Lawyers Provide Better Representation – Pt. 2 of 4
Craig on 08 11, 2009
Continuing from my prior post…
Lawyers provide better representation because of the method by which they are compensated. Typically, agents are typically paid by commission, and this commission is paid only if the transaction closes. Thus, if it does not close, the agents do not get paid for their services. This obviously gives an agent a strong personal incentive to convince the parties to close, even though closing may not be in the clients’ best interests (for example, they could have changed their mind, or there could be an issue with the property). In addition, commissions can vary based on the terms of the offer or other factors, and an agent may not have a duty to inform the client about these variations. For example, some sellers offer an extra commission to any buyer’s agent who presents a full price offer. The buyer’s agent has no obligation to inform his clients about this extra personal incentive (at least arguably, and in any event most agents keep this information to themselves), even though it might not be in the buyer’s best interest to make a full price offer.
In contrast, lawyers are paid directly by the clients. Many firms now offer a reasonable flat fee for legal services associated with a residential real estate transaction. Therefore, if it turns out that closing is not in a client’s interests (because she changed her mind, or because there is some late-discovered issue with the property), a lawyer has no incentive to convince the client to close. Want to cancel the deal? No problem – you won’t get any protest from a lawyer. Is there an extra commission to the buyer’s agent for a full price offer? Who cares? That extra commission will have no effect on the counsel provided by the lawyer.
Why does this matter? Commission-based fees earned at closing create an incentive for agents to get their clients to close, even where it might not be in their clients’ best interests to do so. Moreover, given the commission system, agents may have a personal incentive to convince their clients to make a full price offer on a particular property, even though that particular property, or paying full price for it, is not in the clients’ interests. Using a lawyer eliminates these issues.
About the Author: Craig Blackmon
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14 Responses to “Lawyers Provide Better Representation – Pt. 2 of 4”
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Craig,
I guess we can talk about the worst of real estate agents or the worst of attorneys. At the end of the day everyone has some financial motivation for doing what they do.
If your real estate agent owes only an agency relationship to you, either as a buyer or seller, then that agent has a Fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with you – In California at least.
That simply means that we are obligated to put the Clients interests always above our interests legally. Your suggestion that an agent would tell a buyer to write a full price offer just because of a bonus is really a long shot – although I’m sure someone out there has done just that.
Craig, sometimes rather than just cancel a deal having an agent that can negociate repair or condition issues, solve a financing issue, or re-negotiate a purchase price is invaluable. An attorney may be more inclined to drop the transaction, after all he has been paid, and will get paid on the subsequent consultation.
If a Client of mine wishes to cancel and transaction, and they are within their rights to do so, I would never argue with them.
Look for a real estate agent that is an advisor over a salesperson.
http://www.sandiegolifestyle.info/2009/08/real-estate-salesperson-or-real-estate-advisor-which-one/
Jeffrey — is my suggestion really such a long shot? Why are these “SOC Bonuses” offered if they don’t get results? The fact that they are offered routinely — at least here in WA — tells me that its far from a “long shot” that a buyer’s agent will get paid more by convincing the buyer to pay more. And just the notion that a buyer’s representative will be paid more IF the buyer offers more — well, thats inconsistent with “representation.” I don’t think there is much room for disagreement on that issue. And the fact that this is systemic tells me that the system is stacked AGAINST representation, regardless of any individual agent. Again, this post discusses generalities and systemic biases — it does NOT address any particular agent.
As for your supposition that an attorney will “drop” the deal to make more on the next — that presupposes an hourly fee agreement with the lawyer. If you can find a lawyer who will work for a flat fee, where that flat fee covers more than just one deal (they’re out there, at least here in Seattle) then you eliminate that possible conflict of interest.
Craig, We don’t see a great deal of SOC Bonuses in San Diego. For one reason a bonus cannot be offered in the MLS tied to some result – the listing agent can choose to offer 4%, 3% or $2.00. It certainly is not a wide spread problem here.
When representing a buyer I run a search for them in the area and price range they are looking. I don’t even look at the offered compensation to the Selling Agent (Buyer’s Agent). My concern is for the Buyers to find the best property that fits there needs.
If a buyer is concerned about this issue, he or she can enter into a Buyer’s Contract which outlines how much commission is to be paid to the agent. Any overages could be rebated back to the Client and the agent can choose to forgive a shortage if the offering compensation is lower than the Buyer’s contract.
Again, it is about the character of the real estate agent, and who’s interests are put first. Same goes for your profession.
Actually, Jeffrey, I think there is a big difference between lawyers and agents in regards to the character of the provider. I agree that, ultimately, it is the most important consideration, it should be made on a case-by-case basisi, and there are “bad actors” in both professions. Unlike agents, however, attorneys have many more — and more meaningful — safeguards in place to insure that, on a general and system-wide basis, the service provider will not engage in wrongful conduct. When hiring an attorney, the client need not enter into a special agreement just to insure that his interests are not compromised in favor of the agent. The client need not enter into a convoluted agreement concerning how the attorney will be compensated so as to minimize or eliminate any conflict of interest. Rather, when a client hires an attorney, the client is protected automatically from these sorts of conflicts. The same is not true with agents.
