What You Need to Know About Dispute Resolution

First of all, it is mandatory. Second, it is effective.Third, it can be relatively inexpensive. Today, most contracts including most real estate purchase agreements‚ contain a provision that requires the parties to submit disputes to arbitration before going to court. If you’ve ever been involved in litigation, you know that at some point in the process, Court rules require the parties to participate in some form of Alternative Dispute Resolution, or  ADR. This can take the form of arbitration or mediation. However, most people, including some attorneys, are confused by these terms.  What are they?  How are they different? Which one is better?

According to the Superior Court of California, County of Santa Clara, ADR is a process in which a neutral person helps people who cannot agree, so that they can resolve their case. The types of ADR available for civil litigation include mediation, neutral evaluation, private arbitration, judicial arbitration, and early settlement conferences. In addition, if the case does not settle, a mandatory settlement conference is usually scheduled the week before the matter is scheduled to go to trial.

Mediation is described as an informal, confidential, flexible and non-binding process‚ in which the mediator helps the parties to resolve the dispute. In mediation, the parties are free to come up with whatever solution is mutually satisfactory. The mediator facilitates the discussion, but does not make rulings. A good mediator can help the parties consider options they and their attorneys might not otherwise have considered. The Courts are somewhat limited in what they can order the parties to do — the parties themselves have a lot more flexibility to fashion a remedy more suitable to their situation.

Arbitration‚ is similar to but less formal than a trial. The parties submit their respective arguments to a neutral  either an experienced attorney or a specially appointed Judge who will make a ruling based on the evidence and arguments submitted.  There is no jury in arbitration. The parties can agree (in advance) that this decision will be either binding or non-binding. If the decision is non-binding, either party may reject the ruling and the matter will proceed to trial. However, in many cases the arbitrator’s ruling gives the parties an idea how the Court might view the case. The primary advantage of binding arbitration is that is can be less costly and produce faster results than a trial. In complex cases involving large sums of money, the parties often will pay for special private arbitration, usually conducted by retired judges.

Dispute resolution is very effective, and can be relatively inexpensive.  Over 90% of all cases filed in Superior Court in Santa Clara County settle before going to trial, sometimes, quite literally, on the courthouse steps. Many of the forms of ADR are offered by the Court to parties in litigation for free or for nominal sums. However, for one reason or the other, parties ignore these opportunities and instead spend considerable time, money and effort to prepare for trial.  By the time they are directed to participate in mandatory settlement, they sometimes feel  erroneously  that they have nothing to lose. They fail to take advantage of the opportunity to take control of the outcome, and ignore the real costs of trial, post-trial procedures, and appeals‚  which can take years!

At any time, anyone may seek mediation to help them resolve a dispute and possibly avoid the cost, time and stress of litigation altogether. A key to saving money is to agree to mediation as soon as possible — before lawsuits are filed, if possible. The process is confidential, relatively inexpensive (especially when compared to the cost of lengthy litigation), and surprisingly effective. The ideal mediator should be knowledgeable about the subject area of the relevant law, experienced and trained, and skillful at getting the parties to explore all reasonable options.

ADR provides parties to a dispute the opportunity to control the outcome, reach an early resolution, and save thousands and thousands of dollars. Remember, the money you save may be yours!  If you need an experienced mediator who understands real estate, business, and common sense, please feel free to contact me.

Get it in Writing!

Arecent decision by the Court of Appeal underscores the importance of the oft-repeated admonishment to “Get it in Writing!”  In this case, the failure to do so had particulary drastic consequences for the real estate agent who did not get the buyer’s oral agreement to reconvey the property back to the seller reduced to writing.  More significantly, the Court held that the four (4) year statute of limitations allowed the Seller to proceed against the Agent for Breach of Fiduciary Duty.  Most real estate agents rely with false confidence on the more commonly-applied two (2) year statute of limitations for professional negligence.  Here, the Court agreed that the plaintiff’s action against the agent for negligence was barred by the statute of limitations, but ruled that the failure of the agent to carry out the client’s specific request to get the oral agreement reduced to writing constituted a breach of the real estate agent’s fiduciary duty, allowing the plaintiff to proceed with the lawsuit for damages.

