Attorney Transaction Killers Series - Rule #1 for Attorney Review of Real Estate Transactions - Don't Change the Agreed Terms of the Transaction by Substituting Your Judgment for Your Customer's Judgment

By
Real Estate Agent with PREA Signature Realty - www.preasignaturerealty.com

Attorney Transaction Killer Series - Don't Rewrite the Deal

Rule #1 for Attorney Review of Real Estate Transactions

Don't Change the Agreed Terms of the Transaction

by Substituting Your Judgment for Your Customer's Judgment

As an attorney and a real estate broker, I understand the need for attorney review of some (not all) residential real estate transactions to protect the interests of the tenant or purchaser.  However, this "How the Attorney Killed my Real Estate Deal" series will focus on how inexperienced attorneys can inadvertently kill a deal or transaction through overzealous negotiation, risk-proof contract drafting, and plain ineptitude.  For the "How the Attorney Killed my Real Estate Deal" series,

 

Transaction Killer Factual Scenario

The Listing Agent is offering a Property for sale or lease.  The Property is the most desirable unit in the community and includes a substantial number of builder upgrades and is price - both for sale or lease - below market values and rental rates.  The Customer has recently moved to the area and may or may not be able to immediately obtain employment thereby impacting his ability to obtain a conventional loan for the purchase of the Property.  Customer views the Property with the Listing Agent.  

Initial Options

The Customer, after discussing his credit and employment related issues with the Listing Agent, views the Property and inquires regarding leasing and purchase options for the Property.  The Listing Agent indicates that there are six options offered by the Owner relating to the property, to wit: 

  • Conventional Purchase
  • Purchase with 100% Seller Financing
  • Installment Sale
  • Lease with Option to Purchase
  • Lease with Right of First Refusal
  • Lease Purchase
  • Lease with No Right to Purchase

Proposals Submitted by Owner/Seller

The Customer has multiple conversations with the Listing Agent regarding the structure of the transaction.  The Customer is balancing his desire to take advantage of discounted sales pricing for the Property with the current condition of his financial situation.  After narrowing the options, the Listing Agent receives from the Customer an outline of his proposed terms for the rental and purchase of the Property.  Using terms suggested by the Customer, the Listing Agent obtains preliminary approval of the transaction from the Owner.  The Listing Agent then submits two separate proposals for the Customer's review:

  • Option #1 - Lease at Market Rental Rate of $1.00 per sq. ft. with Option to Purchase Property at Discounted Sales Price of $220,000.00.
  • Option #2 - Lease Purchase at above Market Rental Rate of $1.10 per sq. ft. with Purchase of Property at Discounted Sales Price of $200,000.00 with Seller Credit of 40% of the qualified Rental Payments.

Terms Agreed to by Owner/Seller and Customer/Purchaser

After further discussions with the Customer, the Customer then proposes a variation of Option #2.  The terms of the revised proposal from the Customer are as follows:

  • 12 month Lease Purchase with below Market Rental Rate at $0.90 per sq. ft.
  • Purchase of the Property for $200,000.00 with Earnest Money of $2,000 paid over 10 month period.
  • Seller Credit at Closing equal to 40% of the qualified Rental Payments (ie. Rent Paid on or before the Due Date)

The Listing Agent promptly prepares the Lease and the Lease Purchase Addendum based on the proposed terms received from the Customer and submits the Lease and Lease Purchase Addendum to the Customer.  The Customer, having already agreed to the proposed terms of the deal, then sends the Lease and Lease Purchase Addendum to the Customer's Attorney. The terms that have been fully discussed and negotiated include - the rental rate, the structure of the transaction as a lease purchase transaction, and the seller credit.

Attorney Review

After the Lease and Lease Purchase Addendum are delivered to the Customer, there is a delay of almost a week for "attorney review."  On the 7th day after the transmittal of the Lease and Lease Purchase Addendum, the Listing Agent receives from the Customer's Attorney two poorly or oddly written documents - a Lease Addendum and an Addendum to the Lease Purchase Addendum.  In the intervening period between the intial delivery of the Lease and Lease Purchase Addendum to Customer and receipt of the revisions from the Customer's Attorney, the Customer and/or the Customer's Attorney have given no indication that there would be any changes to the structure or agreed upon terms of the proposed transaction.  