Craig,
Reminds me of the old story about an Attorney that was struggling with his business in a small town in the mid-west. Down to his last few dollars and ready to quit another Attorney opened shop across town and they both prospered.
Like Ardell says, leave the standard contracts behind and go with an Attorney crafted contract, would require the other side to hire an attorney to review the first attorneys work. In a world where one tiny word can make tip the balance of advantage from one party to the next, both need to be fully represented.
Standard contracts have been time tested in “real life” and Court and reflect a mutual understanding of those professionals involved.
Jeffrey — I’m not clear how this comment relates to the comment thread. That said, I agree that form contracts facilitate transactions, particularly where most professionals involved (i.e. agents) are not lawyers and can only engage in the limited practice of law. I have no problem with form contracts, and I have never suggested otherwise.
That said, I think we can all agree that form contracts will not cover everybody’s unique situation. Specific terms will often be necessary. The MLS recognizes this with the Form 34, the blank addendum that is used to draft unique contract language. Thus, even with form contracts, many transactions will require the drafting and acceptance of unique contract terms.
In this example an attorney could write as many transactions as a person wants. The attorney gets paid no matter what. It seems a little like you don’t care. As a matter of fact if the process stalls an attorney can get more money from the client. If the deal dies the attorney gets to write another Purchase and Sale.
David — the lawyer’s compensation will depend on the terms of the fee agreement. I can tell you from personal experience that the attorney might not be entitled to any additional compensation simply because he had to draft a second or even third offer.
As for “it seems like you don’t care”: I think the same can be said of any service provider. Hey, your doctor gets paid for the visit, even if she doesn’t cure your problem. Does that mean the doctor does not care? Certainly not — or if you believe otherwise, then you must lead a tortured existence, having to pay people for services when they really don’t give a hoot about you.
I think adding lawyers to the process is a step in the wrong direction. Again, as a buyer, what I want is more transparency, not more layers of opaque glass. Less lawyers and less agents.
I do want more buyer protection.
If I could start over, I would actually envision a system that listing and selling agents are hired by sellers to get the best price for their clients. The fees are negociated by them in a competitive marketplace. They work hard to market the property for the seller.
As a buyer, I would have the opportunity to shop the properties being marketed. I wouldn’t need to have a “buyer’s” agent or lawyer. I would be aware of the known issues or sellers disclosure prior to making the offer. I would then be required to be be approved on financing prior to the offer. Then I could make an offer, subject of course to title, inspections for unknown problems etc. Strong government laws/regulations would dictate the sales agreement in a transparent, standard way in plain language.
As it appears to be now, I make an much more tentative offer based on more contingencies and earnest money that often make it a large waste of everyone’s time.
Hmmm, I’m no Republican, but I think governmental dictate as to the terms of private contracts is a little overreaching. People need to look after themselves — the government should only be involved in prohibiting unfair or deceptive practices and/or regulating the actual mechanics of markets. There should not be a government-mandated contract. What you call a “waste of time” is really a process that allows each individual to decide what is in his or her best interest.
One other comment: I am unclear on why you think seller’s should pay for listing AND selling/buyer’s agents. If you want “buyer protection,” then shouldn’t the buyer pay for representation so that the loyalty to the buyer is clear?
JimN,
Your assumption is that all Seller’s and listing agents will be completely honest in their disclosure to you. Sometimes that happens, many times it does not. In California 90% of real estate lawsuits have to do with non-disclosure.
Thus is the logic for a reasonable period of time for a buyer to perform his due diligence and determine that the property is acceptable – this works in the real world and gives everyone the opportunity to move through the process.
I didn’t make that assumption. Of course there has to be a due diligence for the transaction. Fraud or non-disclosure will still be an issue and the time for lawyers to get involved.
I’m simply saying make the process buying/selling process more transparent and regulated, limiting the need for all the middlemen with their various profit motives.
Jim — good luck crafting such a benevolent and “fair-to-all” governmental intrusion. The right to contract, on terms that you accept, is an important one. It should not be sacrificed in the name of “transparancy.” And the “middlemen” are actually essential to a healthy and functioning markeplace. Or are you saying the government should act as escrow, lender, mortgage broker, title insurer, etc.?
Craig,
There obviously is no easy solution. You’re position seems to add complexity and cost. We’ll have to just agree to disagree on this one.
As with most things, there needs to be a balence. You could make a strong argument that most people would require a lawyer to explain their credit card agreement, when the majority don’t even read it at all. Maybe we’ll just mandate required lawyer representation for all types of purchases/agreements.