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Why Establishing an LLC is a Good Idea for Real Estate Investors

One of the most common reasons persons establish a limited liability company, or LLC, is to create a level of protection and separation from the business owner and the business itself.  In other words, an LLC is established to protect an individual’s personal assets and risk-management.

As people today are willing to file a lawsuit over the most ridiculous things at the drop of a hat, it is even more important than ever to protect real estate assets with an LLC.

Real estate is a magnet for lawsuits.  First, real estate is an asset that can be used to satisfy any judgment a prospective Plaintiff may win. Second, as the property owner, the law looks to you to ensure that the property is safe for everyone that comes on the property; and if someone gets injured, regardless of fault, the property owner is going to be a target to compensate for the injured party’s damages.

Despite these risks, real estate continues, and will continue, to be a hotbed of investing.  Many of these investors make more than $75,000/year and most investors plan on buying new property in the upcoming year.  It is essential to understand how to protect your investment and plan accordingly.

Usually, however, most investors in real estate resist forming for an LLC for a variety of reasons: accounting, lawyer fees, hassle or creating certain inefficiencies in running the investment with one of more LLCs holding real estate.  But despite this resistance, a real estate investor need to weigh the desire to limit liability in investment risk taking v. the investor’s responsibility of potentially having to make whole an injured person.

The question each investor needs to ask:  Have I protected adequately my hard earn investment and potential returns?

Asset protection is just as important, if not more important, than good tax planning.  You need to protect yourself from bad things that happen to all good, honest hard-working people, and when bad things happen, are you going to be able to retain your assets.

Moreover, merely because you have an LLC does not make you safe. To begin with, if you do not respect the “corporate form” of the LLC a good plaintiff’s attorney can “pierce the corporate veil” and set aside the entity to potentially gain access to your personal assets.

The most common veil piercing factors are:

  • Failure to use separate bank accounts;
  • Mixing of personal and company funds;
  • Lack of annual reports/Operating Agreements/Resolutions

All fine and dandy, but you say, “I don’t want an LLC.”  Fine.  But remember as one person stated:

“Of the 18 million businesses in the U.S. over 70% of them are unincorporated proprietorships. Many small business owners make the mistake of putting real estate property in joint ownership and elect not to form an LLC due to the cost, effort, and time associated. But, as with anything that’s worth the time and money, it’s wise to do this upfront work if you want the ability to accumulate greater wealth. Getting the best start, right from the start, avoids the inevitable consequences of short-sighted thinking that you don’t need real estate asset protection.”

Finally, no matter what, if you have an LLC or nor, protect your property with proper insurance coverage. Moreover, if you do have an LLC make sure that the insurance policy names the LLC as the insured and the coverage is appropriate for the type of real estate. 

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Real Estate Asset Protection

Under Ohio law, if you own real estate in your name, rather than through an entity such as a limited liability company, all of your assets are at risk and could be lost if a problem arises as to the property.

Owning real estate for investment, especially residential and commercial real estate is inherently risky. Life happens, accidents happen, and people can and do get hurt on the property. When injury or death occurs on property that they do not own, that person or their heirs look inevitably to the owner of the property to recover damages.

There are several steps that can and should be taken to protect you, your family and your assets against any potential liability and damage.

First and foremost, make sure your property is insured.  But remember, however, damages can exceed the amount of insurance coverage you have in place. For instance, if you have a $1,000,000 policy in place and an injured person suffers damages in the amount of $2,000,000 you have a problem.  You may be personally liable for the $1,000,000 above the insurance policy in place thus putting your personal assets in jeopardy.

To avoid risking your personal assets should a damage claim exceed your insurance policy limits, the second line of defense is putting your property in a limited liability company (“LLC”). 

Thus, in the scenario above, if a court awarded damages in excess of the insurance coverage and the property was in an LLC and correctly operated, the injured person most likely should only be able to collect against the LLC’s assets and your personal assets outside the LLC should be protected.

The cost to form and hold property in an LLC in Ohio is insignificant to the potential damages you could suffer by failing to take basic steps to minimize your risk and protect your assets.

Contact the attorneys at Painter & Associates, LLC to begin the process of protecting your investment and hard work.

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Real Estate Fraud Not Always Detectable by Home Inspection

Real Estate

Real Estate Fraud Not Always Detectable by Home Inspection

Buyers searching for a new home often fall in love with a property right away. Most buyers are looking for homes that are move-in ready and have all the upgrades and features they want. They expect that the sellers’ representation of the property and any improvements are made by certified contractors and are completed within building standards and code. They also believe home inspections will enlighten them on any problems that may be existing within the home. 

However, home inspections can’t always see all the problems behind the walls. 

Painter and Westfall filed suit on behalf of a couple who bought a home with a recent addition. The buyers were drawn to the property because of the new addition and were told by the sellers that the work was done by a contractor. The sellers also provided a Residential Property Disclosure Form that made affirmative representations that the property, including the room addition, was structurally sound, built in accordance with an applicable building codes and applicable zoning ordinances were complied with. 

In actuality, the sellers did not obtain the proper permitting for the room addition nor did it comply with the applicable zoning ordinances. Further, the room addition is believed to have not been built by a certified contractor and is not in compliance with applicable building codes. 

Soon after the purchase of the home,  the room addition began to have numerous problems relating to its construction including a sagging roof, insufficient support for the roof, bowing of interior wood beams on the ceiling, the window and space heater were installed in a load bearing wall without proper support, carpet was laid over a gutter drain with a plug shoved in it, and no footers were used to allow for shifting of the exterior walls causing severe cracking and moisture damage to the interior of room. It was also found that it was built on an insufficient concrete slab. 

Many of these defects would not be found during a typical, reasonable home inspection and would only be revealed after the problems started appearing.  The new buyers discovered all of these problems after meeting with certified contractors to fix some of the defects and were told that it would be better to tear down and completely redo the addition. 

Distraught that the room addition was the top feature that made them buy they house, they sought legal counsel to learn about their rights and options to remedy the problem.  Painter and Westfall filed a complaint for breach of contract, fraud and negligent misrepresentation.  

If you have problems relating to the sale or purchase of a house, Painter & Westfall can help.  

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