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Attorney Transaction Killers Series - Rule #1 for Attorney Review of Real Estate Transactions - Don't Change the Agreed Terms of the Transaction by Substituting Your Judgment for Your Customer's Judgment

Attorney Transaction Killer Series - Don't Rewrite the Deal

Rule #1 for Attorney Review of Real Estate Transactions

Don't Change the Agreed Terms of the Transaction

by Substituting Your Judgment for Your Customer's Judgment

As an attorney and a real estate broker, I understand the need for attorney review of some (not all) residential real estate transactions to protect the interests of the tenant or purchaser. However, this "How the Attorney Killed my Real Estate Deal" series will focus on how inexperienced attorneys can inadvertently kill a deal or transaction through overzealous negotiation, risk-proof contract drafting, and plain ineptitude. For the "How the Attorney Killed my Real Estate Deal" series,

Transaction Killer Factual Scenario:

The Listing Agent is offering a Property for sale or lease. The Property is the most desirable unit in the community and includes a substantial number of builder upgrades and is price - both for sale or lease - below market values and rental rates. The Customer has recently moved to the area and may or may not be able to immediately obtain employment thereby impacting his ability to obtain a conventional loan for the purchase of the Property. Customer views the Property with the Listing Agent.

Initial Options

The Customer, after discussing his credit and employment related issues with the Listing Agent, views the Property and inquires regarding leasing and purchase options for the Property. The Listing Agent indicates that there are six options offered by the Owner relating to the property, to wit:

  • Conventional Purchase
  • Purchase with 100% Seller Financing
  • Installment Sale
  • Lease with Option to Purchase
  • Lease with Right of First Refusal
  • Lease Purchase
  • Lease with No Right to Purchase

Proposals Submitted by Owner/Seller

The Customer has multiple conversations with the Listing Agent regarding the structure of the transaction. The Customer is balancing his desire to take advantage of discounted sales pricing for the Property with the current condition of his financial situation. After narrowing the options, the Listing Agent receives from the Customer an outline of his proposed terms for the rental and purchase of the Property. Using terms suggested by the Customer, the Listing Agent obtains preliminary approval of the transaction from the Owner. The Listing Agent then submits two separate proposals for the Customer's review:

  • Option #1 - Lease at Market Rental Rate of $1.00 per sq. ft. with Option to Purchase Property at Discounted Sales Price of $220,000.00.
  • Option #2 - Lease Purchase at above Market Rental Rate of $1.10 per sq. ft. with Purchase of Property at Discounted Sales Price of $200,000.00 with Seller Credit of 40% of the qualified Rental Payments.

Terms Agreed to by Owner/Seller and Customer/Purchaser

After further discussions with the Customer, the Customer then proposes a variation of Option #2. The terms of the revised proposal from the Customer are as follows:

  • 12 month Lease Purchase with below Market Rental Rate at $0.90 per sq. ft.
  • Purchase of the Property for $200,000.00 with Earnest Money of $2,000 paid over 10 month period.
  • Seller Credit at Closing equal to 40% of the qualified Rental Payments (ie. Rent Paid on or before the Due Date)

The Listing Agent promptly prepares the Lease and the Lease Purchase Addendum based on the proposed terms received from the Customer and submits the Lease and Lease Purchase Addendum to the Customer. The Customer, having already agreed to the proposed terms of the deal, then sends the Lease and Lease Purchase Addendum to the Customer's Attorney. The terms that have been fully discussed and negotiated include - the rental rate, the structure of the transaction as a lease purchase transaction, and the seller credit.

Attorney Review

After the Lease and Lease Purchase Addendum are delivered to the Customer, there is a delay of almost a week for "attorney review." On the 7th day after the transmittal of the Lease and Lease Purchase Addendum, the Listing Agent receives from the Customer's Attorney two poorly or oddly written documents - a Lease Addendum and an Addendum to the Lease Purchase Addendum. In the intervening period between the intial delivery of the Lease and Lease Purchase Addendum to Customer and receipt of the revisions from the Customer's Attorney, the Customer and/or the Customer's Attorney have given no indication that there would be any changes to the structure or agreed upon terms of the proposed transaction.

