The Right Thing To Do When The Deal Goes Wrong

MICHAEL REPKA, ESQ. DeLeon Realty CEO – March 10, 2017

Unlike many states, California does not require attorney involvement in the purchase and sale of residential real estate. Although this works out fine in roughly 98 percent of the transactions, many people find themselves in a real jam the remaining two percent of the time. Unfortunately, most people assume everything will work out perfectly when they are selecting a real estate agent, only to find out they are on their own once things go wrong.

Further, there are several common misconceptions that can give clients false comfort. First, agents often say they have access to an attorney. While it is true that most large brokerages have limited access to an attorney, those attorneys are generally focused on protecting the brokerage. The brokerage’s interests may directly conflict with the clients’ interests. It is usually not long before the clients are told they have to hire their own attorney—and at considerable cost. A simple way to determine whether the brokerage truly provides access to an attorney is to request a meeting with the attorney up front to discuss the buying or selling process and your situation.

Second, almost all clients vastly overestimate their agent’s legal acumen, especially if that agent has years of experience as a real estate agent. In fact, most agents seem oblivious to their own lack of technical knowledge. For legitimate reasons, agents are not trained in the nuances of very important legal and tax issues. The rationale is that training agents in these fields will embolden them, and they will attempt to explain the issues to their clients. Understanding there is material risk that agents may explain these issues incorrectly, creating liability for the brokerage, agents are trained to tell the clients they cannot give legal advice. Needless to say, DeLeon Realty takes an entirely different approach.

Interestingly, the California Bar Association takes the position that lawyers working for the other major brokerages around the Platinum Core of Silicon Valley cannot provide legal advice as part of their real estate services. The rationale is that some portion of the commission earned would be attributable to the legal services. Given that the non-lawyer owners of the brokerage would be making money from these legal services, the Bar Association deems it an unlawful splitting of legal fees with a non-lawyer.

Fortunately, DeLeon Realty is wholly attorney-owned. Thus, attorneys at DeLeon Realty are able to provide legal services at no additional cost to its clients.

Disputes Over Deposits

A simple example of the potential conflicts of interest and lack of legal knowledge that comes up fairly regularly pertains to the appropriate distribution of the three-percent deposit after a breach of contract. Occasionally, buyers decide they are unable or unwilling to close on a purchase irrespective of the fact that they have no contingencies or other legal justification that excuses performance. The fight then becomes about the appropriate distribution of the deposit.

Interestingly, many listing agents tell their sellers they should give in and return the deposit once the buyers have dug in their heels. I have heard stories of sellers being told the buyers can block the sale to other buyers—which is not true in the vast majority of circumstances—so they should return the deposit and move on. This is generally bad advice. But then again, it is good for the agents because it means that they will get their commission after the sale to the new buyers. Even if the sales price is lower, the marginal difference to the agent’s commission will be insignificant compared to the loss the sellers could endure. More importantly, self-interested real estate agents realize that returning the deposit dramatically reduces the chance that the agents and their brokerage will be pulled into a legal proceeding.

Recently, I had dinner with one of the top agents at one of the largest brokerages in the area. The agent said she was interested in joining DeLeon Realty because she was very impressed by how far we went to protect our seller’s rights when one of her buyers breached the contract. Interestingly, she explained her office’s policy is to always recommend the return of the entire deposit to the buyers so as to avoid potential exposure to a lawsuit and get the property back on the market. This agent confessed she didn’t even know of the applicable legal arguments until she read the letter she received from my law firm.

The traditional commission-based model in real estate is fundamentally flawed. Buyers and sellers need sound professional advice that includes the legal and tax ramifications associated with a number of different issues. Unfortunately, agents with no legal training—who only get paid if the transaction closes—are not the best source of independent, unbiased advice.