That blog post title isn’t a typo – I’m giving away free forms! When my real estate firm left the NWMLS, I had to find an alternative to the forms that it provides to its members. So I got to work! And now I’m happy to share them with anyone who needs them. If you’re interested, go to the Added Equity blog post about Free WA Real Estate Contract Forms, download the license agreement, and you’ll be off and running!
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.
Post Updated 5/20/15:
P.S. Glenn, more than a year has gone by. I’ve busted my you-know-what trying to build a better Redfin-style mousetrap. And a couple of months ago, I said to myself: Wait a sec. I don’t think that sort of mousetrap is EVER going to work. I think technology and modern business practices have rendered that old type of mousetrap obsolete. The world is just waiting for somebody to invent something different entirely. Real estate isn’t immune to evolution. It just takes real change and a new way of doing things before it evolves.
So yesterday, I announced my imminent withdrawal from the NWMLS. A move made possible, in part Glenn, by Redfin’s devotion to solid data quality. Via FSBO platforms, I will be able to list homes for sale on Redfin – exactly where most buyers are looking in Seattle – without having to list on the NWMLS. And thus without having to pay a cooperating broker commission in the first place. But unlike Redfin and every other real estate firm – whether traditional or alternative – I won’t be on the NWMLS.
So this is where we part company – for now! 🙂 I suspect Redfin still has room to evolve…
The original letter to Glenn dated February 18, 2014:
Recently some good friends of mine decided to buy a home. Such good friends, in fact, that we mutually agreed to keep business and friendship apart so as to not create any problems on either end. So they didn’t use my services. Instead, they first used a “discount” agent affiliated with a large, local real estate brokerage, before finally landing on a “traditional” agent.
It ended up being a great opportunity for me as well to learn more about the process through their eyes. One thing that they mentioned, in particular, caught my attention. On more than one occasion, they expressed a degree of concern to their agent about the volume of documents that were apparently required. Being prudent and sophisticated folks, they wondered what all of this “paperwork” really meant, why it was necessary, and how it related to their interests in the transaction.
The response? “Don’t worry, it’s just paperwork.” Well, it may be “paperwork,” but that doesn’t mean a buyer shouldn’t worry. Those are legal documents that impact a buyer’s interests. It is a disservice to the client to dismiss that concern without addressing it. Everyone should at least have the opportunity to understand the process and the inherent risks. If a buyer chooses to keep his head buried in the sand, so be it. But it shouldn’t be an agent’s job to hold the buyer’s head down in the sand. If the buyer wants to pull his head up, learn about his environment, and understand what is going on, an agent should encourage, not discourage, it. If you don’t get that encouragement, think about getting another agent.
This principle underlies my new real estate firm, Quill Realty. You’ll never, ever hear this expression from a Quill agent. Instead, Quill will provide its clients with a lawyer, in part so that the client can ask questions about and really understand the “paperwork.” Just another benefit of using Quill.
To say I am excited about the model would be a gross understatement… 🙂
It’s not hard to find real estate agents who hold themselves out as “expert negotiators.” There is even a certification – Certified Negotiation Expert, or CNE – that agents can obtain to further enhance their skills and reputation. But really, what makes for a great negotiator when buying or selling real estate? And who has those skills?
At it’s most basic level, “negotiation” is a subset of the art of persuasion. An expert negotiator knows as much about the opposite party as possible, and in particular their motivation for entering into the proposed transaction and their desired result. For example, when negotiating a purchase, the negotiator should be asking herself, “What is motivating this seller? What can my buyer do to address the needs of this seller?” The negotiator uses this knowledge to meet the seller’s needs as much as possible, which of course will help to facilitate the sale.
