as the owner of her parent company LLC. With these pieces working together, the opposing attorney quickly lost interest in the initial lawsuit. Why? Because there was very little to gain. As for the new owner, he would have spent more pursuing litigation then he could have ever hoped to win.

If you are a real estate investor, take notes from Sally. Set up your asset protection plan before you rent or sell property, and you too will be protected from potentially devastating lawsuits.

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