Does every buyer or seller need an agent? Does every distressed homeowner need an attorney?

In the comment thread to a recent post, Ardell wrote:

You can’t just tell people they should or should not have an attorney the same way that you can’t tell them they should or should not have a real estate agent LOL! Either can be a waste of money if you have the wrong agent or attorney. If the agent is not going to help you value the property you are buying…if the lawyer is not going to advise you regarding release from the deficiency…either is a waste of time if they are just shuffling papers around. Every buyer and seller should have an agent the same as everyone facing default should have an attorney.

This raises an interesting question: Are agents and attorneys comparable in terms of the services they provide? And more to the point: Are they equally important in protecting a person’s interests?

I think not. Now some may quickly accuse me of being a “typical” ego-driven attorney with an overinflated sense of self worth. But rather than attacking me personally, the more discerning reader will respond to the merits of my argument.

Similarly, I suspect there is a lot of common ground between agents and attorneys — more than a reader might realize. For example, everyone agrees that there are poor agents as well as poor attorneys, and hiring either one will either be a waste of money outright or will get you a poor return on your investment (money spent on service when compared to benefits of receiving service). Moreover, there are always exceptions to every generalization, so specific examples are not very useful in addressing general issues. So, for purposes of this post, let’s focus on a “generic” competent agent — i.e. the abstract, non-specific “everyperson” agent — compared to a similar competent attorney.

So why do I think that an attorney is more important? Or, as Ardell framed the issue, why do I think that people should not have an agent when buying or selling a house, but they should have an attorney when facing foreclosure? The analysis begins with recognizing the different skill sets of each professional. Practically speaking, an attorney must have completed both college and law school, a three year graduate degree. The attorney must also have passed the bar exam, which is recognized as quite demanding. In contrast, an agent must have completed a 60 clock-hour course offered at most community colleges and passed the state license examination. Both professionals must undergo continuing education, so presumably once the career is started they grow professionaly at the same rate. But is there really any question that the attorney is better educated (and thus has the prerequisite intelligence and diligence necessary to complete seven years of advanced schooling)? Furthermore, given these vastly disparate educational requirements, can anyone dispute that the practice of law is more complicated and more intellectually demanding than the brokerage of real estate?

Consideration should also be given to the actual work expected of the two professionals. Again, as Ardell framed the issue, an essential task expected of an agent is valuation of the property at issue. A property’s “true” value is unknown until a willing buyer and a willing seller agree on a price, neither being compelled to do so. Until that time, any estimate of a property’s value is just that, an estimate. This estimate is based on many factors, most of which can be obtained and understood by any competent adult — i.e. sales data and current prices for similar homes in similar areas. Everyone will have a different opinion, even between two agents with the same amount of experience. There is simply no way to confirm that any reasonable valuation — from anyone — is “right” or “wrong” until the property sells.

In contrast, when faced with acute (or chronic) financial distress, there are different strategies that may be employed to address the problem. All of these strategies require an understanding of the debtor’s legal rights and obligations. In comparison to valuing a property, it is much more difficult for a person to do the necessary research (federal statutes, state statutes, cases interpreting both) that will allow the person to reach an informed and correct conclusion. Moreover, an error in valuation is likely to be small as there is a range of “right” answers anyway, and if the buyer/seller formulates their own number and then gets that number, the outcome at least in the short term is good. In contrast, there are many different options that may be available to the debtor. The option chosen by the debtor — after researching the issue himself — may be, in fact, a very poor choice in the near and short term.

Finally, I must also note the costs incurred in using the services of either an agent or an attorney. At least in the realm of residential real estate, I would wager a lot of money that agents are actually more expensive than attorneys. In a “typical” transaction, a consumer will pay his agent (including the broker required for the agent’s license) $12,000 (3% of a $400k house). This is a substantial bill for the services provided, particularly in light of the requirements for becoming an agent. In contrast, even if the consumer files for bankruptcy, he is unlikely to incur such a bill with a lawyer. If the debtor is simply consulting the attorney for options, the bill will be much, much less.

In summary: a consumer need not hire an agent in all circumstances. Look at the services you hope to receive and the value of those services in light of the cost incurred, taking into account the licensing requirements of the professional providing those services. By considering the licensing requirements, a consumer addresses the merits of hiring the professional versus performing the work on the consumer’s own behalf. However, a homeowner should always consult a lawyer when faced with default on a mortgage — or when faced with any other legal issue involving hundreds of thousands of dollars of liability. If cost is an issue, then there are free legal services and low cost services available. Regardless, the money will be well spent. The same is not necessarily true of an agent.

