Introduction to Litigation

Well, greetings. My name is Robert Locke, and the class you're about to begin is about six lessons long, and it's on the topic, Policies and Procedures for Managing Litigation. I was asked to teach this class at the Orlando National Conference for NARPM, and we've taken it in this context and broken it up into six chapters so that you can watch it or have your staff watch it in 12 to eight-minute sections and do it over a period of time, give you a chance to have some conversation within your office of things that you guys might be doing that will help prevent litigation.

And so we're going to spend, it's probably an hour and 15 minutes, hour and 30 minutes total, and again, we're breaking it up into chapters to kind of give you a chance to use it in your office.

Importance of Topic

So when I was asked to do this, I asked the question, why is this topic so important? Because when the national asks you to teach on it, you've got two questions. Why is it important? Secondly, why do they want us to teach on it? So I'm going to address that in this first chapter before we go too far.

So why is this topic so important? Number one, property management is the lowest paid part of the real estate industry. You can be in a lot of parts of real estate and not have any litigation for years. The property management area clearly is the most paid and the highest potential for litigation. You could sell land or houses or office buildings.

You can do a lot of sales. I did it for 20 years and never had a letter from a lawyer, never had any litigation on the sales side of the business. It only took me three years in property management to get my first letter from a lawyer explaining to me what returning the security deposit was all about. So it's the lowest paid part of real estate, and it's the one with the highest potential for litigation. But there's some other reasons as well.

Litigious Society

One is we live in a litigious society. Let's face it, there's only one industry that has more boots on the ground than the real estate sales industry, and that is the lawyer community. You can go on the internet or drive around, and shopping centers and office buildings are full of lawyers, and there are probably more lawyers graduating in the next three or four years than there are on the planet today. So the legal community is continuing to explode, and we live in a society that says, "If I spill hot coffee on myself, or if you hurt my feelings in a university environment, I'm liable to hire an attorney and sue you over something." So we live in a very litigious society.

Toxic Landlord-Tenant Relationship

Fourthly, the landlord-tenant relationship, unlike a lot of others, is highly toxic. It is full of contention and tension, and there's a lot of conflict going on. In fact, the reason that's true is because we have what's called an adhesion contract. You should look that up. An adhesion contract is one where one person has all the power, the other person has no power, kind of a take it or leave it contract, like a life insurance contract or a rental car contract, and one person has all the power.

And so the landlord-tenant relationship is particularly out of balance. One of the reasons is, at least in the mind of the court, is that there's a wealthy real estate baron with more houses than he can afford to live in, and he's going to rent it to a tenant that in the court's mind is one step away from being homeless. So you've got this very much out-of-balance relationship between the wealthy real estate baron and the tenant, who basically signs a lease without reading it, without understanding it, without having any representation whatsoever, and so the relationship is toxic because it is so far out of balance.

And one of the things that we've found is what landlords do, because they have all the power, is to put things in the lease that are either egregious or over the top or unenforceable or against public policy, and the courts lean heavily in the tenant's favor when disputes take place. To make this worse, the wealthy real estate baron has enough money to hire a hired gun called a property manager. So even more out of balance now because it's the rich guy and the knowledgeable guy that's kind of working against the person who's one step away from being homeless. And when this relationship goes south, it kind of looks like this, where the courts protect the tenant.

The courts can just wipe out entire paragraphs of a rental agreement, and if you've ever wondered why they do that, the reason is obvious. The courts know it's an adhesion contract. The courts know that the wealthy real estate baron and his hired gun will frequently put things in the lease that are so egregious, so ridiculous, so out of balance, that the judges just feel the freedom to white out entire paragraphs and then make judgments in complete contradiction of what the lease says. So if you've ever wondered why going to court is such a crap shoot, this is the reason why.

Okay?

Owner's Attitude

So let's move on to the last reason why this topic is so relevant, and that's that owners don't respect low-paid professionals. Betty and I were sitting around the other day looking at our budget, and we realized since I'm not in property management anymore, I have someone else manage my rental properties for me, and we realized we were paying the lawn care guy about twice as much as we're paying our property manager. In other words, we've got a small yard. We pay somebody about $250 a month to come over three times a month and mow the lawn, blow off the yard, and go home and that's three times as much as we pay a property manager to manage our rental house.

Well, I don't know what the message is there. Maybe the lawn guy is better educated or has more skills. But whatever the message is, property managers are not paid very well, and as a result, the owner community doesn't have much regard for us. We continued to go through this discussion. Betty has cleaning ladies come over once in a while.

