Real Estate Investors Using Real Estate Lawyers

Investor Misconceptions

There are several common misconceptions among real estate investors about how to use a real estate lawyer. Many of these are made worse by real estate investor clubs who have reasons of their own for pushing an anti-lawyer bias. Misconceptions include:

(1) Lawyer involvement, if at all, should be confined to a piecemeal approach—just contract review, for instance, or review of the title commitment, but nothing else. However, since case law suggests that lawyers end up being liable for the entire purchase price, lawyers know that if they touch it, they own it.

With significant professional liability on the line, a lawyer may decline to be involved in the piecemeal approach, or alternatively may require a signed release of liability as to portions of the transaction where he or she is not consulted. A real estate investor cannot have it both ways by cutting corners on legal services and then still have full recourse against the lawyer’s E&O policy.

(2) Lawyer involvement should be avoided unless the transaction burns down. In this lawyer-as-fire-department scenario, the attorney has no contact, connection, or familiarity with the transaction until it fails. This approach disregards all protective benefits of early lawyer involvement.

(3) It is cheaper and just as effective for real estate investors to use templates and forms for legal documents rather than asking a lawyer to prepare custom documents on a per-transaction basis. Investor clubs often promote this narrative because they have their own forms to sell.

Two comments in response to this: (1) in forty years of law practice, this author has never seen a non-lawyer correctly complete a template (simple or complex) on his own—not once; and (2) the claims and lawsuits that (sooner or later) arise from amateurs using sketchy templates inevitably outweigh any minor cost savings.

(4) Lawyers should not charge for advice, only documents. Initial consultations and advice on how to structure a transaction and form entities should be free, especially for real estate investors since they might send the lawyer business in the future.

(5) Paying for an inexpensive “review” of a DIY or internet document is allegedly just as good as obtaining a custom legal document and a lot cheaper. This does not work. There is no way to make a junk document satisfactory by just reviewing it. It must be replaced.

(6) Lawyers should not charge for documents until closing—and then only if the transaction actually closes and funds. Legal fees should be contingent just like realtors’ commissions.

(7) Closings at a lawyer’s office (which can consume an hour and require the presence and services of the lawyer or staff) should be free.

(8) Using a real estate lawyer is just as good as using a real estate broker. Instead of the investor paying a 3% commission, a lawyer will do the same work for a couple of hundred dollars. This is perhaps the least true of all items on this list. If work (particularly the hard work of getting a transaction to closing and funding) is to be done then someone must be paid for spending the time and exercising the skill to do it.

Although some of the above propositions might have been somewhat true in the previous century, they are now long dead—at least among real estate lawyers of the first tier. In particular, today’s real estate investors should never expect any free access to a lawyer’s time or schedule.

The Rise of DIY

In the traditional and classic transaction, the parties hire legal and brokerage representation and then step back, allowing the attorneys and brokers to do their jobs from contract through closing. There are no DIY carveouts. An attorney has ongoing familiarity with the transaction—the parties, property, and specific contract terms—so as to foresee and avoid setbacks and obstacles.

Encouraged by real estate seminars and investment gurus, the rise of DIY means that many investors request only limited or partial legal assistance—the piecemeal approach. The first casualty is the initial consultation since DIYers now tend to self-diagnose their transaction and self-determine what legal services and documents will be required. Example: “I have an owner-financed transaction,” an inquirer might ask. “How much are legal fees?” Problem is, there are several different types of owner financing. Which do the parties intend? Are there special provisions that must be documented? Skipping the initial consultation can create misunderstandings and flaws that result in delay, expense, and transaction failure. This is particularly the case in creative transactions such as a wraparounds, seller-finance, subject-to deals, and so forth.

Consult an Attorney BEFORE Signing the Contract

The purpose of the initial consultation is to get an overview of the parties, type of transaction, the property, and a general sense of the scope and extent of legal work and documentation that will be required. This is substantive, not fluff. Paragraph 23 of the TREC 1-4 contract advises:

CONSULT AN ATTORNEY BEFORE SIGNING

Fully 90% of what a real estate lawyer can do for a client occurs at the contract stage. After the contract is signed, terms are limited to what the written contract says, period. Rights and remedies are fixed unless the parties and their agents agree to sign a contract amendment—and there is no requirement that anyone agree to any amendments. When an attorney is asked to review a contract that is already signed, his or her comments are limited to an explanation of its already-ratified provisions.

Avoiding or reducing attorney’s fees is small consolation if the consequence is a lawsuit for breach of contract, misrepresentation, failure to disclose, or specific performance. It usually takes only one such suit to persuade a DIY investor to never make that mistake again—especially since litigation is twice as expensive as it was just a few years ago. The memory of paying a treble-damages judgment plus $50,000 or so in attorney’s fees does tend to stay in one’s mind.

Because of the emphasis on sanctity of contract in Texas, once a contract is signed it is done, at least in the absence of actual fraud that could cause the transaction to be set aside. Consulting an attorney after the fact can serve as an embarrassing reminder not to make that error again.

Adding a Special Provisions Addendum

Good as TREC and Texas Realtors contracts and addenda are, they have certain gaps and weaknesses, particularly when it comes to non-standard transactions. Adding a lawyer-prepared special provisions addendum that goes beyond the terms of the promulgated forms can be quite useful indeed. It should never be assumed that TREC or TXR promulgated forms fully and effectively represent one’s best interests as buyer or seller in the transaction. They do not, nor is that their purpose. This is an amateur mistake that should never be made by a professional real estate investor.

Example: what if a seller would like to sell his property “as is,’ with no liability for post-closing defects or repairs? Is the TREC 1-4 Contract (paragraph 7.D(1)) adequate to make this happen? No, it is not. If a seller wants to require that that the sale be “as is” then a comprehensive “as is” provision should be included in the warranty deed to the buyer—and, for good measure, the buyer should be required to sign and acknowledge the deed in order to confirm acceptance of title on an “as is” basis. (And no, due to the merger of documents at closing, the contract “as is” clause at paragraph 7D(1) does not serve this purpose.) Only a lawyer-prepared special provisions addendum to the earnest money contract can compel inclusion of an “as is” clause in the deed.

Misplaced Reliance on Title Company Lawyers

A title company attorney who prepares legal documents for closing appears late in the process and therefore has no knowledge of (or influence over) documents that were previously signed by the parties—the earnest money contract, for instance, or any special agreements.

Secondly, a title company attorney produces only bare-bones documents that deliberately omit optional and customized clauses. Why? In order to minimize exposure and liability for the title company, because the title company is their client—not the seller, buyer, or lender.

The title company attorney does not represent you. He or she is not obligated to draft documents that optimize the outcome for anyone but the title company.

We can again use the example of “as is” clause in the warranty deed from the seller; inclusion of such a clause is a material contract term (not a casual add-on) and therefore requires the written consent of both parties.

Conclusion

When someone discourages you from talking to an attorney before signing a contract, you should always ask: what is this person’s true motivation? It is nearly always monetary self-interest. By contrast, your real estate attorney may be the only person in the immediate transactional landscape whose impartial goal is to assure that your interests are protected.

The more one analyzes the elements of a real estate transaction, the more apparent it is that every step in the process has legal implications and consequences. The traditional approach to legal representation—commencing with an initial consultation and continuing from contract through closing—offers the most benefits and least risk.