Different Proposal from Attorney

At first glance, the Lease Addendum and Addendum to the Purchase Agreement represent a drastic change to the structure and terms of the transaction.  It blends the terms and conditions of the two original proposal and changes the transaction to a lease purchase (ie. sale) to a lease with option to purchase (ie. only a possibility of a sale).  The terms of the new transaction proposed by the Customer's Attorney was as follows:

  • 12 month Lease with below Market Rental Rate at $0.90 per sq. ft.
  • Option to Purchase of the Property for $200,000.00
  • Seller Credit at Closing equal to 40% of the qualified Rental Payments (ie. Rent Paid on or before the Due Date)

Commentary

Professional Representation

I am not a fan of dual agency.  I am proponent of professional representation and believe that each tenant or purchaser is entitled to representation of their choosing.  However, I would qualify this statement by stating that the real professional - whether attorney or real estate agent - should be introduced and used at the earliest possible time in the transaction.

Selecting the Right Professional

Now, I don't necessarily care whether a buyer or tenant is represented by a real estate agent or attorney.  I do care that they are represented by a qualified professional.  For example, an appraiser may be a poor advisor for a sales transaction if they are unfamiliar with the approved sales contracts, don't have a Supra key, don't have access to MLS, etc. - that is, if they don't have the tools necessary to do the job.  Similarly, an attorney may be a poor advisor if he or she is not active in dealing with residential real estate transactions, isn't familiar with market conditions or standards practices, or has the wrong outlook or temperment.

Common Characteristics of the Attorney Transaction Killer

In the case above, there is absolutely no way to know what discussions were had between the Customer and the Customer's Attorney.  The change in the structure and general terms of the transaction may have been initiated by the Customer or by the Customer's Attorney.  However, given the nature of the discussion, it would appear that it was initiated by the Customer's Attorney.  Often, an attorney who doesn't regularly handle residential real estate transaction may be an inappropriate choice to handle such a matter.  Here are some common problems:

  • Combative temperment more focussed on winning the point as opposed to facilitatiing and closing the transaction.
  • Messiah complex that believes that you can make a transaction risk-free by drafting onerous or excessive provisions.
  • Lack of familiarity with common standards and practices associated with purchase or rental of real estate.

Often, it appears that client delegates negotiations to their attorney and do not fully understand why a transaction isn't moving forward in an expeditious manner.  That is, they are detached from negotiations and fail to realize that their attorney is the cause or has contributed to the problem.  Where the purchaser is represented only by an attorney and is not working with an agent, the problems are often exacerbated because there isn't a check or balance on the attorney and the client's only source of information on the status of negotiations or work performance of their attorney is their attorney.

Reopening Discussions on Settled Issues

In the case above, I can only speculate that the Customer's Attorney substituted her judgment as to the merits of the transaction for the judgment previously reached by the Customer.  Instead of limiting the review to simply protecting the Customer's interest, the Customer's Attorney elected to reopen discussions and negotiations on settled issues such as the structure of the transaction, the monthly rental rate, and the availability of a seller credit, which was only available for the lease purchase and not the lease with option to purchase.  The Customer, who was not represented by a real estate agent, failed to understand that the Customer's Attorney was a part of the problem and not a part of the solution. 

The Rules: 

So, here is a simple rule for attorney review: 

Where there is no indication of undue influence or unfair bargaining or a sophisticated Owner taking advantage of less sophisticated or less knowledgeable Customer, the Attorney:

  • Should accept the basic terms of the transaction and shouldn't reopen discussions or negotiations on settled issues - especially sales price or rental rates - previously agreed to by the Owner and the Customer.
  • Should follow the general instructions provided by the Customer and shouldn't change the fundamental structure of the transaction previously agreed to by the Customer.
  • Should limit their review to identifying and assessing risk and shouldn't substitute his or her business decision or judgment of the merits of the transaction for the business decision or judgment of the merits of the transaction previously reached by the Customer.

Interested in professional representation by a real estate professional who understands the need to identify and assess risk without subsituting their judgment for the client's judgment?  Contact Ryan Shaughnessy at PREA Signature Realty at 314-971-4381 or send an e-mail to Ryan@PREASignatureRealty.com.

Attorney Review Series

Attorney Review Series - Residential Leases

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PREA SIGNATURE REALTY

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PREA Signature Realty is a full service brokerage located at 1709 Park Avenue in the Lafayette Square neighborhood of the City of St. Louis.  PREA Signature proudly serves the following city neighborhoods:  Lafayette Square, Soulard, Benton Park, Benton Park West, Downtown Loft District, Forest Park Southwest, Central West End, Tower Grove East, Tower Grove South, Compton Heights, Shaw, The Hill, Dogtown, Carondelet, Holly Hills, St. Louis Hills, Dutchtown, and the Other Historic Neighborhoods of the City of Saint Louis, Missouri. 