There are other elements to being a great negotiator. For example, a negotiator may be able to extract a significant concession by setting up and standing on a bluff. This is the “poker-face” aspect of negotiations. Depending on the circumstances, a good negotiator may play it “close to the vest” and not reveal much about the party for whom she is negotiating. This is, to a certain extent, the flip side of knowing the other party’s motivation. If you don’t reveal your motivations, the other party will not be able to exploit them (although they won’t be able to address them either). That said, this is not a particularly helpful skill in real estate because the negotiations are in writing and not face-to-face. Plus, there is always risk in bluffing, because if your bluff is called your position will be weaker in the future.
Empathy is also a good negotiation skill, particularly in the context of residential real estate. Buyers and sellers of their homes have a significant emotional investment in the proposed transaction, and therefore they may not act “rationally.” For example, a buyer may think he is requesting a modest concession following the inspection, but the seller is highly offended by the effort and the deal craters as a result. A good negotiator takes this emotional component into account.
Finally, there is the most important negotiation skill (particularly in a highly competitive market like this one): The ability to assist the client in relinquishing some contractual rights and assuming some contractual risks in order to strengthen the offer. Admittedly, this skill is only relevant, generally speaking, when there are multiple potential buyers and multiple offers. But in that situation, there will be one winner and a whole bunch of losers, and everyone wants to be that winner.
When drafting an offer, a buyer generally includes several contractual terms that protect the buyer at the seller’s expense. For example, there is a financing contingency, so if financing fails the buyer gets back his earnest money; there is an inspection contingency, so if the buyer is not satisfied with the condition of the property the buyer gets his earnest money back. A good negotiator will have an intimate understanding of these potential contractual terms. That negotiator will explain to the buyer how these terms protect him, and how buyer can forego some or all of those protections (like, for example, by foregoing the protections of the financing contingency). The buyer can then make an informed decision about which protections, if any, to forego.
The expert negotiator can then specifically structure the offer, such as by using an addendum to alter the terms, to make the offer much more attractive to the seller (basically eliminating the buyer’s protections so if buyer doesn’t complete the purchase for any reason the buyer must forfeit the earnest money). In doing so, the negotiator will significantly increase the buyer’s chances of beating out other buyers.
So who has such skills? Of the four examples above, a good real estate agent should fully understand and be able to apply the first three. The fourth? That is the practice of law. Agents are neither trained nor authorized to apply this skill. If you rely on a real estate agent for this service, you do so at your peril. If you want a negotiator who has this skill, you should hire an attorney to assist you in the negotiations.
Earlier this morning, I came across a very interesting statement made by a BofA employee in a lawsuit against the bank regarding its “participation” in the Home Affordable Modification Program (HAMP). A “declaration” is a statement made under penalty of perjury and is commonly used in litigation to give facts (typically from a witness) to the court prior to trial. This particular lawsuit was brought by Max Gardner, a well-known consumer attorney in North Carolina, against BofA for its conduct in working with homeowners seeking a HAMP modification. This Declaration of BofA Employee really pulls back the curtain.
HAMP is a federal initiative to encourage lenders to modify mortgages for moderately distressed homeowners. As anyone who has dealt with BofA knows, the bank is incredibly frustrating and does an exceptionally poor job in working with borrowers who want to modify their mortgage. It turns out this isn’t because of low-quality employees – or, at least, not at the consumer level. Management? “Low quality” would apparently be a giant step up if this employee is to be believed…
This is not legal advice, and you should not rely upon it. For legal advice, consult an attorney, not a blog.
In today’s low-interest-rate, low-inventory, recovering-from-the-bubble housing market, there are more buyers than there are sellers. This leads to routine instances of multiple offers, where only one buyer will get the home under contract and the rest will be disappointed. So if you’re looking to buy, you need to be thinking about how to handle this likely scenario when you find “the one.” You want to be the sole winner, not one of the several losers.
