Dad is FIRE

One dad's journey to Financial Independence Retiring Early

How to deal with being sued

Oh no, I am 27 years old and being sued!

In 2007 I bought a house. It was one that was outside of my niche. My niche was 3 bedroom, 1 bath houses without a basement that I would be willing to live in if I ran into financial issues. It checked the first few boxes, but it wasn’t one I would live in. I bought it to flip. This was at the height of the “Flip this House” craze.

So we fixed it up and then went to list it. Before listing it for sale, I received a letter with one of my worst fears: I’m being sued. Wait for what? I try to do things the right way. Why in the world would someone sue me? I was devastated.

I was just a co-defendant being sued

It got worse. I noticed the mortgage company was also a defendant. This was the worst case scenario. The mortgage was through a community bank. The president of the bank personally underwrote my mortgages. I was making 25k a year at the time in salary! He appreciated my plan, my financial modeling, and he appreciated me so he gave me a chance to mess up. I messed up. One of the stipulations was that if I made a mistake he could call my loans at any time. Calling a loan means he could have demanded that I pay one or all of the mortgages within 30 days.

I was so afraid that my mortgages would be called, and I’d be done. Bankrupt at age 27. My model and plan seemed fool proof. Buy houses under value, rent them out at market value or a premium for 15+ years, be a good landlord, and then the houses would be paid off in my 20s. Being sued was not something I planned.

The best phone call I’ve ever had

I called the president of the bank. Scared. Shaking. I explained what happened. I was ready to break. He calmly laughed. I asked why? In a very fatherly way (not my father, but fatherly none the less) he gave me the best possible reply. He said: “congratulations, you’ve made it”!

Wow. I made it.

Someone had a claim on my house

The lawsuit sounded like something made up on TV. A lady owned the house. Her adult son went to jail. She wanted to bail him out so she worked with a bail bonds man. She secured the bond against her house. the mom died at some point. Somehow or another the bail bondsman took full ownership and then took out a very large mortgage on her house (way more than the house was worth). He didn’t make a payment. He foreclosed. I knew none of this and I bought the house. One of the mother’s children thought she should inherit the house so she put a claim on it.

Title Search failed

The title company didn’t do their job when I bought the house. They are supposed to research and see if anyone has a claim on the property. They missed a claim.

What is Title Insurance?

When you buy a house you also need to buy title insurance. This is insurance, that you pay the title company to ensure that they did their job. I always thought this was a scam. But now I was being sued because they didn’t do their job. So the insurance kicked in to provide me legal coverage to protect my best interest.

Great, title insurance is there to protect my interest if the title company does their job?

Title Insurance does not protect your best interest

The lawsuit dragged out for over a year. This was 2007 shifting into 2008. 2008 was when housing collapsed 40% in the city this house was in. I felt the storm coming on and continually pleaded with the title company to have their legal department settle with the claimant. I would tell them it’s in my best interest for them to cut a check to her to make her go away. They wouldn’t but they insisted they were protecting by best interest.

Instead they were protecting the size of the check the title company would need to write. Eventually they settled. The settlement was for much less than I lost in property value due to timing of the market collapse. The settlement was also less than the title company’s legal fees representing me. But they said it was in my best interest.

I also kept telling the lawyers that this was just ludicrous. Go after the bail bondsman. Not me. He cashed out on the heirs’ mother’s house, foreclosed, and walked away. The heirs’ beef should be with him and not me. (the courts agreed but the lawyers dragged it out)

Being sued: Just Figure it Out

Luckily I had experience as a landlord. I could tell quickly that the lawsuit would be dragged out. So I turned the house into a rental house. It was one of my most profitable rental houses, but my business model wasn’t to be profitable. My business model was to have stable tenants pay off my rental houses. Confusing? It’s because $1k rent was my sweet spot. Rent much lower or much higher gives different types of headaches from tenants. $1k price point was typically stable, middle class families. This house rented for $700ish.

Things work out, if you just figure things out.

Bottom line to being sued.

If you do things the right way and try not to take advantage of people the odds of you being sued are much less. But hey you still might get sued. Lawyer up and defend why you did things the right way. Things will work themselves out.

…and just remember, it’s a sign that you’ve made it!.

Leave a Reply

Your email address will not be published. Required fields are marked *