We spend about $300 a month, $350 a month, on cleaning people to come clean our house. Well, that's about three and a half, four times what we pay our property manager to manage our rental. So when you hire a lawyer, you pay him $350 an hour, and we get $100 a month to manage a rental house. So the compensation is so far out of balance, it's easy for the public to say, "I guess they don't have much experience. I'm not paying them much.

They're not worth very much." That's an easy default conclusion that owners make a lot of times because we are so far underpaid. Think about $1,200 a month for you to manage a rental house for a year. It's insane. And the owners just have this automatic mindset that says low-paid professionals aren't worth much. And unfortunately, we as professional managers fall into this, and it's part of the reason why there's so much tension in the landlord-tenant business.

So the conclusion, if you're in the property management arena and you're looking at this issue of litigation, the conclusion, quite honestly is eliminating litigation is pretty much impossible. You have to swallow hard and accept the fact that if you're in this business, you're in a nickel-dime, thin margin, toxic, high-conflict area of real estate, and having no litigation is just about impossible. You have to say, "It's coming. I know it's coming, and I don't know quite what it looks like," but this workshop is all about setting up systems and policies in your office to prevent it from happening or managing it when it does happen. Now, I'm going to take a little bit of side trip and answer the second question, which is, why did they ask me to teach this class?

Okay, so give a little history lesson.

Experience in Property Management

Crown Realty and Management was in business in Atlanta, my company, for 35 years. We started in the basement of our home, grew it up, sold it with a thousand houses to a national real estate company. We had about 3,000 owners go through our system and about 9,000 tenants. Now, think about that. If you've been in this three to five years, think about how many mistakes you can make with 9,000 tenants.

Oh my gosh. If there were degrees given out for screw-ups, we would have a PhD. In 30 years, body bags and house fires and HIV deaths and homicides and suicides, we've had it all. So 9,000 tenants gives you a lot of experience and that's what we bring to the table is that kind of experience.

Lawsuits and Settlements

But let's look at how many lawsuits we had. First of all, we had seven from tenants. Now, seven isn't bad in 35 years. That's one every five years. That's not perfect, but it's pretty good.

And everything was settled under 5,000 bucks. I have never been at a deposition. I've never been sworn in on a witness stand. No lawsuit against Crown has ever got us to the point of getting in a courtroom and doing the grilling back and forth from lawyers. So they were all pretty much low-end.

It was for wrongful eviction and unlawful dispossessory and mold and things that were small and frivolous and with Monica's help, got solved with just writing a check or doing something. They were all small. They were all settled for under five grand. Okay.

Owner Lawsuits

We had three from owners. Now, to be fair, two of those owners were lawyers, so they didn't have to hire anybody. They sued us over something. The third one was over mold, and it was just the last year that we were in business. It was such a frivolous lawsuit that when we got done, we sued the law firm that represented the owner, and we won in appellate court in Georgia and got our attorney fees paid because it was such a totally bogus lawsuit.

So lawyers don't understand property management, and they're very quick to listen to somebody's story and file a legal action against you. But think about this, three in 35 years. That's one every 12 years. So if you've gone 10 or 12 years in this business without an owner suit, you're doing really well. Now, again, that's our history.

But there's one other element to it.

Fair Housing Claims

We had zero fair housing claims with about 18,000 applications. Now, listen, a lot of that's just dumb luck, okay? I take no credit for it, but some of it is the result of our putting policies and procedures in place that would ward off and prevent people from taking a run at us, okay? So we averaged in the last 15 years of our business when we're in that $400 to $1,000 or 1,000 properties, we averaged about $3,000 a year, which is very low. That's not much money.

And we sold off at 1,000 houses to a Fortune 500 company in 2015.

Strategies for Litigation

So with that kind of a track record, the question is this, how did we accomplish that? And the answer is this workshop with strategies for policies and procedures to manage threats of litigation. And that's what we're going to spend the rest of this time on. So let's give an objective to identify strategies, policies, and procedures for managing, minimizing, and resolving litigation and the threat of litigation. So that's where we're going.

That's the end of chapter one, and so the beginning of chapter two is going to address this idea of property managers feeling like this, and we're going to talk about where the litigation comes from and what kind of strategies do you put into place to identify it and resolve it and push back and minimize it before it becomes a serious problem. So we're in the end of chapter one. Hang with us. We'll go into two whenever you're ready.