Tag Archives: liability

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

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[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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How Brokers Protect Themselves at their Clients’ Expense

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When you hire a professional to represent you, your interests should be paramount. If your interests conflict with the interests of that professional, you should be informed of that conflict. Before the representation continues notwithstanding the conflict, you should provide your informed consent to that continued representation. These are some of the hallmarks of “representation.” In at least one regard, real estate brokers — or at least those that use the NWMLS forms — fall far short of this standard.

How, exactly? When a contract fails for pretty much any reason, escrow will typically not disburse the earnest money to either party absent consistent written instructions from both parties. Similarly, before the seller signs another contract for the sale of the same property, it is prudent and proper for the seller to confirm that the first contract truly is dead — selling the same home twice is a sure-fire way to subject yourself to a breach of contract claim. For these and other reasons, it is a near universal practice for the parties to a contract to sign an NWMLS Form 51, a “Rescission of Purchase and Sale Agreement,” when terminating the deal.

NWMLS Form 51 is deeply flawed and totally inconsistent with the notion that the broker “represents” the client, at least in regards to a conflict between the broker and the client. Specifically, the “release” portion of the rescission not only releases the other party to the contract from further liability, it also releases the brokers from all liability. Moreover, it is not too hard to imagine a scenario where the rescission was necessitated by the broker’s own negligence, making inclusion of the release particularly distasteful.

For example, what if the broker failed to timely rescind the contract based on the inspection, and the property has a huge and costly defect? In that circumstance, the buyer might decide to simply walk away, but because the broker blew the inspection deadline the buyer will lose the earnest money. The buyer would then have a good claim against the broker for the loss of the earnest money. But if that buyer signs the Form 51, the buyer releases his broker from this claim.

The irony is that the terms are completely unrelated. There is simply no reason to include the release of the broker in the rescission — other than to protect that broker from a potential claim asserted by the client. In other words, the standard form document used by brokers includes an unrelated and irrelevant term that protects the broker from any adverse claim asserted by the client, even where the adverse claim arose out of the very same facts that led to use of the form document.

So if you’re going to hire a broker for “representation,” be aware that the representation is seriously limited by the broker’s own self-interest. For proof, look no further than the form used by a broker when the deal heads south….