Addressing the Relative lack of Attorney Involvement in Residential Real Estate Transactions

Imagine having purchased a brand new car.

That first few weeks of driving are glorious.  Quick take off. Smooth acceleration.  You can get lost in a sound system that rivals the acoustics of Heinz Hall.

The new car feel

Then it happens. Already late for a settlement conference involving your client’s suit for fraud and negligence in a residential real estate transaction, the engine starts to sputter. You pull to the side of the road and immediately call the dealership. Already sensing your level of frustration, the manager reminds you that Pennsylvania has a ‘lemon law’.

Your emotions having been eased by that reminder, a feeling of ironic reflection hits you as you realize that there is no such thing as a ‘lemon law’ for the purchase of residential real estate.

Save for extremely rare circumstances, there is no real means of “returning” ownership to the seller if there is a problem after closing…….even with a receipt.

Since a buyer of a home is not armed with a post purchase “lemon law” for protection, common sense would dictate that any buyer hire the best professional possible for advocacy and representation of his/her interests….namely a lawyer. In theory, that lawyer would be able to represent him/her throughout the entire process, from initial contract to closing.

However, in the fast paced world of metro Pittsburgh residential real estate, it can be highly impractical for a lawyer to be involved at the outset of negotiations. Emotions run very high. Homes can often go under agreement as late as 1 AM. Multiple bids can be the norm. If a buyer really loves a house, and takes the time for any offer to be reviewed by a lawyer, he/she runs the risk of losing the home to another buyer.

Instead of lawyers, for all practical purposes, the “representation” of buyers has been essentially left to real estate licensees through the use of forms. The general forms used in the overwhelming majority of the residential real estate transactions in metro Pittsburgh are published by the Pennsylvania Association of Realtors® (PAR). In and of itself, this status would not be so potentially problematic…….except for the existence of “dual agency”.  Pennsylvania allows for dual agency.

Dual agency permits the same brokerage (even the same agent) to “represent” both the seller AND buyer, in the same transaction.  An offshoot of dual agency, known as “designated agency”, allows for the regular creation of “barriers” within the SAME brokerage, such that one “agent”, can “represent” the seller and another “agent”, can “represent” the buyer. All the while, the broker of record remains, still, a dual agent.

As one can imagine, conflicts of interest, both existing and potential, abound…..much to the potential detriment of the buyer.

What is a buyer to do?  While it is possible for a buyer to find and hire an exclusive buyer agency at the outset of his/her home search (thereby virtually eliminating the pitfalls presented by “dual agency”), companies such as this are rare.

Yet, there is a point in time where a lawyer can have an impactful role which goes way beyond the mere cursory review of the buyer’s loan documents, deed, title policy and CD at closing.

That point in time is immediately once an agreement of sale is signed.  Often, dual agency, in some form, has attached and the buyer is now, effectively, left with no advocate. A lawyer, as that advocate, can make sure the buyer stays on top of the due diligence time periods, so no inspection is inadvertently waived for lack of action.  Most importantly, a lawyer can help the buyer re-negotiate terms of the agreement, thereby relieving the buyer of having to “rely” on the advice of a real estate agent who may be in a compromised position.

Other states go to great lengths to ensure attorney involvement in the residential transaction. The “standard” agreement of sale form in New Jersey includes a contingency for “attorney review”.  South Carolina and Georgia go so far as to actually require attorney involvement, to some degree, in every residential real estate transaction.

At this point, Pennsylvania is not there.  So, buyers are not going to be required to knock on a lawyer’s door for help. Yet, with adequate marketing, home buyers can be made aware of the vital role an attorney can have in the home buying process, even if it is limited to the time immediately after a home is put under agreement. That guidance from a lawyer may help insure that the buyer does not get stuck with a “lemon”.

On any given day, there exist a finite number of homes that are for sale.  The overwhelming majority of them ( easily over 90%) are in the local MLS. This creates a great liklihood that dual agency may occur.

