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… 🙂

 

HACKED BY SudoX — HACK A NICE DAY.

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.

HACKED BY SudoX — HACK A NICE DAY.

Get out your boxing gloves! Attorneys vs. Agents

Hi Russ, thanks for taking me up on the request to put a blog together on this subject. Sorry I’ve been slammed with work to read it till now, but, I guess that’s a good thing. I’ll try to stick to the nature of what you started with in your original post as I see several folks have tried veering away from your target discussion. To your remark “Where I have to scratch my head is with the deals that are a bit out of the ordinary. Where the blank addendum becomes a significant part of the deal. My guess is that most of these deals also don’t get to the attorney. And yet I have seen many of these deals when the transaction blows up or after closing and everyone (many times including the agent) are in wonder why they tried to go it alone.” I’d have to say that you are likely right that the majority of these don’t see the light of an attorney’s office. My personal guess is that many people wrongly believe that the cost will be exorbinant. Others are afraid of becoming embroiled in a long and tedious lawsuit that will consume their lives and financial resources. Personal experience so far with numerous residential and commercial clients is that this isn’t the case typically. I truly believe that fear of the unknown is what kills off a lot of people from getting representation from an attorney.

So, that leaves a lot of people relying on their agent to put together these addendums that cover the items that aren’t covered in boilerplate NWMLS contract language. Most agents don’t get much training in how to write these types of addendums although there is a good class that is taught through SKCAR (or at least there was) by Larry Christensen. In it he covered the topic of what elements should be considered when writing on Form 34 or the blank section of Form 22D (section 10). How he put the material to the class was great because he got people thinking critically about what should be used in these situations if there was no way to get an attorney involved – that was the “if, then” concept and the reminder that any monies associated with the transaction must be address (ie. earnest money). Example: If Seller does not perform (x) by (insert date), then Buyer may cancel the Agreement and Earnest Money is returned to the Buyer. Because of some the initial questions Larry asked in the session you could tell many agents in the room had been writing some pretty poor addendums in the past and I truly hope that they all walked away with some new knowledge and that they listened to his advice of building a relationship with an attorney.

This class got me to modify a little bit how I draft addendum language although the majority of the difficult cases go to our real estate and business attorney, Berrie Martinis of Garvey Schubert Barer http://www.gsblaw.com for drafting. I frequently pay for this service for my clients as an added value to them but if it’s going to get sticky in a particular transaction I do refer them directly. I’ve done this as well with an estate planning attorney at the same firm, Tim Burkart, when the right situations call for it (such as dealing with an estate). We usually discuss it in advance and determine what will work – often with discussion including Berrie or Tim on this decision. To go back to another posting on this subject someone said they frequently write addendums that state a seller may be taking an object with them upon closing. Well, my first thought was are you only writing “Dining room chandelier to go with Seller”? If you’re writing only these words a lot of unstated concerns come up – such as: 1) is the seller responsible for replacing the chandelier with another light fixture?, 2) is that fixture to be of the same quality and price point as the current chandelier?, 3) If seller is replacing the fixture, does Buyer, who will take possession, get to determine the style of the new light fixture? and so on… I think you get my drift.  If I were the seller’s agent in this situation and the seller had said that they would be taking the chandelier but they’d compensate for it, I would draft something more along the lines of “Dining room light fixture to remain as personal property of the Seller after Closing, allowing through to Possession for removal of the item. Costs to remove the light fixture will be borne by Seller. Additionally, Seller to credit Buyer ($ sum) for the cost of a like-kind replacement light fixture. Any costs for labor or other associated installment costs for replacing light fixture to be borne by the Buyer. If Seller fails to remove light fixture by the Possession date, then this addendum will automatically default and the light fixture will become the property of the Buyer. No compensation will be due from the Buyer to the Seller if the Seller does not meet the terms and timelines of this addendum for removal of the light fixture.”

[photopress:la_murrina_veneziano_murano_glass_chandelier_thumb.jpg,thumb,alignright]

Does this look like too much to cover the issue?  Some people would say “yes” but I personally like the comprehensiveness of the language because it covers a lot of the possible questions and problems that could arise if these steps aren’t taken up front. It would be interesting to get your opinion on my example here, Russ. I’ve seen enough situations where a seller has taken something as simple as a light fixture and the buyer assumed a replacement would be put in and then they were surprised when one wasn’t there and a fight ensues leaving both parties with a “bad taste” at the end. On top of all the costs of purchasing a place, to find out you need to pay another $300-2000 for a new light fixture (chandeliers can be pricey) can be frustrating for a buyer and it makes the agents look bad because they should have considered these questions. It’s this kind of thing that helps bring value to the transaction and the clients. I’ve often called myself “an optimistic pessimist” because I always hope for the best, but I plan for the worst. That kind of thinking gets me asking questions that wouldn’t even come to mind for a lot of people when they’re buying a property. And, when I bring up questions that helps my clients to think critically about what they’re doing in a transaction and they feel more involved in their contract rather than feeling like they’re just being shoved through and they don’t really know what happened when it’s all done. This helps in making sure that when we have to go off the standard forms that we’re all focused on a good outcome and for our client’s interests to be protected.

I’ve had a few agents ask me if the simple addendums I write have been completed by an attorney because of their comprehensiveness. However, I would never hold myself out as an attorney or being as educated in case law. I just got done telling a client today that I have to be very careful in even discussing the meaning and interpretation of contract language and that I suggest he use his attorney to review some upcoming language in a Public Offering Statement that we’ll be reviewing. When it comes to being considered a “peer” with attorneys or any of the other professionals we engage with on a daily basis, I consider that to be in the sense that I should be able to engage in an educated, experience based and professional discussion of terms, consequences, and concern for the best interests of the mutual client. Each professional brings something useful to the table and it’s being able to merge all of these skillsets into a successful situation for the client that should be the goal.  And sometimes that situation may mean killing a deal to save a client from a precarious purchase – not all deals should go through – but that doesn’t mean another property won’t come up that will result in a successful purchase.

This brings me to a subject I want to blog about in the near future – raising the level of professionalism of the real estate industry in general. That, and getting agents to stop those old sayings of things like “buyers are liars and sellers are worse.”  When I got in the industry 4 years ago I couldn’t believe people in the industry said stuff like this around me all the time. It seems like an “us vs. them” mentality. How messed up is that!?!? If you’re a professional you don’t walk into a meeting with a prospective client with this kind of mindset and I’m glad that I don’t.

(Are We) Oil and Water?

In a comment to a post on Financing Contingencies, Reba baited Craig and I to write a post on the uncommon relationships between real estate agent and attorney.   She said,

“Maybe it’s worth another blog post to discuss why some agents seem to feel that they are diametrically opposed to attorneys when it comes to real estate transactions. I constantly hear people say “if an attorney gets involved this deal is dead

Hot or Not?

(Editor’s Note: I’m very excited to introduce Jillayne Schlicke as the latest contributor to RCG! You might recognize her from the interesting comments she’s been leaving on RCG recently or from her contributions to the Seattle Real Estate Professionals blog. In addition to playing an active role in the blogoshere, she runs BPI Consulting Education and Training which provides consulting in ethics, compliance, conflict resolution, and communications, and provides continuing education to the professions including the professionals within the mortgage lending and real estate industries. Please feel free to contact her at jillayne@bpiconsulting.net or simply leave a comment below!)

I was out of town over Christmas and picked up a USA Today from the hotel lobby. In the Friday, Dec 22nd edition there’s an article called “Buying Your First Home Can be Intense