The Traditional Approach
In the traditional, classic real estate transaction, buyer and seller both hire legal and brokerage representation and then step back, allowing the attorneys and brokers to do their jobs from contract through closing. The first step is a thorough initial consultation to get an overview of the parties, the property, and a general sense of the scope and extent of the work required. After that, the professionals take charge and largely run the process. The principals are consulted of course; they give direction and consent to the professionals representing them. But they do not take over direct negotiations with an opposing party or attorney; they do not attempt to impose unreliable Internet “forms” on the process; and they do not carve out whole portions of the transaction for them to do themselves. All of these things were, until recently, unheard of.
The Rise of DIY
The rise of DIY in real estate has significantly altered the traditional process. Encouraged by real estate seminars and investment gurus, clients sometimes request only limited or partial legal representation, a kind of “bits and pieces” approach. The first casualty is the initial consultation, since many prospective clients will now self-diagnose their transaction and assume that they already know what services and legal documents are required. “I have an owner financed transaction,” an inquirer might ask an attorney. “How much?” Problem is, there are several different types of owner financing—there is the “classic” owner finance (where the property is fully paid for) which may involve fully-amortizing notes or balloons; there are wraps and double wraps, and wraps where even the down payment may be financed; there are assumptions, “subject to” transactions, options, and more.
Skipping the initial consultation is hazardous. The client often gets the self-diagnosis wrong and omits important details; or worse, asks the attorney for the wrong type of documents entirely. This results in the process changing course in midstream, causing more delay and expense, not less—ironic, since the client’s motivation for bypassing the initial consultation was to save money. The fact is, most clients are not competent to self-diagnose transactions and self-prescribe the documents that will be required, any more than they are competent to self-diagnose their own medical ailments.
Another example of bits and pieces representation is requesting a review/comment on the earnest money contract—but nothing else; or requesting an explanation of the title commitment—but nothing else. While a selective DIY approach may provide some up-front savings for the client, it effectively defeats the reassuring level of quality and competence that comes with wholistic legal representation.
For their part, lawyers who are drawn into the DIY world often struggle to find an acceptable path by which they can deliver first-rate legal services while minimizing their potential liability if the transaction fails. Too often the result is a decline in the quality of documentation, an increase in potential liability for everyone, and an enhanced likelihood of a lawsuit or loss in the aftermath. (In such cases, no one wins except seminar promoters, gurus, and alleged investor mentors who, after encouraging a DIY approach and collecting their fees up front—of course—then disclaim any responsibility.) Lawyers can become exasperated with clients who are driven to save relatively small amounts of legal fees at the expense of doing the job right from start to finish.
Why bother with a real estate lawyer in the age of DIY?
There is a lot of emphasis on DIY in real estate today, but one should realize that this approach has serious limitations for anyone trying to do one’s own contract negotiating, document preparation, or other legal work.
It is worth recalling that in Texas executed documents are almost always the final word when it comes to real estate transactions. Once a contract and its various addenda are signed, the rights and remedies of the parties are defined by those written terms, subject to any voluntary amendments to which the parties may subsequently agree—and no one is required to agree to any amendments at all, which is why it is important to get the contract terms right in the first place. Amateur action by DIYers can result in potential liabilities and conflicts between the parties being inadvertently built into the early documentation. These issues may not become apparent until closing, when everything blows up. A lawyer who provided limited or partial representation along the way may have reason for concern at that point. Will he or she be held responsible?
Buyers and sellers need to look hard at the central question here: does it not make better economic sense, particularly for real estate investors, to offload professional duties (such as contract draftsmanship) as well as potential liability onto an attorney? An attorney who (yes) will charge fees, but who can avoid nightmarish legal and financial consequences later?
It usually takes only one expensive lawsuit to persuade a DIYer never to make the same mistake again, since lawsuits are indeed expensive—about twice as expensive as they were just a few years ago. In light of this, avoiding or reducing attorney’s fees by a relatively small amount may be short-sighted if, in the end, a pro se buyer or seller winds up dealing with a suit for breach of contract, misrepresentation, or specific performance.
Why not save money by using a lawyer only in the specific areas where you believe you need one?
There are many areas in which clients seek limited or partial representation, but the following is a sampling:
initial general consultation to review client goals and strategy and determine applicable law and what legal documents will be required
entity-structuring consultation concerning proper parties, LLC formation, asset protection, and so forth prior to engaging in the transaction
earnest money contract preparation
review/comment on an existing earnest money contract that is not signed
review/comment on an existing earnest money contract that has already been signed
loan commitment review/comment
loan commitment representation/negotiations
representation, negotiations, and discussions with the attorney for the other party
representation, negotiations, and discussions regarding loan terms with the lender or its counsel
representation and negotiation of contract and business terms with the other party or its attorney
due diligence review/comment on inspections, environmental assessment, the survey, etc.