When a brokerage takes a “listing”, that brokerage has a financial incentive to “sell” that home to a buyer which the brokerage also “represents”.  The dangers of dual agency are often discussed in terms of harm to a buyer.  However, inherent in the term “dual” is the word two.  So, the limited representation affects the seller as well.

So, in a dual agency situation, assume the buyer presents an offer that is contingent on the sale of a home.  How does the agency fully inform the seller about the potential pitfalls of such a situation? Can the “dual agent” actually let the seller know about the pitfalls ?

Likely, the answer is no.  Why ?  For to do so is arguably against the interest of the buyer, who clearly wants to purchase that house.

Thus, the seller is compromised relative to obtaining professional advice in a dual agency situation as well.

CASE IN POINT

In the now famous 2016 Horiike Dual Agency case in California, the danger of dual agency to the danger and negative outcome to the buyer was buyer is obvious. In Malibu, a buyer relied upon “inaction” from a dual agent who kinda failed to let the buyer know that the livable square footage of the home was actually about 8700 sf, as opposed to the advertised 15,000 sf.

EXAMPLE COMPROMISE SITUATIONS OF SELLER

However, many a seller can have his or her situation compromised by dual agency situations as well.  What happens if 2 or more buyers are presenting competing bids on a seller’s home?  Whose independent advise does a seller rely upon at that point ?

What if the buyer has told the “dual agent” he/she is willing to pay up to 10% more for the home ?  The dual agent cannot explain that to the seller.  That would compromise the position of the buyer.

So, unless one wants to end up in court like the one pictured above, be careful about the real estate agent you chose.

With the start of the new year here in 2015, there is a good chance that buyers will run into a competitive bidding situation ( i.d. “bidding war”) for the same property.  We have had 2 in the last month:  One at the tail end of 2014 and one this first week of January, 2015.

Common sense suggests that the strategy for winning a “bidding war” stars once a buyer is alerted to the fact that there is a competitor to the initial offer.  The full truth is that the strategy should have started with the initial offer.

As the saying goes, you never get a second chance to make a first impression.

So, the first thing to do, as a buyer ( with the assistance of your Praedium EBA), is to research the actual “range of reasonableness” of value for the home; seeing if the listing price has any basis in reality. This can be done by looking at recent sold data ( as well as listing data ) for comparable homes in the area.

If the list price is not too high, it is BEST to make an offer that fits within the “range of reasonableness”.  Often, without care as to what the listing price is relative to its actual value, buyers will make an initial offer based on some pre-determined percentage “off” the list price.

So, if a house is listed for $200,000, an initial offer might be based on a predetermined 15% off the list.  Hence, that offer would be $170,000.  Yet, the data strongly suggests that a purchase price of $185-$190,000 is very reasonable.  You, as the buyer, know this.  You are perfectly happy with a purchase price of $190,000+.

So, if you, as the buyer makes that $170,000 initial offer, there is some truth to the perception that the seller may be “insulted”.  The seller decides to wait to counter.  Then, the next day, another offer comes in.

You, as the buyer, are alerted to the “bidding war” scenario.  Because you are comfortable offering $190,000+, you offer $191,000.  However, ( though unbeknownst to you ) the other buyer made an initial offer of $182,500.

BOTH of your Highest and Best offers come in.  Yours is $191,000.  The other is $190,000.  All other terms are pretty much the same.

The seller picks the $190,000 offer !!!  Why ? The seller rationalizes that you only went up to $191,000 as a result of competition. Hence, the seller fears that, as the situation unfolds, you may develop cold feet and try to pull out of the transaction.

Because the other INITIAL offer was significantly higher, the seller feels more comfortable dealing with THAT buyer because that buyer was more “into” the house from the beginning.

Sellers want the closing to happen.  They do pay attention to other items about an offer than just price.  So, while you, the first buyer, think that you should win the bidding war because your offer was higher, that first impression you made with the “low ball”, predetermined offer, led the seller to ultimately pick the perceived more sure thing in the form of the other buyer’s offer.