The facts are simple.  The Seller made arrangements to sell her house in San Francisco to an investor to avoid foreclosure.  The Investor/Buyer agreed to buy the house, pay off the liens, then reconvey the property back to the Seller in six months for a $10,000 profit.  The Seller insisted that the real estate agent get the agreement to reconvey the property in writing, but the agent kept putting her off, eventually preparing a purchase and sale agreement but did not include the agreement to reconvey.

The Seller sued the Buyer for fraud, but the Court ruled in favor of the Buyer.  The Seller then sued the Agent for negligence and breach of fiduciary duty, arguing that the failure of the Agent to follow the Seller’s request to get the agreement in writing resulted in her damages (loss of the house).  The trial court ruled that the Seller’s cause of action against the Agent for professional negligence was barred by the 2-year statute of limitations, and also ruled that the cause of action for breach of fiduciary duty was also barred because the complaint had not been filed within four years of the close of escrow (June, 2004).

The Court of Appeal agreed that the Seller’s action for negligence was barred by the 2-year statute, but ruled that the gravamen of the complaint was not negligence or fraud, but the Agent’s failure to draft documents necessary to the real estate transaction.  The Court declared that the “fiduciary duties of a real estate agency include the duties to obey the instructions of the clinet, and to provide diligent and fiathrufl service.”  The Court went on to declare that the cause of action accrued, not when escrow closed, but when the Investor/Buyer sold the property to a third party – effectively denying the Seller the benefit of the agreement to reconvey.  Since this occurred in or around November, 2004, and the Complaint had been filed in July, 2008, the Court ruled that the Seller could proceed since the four-year staute applied.

Obviously, this ruling, which was certified for publication on August 17, 2011, will create a stir among real estate agents who had been counting on the two-year statute as the upper limit of liability for any damages resulting from a real estate transaction they had been involved in.  But it also sends a clear and unambiguous message that, to the extent reasonably possible, all essential terms of an agreement should be put into writing for the parties to review and make certain there is no misunderstanding of those terms.  More importantly, the ruling underscores the importance of Agents to recognize that their primary duty is to their client, and a failure to heed that warning carries a very long tail — 4 years from the date any resulting damages might take place.

Ten Questions to Ask Before Hiring a Lawyer

Every successful real estate investor works with a team of professionals.  For those who are getting started, you should include a lawyer on your team, but start early.  If you wait until a situation becomes a crisis, the process can be confusing and could get very expensive.  Selecting the right lawyer can take some time and effort, but it will be worth it.

Even after going through a process of getting referrals from friends and colleagues, doing research on the Internet, and perhaps conducting a couple of interviews, you still need to learn how to make the best use of this valuable resource as a member of your team.  Many advisors promote the use of the “10 Question” approach – asking a series of questions before you hire a professional, such as a doctor, lawyer, financial planner, or other specialist.  These are often the same questions:  What is your experience? How long have you been doing this?  Have you handled cases like mine?  What is your success rate?  What do you charge?  How much will it cost?  What will be your approach?  Who will be handling the file?  What are my chances of winning?

These are all good questions, but I recommend a different approach – asking yourself a series of questions before you hire a lawyer.  Let’s face it – if you’re in trouble, you are not in the best position to bargain.  Imagine asking your cardiologist about his fees as they’re wheeling you into the emergency room.  In the real world, it is not always practical or advisable to negotiate with the ambulance driver or the roto-rooter man.

In order to make the best use of a lawyer on your team, you should ask yourself the following questions.  At all times, you will (or should) know more about your circumstances than your lawyer.  If you don’t know how you got into a dispute, or what you hope to achieve, how can you expect any professional to assist you? By asking yourself the following questions, you will find that you will be able to maximize the return on your investment in professional legal advice, and make the best use of the lawyer on your team.

1.  ARE YOU SEEKING KNOWLEDGE, JUSTICE OR REVENGE?

In other words, are you planning ahead or reacting to a legal problem?  If you are just getting started in a business or real estate transaction, a lawyer should be able to help you spot potential problems and provide useful guidance.  On the other hand, if you have been sued or recently experienced a breakdown in a business transaction, you need a lawyer who can help you review your options, and if necessary, take legal action on your behalf.  Unfortunately, most people wait until they need a lawyer instead of seeking advice before the need arises.  Consulting with a lawyer before circumstances force you to hire one can prove to be one of your most valuable “investments.”

