Buying or selling a home is a legal transaction. Real estate brokers are able to engage in the limited practice of law needed to put together contracts for real property. But brokers certainly aren’t lawyers. And buying or selling a house is usually one of the biggest financial transactions in someone’s life.
So “forward thinking” consumers – both buyers and sellers – might consider using a lawyer instead of a broker. This allows them to save money while getting superior legal services. Other consumers will go the traditional route, but end up wondering whether they should also hire a lawyer to assist them in the transaction. If that describes you…
You should hire a lawyer in a real estate transaction when the legal risk outweighs the cost of a lawyer.
What is “legal risk”? For a seller, it means possible liability for someone else’s financial losses. So there are two parts to “legal risk.” First, what is the possibility of being held liable? And second, what is the probable amount of that liability? A 98% chance of owing $100 is a very different legal risk than a 2% chance of facing a cool $1m liability.
What sorts of issues might create liability? On the seller side, there are two general obligations: disclosure obligations, and title obligations. An attorney will help you to understand these obligations, what you need to do to comply with them, and the possible amount of liability if you fail to do so and are held accountable. In other words, by hiring a lawyer, you’ll be able to identify – and then reduce – legal risks.
On the buyer side, “legal risk” means the possible hassle and costs associated with some condition of the property. In other words, a buyer engages in due diligence specifically to identify the legal risk of completing the purchase and owing the house, usually under the title contingency and the inspection contingency. If there are land use concerns or landlord/tenant issues, an attorney will really help. And regarding title, only an attorney is qualified to analyze a title report. For example, if a neighbor has a driveway easement across the property, you’ll want to know that. Based on what you find, you might have the ability to renegotiate the contract to account for the defect. An attorney can help there too.
And of course you need to know the cost of an attorney. As a general rule, expect to spend $1-2k on an attorney if you need to rope one in for some legal analysis and counsel.
At the end of the day, it simply makes sense to hire both a lawyer and a broker if you are a prudent consumer. Why? Because…
Every transaction has risk. A lawyer reduces it.
Those two statements are simply not debatable. And as a long-time practicing attorney, I have lots of examples of the risks associated with buying or selling a home, and how a lawyer will reduce those risks. Here is one such example.
THE ENCROACHING GARDEN: AN ILLUSTRATIVE STORY IN TWO PARTS
A young married couple signed a contract to purchase a home. As closing approached, the seller told them that a neighbor’s garden crossed over the common boundary. But the garden and the boundary were both uphill from a retaining wall, so the buyers had no concerns about this encroachment.
Their agent, though, recognized this encroachment as a legal issue that needed to be addressed. The agent decided that the solution was a statement from the neighbor promising never to claim “adverse possession” to the portion of his garden that encroached over the boundary. Sadly, the agent was mistaken.
Adverse possession is a legal doctrine that allows one person to take ownership of land formally owned by another. To do so, a person must use another person’s land in an open and obvious fashion and must exclude the true owner. If the person uses the land in this fashion for 10 years, the user takes legal ownership of the area being used.
The seller talked to the neighbor and got a terse note, apparently signed by the neighbor, stating that he would never claim ownership to the portion of his garden that encroached over the boundary (i.e., he would never make a claim of adverse possession). The seller provided this note to the buyers. The couple’s agent thought she had solved the problem. The sale closed.
RISK NO. 1 TO THE YOUNG COUPLE
The allegedly signed document might not be sufficient to defeat a future claim of adverse possession by the neighbor. Accordingly, the problem might not be solved, and the couple could end up losing ownership to that portion of their property.
HOW A LAWYER WOULD HAVE MADE A DIFFERENCE
A lawyer would have known that simply getting a statement from the neighbor would not resolve the problem, particularly where the statement was merely signed but not acknowledged (i.e., no notary signature). The buyers needed to take immediate legal action to resolve the issue. They could have done so before closing, or after. But a lawyer would have known that further action was necessary and would have made sure the couple did what was necessary to fully resolve the issue. Instead, the problem lingered, and festered….
THE FACTS, PART TWO (THE SALE)
The couple lived happily in the home for 11 years before they decided to sell it. When they sold it, the couple (no longer so young) transferred title to the new buyer by a statutory warranty deed (the most common form of deed, used in most transactions).
In a statutory warranty deed, the seller makes several promises to the buyer. One promise is that the seller is the true and legal owner of the entire lot being sold. If, after closing, it turns out the seller is not the true and legal owner of the entire lot, then the seller has breached that promise and is liable to the buyer/new owner for the loss. Another promise is that the buyer will have full possession of the entire lot being sold. If it turns out the buyer doesn’t have complete possession, then the seller can be held responsible for restoring the buyer to full possession.
Unfortunately for the young couple, the neighbor’s encroaching garden hit the ten year mark during their 11 years of ownership. So when they sold their lot, they may not have been the legal owners of the entire lot. They may not have owned that portion of their lot encompassed by the neighbor’s encroaching garden. And the buyer certainly did get full possession of the entire property, again because of the encroaching garden.
RISK NO. 2 TO THE YOUNG COUPLE
They will be liable to their buyer under the statutory warranty deed by which they transferred title. First, the couple failed to provide the buyer will full possession of the entire property. Second, the allegedly signed note might not be sufficient to defeat the neighbor’s claim of adverse possession. In other words, the couple could very easily be forced to incur legal fees in seeking to have the encroaching garden removed. If the garden cannot be removed because the neighbor now owns it by adverse possession, then the couple would also owe the buyer/new owner money as compensation for the loss of that portion of the lot.
HOW A LAWYER WOULD HAVE ELIMINATED THAT RISK
A lawyer would have identified this very significant potential liability and would have taken steps to eliminate it. Specifically, when the couple sold the property to the new buyer, the lawyer would have made sure this encroachment was both disclosed to the buyer and excluded from the promises in the statutory warranty deed. Disclosure alone would not be sufficient. The deed needed to be made “subject to” the encroachment or else the couple would be liable to the buyer after closing.
HOW IT ALL TURNED OUT (not good)
A year after closing, the buyer/new owner got a survey and discovered the neighbor’s encroaching garden. The buyer informed the couple, who by now had long since “moved on” in their lives, that the couple was in breach of the promises they made in the statutory warranty deed. The buyer told the couple – correctly – that as a result they needed to take the legal steps necessary to have the encroachment removed. If they refused to do so, the couple would be responsible for the lawyer’s fees incurred by the new buyer in seeking to have the encroachment removed. And if the neighbor in fact took ownership to that portion of the lot by adverse possession, then the couple would also be liable to the new buyer for the loss.
Having no other choice, the couple agreed to hire an attorney to get the encroaching garden removed. Soon thereafter, when presented with the note he had signed some 12 years earlier, the neighbor claimed he had never seen or signed the note. He claimed that the original seller had forged his signature on the note. The neighbor made it clear that he believed he had taken ownership to that portion of his garden that encroached over the boundary.
In other words, the couple was in a terrible spot. They were now looking at a complicated lawsuit, with no guarantee of victory. But they were over a barrel and had no other choice. The couple’s attorney initiated the necessary legal action and eventually settled the claims. Total costs incurred by the young couple, between legal fees and sums paid in settlement? About $40,000.
Every transaction has risk. Lawyers are trained and paid to identify those risks and to reduce or eliminate them. So should you hire a lawyer the next time you buy or sell a home? If you want to identify and reduce your risk and minimize your chances of suffering a loss, then the answer is an unequivocal “Yes”. Don’t mind assuming risk? Not worried about potential liability? Then no need to hire an attorney.