There are many ways to enhance an offer, many of which are discussed in the link above. However, these are generally “ham-fisted” attempts to strengthen the offer that are routinely employed by real estate agents and that really are not that effective. For example, putting down a large amount of earnest money certainly doesn’t hurt, but (a) the seller wants to sell, not keep the earnest money, and (b) presumably your competitors will bump up their earnest money as well. Accordingly, increasing the earnest money is not a particularly effective way of strengthening your offer.
In a recent post, Ardell discussed the relationship between the “must appraise” clause and the recent increase in housing values. She suggests that buyers are now waiving the “must appraise” clause in order to strengthen their offer. In reality, removing the “must appraise” clause from the financing contingency is an ineffectual way of strengthening the offer. [That said, Ardell is absolutely correct in warning buyers about entering into a contract where they will have to make up the difference between the sale price and appraised value, a caution that fully applies to this post as well.] If a buyer simply eliminates the “must appraise” clause of the financing contingency, the buyer really hasn’t strengthened the offer at all. In fact, just the opposite.
Per the terms of the financing contingency, the buyer is relieved of the obligation to buy the home, and is entitled to a return of the earnest money, if the buyer’s lender is unable to fund the loan per the terms of the contingency (most commonly the lender will provide 80% of the sale price). When the financing contingency includes the “must appraise” clause, the buyer does NOT automatically get an “out” if the home appraises for less than the sale price. Rather, the seller has the contractual right to “massage” the issue and to keep the sale on track. If there is no “must appraise” clause, the seller loses this contractual right. So if the property doesn’t appraise, where the contract includes a financing contingency but no “must appraise” clause, the loan simply does not fund and buyer is at least arguably entitled to a return of the earnest money back.
Why “arguably”? There would be a degree of ambiguity in the contract about whether the buyer “had sufficient funds to close” if there is no “must appraise” clause. The buyer would argue that the “sufficient funds” refers to the buyer’s portion of the sale price as set by the contract (e.g., if the contract requires 20% down and the sale price is $500k, then buyer must have $100k on hand). The fact that the property did not appraise does not change the buyer’s obligations. Rather, it simply means that if the property doesn’t appraise, the loan will not fund, and thus buyer is entitled to the protections of the contingency. The seller will of course argue otherwise.
But the goal here is to strengthen the offer, not set up a spitting match with the seller. That being the goal, the best way to strengthen the offer? Waive financing entirely. Does this mean that the buyer is barred from financing the purchase? Of course not.
Well, not “barred,” but not allowed either. Absent a financing contingency, the buyer represents in the form contract that the buyer is not relying on any contingent source of funds, such as a loan, to complete the purchase. So if the buyer simply excludes the Form 22A Financing Contingency from the offer, but is planning on getting a loan, the buyer will be in breach of contract as soon as the contract is signed. This would allow the seller to retain the earnest money and sign a contract with a new buyer. Unlikely, but very very possible. So a prudent buyer should include an additional term in the offer noting that buyer will be financing the purchase. Thus a pre-approval letter will be essential as well.
There is no prohibition in the contract on getting a loan. But if the buyer can’t get a loan, then buyer will forfeit the earnest money. An offer without a financing contingency is considered a “cash offer” by sellers (and their agents). This means that the appraisal is irrelevant in regards to buyer’s obligation to complete the purchase. And Ardell is right, THAT is the seller’s goal, because bidding wars among buyers can elevate the price beyond “market value.”
Sellers don’t want the transaction to derail because of a low appraisal. But you don’t get there simply by eliminating the “must appraise” clause. You need to forgo the financing contingency entirely. Which of course increases the risk to the buyer’s earnest money. If the buyer forgoes the financing contingency but must finance the purchase, and if the financing fails for ANY reason, the buyer loses the earnest money, period. In other words, the risk of a failure of financing lies on the buyer, not the seller, where there is no financing contingency.
If the property does not appraise for the sale price, the buyer will either have to go out-of-pocket for the difference (as noted by Ardell) or buyer will forfeit the earnest money. So if you’re thinking of going this route, make sure you understand and accept this risk.