2.  HOW DID YOU GET HERE?

If circumstances suggest you need to hire a lawyer, the first question you should ask yourself is “How did this happen?  How did it get to this point?”  Carefully and objectively review the chronology of events leading up to the dispute, and be prepared to explain to the lawyer what steps you have taken, if any, to resolve the matter.  Generally, disputes don’t happen suddenly.  Documenting the events will help your lawyer better understand the background and could save you significant amount of legal costs.

3.  IS THIS A BUSINESS ISSUE OR A LEGAL ISSUE?

A majority of disputes arising from real estate transactions involve primarily business issues rather than legal issues.  All dispute resolutions ultimately involve decisions that encompass elements of legal rights, fairness and equity.  A lawyer cannot make business decisions for you, but they can explain different legal strategies and consequences affecting your strategic planning and the “bottom line.”  The more the lawyer understands your business model, the better the chances the legal advice will be tailored to your situation.  Ultimately, you must make a decision, or it will be made for you.

4.  HOW MUCH IS AT STAKE?

This is usually among the first three questions a lawyer will ask you.  The answer helps the lawyer to understand the nature of the dispute and assess the amount of resources that might be required.  Every client should understand the importance of doing a cost-benefit analysis before going forward with expensive legal strategies.  Under the American judicial system, recovering your legal costs and attorneys’ fees is the exception to the rule.  If you feel you have been wrongfully sued, or are seeking your “pound of flesh” from a former business partner, seeking justice or revenge can be very, very expensive.  Legal disputes can end up costing hundreds of thousands of dollars and could result in a person losing their career, their marriage, and sometimes their sanity.  A good lawyer who is looking out for your best interests will help you to carefully evaluate all consequences of a proposed legal action.  Be realistic when evaluating the relative costs versus the benefits of your legal strategy.

5.  CAN YOU MAKE BETTER USE OF YOUR TIME AND MONEY?

Litigation can take up a lot of time and cost you lots of money.  You should make your decision on the basis of what is best for you in the long term.  What outcome is most compatible with your long-range plans?  If you have suffered a loss of money in a transaction, consider the “hidden” cost of trying to recover the funds, such as the amount of time you will have to spend searching for documents, attending depositions, and preparing for trial, not to mention attending a lengthy trial in some cases.  You should consider how you could use this time to better advantage – perhaps making more money than you lost!  You should evaluate what you can learn from the experience, and put that knowledge to good use.  Do the math – and consider the return on investment.

6.  HAVE YOU DONE YOUR HOMEWORK?

Before you hire a lawyer, do your homework.  You know more than anyone about your case and the circumstances.  Thanks to the Internet and many excellent publications like Nolo Press, you can educate yourself about some of the relevant law that may affect your situation.  It is rarely a good idea to represent yourself, but learning more about the law will help you ask the right questions when you meet with your lawyer.  Since most lawyers charge by the hour, doing your homework will save you money.  A better understanding of the legal process will also help you make better decisions about your case.  Doing your homework can yield a valuable, tax-free free return on your investment.

7.  WHAT WOULD YOU SETTLE FOR?

One of the first questions a lawyer should ask their client is what they would be willing to accept to settle the case.  Clients are often skeptical – why think about settlement when they have a good case?  The reason is simple – there is no such thing as a guaranteed outcome.  More importantly, our legal procedures make it mandatory for parties involved in litigation to make a good faith effort to resolve the dispute through “alternate dispute resolution” procedures, such as mediation and arbitration, before going to trial.  There is absolutely no way to know for certain how a Judge or Jury will decide your case after a trial, and the post-trial procedures for challenges and appeals can go on for years (yes, years).   If you want to have any control over the future of your case, you need to consider settlement.  In fact, most cases can be settled before any litigation is commenced.  Over 90% of all cases filed in Court are settled before going to trial, and many more are settled within hours of commencing the actual trial.  Bottom line:  the sooner you can settle a dispute, the less it will cost in terms of time and legal fees.

