I Have a Real Estate Agent.
Do I Also Need a Lawyer?
I often receive calls from prospective homebuyers and commercial tenants (collectively, "buyers") who say, "I am 'represented' by a real estate agent. Do I also need a real estate lawyer?" The short answer is, "Yes."
For most people, buying a house, or leasing and improving commercial space, represents the single largest financial investment of a lifetime. If one is ever going to seek legal advice, this is a good time to do so. This fact is widely recognized in the eastern United States, where most buyers and sellers are represented by lawyers.
Yet, in the western United States most buyers and sellers are not represented by lawyers. Ironically these buyers and sellers (who are the parties with the most at stake) are typically the only parties involved in the transaction who are not represented by lawyers. Developers, real estate agents and lenders all recognize the risks and complexity of real estate transactions. That is why these parties are almost always represented and advised by lawyers. Buyers and sellers need and deserve no less.
The Role of the Agent. An ethical and competent real estate agent (an "agent") provides valuable services to his or her "principal". The particular duties of the agent vary depending upon whether the agent is acting as a "seller's agent", a "buyer's agent", or a so-called "dual agent". For example, the services offered by a buyer's agent typically include the following:
- Valuation – advising the buyer about the value of the property, when compared with similar properties, so that the buyer can make an informed choice about how much to pay for the property
- Preparing and Presenting the Offer – preparing a “standard” real estate Purchase and Sale Agreement, by filling in preprinted forms and addenda (written by lawyers for the real estate brokerage industry), and then presenting these documents to the buyer and seller for signature
Agents in the western United States typically make themselves the conduit for virtually all of the communication between buyers and sellers. Nonetheless, the actual duties of a buyer's agent are typically limited to the matters described above. As discussed in my article titled A Homebuyer's Survival Guide, a prudent buyer has a lot more than this to be concerned about. The agent is not allowed to provide legal advice (unless the agent happens also to be a lawyer). And, despite common parlance, the agent does not "represent" his or her principal in the same sense that a lawyer represents his or her client.
The Role of the Lawyer. The lawyer's role is distinct from, and much broader than, the role of the agent. Lawyers are uniquely trained and licensed to address the myriad legal issues that arise in real estate transactions. The legal interests and concerns of buyers are different from the interests and concerns of sellers (and agents). Buyers have a lot more to think about than anyone else in the transaction. For this reason, and for purposes of comparison to the role of the "buyer's agent", I list here the primary services offered by a buyer's lawyer in a real estate transaction:
- Negotiating and Drafting the Purchase and Sale Agreement. The time for a buyer to see a lawyer is before signing a purchase and sale agreement. Contrary to popular belief, and despite the prevalence of forms written by and for the real estate industry, there is no such thing as a "standard" purchase and sale agreement. No two transactions are exactly alike. It is only for the convenience of agents and residential developers that most parties in Washington use the pre-printed forms written (with the help of lawyers) by the Northwest Multiple Listing Service. Agents use this form because: (a) drafting a purchase and sale agreement is a highly technical undertaking that involves the practice of law, (b) agents are prohibited from practicing law (however, they are allowed to complete the preprinted forms), (c) drafting individualized purchase and sale agreements is (at least for the untrained) more time consuming and risk-laden than filling in the forms, (d) the forms include numerous provisions that protect agents, and (e) the forms tend to favor sellers over buyers by forcing either a closing or a rescission within a brief amount of time (i.e., the buyer is forced to "take it or leave it", despite time and money spent on inspections, and despite omissions and misrepresentations that those inspections might reveal). In short, the forms are not very "buyer-friendly". Most lawyers representing buyers will want either to draft a customized purchase and sale agreement (from a template that the lawyer has used when representing other buyers) or to draft an addendum that alters the terms of the preprinted forms.
- Reviewing Title Matters. In most residential transactions, the seller is required to deliver to the buyer a title insurance commitment, including copies of all documents described in the title insurance "exceptions". "Exceptions" are matters for which the title insurance company will not provide coverage. The exceptions vary from one property to another, and include such things as covenants, easements and other matters that will affect the buyer's use and enjoyment of the property. A prudent buyer will have a real estate lawyer review the title insurance commitment and exceptions. Agents are not trained or licensed to review or interpret these important documents.
- Reviewing Survey Matters. A prudent buyer will in most cases obtain, and have a real estate lawyer review, a survey of the property. The reasons to obtain and review a survey are explained in my article titled The Importance Land of Surveys.
- Addressing Issues Unique to the Property. Many properties are affected by matters that are unique to the property. Examples include issues of access, views, development of adjoining properties, easements, environmental concerns, well water, and septic disposal. A real estate lawyer can help the buyer identify and address these issues prior to closing, so as to avoid unpleasant surprises after purchasing the property.
- Recommending Other Inspections and Specialists. There are situations in which a buyer would benefit from the advice of an expert or specialist other than a real estate lawyer. The real estate lawyer can help identify these issues and situations, and refer the buyer to appropriate service providers.
- Reviewing Closing Documents. Despite federal legislation that has made residential closing statements (also called settlement statements) more uniform, most inexperienced buyers still find these documents challenging to interpret. A real estate lawyer can help review these documents to make sure that all charges to the buyer are appropriate, and that the closing statement complies with the purchase and sale agreement, and with the "Good Faith Estimate of Closing Costs" that lenders are required to provide to the buyer.