The opinions expressed herein represent the opinions of the author only and do not reflect the opinions of PREA Signature Realty.  All photos and written content were produced by PREA Signature Realty.  All Rights Reserved - PREA Signature Realty (2009).  This content may not be reproduced or reprinted, except for Active Rain re-blogging, without express written permission of PREA Signature Realty.

For more information, visit our website at www.PREASignatureRealty.com or contact Ryan Shaughnessy at 314-971-4381 or send an email to Ryan@PREASignatureRealty.com

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Show All Comments
Rainmaker
534,689
Liz Moras Migic
Chilliwack, BC
Chilliwack, British Columbia - Realtor

I must have ADHS - I can't seem to read through that mass of info you brainiac! :-)

Aug 15, 2009 05:05 PM #1
Rainmaker
588,465
Susan Neal
RE/MAX Gold, Fair Oaks - Fair Oaks, CA
Fair Oaks CA & Sacramento Area Real Estate Broker

Hi Ryan -

Interesting discussion of a complex transaction.  I too am an attorney and real estate broker and have been both for over 20 years.  When clients have come to me to review their proposed purchase agreements, my first question, even before I looked at the documents, is: what is your goal?  From then on, my goal is to help that client to achieve his goal.  If the proposed agreement accomplished that and if there was nothing about it that either worried the client or looked to me to be a problem for him in the future, I have approved it and congratulated him.

I do admit that twice I killed a deal, but only because it was clear that a naive purchaser was been flim-flammed badly by an unscrupulous seller in one case, and in another an illegal typewritten purchase contract prepared by the seller had terms in it that were clearly litigation-bound, including seller financing at usurious rates with foreclosure and eviction to occur automatically within 30 days at any time the buyer was 20 days late - no court procedures or recourse for the buyer - just loss of everything automatically any time there was a 30 day late payment.

Most of the time even if there are troublesome provisions, they can be tweaked slightly without changing material terms of the agreement or destroying the transaction.

Aug 15, 2009 05:14 PM #2
Rainer
229,238
Ryan Shaughnessy
PREA Signature Realty - www.preasignaturerealty.com - Saint Louis, MO
Broker/Attorney - Your Lafayette Square Real Estate Partner

Good news - It is only a 4 part series and they get shorter.  Gist of this one was - terms and structure agreed to, contract submitted for review, and the attorney opens up everything.  End result - customer lost condo because his attorney was impeding the deal from the start.

Aug 15, 2009 05:15 PM #3
Rainmaker
158,078
Carol Pease
JP & Associates Realtors - Bastrop, TX
CRS, Broker-Associate 512-721-6320

Wow!  An attorney with a brain.  Isn't that an oxymoron.  ... and I thought my husband had the only one.  :)

Aug 15, 2009 05:29 PM #4
Rainer
229,238
Ryan Shaughnessy
PREA Signature Realty - www.preasignaturerealty.com - Saint Louis, MO
Broker/Attorney - Your Lafayette Square Real Estate Partner

Susan - I agree with your approach.  In this case, we have a sophisticated buyer who understood his financial situation and his options.  He needed to lease before purchasing.  Structure changed from lease purchase to option.  Totally different animals with different economic issues.  It was just the opening salvo on 21 days of needless negotiation and revisions.  In the end, I sold the property to another customer.  There are terms that I would write differently in every deal.  However, I don't try to rewrite the deal.  Rather, I try to facilitate the deal based on the agreed terms while protecting my client.  In the end, most of the changes (which we agreed to) really just didn't matter - especially because this was new construction. 

Have I killed deals?  You betcha.  But similar to your examples, only where there was some indication of fraud, collusion, unfair dealing, etc.  None of these issues were present in the example that I am using for this series.

Aug 15, 2009 05:31 PM #5
Rainer
229,238
Ryan Shaughnessy
PREA Signature Realty - www.preasignaturerealty.com - Saint Louis, MO
Broker/Attorney - Your Lafayette Square Real Estate Partner

Carol - I don't believe it is my role to insert myself into the deal.  I identify and assess risks - I don't assume responsibility for the risks.  Ultimately, it is the client's decision.  Over the years, I have learned to appreciate the need for picking fights on issues that matter as opposed to trying to rewrite the contract just because some minor issue may be written different than how I would draft it.

Aug 15, 2009 05:34 PM #6
Rainmaker
1,157,274
FN LN
Toronto, ON

Hi Ryan - One of the key points out of this series is that it is essential to have the attorney review performed by an attorney who understands real estate transactions and has experience with real estate transactions.  The same is true with other professions as well as other parts of the legal and real estate professions.  Get a professional who understands and has experience (or can obtain assistance from those with appropriate experience) on the subject matter that requires assistance.