8.  HOW COULD THIS SITUATION BEEN AVOIDED?

At some point, usually after you receive an invoice from the law firm you hired, you will ask yourself how the dispute could have been avoided in the first place?  Obviously, it would be better to know the answer before you get into difficulties, but hindsight tends to teach us the value of foresight.  Consulting with an attorney before you commence a business or real estate transaction could be the most valuable use of your time and money.  Because lawyers see lots of problems after they’ve occurred, they can usually provide some good guidelines on how to avoid them in the first place.  CAVEAT:  You cannot prevent litigation, but you can take steps to reduce the probability that it will occur.  The sooner you ask the question, the more benefit you will gain.

9.  WHAT IS THE BEST WAY TO PROTECT MY ASSETS?

There are many, many books and seminars available on the topic of “asset protection.”  Most of these are sold on the premise that you could “lose everything” in a lawsuit.  Novice real estate investors are frightened into spending thousands of dollars for all sorts of “asset protection” schemes that, in the long run, are often useless and unnecessary.  Selecting the correct entity for your business model, whether it is a C-corporation, an LLC, a limited partnership, has important consequences for accounting and tax issues, and in some cases may serve to provide you with an added degree of privacy.  But the two most important steps you can take to protect your personal assets are (1) good management practices, and (2) insurance.  The combination of these two factors work together to resolve almost all types of legal challenges, and as noted above, most cases settle before any judgments are handed down.  Statistically, the probability of anyone “losing everything” as a result of a lawsuit is extremely small, yet some people invest more money in asset protection schemes than they invest in real estate!

10. WHEN IS THE BEST TIME TO TALK TO A LAWYER?

Now. Really – now! If you’ve already made a decision to get involved in a business or real estate transaction, or want to get started investing in real estate, you need to have a lawyer on your “team” of professionals to consult as you go forward.  For the cost of an initial consultation, you could learn a lot about where your plan may need further review, what risks you may not have considered, and key questions to ask your investment partners before you proceed any further.  It may be the wisest investment of your time and money that you’ll ever make!

Getting Started in Real Estate Investing

Many people would like to invest in real estate.  Housing prices have plummeted; rates are at historic lows.  You can actually buy cash-flow investment property in California!  It’s a great time to buy real estate.  But how do you get started?

There are several ways to invest in real estate.  You can buy investment rental property, or purchase in an interest in an investment company.  You can buy single family homes, apartment buildings, REOs, fixer-uppers, or even raw land.  Or, you can purchase tax liens, options, or notes.  Thanks to the credit crunch, you can also invest by loaning money secured by real property.  There are several strategies, such as:  “buy and hold,” “leveraging,” “flipping,” “wholesaling.” for maximizing profit:  flipping, “buy and hold,” leveraging, wholesale contracts.    For the new investor, it’s like learning a new language.  There are literally dozens of books and articles in the library, the bookstore, and on the Internet – it can seem very overwhelming!

A word (or two) about risk.  All real estate investing involves risk.  There is no such thing as a “risk-free” investment.  You can learn to manage risk, and take steps to reduce risk – you cannot eliminate it.  Each individual has their own personal risk tolerance level.  While getting started, consider what would happen if you lost your entire investment.  As you gain experience and confidence, your tolerance for risk will probably increase, along with your ability to reduce the risks inherent in any investment.  An important element of risk management is to avoid problems, whether they are of an economic or legal nature.

There is not enough room here to explain everything you need to know about real estate investing, but a few pointers will help you get started.  I strongly recommend new investors should attend real estate investment seminars, talk to other investors, and read books and articles on real estate investing.  Learn the language.  Consider a low-risk, short-term investment and try it.  You will learn more “by doing” than anything else.

First Step:  Make a Plan.  The most important step is to consider both your personal and your financial goals, and develop a Plan.  A good Plan will focus on your goals.  Goals must be realistic.  Your plan should be flexible, and contain an exit strategy.  Be sure to have a Plan before you write your first check!

Your financial goals should support your personal goals, not the other way around!  Determine where you want to be in a few years down the road:  in a new home; retired; or not worrying about the kids’ college tuition.  Your financial goal should be to earn enough to help you reach your personal goals, plus a little extra for emergencies.  Remember, good investment plans take time – there is no single perfect investment, despite what some promotional ads try to make you believe!