due diligence review on the other persons or entities that are parties to the transaction
review/comment on the title commitment
representation, negotiations, and discussions with title company or its counsel (usually pertaining to removal of objections on schedule C of the title commitment)
closing document preparation—cash transactions, third-party financing, owner-financed transactions, wraparounds, “subject to” conveyances, assumptions, etc.
miscellaneous closing document preparation such as drafting the warranty deed; the real estate lien note and guaranty; the deed of trust; a joint venture or partnership agreement; LLC formation; a lien release; a leaseback; Dodd-Frank compliance; etc.
review of the proposed closing package prepared by others
personal appearance by the attorney at closing
recording of documents with the county clerk
It cannot be emphasized enough that both client and attorney should be crystal clear on which of these items are included within the scope of representation and which are not. Get it in writing.
Limited representation in a real estate transaction presents professional liability issues for the attorney. It is similar to asking a surgeon to perform only part of an operation, so that the patient can do the rest himself in order to avoid medical costs. Or asking a CPA to prepare only part of a tax return, so the taxpayer can DIY the rest of it. Similarly, asking a lawyer to work on only a portion of a real estate transaction puts him at risk of being sued for the whole purchase price. This has actually happened in numerous cases. The problem for the doctor, the CPA, and the lawyer is that even if they work on only part of an issue, the legal system tends to hold these professionals responsible for all of it . . . thus the saying “You touch it, you own it.” As a result, many better real estate lawyers will not engage in partial representation in a real estate transaction at all. Is it worth collecting a few hundred dollars in legal fees if one finds oneself on the hook for the outcome of a seven-figure transaction?
And it’s not just liability problem. Lawyers are professionals who take pride in their work and want to do a good and thorough job. Asking a lawyer to handle only one slice of a transaction goes against the professional grain and can create a disagreeable tension between attorney and client.
Careful attorneys who agree to offer partial or limited representation will require a written agreement releasing the law firm from liability as to portions of the transaction where the lawyer was not consulted or otherwise involved (a limited representation and indemnity agreement). Such an agreement has the advantage of clearly defining the scope and extent of the attorney’s engagement—always a plus since ambiguity in this area is the enemy of good attorney-client relations.
Why not rely on the title company’s attorney to produce the deed or other legal documents at closing?
There are a couple of observations to be made here. Firstly, the title company attorney appears later in the process and therefore has no significant influence on documents that were previously signed by the parties—the earnest money contract, for instance, the terms of which are all-important.
Secondly, the title company attorney represents the title company. He or she does not represent the buyer or the seller and has no inclination or incentive to include optional clauses that may be useful or beneficial to either party. In fact, the title company attorney will produce a minimalist document that intentionally contains no extra or optional clauses in order to minimize exposure and liability for his or her client: the title company.
The title company is an insurance company, not an advisor, counselor, or friend to either buyer or seller. The title company’s attorney is its legal representative and is professionally obligated to pursue the title company’s best interests to the maximum extent. If you doubt this, ask yourself: when is the last time you witnessed an insurance company or its attorney acting for the benefit of the insured? That is about as common as a strawberry super-moon. A real estate transaction is invariably an adversarial transaction amongst parties whose interests plainly differ . . . and yet buyers and seller will often say “Just let the title company lawyer prepare the documents.” Naïve, to say the least.
Signed Versus Unsigned Documents
Clients will occasionally ask an attorney to “look over” a contract or similar document. Again, this approach falls short of full representation, but many attorneys will agree to do it if their professional liability can be successfully contained to that task alone. What happens next occurs with alarming regularity: the attorney discovers that, lo and behold, the contract is already signed. At that point, at least in Texas, the parties’ obligations, rights, and remedies, as well as the terms and conditions of closing, have been largely established. Barring a voluntary contract amendment, these may now be set in stone.
Equally important, the opportunity to control the wording of any of the closing documents (such as the warranty deed) has likely been lost. Just to point to one example: controlling certain language in the warranty deed may be especially critical for sellers, since the seller usually wants to include a thorough and effective “as is” clause (Reason? Having an “as is” clause in the contract is not sufficient going forward from closing, due to the fact that earnest money contracts in Texas “merge” into the closing documents, thus superseding the contract’s terms). However, after the contract has been signed without addressing the need for an express “as is” clause in the deed, then the inclusion or wording of such a clause (or any other optional clause) is now up for request and negotiation, perhaps causing delay or failure to close altogether.
Fully 90% of what a real estate lawyer can do for a client in Texas happens at the contract stage, before signing. As a result, an attorney reviewing a signed contract is largely limited to an explanation of the meaning of its provisions. This is the #1 mistake made by DIYers. Often, it cannot be undone.
Example: The “As Is” Clause
Let’s discuss an example, a case where a seller previously experienced substantial flooding on the property. Is it advisable for that seller to include an effective “as is” clause in the deed? Of course it is. Will the title company attorney volunteer to include that clause in order to benefit the seller? Unlikely.
