Should you hire a lawyer when buying or selling a home? Depends – do you want to reduce your risk?

[Updated 3/2016]

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.

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An Open Letter to Glenn Kelman, Redfin CEO, on the “Discount Real Estate Broker” Model

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…

-CB

The original letter to Glenn dated February 18, 2014:

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Have you ever heard, “Don’t worry, it’s just paperwork” from your Real Estate Agent?

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… 🙂

 

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Real Estate Negotiation Skills: What Are They And Who Has Them?

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.

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When your financing evaporates, do you lose your earnest money?

This is not legal advice. For legal advice, consult an attorney, not a blog.

In this challenging market, many buyers are discovering that their loan program is no longer available. This is a particular problem with new construction, whether condo or house. The buyer signed a purchase and sale agreement (PSA) several months or even years ago. Back then, in the “good ol’ days,” lenders offered a variety of financing options. Some buyers relied on some of the more “aggressive” options (e.g., an option ARM) in order to qualify for the new home. Today, that financing option is gone, gone, gone, and the buyer can no longer afford to buy the property. What happens then?

Well, the short answer is that the buyer loses the money. In almost every new construction contract, the builder’s addendum will note that the financing contingency, if any, is waived within several weeks of signing the PSA (and months or years before closing). Once the financing contingency is waived, then the risk of a failure of financing rests squarely on the buyer. At that point, if financing fails, it is the buyer’s problem, not the seller’s. Accordingly, if the buyer cannot close as a result, then the buyer will lose the earnest money as the buyer is in default of the PSA.

However, there may be more to the contract than what is seen by the untrained eye. There are a variety of state and even federal laws that apply to the sale of property, and in particular new construction. In many instances, these laws create “loopholes” in the contract that allow the buyer to at least arguably rescind the contract. Thus, depending on the terms of the PSA at issue, these laws can be used to exert negotiating pressure on the seller to at least return some of the earnest money.

Certainly, a buyer should not rely on these laws when signing the PSA originally. Every buyer should be aware of the risks and obligations created by a contract. But sometimes, the buyer’s situation changes (to put “America’s Money Crisis” mildly) and the buyer can no longer perform. Heck, sometimes the buyer may just decide that the purchase is actually a bad idea and not want to complete it. Under those circumstances, the buyer should consult an attorney to determine if there is a mechanism by which the buyer can get some or all of the earnest money back.

Has the Distressed Conveyances law curtailed foreclosure rescue scams?

In this Sunday’s Seattle Times there was an article on “foreclosure rescue scams.” I found the timing interesting given the recent enactment of the Distressed Conveyances law effective in June of this year. This law was specifically enacted to curtail these practices and even provides a rather large “stick” to use in convincing people that they should not lure owners into such transactions (in the form of punitive damages of up to $100,000).

Does anyone have any insight into whether these scams continue unabated? Unfortunately, I have no direct personal insight into the issue. [CAUTION: Plug Ahead.] Although I offer a very affordable consultation that is well-suited for anyone who has been approached by a “rescuer,” I have yet to generate much business. So, I really have no idea whether the new law is having the desired effect. Unless the Seattle Times is behind the curve, it would seem that the new law has yet to achieve the desired impact (i.e., make this practice less common).

Homeowners in Foreclosure Should Hire an Attorney

When I teach the Short Sale class, I say many times during the class that homeowners selling short and homeowners in default should always be directed more than one time to seek legal counsel. Sometimes homeowners in financial distress don’t hear you the first time. Just handing them the agency pamphlet isn’t enough. Attorneys can help homeowners in ways that real estate agents cannot. They will know more about their state’s deed of trust laws and any state-specific anti-predatory lending laws as well as federal residential mortgage lending laws than an average real estate agent, and attorneys will have access to recent case law.

justiceStuck with a bad loan, a Staten Island family fights back
Staten Island Advance

David and Karen Shearon were like many other Staten Islanders stuck with bad loans, collapsing financially under the weight of a crushing mortgage less than a year after buying their first home.

But unlike thousands of others who have entered foreclosure as part of the fallout from the subprime lending crisis — homeowners often embarrassed by their situation and unable to afford legal representation — the Shearons fought back.

A judge recently ruled that the owners of this Westport Lane townhouse in New Springville home were victims of predatory lending.They argued through their attorney that brokers aggressively marketed them a high-cost loan and then pressured them to go through with the closing when they could have qualified for a traditional fixed-rate mortgage.

In what is likely to be a precedent-setting decision in New York, state Supreme Court Justice Joseph J. Maltese agreed with the Shearons, recently telling the bank that it could not foreclose on the couple’s New Springville townhouse and that it may have to pay them damages for their troubles and void the $355,000 mortgage on their Westport Lane home…

Judge Maltese determined the original lender violated banking law by failing to check the Shearons’ income and ability to pay the high-cost loan. He said the lender crossed the line again when it financed the home above the $335,000 sale price, using an additional $19,145 to pay the costs and fees associated with securing the high-cost loan. The Shearons’ $5,000 deposit, meanwhile, was never deducted from the ultimate $355,000 in financing.

“This ultimately left Shearon with negative equity in the property,” the judge wrote.

“The mortgage loans may be unenforceable and the homeowner may be entitled to reimbursement of all prior mortgage loan payments, the fees for obtaining the loans and attorney fees,” Maltese added.

At a hearing Feb. 28, the judge is expected to decide whether the mortgage should be voided and damages granted to the Shearons.

Read the entire story here.

I keep reading comments about how there are not enough regulators to adequately oversee state and federal lending laws. With the mortgage lending meltdown continuing into this election year, we are already seeing more proposed state and federal laws.

Question: Would the threat of having the mortgage voided in the courtroom be a more effective way of bringing some rapid order into the mortgage industry?