- Serving as Confidant, Advisor and Advocate. The lawyer will keep in strict confidence the things that the client identifies as confidential. The lawyer is a also a reliable source of accurate and timely legal advice that is based solely upon the best interests of the client. And the lawyer will (if the client desires) vigorously advocate for the rights of the client. This is especially important when the buyer might not be aware of his or her rights, or feels pressured and uncomfortable about asserting those rights.
The Broker's Compensation. Commissions payable to agents are by far the largest cost in connection with most residential real estate transactions. Commissions typically range from 3-6% of the purchase price (or as much as 10% of the rent payable in the case of a lease). In markets where the average home price is $500,000, this means that average commissions amount to as much as $30,000. Although commissions are usually "paid by the seller," in reality the buyer is paying all or most of this cost in the form of a higher purchase price. Agents are typically paid only if the transaction closes. This contingent fee arrangement explains in part why agent commissions are so large when compared with other transaction costs. However, this same contingent fee arrangement puts pressure on agents to close transactions quickly and with the least amount of fuss and bother. This bias is sometimes not in the best interest of the buyer (for example, when inspections reveal adverse matters that were not known when the buyer signed the purchase and sale agreement).
The Lawyer's Compensation. The lawyer's compensation is modest by comparison (typically less than $2,500 to represent a buyer in a transaction that closes without significant conflict), despite the lawyer's broader duties to the client. However, this compensation is not contingent upon whether the transaction closes. The lawyer can therefore focus on the best interests of the client, without financial pressures that can adversely affect professional judgment and advice.
The Agent's Perception of the Lawyer as "Deal Breaker". There has long been some professional tension between agents and lawyers. Agents sometimes perceive lawyers as potential "deal breakers". They believe that lawyers tend to "create" problems (as opposed to revealing or resolving them), and that lawyers are a threat to the closing of the transactions, and therefore a threat to the agents' commissions. A "buyer's agent" is required by law to advise the buyer to seek expert advice on matters relating to the transaction that are beyond the agent's expertise. This necessarily includes matters calling for legal advice. However, in practice, agents seldom refer their principals to lawyers unless and until there is an impasse in the transaction.
The Lawyer's Role as "Deal Maker". Contrary to the perceptions of some agents, a real estate lawyer knows that he is not serving the client's best interest if he merely scares the client away from a particular property. An experienced real estate lawyer understands and explains to the client that no property or transaction is completely without risk. A major part of the lawyer's job is to help the client identify and understand those risks so that the client can make informed decisions. Another important part of the lawyer's job is finding creative solutions to the problems and conflicts that sometime occur. In most cases, it is possible for all parties (including the agents) to "win". However, in some cases a mutually beneficial resolution cannot be reached. In those cases, a prudent buyer might decline to purchase the property. In such situations the lawyer might be the messenger, but is not the cause.
Agents and Lawyers as Members of the Same Team. Agents and lawyers each provide important, but different, services to buyers and sellers. Neither one is a substitute for the other. Working together, agents and lawyers can help the parties achieve their objectives and minimize the risk of surprises and resulting conflict.
Please remember that this article contains only the most basic information about its subject matter. I do not intend this article to contain legal advice specific to any particular person or situation. Before entering into any agreement concerning your property, I urge you to consult with a real estate lawyer and with your tax or estate planning advisor.
Strictly speaking, agents do not have "clients," although they frequently refer to their "principals" as their "clients". For a more complete explanation of the relationship between the agent and his or her principal, see RCW Chapter 18.86 (titled “Real Estate Brokerage Relationships”). That chapter refers only to "agents" and "principals". The word "client" does not appear anywhere in the statutes. Traditionally, the term "client" was reserved for a person who hired a "professional" to render professional services. The term "professional" once referred only to licensed service providers who were required to obtain post-college degrees before they could lawfully practice. The traditional professions included medicine, law, accounting, engineering and architecture. Lawyers, like most traditional professionals, have a fiduciary duty to their clients. This means that the lawyer must place the client's interests above the lawyer's interests. It is questionable whether an agent has any such duty to the agent's principal.
The duties of a "seller's agent" are described in RCW 18.86.040. The duties of a "buyer's agent" are described in RCW 18.86.050. And the duties of a "dual agent" are described in RCW 18.86.060.
A lawyer's duties to his or her client are extensive and explicit. In Washington, those duties are described in the Rules of Professional Conduct (RPCs). For examples, a lawyer has duties of competence, loyalty, and confidentiality, all of which are spelled out in detail by the RPCs. A lawyer also has a duty of "zealous advocacy." A lawyer has a fiduciary duty to the client and must hold the client's interests above those of the lawyer. A lawyer who violates any of these duties is subject to professional discipline and can even have his or her license suspended or revoked. The duties of a real estate agent to a principal are found in RCW 18.86.030 et seq. An agent's duties to a principal are quite limited when compared with the duties of a lawyer to a client. And an agent's breach of these duties typically involves lesser consequences to the agent.
The legal issues and concerns of a commercial tenant are beyond the scope of this article. I hope eventually to include on this web site an article on the topic of commercial leases.