12 P.M. PST, July 11, 2016
Contact: Leila Banijamali
San Francisco, California | July 11, 2016
Who are the Professionals?
Buying or selling real estate is the largest investment that most people make during the course of their lives. During the real estate transaction due diligence process, a buyer or seller may choose to engage the services of a variety of experts, including a broker, lawyer, tax advisor, inspector, appraiser, and architect. While using all of these experts in a single transaction may be overkill (depending on the particulars of the situation at hand), in California, there is no legal requirement to use any of these professionals for the purchase or sale of real estate. Still, most buyers or sellers of real estate still seek the help of brokers or lawyers with their real estate transactions. This article focuses on the benefits of using real estate brokers and lawyers in a real estate acquisition or sale and how to manage both.
Ethical Duties of Real Estate Brokers and Lawyers
A buyer or seller’s relationship with their real estate broker is contractual in nature and is regulated, in part, by (in California) the California Bureau of Real Estate. Brokers are typically paid on a commission basis as a percentage of the sale price. An attorney-client relationship exists between attorneys and their clients that is governed by the attorney’s engagement agreement and regulated by the State Bar. Lawyers are typically paid on an hourly basis, though they have considerable flexibility with alternative fee arrangements, which are growing in popularity.
Brokers and lawyers both owe their clients all of the duties and responsibilities to which they agreed in writing as well as all the ethical duties and responsibilities that are owed to clients by virtue of being a licensed professional. For this reason, brokers and lawyers owe clients a series of ethical duties, including the duties of integrity, honesty, loyalty, and confidentiality, regardless of whether a transaction is ratified. A client should feel like they can fully entrust their broker or lawyer with the greatest responsibilities and should steer clear from brokers or lawyers that are willing to compromise ethical duties for the sake of their own profit.
Caution: Beware of agents who know you are working with another agent and still try to win your business. They will go to any lengths to make an extra profit and have no problems comprising their fiduciary duties to their own clients.
Using a Real Estate Broker to Help You Buy or Sell Real Estate
Based on conversations with clients and industry professionals, we’ve pinpointed the top reasons to engage the services of a real estate agent to purchase or sell real estate are:
- Brokers are market experts that understand certain nuances of a real estate transaction on both a micro and macro scale within a target city. A good broker that invests her time among colleagues, industry professionals, and in the market trenches on a daily basis, understands pricing and value and can confidently advise clients of market trends to inform successful sales and purchase strategies.
- Brokers provide buyers with early access to properties before they hit the market. This is particularly important in hot markets, such as San Francisco and New York (see below for more).
- Marketing and sales are two core functions of a real estate broker. Despite premium commission rates, successful brokers are in high demand by sophisticated clients since the value brokers provide through their marketing prowess and sales channels is unmatched by other professionals. By way of example, the top brokerage firms have national and international agent networks. They host weekly agent meetings where agents have an opportunity to present upcoming real estate listings that have not yet been released to the public. Agents representing buyers also have an opportunity to represent the needs of their buyers in detail at these meetings. Since agents are typically paid on a commission basis, everyone at the agency is motivated to get a piece of a transaction and it’s not uncommon to build serious traction for real estate sales even before these properties hit the open market. That’s why it’s absolutely critical for buyers and sellers of real estate to work with only the highest ranked agencies in town – so that they can have access to the largest pool of pre-approved buyers and off-market properties.
Using a Lawyer to Buy or Sell Real Estate
Here are the top reasons a buyer or seller might engage the services of a lawyer to help with the purchase or sale of real estate:
- Lawyers provide legal advice. Only lawyers can advise on a client’s legal rights and remedies that is tailored to their specific situation. If a client requests the same kind of advice from a broker who is not a lawyer, that broker will not be able to provide any legal advice and must, instead, refer the client to a lawyer for help. The referral process will result in delays and additional fees. Working with a broker who is also a lawyer can resolve this, though the broker should be clear, preferably in a written agreement, about her separate roles as a lawyer vs. broker.
- To negotiate (and enforce) complex, non-standard terms in a real estate transaction. This includes landlord-tenant issues, special disclaimers or deed restrictions, any addenda etc.). Working with an experienced contract lawyer who is accustomed to both negotiating and drafting legal terms will help expedite the process. A lawyer may be able to follow a contract through to enforcement, if needed, which tends to provide clients with added security.
- The buyer and seller have already settled on the property and price. In some cases, a buyer or seller of real estate may have no reasonable need for a market expert or professional sales person and they just need assistance with formalizing the transaction in writing. This is a rare example of when a lawyer might be used on an hourly or fixed fee basis in place of a commission-based real estate broker. In this case, each of the buyer and seller may want to engage the services of their own independent lawyers to draft the purchase agreement and prepare the disclosure documents, then follow the transaction through escrow to close. Sometimes, this can be more cost effective for the seller than a 6% commission arrangement with a broker. On the other hand, if a buyer and seller choose to use lawyers, instead of brokers, in the purchase and sale of real estate, each party must separately engage the services of their own lawyers and, thus separately pay for their lawyers’ legal fees. In a brokered transaction, a buyer does not typically pay any brokerage fees since those fees are deducted from the seller’s sale price but, when a buyer engages the services of a lawyer, she must always pay for her own legal fees out-of-pocket, whether or not the transaction closes.
There are many excellent attorneys who are also licensed real estate brokers and can represent clients for the same fee earned by real estate agents.
Bedrock’s Principal Attorney, Leila Banijamali, is a licensed California real estate broker and she represents investors in the purchase or sale of commercial real estate at Bedrock and residential real estate through her affiliation with Vanguard Properties, San Francisco’s top residential real estate agency in the coveted District 9 (SOMA, Yerba Buena, The Mission, Mission Bay, and South Beach). Contact Leila for a complimentary consultation and investor report.