Why Hire An Attorney To Guide Your Real Estate Brokerage?

Real Estate Broker/Owner with Achieve Realty, Inc.

There are several reasons to have an attorney throughout the life of your brokerage business. Initially, a lawyer will help decide which entity is best for you. Once a decision is made about choice of entity - from sole proprietorship, limited or general partnership, to LLC or incorporation - a lawyer will complete and file the necessary paperwork to register the entity with the state and the IRS. A tax identification number should be obtained and, if you choose to form a "sub-S" corporation, the filing must occur within a requisite period of time.  (Also, some states have an ongoing requirement to periodically re-register with them.) If you choose to buy a franchise, you'll need a lawyer to read and explain the franchise paperwork to you.

Construction and adoption of your entity-governing documents is the next step. If you are going into business by yourself, this process is made easier because you don't have to worry about all the scenarios that can unfold with a partnership. If you are going into business with a partner or partners, the process of creating entity-governing documents becomes much more difficult.

Besides providing language that establishes the tax structure for the entity, the entity-governing documents (known as Partnership Agreements, Membership Agreements or Corporate By-Laws), dictate how the business should run. There should be a voting process to resolve disputes, amend or create new rules for the entity. When you are contemplating the creation of your entity, you should also contemplate several other topics such as: what happens if a partner dies; what happens if a partner wishes to work for a competitor; what happens if a partner wants out of the business; what happens if a partner becomes ill; what happens if a partner wishes to sell his ownership interest to an outsider. These are just a few examples of issues that can arise. By having a clear mutual agreement about how to tackle the problems I just mentioned, partners can prevent headaches from occurring and more importantly, hopefully alleviate a painful, costly "business divorce."

Once the entity is formed and registered and the entity-governing documents are signed, the lawyer's job is just beginning. The next job for your lawyer is to formulate a list of documents required for each of your transactions. The listing side of the transaction has it's own set of unique documents and the buyer's side has another set of unique documents. Some of these documents are required by the state; some of these documents are required by your multiple listing service; and some of these documents will be strongly recommended by your lawyer to reduce legal liability. For example, we have a document that was tailored as a response to an incident that occurred. To paraphrase, it says "sellers should safe-keep all their valuables - like watches, jewelry, and pharmaceuticals - and if they're stolen during an open house or other viewing, the agent is not legally responsible."

As you may know, the practice of real estate is governed or impacted by many laws including, but not limited to, RESPA, State Real Estate Licensing Act, State Sellers Disclosure Act, Real Estate Commission Guidelines, REALTOR(R) Code of Ethics, Uniform Condominium Act, State and Federal Environmental Laws, Local Ordinances, and Multi-List Regulations. There are real estate lawyers out there who have working knowledge of all these rules and how they might effect your business or transaction. If your lawyer is available at a moment's notice to answer a question from you, your agent, or your client, you can prevent problems from occurring. Here are some other reasons to have a lawyer on-call: 

Let's not forget contract law! The Agreement of Sale is a legally binding contract. Contract law is a complicated subject. REALTORS(R) are expected to have a firm grasp of contract law so that they can help their customers form contracts to purchase or sell real estate. REALTORS(R) are also expected to draft contracts in a manner that is beneficial to their clients. Finally, REALTORS(R) are supposed to be able to explain to their customers how an Agreement of Sale and/or contingency addendum dictates the transaction. A lawyer should be available at a moment's notice to answer any questions.

Have you ever drafted language for an addendum? If so, you are taking great legal risk. There's probably some occurrence that you haven't thought of. Moreover, sometimes the words you write can have unintended consequences. I recommend against writing your own addenda or contractual clauses without a lawyer's approval. It is possible that your lawyer already has a "forms library" created so that, after a brief conversation with you, she can quickly email a form from her database.