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46 thoughts on “Does every buyer or seller need an agent? Does every distressed homeowner need an attorney?

  1. Watch out Craig, the attacks are going to come rolling in. If you don’t hire an agent, who will value the property? Real estate agents are the only people with the secret decoder rings for valuing property. It is impossible for anyone else to come up with an estimate.

    I agree completely with this analysis, especially on the buyer’s side. It is hard to justify 3% to a person that can’t draft a contract, explain your rights under the contract, or really answer any legal questions about the largest and most complicated purchase in your life.

    Many people (agents) say that the roles are complementary, but I don’t think that needs to be the case of buyers. If you hire a competent attorney you don’t need an agent. If you hire an incompetent attorney, then you are going to be in trouble, but the same risk applies to hiring an agent.

  2. Craig, I think Ardell posted her second piece quickly, purposefully to hide yours! 😀

    I’m going to say something I recently said over in P-I land, and that is: “You don’t know what you don’t know.”

    That really fits here in a lot of ways. The average consumer really doesn’t know what a piece of property is worth or how do execute the transaction–and the more they think they do the less likely it is they are right. The average agent really doesn’t understand the legal issues involved in a transaction–and the more they tell their client about such issues the more likely it is they will make a significant mistake. And when it comes to the average attorney–there all I’d say is people would probably be surprised if they knew how low of quality level that was. Despite all the education required, the average quality of attorneys is rather low (but there are obviously many excellent ones too). So what do people need to know? Simple. A great agent and a great attorney. Easier said than done.

    I view agents and attorneys as being complementary, and that neither can replace the other in most instances. Between the two attorneys are clearly more underutilized, at least in SFR transactions. And there’s a reason for that. In most such transactions you have not only a willing buyer and seller, but an eager buyer and seller. About the only thing that happens with some significant frequency is an unknown defect with the property, so in most cases the buyer and seller are both happy. It’s sort of what marriage would be like, if you never had to see the other person again after the ceremony. 😉

  3. Kary — I disagree that the “average quality” of attorneys is low. That has not been my experience at all. Most attorneys range from competent to outstanding. As for the “happy buyer-happy seller” part: the irony is that two attorneys could be utilized for less than the cost of the two agents.

  4. Maybe life in the transactional world is different than life in the adversarial world, but I really discount the education argument you make. A lot of that education seems to have done little good. (And I’d discount the value of continuing education on both sides.)

    I’m not really focusing on the cost, because the attorneys can’t do the services of an agent. The agent can legally do the minimal services that an attorney can do (fill out simple forms), but not visa-versa.

  5. I agree with Craig. If attorney advices regarding a real estate transaction are of low quality, it is only because he is not a long term and experienced real estate attorney. If you go to a divorce attorney for real estate advices, perhaps that advice would be low quality, though the attorney may be the best divorce attorney in town. An excellent attorney is not excellent at all things. Likewise if you are buying horse property or waterfront property, the best agent in town may not be the best agent for the task at hand.

  6. Ardell, it’s not just experience. I dealt with a lot of attorneys with a ton of experience that simply were not very good. Also, it’s interesting you mention divorce. That seems to be an area where it’s extremely difficult to find a quality attorney–more so than any other area I’m familiar with.

  7. Valuation of the property. An attorney simply doesn’t typically go visit a lot of properties, and thus is incapable of determining value or spotting features/conditions that will be useful/harmful in the future. It’s the same problem the buyer has. Inexperience.

    Assistance with inspections/repairs.

    Finding properties.

    I’m not really sure what an attorney really can do, other than a good job with the forms.

  8. Well, “assistance with inspection/repairs” and “finding properties” sound like the ultimate in handholding. The buyers are, after all, gainfully employed, functioning adults. I think they can work with an inspector and find other experts as necessary to further inspect and/or fix conditions.

    As for “finding properties”: As I think you know, MLS data is widely available via the internet. The days of agents having exclusive control over the listings is long, long gone.

    So we’re left with valuation. I guess “Here it comes” was right on the money — its all about the secret decoder ring. Seriously, I think most buyers are capable of determining — on their own — the right price to offer for a property.

    Now, those are the services provided by a buyer’s agent. At what cost?

  9. If you think finding a good inspector is easy, or even knowing what the real concerns are, you’re sadly misinformed. The average buyer doesn’t know either–it’s not something that just flows from being employed.