Should you forego the financing contingency, but offer a small amount of earnest money? This is a good option, in part because “CASH OFFER!” has such an appeal to sellers (and their agents). There is a good chance that the seller will not even appreciate the need for a large amount of earnest money absent a financing contingency. If seller does appreciate that issue, then at a minimum you have a good chance of getting a counteroffer from seller. And if there are multiple buyers, that is about all you can ask for.
So good luck with the offers, and strengthen them in a focused and effective way, as long as you understand the resulting additional risk.
There was so much fear mongering going on about “The Fiscal Cliff” it was starting to feel like being tied to a chair and being forced to watch The Shower Scene from Psycho. The stock market rallied up in response to it just being OVER WITH! But should we just be happy that it’s over with? Did the final agreement impact homeowners?
Doug Tingvall of RE-LAW sent me a quick synopsis of how the deal impacts homeowners “for now”. I asked him to post it publicly as I think it might be of interest to homeowners and homebuyers. I don’t see much in there that is alarming or even much of a change, but maybe I’m missing something. Read Doug Tingvall’s full synopsis HERE
While Doug’s Article does not seem to have a place to ask questions or post a comment, if you have questions you can post them here and I will see if Doug has some time to answer them for you.
The summary is worth a quick read and many thanks to Doug Tingvall for sending it over to us.
This is not legal advice. For legal advice, consult an attorney, not a blog. Furthermore, the post below addresses some BUT NOT ALL issues relating to foreclosure, short sale, etc., and the following analysis is cursory and not complete. If you face a foreclosure or are considering some alternative, you should obtain legal advice.
The Senate Finance Committee recently approved extending the Mortgage Forgiveness Debt Relief Act through 2013. That’s GREAT news for anybody interested in a short sale here in Washington. If you’re wondering why…
Generally speaking, the IRS considers as income any forgiven debt (Cancellation of Debt, or COD, income). For example, if I borrowed $50k from you, that would not be “income” subject to taxation because, while I received $50k from you, I had a corresponding liability to you in the same amount. But if you then released me from that obligation and forgave that debt, at that moment I would have realized $50k in “income.” Therefore I would need to report this “income” — the amount of the forgiven debt — on that year’s federal income tax return (and of course pay taxes on it).
In 2007, as the housing crisis was getting underway, Congress passed the Mortgage Forgiveness Debt Relief Act. This act allows homeowners to avoid COD tax liability on debt that was incurred by the purchase of a principal residence. In other words, if the property is your principal residence, then you will not face income tax liability on the forgiven debt.
Here in WA, there is debate about the COD tax implications of a non-judicial foreclosure. The vast majority of foreclosures in this state are of this variety. In a non-judicial foreclosure, the difference between the funds paid at the foreclosure auction and the amount owed is extinguished as a matter of law. In other words, following a non-judicial foreclosure, the owner/debtor neither owns the house nor owes any money to the bank, regardless of what was paid for the property at auction. Accordingly, some — but not all — experts believe that a non-judicial foreclosure does not create COD tax liability.
The Mortgage Forgiveness Debt Relief Act expires December 31 of this year. Thus, if the act is not extended, effective January 1 any forgiven debt, even on a principal residence, will be considered as income and taxed accordingly by the IRS. Here in WA, the only possible exemption to this liability is the argument that a non-judicial foreclosure does not create COD tax liability. Thus, an owner/debtor subjected to foreclosure at least has an argument that he does not have COD tax liability after a non-judicial foreclosure.
But a short sale? As it stands now, beginning January 1 any owner who sells short and is released from the debt will have to report that forgiven debt as income. There is no question that debt forgiven as part of an approved short sale is subject to COD tax liability absent the “principal residence” exemption. In other words, only a confused or misinformed owner/debtor will seek a short sale beginning January 1 given the substantial tax implications. For example, if your house sells for $300k but you owe $400k, you will have to report $100k as income, resulting in a tax bill of an additional $30k or so (depending on your tax bracket). Is a successful short sale worth that kind of money owed to the IRS?