Finally, a lawyer is helpful in resolving disputes. For example, if you have a client who is "under contract" to sell her house and the buyer has stated their intention to breach the contract, there are steps that should be followed and evidence to be gathered in case there is a future lawsuit. Lawyers will advise the sellers what steps to take in order to preserve their legal rights against the buyers and get their property back on the market as quickly as possible. There are innumerable instances when disputes arise between the parties to a contract or their real estate agents. Since lawyers understand the "end game," ie., what happens if the case ends up in court, they can provide incredible advice to the parties in order to reduce or mitigate their damages.

In closing, I've explained why it's important to have a good real estate lawyer on retainer. It is also a good idea to have that lawyer present annual risk-reduction seminars to explain many of the topics I have mentioned in this article.

My policy is "it is far cheaper to utilize a lawyer at the beginning of a problem (or even before a problem arises) than to wait until the problem is full-blown."

Good luck! - Lawton Stokes

Comments (3)

Charles Stallions
Charles Stallions Real Estate Services - Pensacola, FL
850-476-4494 - Pensacola, Pace or Gulf Breeze, Fl.

Have you or anyone considered the pre paid legal services. I have heard of this and thought it might be a pretty good idea.

May 27, 2009 02:14 PM
Lawton Stokes
Achieve Realty, Inc. - Pittsburgh, PA

What makes you think it might be a pretty good idea? Because it sounds inexpensive? Because you sell pre-paid legal?

Some people think pre-paid legal services is a pyramid scheme.

I do not know anyone that has had a rewarding professional relationship established through pre-paid legal services.

There's an old saying: "you get what you pay for." If you work with a discounted commission firm, perhaps pre-paid legal services is right for you. If you believe in de-valuing the services provided by REALTORS(R), then why not de-value the services provided by lawyers.

Here's another idea: never mind calling a lawyer to help establish and maintain your firm:  just get all your forms from Robert Shapiro's LegalZoom.com. And while you're at it, don't forget to incorporate in Nevada.

Good luck!

May 27, 2009 02:34 PM
Jaclyn Erwin
Jackson Erwin Realty, Inc. - Charlotte, NC

Lawson: Nice Post---This gives many of us insight on the importance and/or idea of incorporation. I actually had a company which consists of Judges, Business Attorneys to incorporate my firm name years ago. I guess I was planning early. :) My college friend-girl who happens to be a graduate from Yale who practices business law advised me of a few "legit" and totally good companies that will incorporate my business in my state correctly and for much less. I believe her practice charged $1150 at the time. I actually paid around $300. So the savings of $850.00 was well worth it.

Charles: While I have heard of "pre-paid Legal Services" in my area, I have not adopted the use of the services. I'm only vaguely aware of how the program in my area operates. I do know, however, that Pre-paid Legal may provide a service to those who may not be able to afford a private lawyer. However, if it's criminal charges someone is faced with: The court can appoint them a lawyer if they can not afford one. In other areas, there are also specific departments such as Legal Aid that will provide "free" or fairly reduced priced representation from qualified lawyers. Many of these lawyers come from a variety of specific backgrounds and firms within the area who commit to a certain number of Pro Bono work per year. Pro Bono is similar to free services for those in need. Many of the medium to large firms urge their associates to participate "x" amount of Pro Bono hours per specified term.

However, I do know, that it is always best to have an established relationship with an attorney to help you at a drop of a dime if you need help. Be it for real estate, personal, etc.

I was lucky to have established a great relationship with a real estate attorney early on. We met during a closing. I had shared with him a specific problem I was having with another file and he was extremely kind and willing to advise me on how to best handle the situation. I'm still thankful today for his help.

Believe it or not, there are actually some cool attorneys that will help you, want to establish a good relationship with you and will not bill you for every question, concern or piece of advice. I would suggest maybe establishing a relationship with attorneys who have conducted one of your closings---espcially those that may be in private practice and are in the early stages of building their practice.

You think the real estate profession is hurting: Trust Me--the legal profession is hurting much worse. Take a look at the number of large firms (1000+) associates that have closed doors, merged or completely downsized to the point that they are hiring new associates who will report to the firm --not in 2009 after graduation, but 2010!

Jun 08, 2009 03:00 PM