How to Use a Real Estate Lawyer

The Traditional Approach

In the traditional, classic real estate transaction, both buyer and seller 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 with advice and consent of the parties. The principals give direction to the professionals representing them but they do not take over negotiations; they do not attempt to impose unreliable Internet forms on the process; and they do not carve out portions of the transaction to handle DIY. All of these things were, until relatively recently, unheard of.

Paragraph 23 of the TREC 1-4 contract advises:

CONSULT AN ATTORNEY BEFORE SIGNING

Paragraph 24 goes on to provide a space for buyer and seller to list their respective attorneys on the transaction. Unfortunately, in most residential contracts, this space is left blank.

There is a reason TREC suggests consulting an attorney. After the contract is signed, the parties’ rights and remedies are limited to what the contract says, period. An attorney’s ability to renegotiate or change contract terms is limited by the opposing party’s willingness to sign a contract amendment—and there is no requirement that anyone agree to any amendments.

Fully 90% of what a real estate lawyer can do for a client occurs at the contract stage. When an attorney reviews a contract that is already signed, his or her comments are mostly limited to an explanation of its provisions. If errors were made, they cannot be undone without a contract amendment signed by both parties.

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) rather than full representation in the whole transaction.

The first casualty is usually the initial consultation since DIYers now self-diagnose their transaction and self-determine what legal services and documents will be required. An example: “I have an owner-financed transaction,” an inquirer might ask. “How much are legal fees for documents?”

Problem is, there are several different types of owner financing—there is the classic owner finance (where the property is fully paid for); there are wraps and double wraps and wraps where even the down payment may be financed; there are assumptions, “subject to” transactions, and more; so skipping the initial consultation can create misunderstandings that result in more delay and expense, not less.

The Piecemeal Approach and Lawyer Liability

Lawyers who are drawn into working with DIY clients often struggle to find a means of delivering quality services while addressing only the selected slice of the transaction that the client offers them—just contract review, for instance, or only review of the title commitment. This is a problem since case law suggests that lawyers may end up being liable for the entire purchase price. You touch it, you own it applies.

What incentive exists for a lawyer to collect a few hundred dollars for contract review that leaves the lawyer on the liability hook for a $1M closing? Does the attorney have liability even though the client deliberately excluded him or her from critical phases of the deal? The disturbing answer is quite possibly yes. As a result, many better real estate lawyers will not engage in this sort of partial representation at all.

Contracts Already Signed

Once a contract and its various addenda are signed, the rights and remedies of the parties are fixed, which is why it is important to get the contract terms right in the first place.

Avoiding or reducing attorney’s fees is small consolation if the result is a suit for breach of contract, misrepresentation, failure to disclose, or specific performance. It usually takes only one lawsuit to persuade a DIYer never to make the same mistake again—especially since lawsuits are about twice as expensive as they were 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 memory.

Benefits of Legal Counsel

There are many areas in which an attorney can be helpful in a real estate transaction:

(1) initial general consultation to review client goals and strategy and determine applicable law and what legal documents will be required;

(2) entity-structuring relating to LLC formation and asset protection;

(3) earnest money contract review/comment;

(4) preparation of a special provisions addendum to the earnest money contract;

(5) loan commitment review/comment and negotiations;

(6) representation, negotiations, and discussions with the opposite party in the transaction, the lender, or their respective counsel;

(7) review/comment on inspections, appraisal, environmental assessment, survey, etc.;

(8) review/comment on the title commitment and assistance with curing objections;

(9) closing document preparation, particularly in non-standard transactions;

(10) review/comment on proposed closing documents prepared by others;

(11) appearance by the attorney at closing if needed; and

(12) closing, escrow, and recording of documents with the county clerk if a title company is not involved.

Why not engage a lawyer from the beginning for the whole transaction, so that he or she can address all of these issues as they occur? The attorney will then have an ongoing hands-on familiarity with the transaction—the parties, the property, and the specific contract terms—so as to be well-equipped to foresee and avoid the usual transactional pitfalls. If setbacks or obstacles occur, the attorney is positioned to expeditiously deal with them.

The Attorney as Fire Department

Contrast the foregoing strategy with the notion that an attorney should be brought in only when something catches fire and threatens to burn down the transaction. Another analogy is to waiting until it is raining to call someone to fix the roof. The idea is that as soon as the fire is extinguished or the flood recedes (if it all) the attorney should go away and the client may then resume mishandling the transaction on a DIY basis.

This approach reflects a mistaken understanding of how contracts and legal representation should work. In this scenario, the attorney has no ongoing contact, connection, or familiarity with the transaction, the parties, or the property. There is no knowledge of the big picture as the deal moves through its various stages from contract to closing. For the DIYer, this is immaterial since the primary goal is to avoid or eliminate attorney’s fees—not get professional guidance that will help assure a successful closing.

Attorney Engagement Letters

Careful attorneys who are willing to offer partial or limited representation will likely require a written agreement releasing and indemnifying the law firm from liability as to any portions of the transaction where the lawyer was not consulted (a limited representation and indemnity agreement).

Such an agreement has the advantage of clearly defining the scope and extent of the attorney’s engagement. It cannot be over-emphasized that both client and attorney should be clear on the scope of legal representation. What specific items will the attorney be addressing? And just as importantly, what specific items will he or she not be addressing?

Adding a Special Provisions Addendum

Good as TREC and Texas Realtors contracts and addenda are, they have certain weaknesses. In non-standard transactions in particular, they fall short when it comes to protecting the client’s best interest. It can be useful in such cases to add a special provisions addendum that goes beyond the terms of the promulgated forms. Only an attorney can prepare such an addendum.

Example: what if a seller is determined to sell his property “as is?’ Is the TREC 1-4 Contract (paragraph 7.D(1)) adequate to make this happen? No. If a seller wants to assure an “as is” sale and minimize post-closing liability, 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. Only a special provisions addendum to the earnest money contract can compel this to happen.

Relying on Title Company Documents

There are a couple of observations to be made here. Firstly, the title company attorney (who is the one who prepares legal closing documents) appears later in the process and therefore has no influence on documents that were previously signed by the parties—the earnest money contract, for instance, the terms of which are all-important.

Secondly, a title company attorney will produce only bare-bones documents that omit optional and customized clauses. Why? In order to minimize liability for the title company. The title company is not participating in the process for purposes of looking after any interests other than its own.

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 at the contract stage, then the title company is under no obligation to insert custom clauses into the closing documents.

Just let the title company prepare the documents is a flawed approach.

Board-Certified Real Estate Lawyers

In recent years the trend for lawyers (as with other professions) has been toward greater specialization. Lawyers who are board-certified specialists 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 without being formally board certified. However, they are more the exception than the rule in today’s specialized age.

Texas lawyers may become board-certified specialists in four areas of real estate practice: residential, commercial, farm and ranch, and HOA law.

Do lawyers kill 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. Example: 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.

When someone discourages you from talking to an attorney you should ask: what is this person’s true motivation? Usually it is monetary. Your real estate attorney may be the only person in the immediate landscape who has no motivation except to insure that your interests are protected.

Conclusion

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

Because of the emphasis on sanctity of contract in Texas, once a deal is negotiated (the contract is signed) it is probably done, at least in the absence of actual fraud. Consulting an attorney after the fact becomes an embarrassing reminder not to make that error again.