Second Step:  Do your Research.  You don’t need to be a genius to make money in real estate investing, but you need to be smart.  And you can get smarter.  Again, I recommend that you attend real estate investment seminars (like SJREI) and talk to other investors.  Warning: Be wary of motivational seminars that try to sell you investment products, books, software programs, and CDs.  Listen.  Learn.   But don’t buy everything they sell -or say!   Invest in real estate – not gimmicks!

Remember, there are many different types of ways to invest in real estate.  Focus on those that you understand and are comfortable with.  When you are getting started, avoid complicated schemes, and stick to simple.  Achieving a level of comfort and success with one type of investment activity or another requires practice and patience.  Smart people learn from their mistakes.  Really smart people learn from other people’s mistakes!  (Hint:  everyone makes mistakes.  Try to make small ones, not big ones!)

As you learn more and gain confidence, you may choose to modify your Plan.  Make adjustments to keep your Plan realistic and achievable.  Establish a realistic timeline for your financial goals.  Modify your Plan to help ensure that your Plan will remain current and relevant.  For example, you might choose to modify your plan to invest out of state, or to team up with other investors.  The key to survival is adapting to a changing environment, and a smart investor must be prepared to adjust their investment strategy in response to changing economic conditions.  Remember: It is important that your Plan include an exit strategy.   In addition to doing Research on your strategy and a more specific investment proposal, you should develop a reliable “team” of professionals you can rely upon for timely, relevant advice.  Most successful investors have a team of tax specialists, real estate agents, attorneys and other professionals they work with on a regular basis.  They are often well-worth the cost of their services.  You can use the knowledge you gain from your professional advisors over and over.  The rate of return on your investment in professional advice is priceless!

Other steps to take:  Research the market and local conditions.  Fact-check information you get at seminars.  Remember: If it sounds too good to be true, it probably is!  Don’t rely on obsolete  information.  A lot has changed in the past two years – check the dates.  Learn as much as you can about the local market, demographics, and conditions.  Get local information:  use the Internet, but don’t rely on what you see online.  Find local newspapers, churches, and realtors, and talk to someone “on the ground.”

Finally, as part of your research, don’t forget to make sure the investment is consistent with your financial and personal goals.  If not, STOP.  Ask yourself:  “Will this investment get me closer to my financial goals?”  If the answer is “No,” step back slowly from the checkbook!  If you don’t have enough information to answer the question, you need to do more Research, modify your Plan, or find a new investment.

Third step:  Action.  Invest, don’t spend, your money.  If your ultimate plan is to make money investing in real estate, invest in real estate – not in sales pitches.  Remember, there is no such thing as the “perfect” investment. When getting started, it is okay to proceed slowly and deliberately, but you need to proceed.  Take a deep breath, get going, and keep an eye on your exit strategy!

Getting started is important.  Getting started on the right foot is even more important!

Asset Protection: A Rational Approach

“You’re going to lose everything you own,” the speaker solemnly warned the audience at a recent real estate investment program.  “We live in a very litigious society,” he continued; “you need asset protection.”

Real estate investors, as a group, will flock to hear speakers talk about the need for what is commonly known as “asset protection.”  They will spend hundreds, if not thousands of dollars setting up elaborate business entities (the LLC – “Limited Liability Company” – being the most popular), in an effort to avoid “losing everything.”  Ironically, many new investors spend more money on “asset protection” than they do on real estate.  Sometimes they end up with all sorts of asset protection entities, but no assets to protect.

There is a more rational and practical approach to asset protection.  Setting up the correct business entity to allow you to achieve your real estate investing objectives is both important and necessary.  The correct entity will allow you to take full legal advantage of tax benefits and provide a structure for running the business.  Properly established and registered, the entity will allow the investor to work with investment partners, obtain financing, and provide a basis for determining the relative percentages of ownership and allow for succession and continuity for a successful operation over a period of time.  And yes, the entity will provide a measure of “asset protection” for the benefit of the principals, if the entity is properly established and capitalized, and has complied with the appropriate level of corporate formalities.

