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I reading a tweet by @MarcSGIlbert today about lead paint/real@estate and rather than just hijack his tread I thought I would just pass along what I’ve learned over the years about lead liability. First of all the laws and overall liability vary from state to state.
There are particular states and particular cities that have significantly higher number of lawsuits than others. It is worth figuring out how the particular state you are investing in handles lead paint liability. Some people have said to me that it doesn’t matter because they
own their property in an LLC. Those same people are typically shocked to find out that lead paint judgements (which can run into the millions of dollars) can pierce the corporate veil and the LLC is not an effective barrier against individual liability. Most landlords will
probably not run into a lead paint lawsuit. But it only takes one sizable judgement to ruin an investor. I’m not big on giving other people advice but I’ll just be an example of someone who takes the issue of lead paint in residential/multifamily rentals very seriously as I
know several investors who were crushed by large judgements and one landlord who even went to prison for his failure to properly maintain his rentals. While these cases are outliers in some ways, they are worth knowing about as real potential outcomes. I’ve spent probably
a total of 15 hours in meetings with various attorneys trying to find ways to manage the potential liability (even with very well maintained buildings). It’s not an easy topic and again, each state has different legal issues. One of the most interesting landmark cases in
Maryland involved an investor who bought an abandoned home at a foreclosure auction. When the investor went to the home it turned out that a squatter was living in the house. The squatter ended up suing the new owner for lead paint poisoning and the MD Supreme Court ended up
ruling in favor of the squatter. So that’s kind of as absurd an outcome as I could have imagined. I’m not a lawyer and obviously none of this is legal advice. But everyone on ReTwit seems to run fast and loose these days and it has been valuable to me to do learn from others and
do research to understand the laws around some of the harder to defend and nearly impossible to insure issues like lead and to a lesser extent mold. To take it one step further, one reason to understand the full spectrum of liability is to be able to better price the risk in a
deal. Now that we are in a low yield environment it seems like properly pricing risk is somewhat out of fashion. But if I’m buying a pre 1978 resi building (or a portfolio) in Baltimore MD I’m probably not going to be the winning bidder because my risk adjusted pricing is
probably going to be lower than a lot of other investors. And maybe I won’t make as much money as a result but I’ll sleep better at night knowing that I have been properly paid for any risk that I’ve assumed. Also when renting to someone who has a child in the residence
(the kid doesn’t even have to be a tenant to have grounds to sue) the liability period can run up until they are an adult. So if you are renting to a 4 year old currently there is at least another 14 years where they could potentially sue and states like MD have a very low
burden of proof to show that the kid actually got poisoned in your rental vs any of the other places they have lived. I’ve seen enough bad outcomes in the world of lead paint liability that as a result I’m very cautious around it.
In this respect I often think about Sam Zell’s quote, “We suffer from knowing the numbers.”