    Same with thinking that the lock on the MLS is gone. If you’ve never used the search tools agents have available, again you don’t know what you don’t know. The consumer tools are a joke. Redfin and Trulia each have made some advances, but they have their shortcomings. The information is provided to consumers for a reason–it’s not like it’s unexpectedly leaking out. But the best tools to search it are still held by agents.

  10. Ahem — at what cost, Kary? Does the cost outweigh these benefits? $12k is an awful lot to pay for an inspector referral and improved internet search tools…

  11. Well given the fact that 98% of SFR sales go without a hitch, I could say the same thing about spending any money on an attorney. But I don’t. I say attorneys and agents are complementary, because I’m not mistakenly believing I could do your job as well as you can (even though I am an attorney).

    On the inspection matter, I once had a client pick their own inspector, because they’d used them in the past. I happened to notice something that the inspector missed, and it turned out that thing was very important to the client. The deal fell apart because of what I noticed. I suspect my clients think my fee on the house they did end up purchasing was rather worthwhile given the fact that they didn’t spend over $400,000 on a house with a defect that concerned them a great deal. Somehow I don’t see an attorney providing that service at all. And it was also something they couldn’t do themselves, despite both being employed.

  12. Craig,

    Valuation has more to do with what most people want, than what this particular buyer wants. A good buyer’s agent is looking for weaknesses that may not impact the buyer until they are ready to sell. This was much harder to accomplish in a hot market than this one. Often I have a list of the top 5 weaknesses of a home, with not one of them being noticed by the buyer, or noticed but not recognized as a weakness.

    The biggest mistakes buyers make have to do with a home’s weaknesses being OK with them, and their not reducing their offer appropriately to that weakness, even when they see it.

    The buyer is most often looking at what they like, and least often looking at what they don’t like (unless it smells really bad :). I find this MOST at issue in staged homes made to look perfect, where the staging is camoflauging a home’s weaknesses. I once sat a buyer down who wanted to make an offer on an awful and overpriced property, and forced them to write down what they liked. Every item on their list was a part of the staging and not the house. And this was a first time investor who didn’t plan to live in the property.

    I think an attorney can handle the whole thing…but wouldn’t it be better for that attorney to pay an agent a flat fee to go check out the house while the attorney is drafting the offer? The cost of an agent’s report on the house would be well worth it. Home “weaknesses” vs. “defects” are not in the home inspection report.

    What would you think of an agent who wrote up offers without seeing the property he/she is writing an offer on? Rarely does that happen, and there is good reason why we almost always have to see the house before writing an offer on it.

    An agent who reviews the offer before it is submitted, or before it is finalized in counters, and who views the property before or while the offer is written and also attends the home inspection, would be a good supplement to what you offer as a service to home buyers.

    You would be amazed at how much a difference there is between what a home inspector says at the inspection, and what he writes in the official report.

    Always eating the dollar meal is not good for anyone. You need a variable list of services to meet the needs of most people. Pretending no visits to the property by a professional is good enough for all people, is…well, let’s not say what it is 🙂

  13. As for your first point: As you know, you need a contract for the transaction. Either an attorney can provide you with that, or an agent. Certainly you agree that a buyer or seller should use one or the other, right? So who cares how many go SFR transactions go without a hitch? My point is you should pay for that service and recognize that you are paying A LOT MORE for referral to an inspector, valuing the property and improved internet search tools.

    As for your inspection anecdote: I take it, then, that you think your fee is merited because in this one instance you saved your clients from buying a house with a defect. How about other thousand or so transactions you handled — did you provide something of comparable value in each instance? Any instance? Anything can be proven anecdotally, Kary — there is always an exceptional story. Can you make the argument that — GENERALY SPEAKING — agents are worth the costs, given that attorneys provide the same essential and mandatory service for much less?

    I note that you still have not answered my question: Do the costs of an agent — $12k — outweigh the benefits?

  14. Craig,

    Writing the offer has more to do with knowing the seller’s weaknesses than you apparently realize. A collaboration of efforts would likely produce a different offer than one written without seeing the house. You’d be amazed at what you see in the house, like “moving to chicago” highlighted in red on a calendar on the refrigerator. Knowing that the seller will be carrying a vacant property as of X date is important info in negotiations. Knowing that the person in the house is having all of their bills paid by their spouse until the home sells is also important, and rarely is info like this derived by asking direct questions. Sometimes planning a 2nd visit to the home when you know the owner is going to be home is of huge advantage.