Aug 16, 2009 01:28 AM #7
Rainer
229,238
Ryan Shaughnessy
PREA Signature Realty - www.preasignaturerealty.com - Saint Louis, MO
Broker/Attorney - Your Lafayette Square Real Estate Partner

Marc - it is more a comment on retaining a professional who can indentify and assess risk without killing the deal.

Aug 16, 2009 03:28 AM #8
Rainmaker
1,157,274
FN LN
Toronto, ON

Ryan - I agree completely with you.  I'm thinking that those with appropriate types of experience or background are more likely to be able to identify and assess the risk since they are more likely to understand the real estate industry.

Aug 16, 2009 10:33 AM #10
Rainer
229,238
Ryan Shaughnessy
PREA Signature Realty - www.preasignaturerealty.com - Saint Louis, MO
Broker/Attorney - Your Lafayette Square Real Estate Partner

Erica - We have all known the type.  Combative when a combative attitude causes only more problems.  Instead of focusing on the problem or assessing blame, I like to focus on solutions.

Marc - I do think that is a major part of it.  We don't typically see attorneys involved in residential transactions.  I will admit I have seen good and bad approaches.  The best seem to pick up the telephone, talk through the issue, and agree to balanced language.  Deal done - close file and move on to next project.  Thanks for reading.

 

Aug 16, 2009 12:32 PM #11
Rainmaker
1,536,832
Brian Madigan
RE/MAX West Realty Inc., Brokerage (Toronto) - Toronto, ON
LL.B., Broker

Ryan,

I'm reading these out of sequence, and I am very disappointed to hear that this is just a 4 part series. Don't hesitate to go for Rule #5 when you get a chance.

Here's something very worthwhile:

  • Combative temperment more focussed on winning the point as opposed to facilitatiing and closing the transaction.
  • Messiah complex that believes that you can make a transaction risk-free by drafting onerous or excessive provisions.
  • Lack of familiarity with common standards and practices associated with purchase or rental of real estate.
  • Again, I must say that I agree with you 100%. This is right on the money. It almost seems like we know the same people. Aggressive, litigious behaviour is not the right attitude to bring to the table, if you want to do a deal.

    Brian

    Aug 18, 2009 08:34 AM #12
    Rainer
    229,238
    Ryan Shaughnessy
    PREA Signature Realty - www.preasignaturerealty.com - Saint Louis, MO
    Broker/Attorney - Your Lafayette Square Real Estate Partner

    Brian - Type A personalities make for great litigators - not always the best for transactions.

    Aug 18, 2009 02:37 PM #13
    Rainmaker
    1,536,832
    Brian Madigan
    RE/MAX West Realty Inc., Brokerage (Toronto) - Toronto, ON
    LL.B., Broker

    Ryan,

    I was the head of commercial litigation for a large downtown Toronto law firm that specialized in litigation, so I know the characters you are talking about.

    Brian

    Aug 19, 2009 11:04 AM #14
    Rainer
    229,238
    Ryan Shaughnessy
    PREA Signature Realty - www.preasignaturerealty.com - Saint Louis, MO
    Broker/Attorney - Your Lafayette Square Real Estate Partner

    Brian - I still have the competitive spirit that I had when I tried jury cases.  However, I have mellowed and now focus more on crafting solutions and less on being right.  Being right doesn't get the deal done.

    Aug 19, 2009 01:15 PM #15
    Rainmaker
    1,080,029
    Sharon Alters
    Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
    Realtor - Homes for Sale Fleming Island FL

    Ryan, can't wait to read the rest of this series. I would like to send this to an attorney who cost us a deal last year while representing an agent in South FL who was short selling her condo hotel in Orlando. He just did not do his job and finally he was caught on the second contract and fired by the agent after she had spent a lot of money with him. You are so right - if an attorney is not experienced in real estate, then they are not the ones to use.

    Aug 19, 2009 05:13 PM #16
    Rainer
    229,238
    Ryan Shaughnessy
    PREA Signature Realty - www.preasignaturerealty.com - Saint Louis, MO
    Broker/Attorney - Your Lafayette Square Real Estate Partner

    Sharon - We lost the deal described in the post.  Luckily, we leased it a few days after it was released.  This was a lease purchase deal and took 21 days just to have it blow up.  It was a shame because it was a good deal for her client.  The story in your comment is unfortunate.  I believe there is a role for attorneys in residential contracts.  I just don't believe that it entails wholesale rewrites of contract documents or incompetent, non-responsive representation.

    Aug 19, 2009 05:53 PM #17
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    Rainer
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    Ryan Shaughnessy

    Broker/Attorney - Your Lafayette Square Real Estate Partner
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