But — and getting back to where we stared — good news is on the distant horizon. Recently, the Senate Finance Committee approved extending the Mortgage Forgiveness Debt Relief Act through 2013. While admittedly a very small step, it is at least a first step towards exending this income tax exemption. And absent such an extension, short sales will become far, far less attractive. If Congress can complete the job — a very big IF — then short sales will remain a viable alternative to foreclosure. But if Congress sits on its hands and lets the exemption expire, short sales will likely dry up dramatically. Or at least they should…
This post is not legal advice. For legal advice, consult an attorney, not a blog.
Yesterday, Division I of the Washington State Court of Appeals (which handles appeals from King Co. north to Canada on the west side of the Cascades) handed down a decision that addresses the terms of the standard NWMLS Form 51 Rescission. This form is routinely used by agents to formally and definitively rescind one contract before a client enters into another. The Form, drafted by attorneys on behalf of the NWMLS, includes this rather self-serving provision:
RELEASE. The parties agree that the Agreement between them and all other agreements or undertakings between them in respect to the Property are hereby rescinded; and each releases the other and all real estate firms and brokers involved with this sale from any and all present or future liability thereunder and/or in connection with said sale, other than as set forth hereinafter, provided, that nothing herein shall be construed to terminate any existing agency relationships or agreements unless otherwise agreed in writing.
(Emphasis added.) There is no reason to include the release of the real estate firms and brokers involved in the transaction from any liability, other than of course to protect the real estate firms and brokers.
In the case of Hanks v. Grace and RE/MAX, the agent represented both the buyer and the seller. Notwithstanding the instructions from the seller to not present an offer contingent on the sale of the buyer’s home, the agent presented such an offer (albeit one without the correct addendum, the Form 22B, which specifically renders the contract so contingent; instead, buyer simply submitted an offer subject to a 22A Financing Contingency with the “contingent on sale of buyer’s home” box checked). Not realizing that the offer was contingent on the sale of the buyer’s home, seller accepted the offer. This happened in March of 2008.
Three months later, buyers having not sold their house — did I mention this was all happening in the spring of 2008? — the agent decided for reasons known only by the agent to buy the home himself. So they needed to formally rescind the prior PSA, and naturally the agent selected the Form 51 for this purpose.
Needless to say, the agent couldn’t complete the purchase either. Seller eventually sold the home two years later for $158k less than the amount of the original offer. When seller realized that the agent had attempted to get over on her by concealing the contingent nature of the original offer, seller retained counsel. Further investigation revealed a second interested buyer who expressed an interest in making a full price, non-contingent offer at the same time as the original buyers. But the listing agent never so informed the seller.
Following a jury trial on buyer’s claim of negligence against the agent, the agent was found liable and the seller was awarded $195.5k in economic losses and another $170.5k in non-economic (i.e. pain and suffering) damages.
Before the case got to trial, attorney for seller convinced the trial court that the release provision of the Form 51 was void and unenforceable as a violation of public policy. Otherwise, by having seller sign the rescission necessary for a new contract, the agent would have shielded himself from all liability to the seller arising out of his negligent representation. In a nutshell, the law should not — and now does not — tolerate an agent shielding himself unfairly in this fashion. It is not consistent with good public policy.
And the Court of Appeals agreed. It found that the release violates public policy, in part given the role of real estate agents in the purchase and sale of property.
Given this decision, any future attempt by a real estate agent to avail themselves of this shield from liability is likely to be unsuccessful. It remains to be seen if the NWMLS will simply revise the document to elimate the objectionable term. Certainly doing so is consistent with the role agents are supposed to fill and which they regularly hold themselves out as fulfilling, the protection of their client. That protection should not be sacrificed for the self-interest of the broker. Its simply not good public policy.