Different Proposal from Attorney

At first glance, the Lease Addendum and Addendum to the Purchase Agreement represent a drastic change to the structure and terms of the transaction. It blends the terms and conditions of the two original proposal and changes the transaction to a lease purchase (ie. sale) to a lease with option to purchase (ie. only a possibility of a sale). The terms of the new transaction proposed by the Customer's Attorney was as follows:

  • 12 month Lease with below Market Rental Rate at $0.90 per sq. ft.
  • Option to Purchase of the Property for $200,000.00
  • Seller Credit at Closing equal to 40% of the qualified Rental Payments (ie. Rent Paid on or before the Due Date)

Commentary:

Professional Representation

I am not a fan of dual agency. I am proponent of professional representation and believe that each tenant or purchaser is entitled to representation of their choosing. However, I would qualify this statement by stating that the real professional - whether attorney or real estate agent - should be introduced and used at the earliest possible time in the transaction.

Selecting the Right Professional

Now, I don't necessarily care whether a buyer or tenant is represented by a real estate agent or attorney. I do care that they are represented by a qualified professional. For example, an appraiser may be a poor advisor for a sales transaction if they are unfamiliar with the approved sales contracts, don't have a Supra key, don't have access to MLS, etc. - that is, if they don't have the tools necessary to do the job. Similarly, an attorney may be a poor advisor if he or she is not active in dealing with residential real estate transactions, isn't familiar with market conditions or standards practices, or has the wrong outlook or temperment.

Common Characteristics of the Attorney Transaction Killer

In the case above, there is absolutely no way to know what discussions were had between the Customer and the Customer's Attorney. The change in the structure and general terms of the transaction may have been initiated by the Customer or by the Customer's Attorney. However, given the nature of the discussion, it would appear that it was initiated by the Customer's Attorney. Often, an attorney who doesn't regularly handle residential real estate transaction may be an inappropriate choice to handle such a matter. Here are some common problems:

  • Combative temperment more focussed on winning the point as opposed to facilitatiing and closing the transaction.
  • Messiah complex that believes that you can make a transaction risk-free by drafting onerous or excessive provisions.
  • Lack of familiarity with common standards and practices associated with purchase or rental of real estate.

Often, it appears that client delegates negotiations to their attorney and do not fully understand why a transaction isn't moving forward in an expeditious manner. That is, they are detached from negotiations and fail to realize that their attorney is the cause or has contributed to the problem. Where the purchaser is represented only by an attorney and is not working with an agent, the problems are often exacerbated because there isn't a check or balance on the attorney and the client's only source of information on the status of negotiations or work performance of their attorney is their attorney.

Reopening Discussions on Settled Issues

In the case above, I can only speculate that the Customer's Attorney substituted her judgment as to the merits of the transaction for the judgment previously reached by the Customer. Instead of limiting the review to simply protecting the Customer's interest, the Customer's Attorney elected to reopen discussions and negotiations on settled issues such as the structure of the transaction, the monthly rental rate, and the availability of a seller credit, which was only available for the lease purchase and not the lease with option to purchase. The Customer, who was not represented by a real estate agent, failed to understand that the Customer's Attorney was a part of the problem and not a part of the solution.

The Rules:

So, here is a simple rule for attorney review:

Where there is no indication of undue influence or unfair bargaining or a sophisticated Owner taking advantage of less sophisticated or less knowledgeable Customer, the Attorney:

  • Should accept the basic terms of the transaction and shouldn't reopen discussions or negotiations on settled issues - especially sales price or rental rates - previously agreed to by the Owner and the Customer.
  • Should follow the general instructions provided by the Customer and shouldn't change the fundamental structure of the transaction previously agreed to by the Customer.
  • Should limit their review to identifying and assessing risk and shouldn't substitute his or her business decision or judgment of the merits of the transaction for the business decision or judgment of the merits of the transaction previously reached by the Customer.

Interested in professional representation by a real estate professional who understands the need to identify and assess risk without subsituting their judgment for the client's judgment? Contact Ryan Shaughnessy at PREA Signature Realty at 314-971-4381 or send an e-mail to Ryan@PREASignatureRealty.com.

Attorney Review Series

Attorney Review Series - Residential Leases

Posted Saturday Aug 15