“As is” clauses can be brief one-liners or they can go on for pages, in excruciating detail. Take a look at a deed conveying a property with known environmental hazards (such as a car dealership or gas station) and you will find a mind-bending set of clauses that cover “as is” considerations, environmental contamination, and indemnity for future loss and liability. Few title company attorneys will volunteer to draft anything of the sort, since such terms have nothing to do with the interests of his or her client. That client is the title company. Instead, custom terms and clauses are usually negotiated by lawyers for the buyer and seller. If you have no real estate lawyer advocating on your behalf, then you literally have no representation. You are winging it in a world of predators.
Another practical fact: the title company is an independent party to the transaction, just like the buyer, seller, and lender. Its role is to ascertain and insure title for a profit, and in doing so it will look after its own interests, which may not always coincide with the desires of the buyer and seller. It is thus necessary from time to time to discuss or negotiate issues with the title company’s attorney (the release of a schedule C requirement would be an example). Is the buyer or seller going to do this without legal counsel? Will they even know what document or clause to ask for?
The more one pulls apart and analyzes a real estate transaction, from contract through closing, the more it is apparent that nearly every step in the process can have legal implications and consequences, including financial consequences that may run into the tens or even hundreds of thousands of dollars. Moreover, because of the emphasis on the sanctity of contract in Texas, such consequences are not easily overturned at a later date. Once a deal is done, it’s probably done, at least in the absence of actual fraud. Consulting an attorney after the fact becomes little more than an embarrassing reminder not to make the error of acting pro se again.
Why use a board-certified real estate lawyer?
Any licensed Texas attorney can practice law in any area of state law, including real estate law. In recent years, however, the trend for lawyers, as with other professions, has been toward greater and greater specialization. No matter what one’s legal needs may be, it is generally advisable to seek out a board-certified attorney in the relevant specialty. Board certified lawyers must:
1. have at least five years experience in the legal profession;
2. receive ten peer recommendations attesting that the lawyer is qualified to be certified as a specialist;
3. pass a specialization exam that is tougher than the bar exam;
4. meet more stringent continuing legal education requirements, attending seminars every year; and
5. board-certified lawyers must re-certify every 5 years, a process which again requires references from other attorneys.
There are many fine lawyers who by means of experience and exceptional ability acquire special competence in an area of legal practice without being formally board certified. However, they are perhaps more the exception than the rule in a specialized age. It is simply a fact that the better legal practitioners tend to be board certified in their fields.
Texas lawyers may become board-certified specialists in four areas of real estate practice: residential, commercial, farm and ranch, and HOA law. In reality, however, there are many more sub-specializations within the broad category of real estate law. An example would be construction law. There are real estate lawyers who confine most of their time solely to this complex and demanding field. Unfortunately, there is no board certification for construction law, but there probably should be, since it is a frequently-encountered sub-specialization. There are numerous other examples.
Do lawyers kill deals?
There is a theory, popular among less-informed realtors and others, that lawyers kill deals. There may be some truth to this if one is talking about non-real estate lawyers. However, a lawyer specializing in real estate—a lawyer who represents investors, brokers, buyers, sellers, and lenders—could not stay in business if he or she acquired a reputation for killing deals. Every good real estate lawyer knows that it is his or her job to help make the deal happen on the best terms possible for his client. Experienced real estate attorneys know better than to present a contract modification to the opposing party that they themselves would not agree to if roles were reversed.
“Lawyers kill deals” is a myth, and a malign one, usually propagated for selfish monetary reasons by someone who would rather that a buyer or seller remain unaware of available legal rights and remedies. One should ask, what is this person’s true motivation? Why are they trying to keep me from getting professional advice? Maybe it’s the buyer who would really rather you not include that “as is” clause in the warranty deed at closing (thus insuring the seller’s continued liability for defects); or perhaps it’s the seminar guru who would really rather sell you his forms—“Good in all 50 states!”—which is never true, by the way. Look around. Your real estate attorney may be the only person in the immediate landscape who has no other motivation except to insure that your interests are protected.
At the risk of sounding old fashioned, our view is that the traditional, classic form of legal representation—commencing with an initial consultation and continuing forward from contract through closing—offers the most benefits and least risk, both to the parties and to the attorneys who represent them. While partial or limited representation may seem a cost-saver for the client, at least initially, it is also a gamble that one’s DIY abilities are sufficient to replace a real estate attorney’s expertise and experience. The attorney who accepts such limited representation is also taking a risk, a serious professional liability risk, since he or she is being asked to participate in only part of the transaction but may later be held responsible for all of it. The tension resulting from this misalignment is unhealthy for the attorney-client relationship and unproductive when it comes to the quality of outcome. A clear assessment of these factors by a buyer or seller may determine the success or failure of the transaction.
Information in this article is provided for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is expressly retained in writing to do so.
Copyright © 2020 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, www.LoneStarLandLaw.com.