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.
Paragraph 24 of the TREC One to Four Family Residential Contract provides a space for buyer and seller to list their respective attorneys on the transaction. The Texas Real Estate Commission was established in 1949 and TREC promulgated forms have been around for a long while. There’s a reason these contracts contain a space for the parties to designate their lawyers: it’s a good idea to have a lawyer when buying or selling real estate, beginning with the earnest money contract. In fact, TREC says expressly that one should consult an attorney before signing the contract.
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 and proper representation in the whole transaction. The first casualty is usually the initial consultation, since many prospective clients will now self-diagnose their transaction and assume that they already know what legally-related services and documents are going to be 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 as well as other complications; 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. These should all be thoroughly discussed with an attorney before the contract is signed and certainly before a buyer or seller gets deep into the process.
So skipping the initial consultation can be hazardous for the client. This can result in the process being forced to change 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 contract terms and 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 continuing 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 negotiating, document preparation, contract monitoring, due diligence, and 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 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 at the contract stage 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 only limited or partial representation along the way may have reason for concern at that point. Will he or she be held responsible, even though it was the client who deliberately excluded the lawyer from other critical phases of the deal? The disturbing answer for legal professionals is quite possibly yes.
Buyers and sellers need to look hard at the central question here: is it not shrewder, in the economic sense, particularly for real estate investors, to offload professional duties and potential liability onto an attorney? An attorney who (yes) will charge fees, but who can avoid nightmarish legal and financial consequences later?
Avoiding or reducing attorney’s fees by a relatively small amount is short-sighted if, in the end, a buyer or seller winds up dealing with a suit for breach of contract, misrepresentation, failure to disclose, or specific performance. 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. The memory of paying a treble-damages judgment plus $50,000 or so in attorney’s fees does tend to stick with one.
Who needs a lawyer for the whole transaction? 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
preparation of a special provisions addendum to the earnest money contract
loan commitment review/comment
loan commitment representation/negotiations
representation, negotiations, and discussions with professional representing the other party
representation, negotiations, and discussions regarding loan terms with the lender or its counsel
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
review/comment on the inspection(s)
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.
review of the proposed closing package prepared by others
appearance by the attorney at closing
recording of documents with the county clerk (if a title company is not involved)
In contemplating the foregoing, which is only a partial list, the first question that comes to mind is: Why not engage a lawyer from the beginning, for the whole transaction, so that he or she can deal with all of these issues as they occur? Doesn’t that make good sense? 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.
Contrast the foregoing strategy with the notion that an attorney should be brought in only when something goes wrong. In this view, he or she is a legal fire department who rushes in to extinguish a blazing dispute and then withdraws. The attorney has no ongoing contact, connection, or familiarity with the transaction. There is no knowledge of the “big picture” as the deal moves through its various stages from contract to closing. The client (buyer or seller) has no consistent professional guidance. According to this approach, as soon as the fire is extinguished the attorney should go away, and the client is then free to resume making mistakes and mishandling the transaction on a DIY basis.
This is comparable to waiting until it is raining to fix the roof. It is a fundamental error. It indicates a mistaken understanding of how optimal legal representation should work.
Moreover, once a transaction has burst into flames, it is often impossible to restore a sense of amity or cooperation amongst the parties—with or without legal help. The transaction may, for all intents and purposes, be dead.
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. It cannot be over-emphasized that both client and attorney should be crystal 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?
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.
The Special Provisions Addendum: Buyers Versus Sellers
Good as TREC and TAR contract and addenda are, they have certain weaknesses. From the buyer’s side, promulgated contracts are fall short in demanding full disclosure from sellers, especially when the “as is” option (paragraph 7.D(1) of the TREC 1-4 contract) is checked. Sellers frequently interpret this as a means of avoiding full disclosure of defects and adverse conditions. To make matters worse, the TREC residential seller’s disclosure even states (in all caps) that “THIS NOTICE . . . IS NOT A WARRANTY OF ANY KIND BY SELLER OR SELLER’S AGENTS.” Given these factors, it can be more than useful—it can be critical—for buyers to add a special provisions addendum making it abundantly clear that the seller has both an existing duty and an on-going duty to disclose under Texas law.
A comparable situation applies in the case of a seller who is determined to convey the property entirely “as is.” Is 7.D(1) adequate to make this happen? No. If a seller wants to assure an “as is” sale, a comprehensive provision to that effect must 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 contract can compel the inclusion of an “as is” clause (one that is satisfactory to the seller) in the deed.
Attorney Assistance with Creative Transactions
The foregoing are common considerations for standard transactions. What about transactions that may have certain non-standard aspects, like wraparounds and “subject to” deals? There are no promulgated addenda for these. Again, a special provisions addendum is the solution, and only an attorney can prepare one.
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 without counsel again.
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.
Let’s return to the topic of “as is” and consider 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.
The title company is an independent party to the transaction and will look after its own interests, which may not always coincide with the desires of the buyer and seller. It is not an advisor, friend, or even a neutral party—and the title company’s attorney is professionally obligated to pursue the title company’s best interests (even if one of the parties is paying the attorney’s bill). If you doubt this, ask yourself: when is the last time you witnessed any 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.
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 practicioners 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.
Why hire a lawyer? Don’t 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.
A Tale of Two Clients – The Value of Paying for Quality
There were once two men who were curious about a new restaurant in town called Le Bistro. The first, Alan, claimed he knew the best way to determine if the fare was excellent, fair, or poor. The second, William, had his own method in mind. The two decided that they would each try their respective technique and then, afterwards, meet to compare notes.
Alan went into Le Bistro and demanded to be seated immediately. The owner complied. Alan then instructed the owner to bring a sample of each main dish for Alan to try. Again, the owner complied. Some items were to Alan’s liking, others were less so. After all, he was a discriminating man and there were many other restaurants in town. As Alan stood to leave, the owner presented him with a bill. Alan sneered and said “Why should I pay you? I have only come to see if I wish to be your customer in the future. All that you have served me today should be free! I will pay for none of it.”
The owner bowed politely and Alan left. After the door closed, the owner turned to his assistants and said “Never, ever allow that man in here again.” They nodded and agreed.
The next day, William went to Le Bistro and asked for a table. The owner complied. William asked that he be brought the special of the day, and again the owner complied. William sampled the fare and considered it to be above average. When the meal was over, William gladly paid the bill and generously tipped his server. He shook the owner’s hand as he left saying “I will come here again often.” After the door closed, the owner turned to his assistants and said “That man is welcome here at any time. Always, always make him feel at home.” The assistants nodded. They had known the owner for a long time and understood perfectly.
Some time later Alan and William met to discuss the matter. Alan was contemptuous of the restaurant owner and his establishment, saying that he could easily find other eateries that served larger helpings of cheaper food. William responded by saying that quantity is not the same as quality.
Six months later, William was saddened to read in the newspaper that his friend Alan had died of food poisoning. Alan had dined at a Chinese restaurant that served stale cat instead of the chicken that was advertised on the menu. William shook his head and relayed these events to his new friend, the owner of Le Bistro. They were sad for Alan, but agreed that Alan had brought his fate upon himself, since he had found the cheap meal he had been looking for. In the years that followed, William celebrated many special occasions at Le Bistro. Gradually, he forgot about Alan.
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 © 2021 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.