However, no form of entity is a substitute for good risk management.  The fundamental components of a good risk management program are (1) good management practices, (2) adequate insurance coverage, and (3) regular review and oversight.  For real estate investing, good management practices include using the services of a reputable, licensed, professional property management company.  The relatively small cost (usually 6 – 8%) will be more than justified by the savings from avoiding disasters.  Good management includes proper screening of tenants; regular and thorough inspection of the investment property, arranging for prompt and competent repairs, and if necessary, timely initiation of eviction proceedings.

In addition to standard form “all risk” fire insurance policies, adequate insurance coverage should include, where appropriate, flood, earthquake and other forms of disaster coverage.  I recommend that tenants be required to carry renters insurance, which can cost as little as $12 per month, but will cover the tenant’s personal belongings, relocation costs (if necessary), and injuries sustained by their guests.

Last, but not least, good risk management practices includes regular review and oversight.   “File and Forget” is not a smart way to manage anything.  Prudent owners make sure they manage their property managers, and take steps to ensure that their expectations are met.  Do not just sit back and hope the checks roll in every month.  Be proactive. Pay attention.  Ask questions.

But what about “asset protection.”  What if something “bad” happens, the tenant sues, and the investment property is in your name and not buried under an onion’s worth of layers of special entities?  What can happen?  Indeed, what DOES happen?

First and foremost, the type of liability that owners need to be concerned about involve claims resulting from personal injury, either to the tenant or their guest.  Injuries can range from a sprained ankle caused by a crack in the walkway to serious brain injury (or death) resulting from a collapsed balcony or similar structural failure.  There are also potential claims based on acts of discrimination, for example, but in terms of monetary damages, the “big ticket” issues usually arise from personal injury cases.

In such cases, the first and best line of defense is good property management, as discussed above.  In terms of avoiding catastorphic loss, investing in good prevention can yield a very high rate of return!  The next line of defense is your insurance policy (or policies), which should include comprehensive general liability coverage.  In the event of a claim, the insurance company will provide legal counsel and will pay for investigation and other costs arising from the incident.  If early settlement does not resolve the issue, and the matter proceeds to litigation, your insurance company is most likely under an obligation to provide a defense in most cases.  There are general exceptions, such as for willful or deliberate acts, and specific exceptions, such as where the policy does not cover certain types of loss unless a special “rider” has been obtained; i.e. flood, earthquake, etc.

Statistically speaking, it would be extremely rare if you found yourself facing a full-blown lawsuit with a prospect of a large jury verdict that might exceed the limits of your insurance coverage — the type of catastrophic “lose everything” outcome that promoters of “asset protection” programs use to sell their services.

Let’s look at the reality — not the hype.  It is fairly well established that close to 90% of all lawsuits that are filed will settle before going to trial.   So, if your insurance company has not been successful in resolving the claim and the plaintiff (i.e., your tenant) proceeds to file a lawsuit, the probability of the matter going to trial before a jury is 1 in 10.  Arbitration, mediation and other forms of formal dispute resolution are mandated by most State rules governing litigation.   In California, the parties are required to participate in a Mandatory Settlement Conference the week before the start of trial.  Statistics vary, but in one County, the Court noted that one-third of all remaining cases settle at the Settlement Conference, usually held on the Wednesday before the start of trial; another one-third settle on the Friday before trial, and a percentage settle even after the jury has been seated.  Again — as a statistical fact — very, very few cases make it all the way to the end of trial.  And even after the Jury renders a verdict, there are appeal procedures, that work to modify the outcome.  Many headline-grabbing jury awards are often reduced — drastically — by these types of procedures.

Real estate investors should consider the actual threat of “losing everything” in considering how best to protect their investment and their personal assets.  Sadly, many new investors spend more time focused on so-called “asset protection” measures than they spend doing their due diligence in relation to the investment itself.  Investors pay money to set up elaborate LLC entities only to find themselves locked into a bad investment with other partners they did not take time to know.  If one added up all the personal injury jury verdicts that exceeded insurance policy limits over a 10-year period in the United States, I wonder if the total amount would come close to matching the losses caused by Bernie Madoff and his scheme.

This is not to say that forming a LLC or a C-Corporation is not a good idea.  Properly done, the appropriate business entity provides the means to manage your investment assets, entitles you to certain tax benefits, and manage your investment partners.  But a business entity should never, ever be a substitute for good management practices.