DIY documents part 3: real estate LLC

Today’s post on DIY documents takes the pre-made LLC and kicks up the temperature a few notches.

My last post, a foray into the exotic pizza industry, revealed how a simple LLC agreement can lead to disaster without a little fine-tuning by a skillful pair of eyes. Here I’m going to show you how a simple real estate LLC setup, when prepared without consulting an attorney, by using only free advice from sites/books like NOLO (or the many other Internet voices out there), can wreak havoc similar to having a major volcano eruption on one of your real estate properties.

Lava entering the sea, expanding the big islan...

Lava entering the sea, expanding the big island of Hawaii. (Photo credit: Wikipedia)

As a sidenote, sites like NOLO are not all that bad as a place to start. Even I tend to go there when I want some basic ballpark information or when I’m preparing a shortlist of things to look for on a certain type of case. I would actually recommend using such sites in the same way that a history professor would recommend Wikipedia as a place to start when writing a research paper, or that a lottery winner might visit a bank branch to set up a savings account as a place to start when investing their millions wisely. As a general rule, you can learn a lot (and save a lot of money) by doing your own homework first before you sit down with a professional. But going forward with that free information alone and then drafting your own documents may not be the right choice to make.

Let’s look at another example of someone who went the DIY route:

J.J. Jingleheimerschmidt got lucky in the last few years. With a great name, a great job, great credit, and plenty of disposable income, he scooped up three foreclosure properties for pennies on the dollar, fixed them up and began leasing them out. He decided that reading up about this sort of thing online and watching HGTV was the way to go: “Why pay an attorney when I can do it myself?” (He also opted out of using an accountant as well.) Thinking it was easy enough, J.J. had zero stress when he read up about starting an LLC to protect himself from liability, wrote up an operating agreement, paid his state fee, and signed a quitclaim deed for each property, transferring his entire interest to the LLC.

FIRST, J.J.’s mortgage lender called and said they were calling his note, as he had sold his property, and he now has 3 months to send in the payoff amount before they start collection proceedings. J.J. tried to tell the bank it was merely a trade to his LLC, but the bank only told him to re-read his contract, which raised J.J.’s stress level to 22.

SECOND, within the same month, all three tenants, who worked for the same factory, lost their jobs when the only Illinois location of the company lost the building in a massive fire. All three of them told J.J. they won’t have rent money until the insurance check arrives, which raised J.J.’s stress level to 30 as he tried to figure out how to pay the lender without liquidating his whole retirement fund.

THIRD, J.J.’s third tenant called him the next day. Apparently he was so mad about the whole fire thing that he punched a hole in the wall of his home, and looking for a band-aid, he slipped on a puddle of water caused by a leak in the roof. J.J. called his insurance company to make a claim, who told him that the coverage ceased when he sold the property. J.J. tried to explain that he had simply made an LLC and transferred the property, but the insurance company told him to re-read the policy, which raised J.J.’s stress level to 50.

FOURTH, after 10 days, J.J. was served papers by the sheriff. The third tenant was suing him for medical damages caused by him punching the wall. J.J. assumed he was safe from liability, thanks to the LLC, and decided to do nothing. 35 days later, the judge entered a default against him personally, based in part on having seen the lease agreement between J.J. and the tenant. J.J.’s stress level was now 75.

FIFTH, at the end of the third month, the lender was now suing, the injured tenant was now trying to garnish J.J.’s wages, the other tenants still had not paid their rent, and J.J. finally called up an attorney to help him fix this mess, who told him, “I can help you, but this is going to be very expensive. Why didn’t you come see me before you set up this whole LLC?”

J.J. turned bright red with rage, his stress level now finally at 100, as he erupted like a violent volcano: “I was just trying to do it all myself!”

Moral of the story: it’s a good idea to consult with an attorney before you set up your own residential leasing LLC.

DISCLAIMER: Please do not prepare your own forms after reading this blog, without consulting an attorney first to see if they are appropriate for your situation. I make no representations or guarantees as to the applicability of any forms mentioned here to your specific situation. This blog is ADVERTISING MATERIAL only, and should not be relied upon as legal advice, especially if you are not an Illinois resident. Please contact me if you have a legal question or concern, as no attorney-client agreement will exist between myself and any readers of this blog unless it is signed in writing.

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