By Michael Repka, Esq.
After obtaining my first law degree back in 1999, I took and passed the New York and New Jersey bar exams. In both states, real estate agents help clients buy and sell real estate, but they do not delve into all of the legal, tax, and contractor questions that comprise an essential part of each transaction. Instead, residential real estate attorneys provide legal advice and counsel for the myriad of deal structures and potential pitfalls out there. Spending the formative years of my legal career in this environment, it seemed very logical for clients to obtain unbiased advice from qualified attorneys with the appropriate professional training, rather than from blind reliance on real estate agents who lack the requisite professional preparation and on decisions that may be unduly influenced by commission.
Upon moving to California, I was distressed to learn that most buyers and sellers of multi-million-dollar pieces of real estate transact without any professional legal or tax advice. To me, this seemed like playing football without understanding the rules or wearing a helmet. Even the listing agreements used by most local Realtors® contain clauses that most sellers should find objectionable. Nevertheless, these provisions slide through seemingly unnoticed.
Real Estate in California
Unlike requirements in 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% of transactions, many people find themselves in a real jam in that other 2% of the time. Unfortunately, most people assume that everything will work out correctly when they select a real estate agent only to find out that they are on their own once things go wrong.
Further, several common misconceptions give some clients false comfort. Firstly, agents often say that 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. At times, the brokerage’s interest may directly conflict with the client’s interest. The brokerage may tell clients to hire their own attorney—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 home buying or selling process and your situation.
Secondly, almost all clients vastly overestimate their agent’s legal acumen, especially if that agent has years of experience. In fact, most agents seem oblivious to their own lack of technical knowledge. For legitimate reasons, agents are not trained in the nuances of critical legal and tax issues. The rationale is that training agents in these fields will embolden them to attempt to explain the issues to their clients. Understanding that there is a material risk that the agent will misdescribe the issue, which would create liability for the brokerage, the agents, instead, are trained to tell the clients that they cannot give legal advice. 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 this situation as an unlawful splitting of legal fees with a non-lawyer.
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 3% deposit after a breach of contract. Occasionally a buyer decides that he/she is unable or unwilling to close on a purchase irrespective of the fact that he/she has no contingencies or other legal justification that excuses reneging. The fight then becomes about the appropriate distribution of the deposit.
Many listing agents, then, tell their sellers that they should give in and return the deposit once the buyer has dug in his/her heels. I have heard stories of sellers being told that the balking buyer can block the sale to other buyers. This is not true in the vast majority of circumstances. Sellers are advised to return the deposit and move on. Doing so is generally bad advice. However, to illustrate the conflict, moving on is good for the agent because it means that he/she will get his/her commission after the sale to another buyer. Even if the new sale price is lower, the marginal difference to the agent’s commission will be insignificant compared to the loss the seller will endure. More importantly, self-interested real estate agents realize that returning the deposit reduces, dramatically, the chance that the agent and their brokerage will be pulled into a legal proceeding.
I recall having dinner with a top agent at one of the largest brokerages in the area. The agent said that she was interested in joining DeLeon Realty because she was very impressed by how far we went to protect the rights of our client when one of her buyers breached the contract. She revealed that her office’s policy is always to recommend the return of the entire deposit to buyer to avoid potential exposure to a lawsuit and get the property back on the market. This agent confessed that 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 several 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.
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