Monday, November 10, 2014

Should You Hire a Real Estate Agent or Lawyer to Buy a House?

Should You Hire a Real Estate Agent or Lawyer to Buy a House?

If you’re selling a house in California, then it’s critical that you have a licensed real estate agent list your property on the Multiple Listing Service (MLS) so that the seller obtains the best marketing exposure; but, if you’re buying a house, you might be surprised to learn that using a lawyer is often a better alternative to the normal agency relationship.  Here’s why:

Lawyers Owe their Clients Higher Duties than Agents

Real estate agents owe their clients typical fiduciary duties of good faith, fair dealing and full disclosure, but these duties are fairly limited.  For example, agents in California can (and often do) represent both the buyer and seller of a home, or may even have a personal interest in the transaction, as long as the proper disclosures are made.  Lawyers, on the other hand, are ethically bound to avoid conflicts of interest by representing only the interests of one party, and a lawyer may not have a personal interest in the transaction.  Lawyers owe their clients the highest duties of loyalty and fidelity.    

Agents Cannot Give Legal Advice

Real estate agents are not authorized to practice law.  This means that they can help negotiate and fill-in blanks on a form selected by the parties or act as a scrivener in recording the parties' agreement, but that’s about it.  Lawyers, on the other hand, are specifically trained and authorized to practice law without limitation.  Moreover, lawyers owe their clients a duty of competency, including a duty of diligence that far exceeds the duties of a real estate agent.  This means that lawyers are supposed to think about and anticipate potential problems in the transaction that agents often overlook (often resulting in expensive litigation), and lawyers must advise their clients accordingly. 

Agents Are Paid Only if the Sale is Completed

This may sound like a benefit to a homebuyer, but the fact that a real estate agent only earns a commission if the deal closes creates inherent conflict and bias in the agency relationship.  The agent is obviously incentivized to make sure the transaction is completed so they can get paid, even if the closing may not be in the buyer’s best interests.  This conflict is even more pronounced when the agent represents both the buyer and seller in the transaction, since a buyer’s interest is in direct conflict with the seller’s interests—the buyer wants the lowest possible price while the seller wants the highest possible price.  Recognizing this inherent conflict, some states actually prohibit such dual agency.  Lawyers, on the other hand, typically charge an hourly or flat fee, such that they are unaffected by the transaction itself. 

The Best of Both Worlds

Real estate lawyers are often more knowledgeable about their local real estate markets than the average real estate agent, and they have access to the same tools as the agents, but a lawyer's focus is strictly put on you, as the buyer.  Some law firms (like even have lawyers on staff that are also licensed real estate brokers, and may offer flat-fee and hybrid contingency fee arrangements, so that the home buyer client can realize the benefit of the commission based fee structure without suffering the detriment and inherent conflict that taints the typical agency relationship.  

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