    As to the rest of your question, you obviously don’t know what my fee is. Why do you imply that you do? Do you really think there is one standard fee for all agents these days? There is not, and all clients do not pay the same fee. Some find the homes themselves, some do not. Some need a lot of assistance with financing issues, some do not. The offering in the mls is only the amount “suggested” by the seller and included in the asking price. The actual fee is determined by the client and their agent, not the seller. The seller is just making sure that the fee can be included in the financing.

  15. Ardell – the ability of the agent to ferret out information that will be useful to a strong-armed negotiating strategy is indeed an added benefit. While my office may speak with the listing agent, we certainly do not attempt to speak directly with the seller to glean information that we will then use to the seller’s disadvantage. Actually, this raises an interesting point: this type of negotiations would be prohibited by the Attorney Rules of Professional Conduct if the seller had their own attorney. It is another example of the higher ethical standard to which attorneys are held. Apparently, nothing prohibits an agent from speaking directly with another represented party, even where the conversation is driven entirely by the agent’s desire to obtain prejudicial information.

    Regardless, you point out some of the advantages of using an agent. Perhaps the service is worth the cost in some instances.

    As for the buyer’s fee: correct me if I’m wrong, but isn’t it still the customary practice for buyer’s agents to simply rely on the MLS commission for payment and to not discuss compensation with the buyer? I know that is not how you operate, to your great credit. But that is still how the “system” works by and large, isn’t it? If that is the case, then I can certainly presume to know the buyer’s agent’s fee — it almost certainly ranges from 2.5 to 3%.

  16. Craig,

    re your paragraph one above:

    1) in our area buyer’s agents make appointments to view the house by calling the seller direct. So we almost always have the opportunity to speak with the seller if the home is occupied.

    2) Agents tell other agents things they would never tell an attorney.

    As to the buyer agent’s fee, I think nationally you would be correct, but not in my service area. I doubt you would find one person who has ever heard of Redfin (and are there many left who haven’t?) who would not be talking about the buyer agent fee with their agent. Most will pay more for more. Rarely will a buyer these days think the services are free and the cost non-negotiable. I don’t know about Puyallup, Tacoma, Maple Valley and Federal Way (as example), but I do know that in my service area of North Seattle and Eastside, a buyer thinking the seller is paying the commission is rare.

  17. Craig, the 12k you keep referring to is a contingent fee. Hourly it would be less in almost every case. It’s the same with attorneys. If you look at the contingent fees some of them earn, it can be outrageous–sometimes over 10 figures per hour.

  18. Nice try, Kary, but no luck. In the case of an attorney, the fee is contingent on the outcome where the other party IS DIRECTLY ADVERSE. In other words, the other party wants the EXACT OPPOSITE of what the client wants: a finding of no liability or an award of minimal damages (while the client wants liability and a substantial award of damages). Under these circumstances, there is a clear risk to the attorney that the recovery will be zero or otherwise less than what might be a fair fee to the lawyer.

    An agent, on the other hand, represents the client in a matter where the other party wants essentially the same thing: a closed deal. What are the risks to an agent that the deal will not close? And if not this deal, then the next deal — the client wants to buy or sell, after all, so presumably that will happen eventually. Nobody is actively trying to prevent it. A “contingency fee” does not make any sense in this case — there is no need to reward the agent for assuming the risk of no payday whatsoever.

  19. Buyers and sellers are not adverse? Maybe within 20 days of foreclosure where the buyer is deemed a fiduciary of the seller. Hey, if their interests are so aligned, they could do without the attorney and the agent, because they’ll just work things out on their own in a fair, friendly manner. 😉

    Any time an agent shows a buyer a property, the agent is guaranteed a commission? Maybe agents at Redfin, but it’s called a salary.

  20. Kary,

    I agree with Craig, but for a different reason. A contingency fee takes a % of what the principal “gets”. In some cases the agents get more than the principal. If a seller has $30,000 of equity and the real estate commission is $30,000, then the seller gets nothing and the agents get it all. An attorney would never take the entire award in a contingency case, based on what I see on TV, anyway 🙂

  21. To the contrary Ardell. The contingency fee would include money that is actually paid to others, or to be paid to others, such as medical expenses. In a major personal injury case, this could be a large amount of money.

    So if you had $200,000 of medical expenses, $50,000 of lost wages, and $400,000 of pain and suffering, and a 40% contingency, the attorney would take $260,000, leaving the client with only $390,000. They would take $80,000 of the $200,000, which is basically similar to what people have happen with mortgages on their homes.

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