Lawyers and Residential Real Estate Transactions: What Happened?

By
Real Estate Broker/Owner with Achieve Realty, Inc.

lonely professionalAt a recent seminar for real estate attorneys, I heard a colleague lament the fact that Pennsylvania attorneys have been nudged out of the residential real estate transaction. Gone are the days when lawyers are a essential cog in the deal. For the foreseeable future, they're not coming back, either. 

Somehow, the Pennsylvania legal community did not do enough to protect attorneys. The practice of law without a license is forbidden in Pennsylvania, but real estate licensees do so every day. How? By writing real estate contracts. A licensee may respond by saying, "we don't write contracts per se; we just fill in the blanks." To respond: there's a way to fill in the blanks that may benefit a buyer more than a seller, and vice-versa. To give an agent the discretion to fill out the contract equates to allowing them to practice law. This is detrimental to consumers. (Foreshadowing: watch for my future article about why Robert Shapiro did no one a favor by creating "Legal Zoom")

I have been involved in the transactional residential real estate business for over 15 years. I have co-owned a title insurance agency the entire time. For the last 8.5 years, I have owned two different real estate brokerages. Throughout my experience, I have witnessed first-hand the problems associated with real estate licensees writing contracts. The majority of the real estate sales force in Southwestern Pennsylvania is horribly incapable. It's not their fault; instead, it is the fault of their brokers who have failed to train them adequately. I have been training REALTORS(R) and lawyers on the agreement for a long time. It is a tedious, arduous process. It's no fun. I have no doubt that agents at other companies do not receive a remotely comparable level of Agreement of Sale training. During the course of my training, I state, "I consider it my duty to make you as capable of handling this transaction as any attorney." That's a lofty goal, but it's also impossible. You can't substitute for three years of law school and passing the bar exam. The only group of licensees who are somewhat qualified are those who have written contracts innumerable times and therefore have learned from experience. God helped their customers who served as their guinnea pigs over the years.

Once upon a time, the transaction was governed by attorneys, who used diverse forms, custom written, to memorialize the various terms and conditions of a residential real estate transactions. Over the years, the local REALTORS(R) association RAMP (Greater Pittsburgh's board of REALTORS(R)) in conjunction with Pittsburgh lawyers, created a form for an Agreement of Sale. Attorneys and REALTORS(R) alike used the form. This created greater simplicity for the process, making it possible to write or analyze the contract in a matter of minutes versus hours. It also made lawyers an expendable part of the transaction. In the mid-90's, RAMP adopted the form promulgated by the Pennsylvania Association of REALTORS(R). Over time, it became far less common for lawyers to write sale contracts.

Consequently, members of the local bar association have become marginalized. There are very few lawyers left who are familiar with current agreement of sale form. I presented a continuing legal educational seminar to my local legal colleagues a few years ago and I was disheartened by the level of interest (as judged by the number of questions and by the number of sleepers). This waning interest reflects the attitude the most attorneys have: we aren't invited to sit at the table anymore. Besides standardization of the contract form, there is another reason for lawyer marginalization.

In Pittsburgh, there has been a tremendous consolidation among real estate firms. Now, four firms control over 80% of the residential real estate market. Control of the market and the multi-list is in the hands of less than a half-dozen people. None of them value the participation of lawyers in the transaction. REALTORS(R) are never encouraged to recommend that their customers obtain their own legal counsel. The reason for this has to do with control and with changing laws.

Until the 1990s, real estate brokers were not permitted to own or financially affiliate with "ancillary services," ie. title insurance, homeowners insurance, mortgage services and more. As competition among brokers grew, commission rates decreased causing broker profit levels to decrease. In order to combat the trend, brokers lobbied successfully to change the law so that they can own their own ancillary businesses. Once brokers owned their ancillary businesses, it became crucial for the brokers to maintain control of the transaction. 

If brokers recommend that another professional help in the transaction, the brokers may lose the ability to control who the borrower utilizes for all their ancillary services.  A brokers' worst nightmare is to have a lawyer help a consumer shop mortgage interest rates or evaluate title insurance agents based upon their reputation, quality of ownership (lawyer-owned vs. lay-person-owned). By allowing the lawyer to participate, the broker may lose business.

As a result of the  evolution of a standardized form and the brokers' successful effort to own their own ancillary businesses, lawyers have been pushed out of most residential real estate transactions. Do you think that excluding attorneys from the process is good for the consumer? Do you think that the "steering" of consumers toward ancillary businesses is good for the consumer? Do you think consolidation of real estate brokerages is good for the consumer?
Next, ask yourself the same questions and replace the word "consumer" with "REALTOR(R)."
 

 


Comments (4)

Leslie Prest
Leslie Prest, Prest Realty, Sales and Rentals in Payson, AZ - Payson, AZ
Owner, Assoc. Broker, Prest Realty, Payson,

Living in a state where it is uncommon to have an attorney involved, and having been in RE, here, for 19 years, I AM GLAD that we don't have to involve an attorney. The agents in your state will just have to get better informed and more competent.

Feb 18, 2009 05:56 AM
Anonymous
Lawton

Hi Prest Realty: Thanks for your comment, but why are you so glad (that you had to capitalize the word) that you "don't have to involve an attorney?" And, would your customers agree with you?

Feb 18, 2009 07:17 AM
#2
Anonymous
Cliff Tuttle

The Real Estate Settlement Procedures Act (RESPA) was intended to promote competition among service providers and give choices, lowering settlement costs. This was supposed to be achieved in great part by prohibiting kickbacks for referrals, which were seen as increasing consumer costs. But the outcome, especially after amendments permitting Controlled Business Arrangements, has been the opposite. The mortgage broker/mortgage banker has long ago taken charge of the process of selecting a settlement service provider and they always select a provider that essentially gives kickbacks that are legal under RESPA. This has not been good for the borrower, since the settlement provider, who is usually not a lawyer, is primarily dedicated to making sure that the transaction closes as quickly as possible. Congress did not anticipate the sheer volume of refinance transactions that came about in the 80's and 90's, which made settlements in volume a very lucrative business. Nor did it anticipate that mega-real estate firms would be able to steer a vast number of transactions their way by offering discounts to employees of large companies and to anyone else who bought a house through their agency and wanted to hire anyone else to close it.

Why does it make a difference?  The consumer thinks that his interest is being protected when in fact it is not.  The practical outcome may not matter in many transactions where there is nothing unremarkable going on.  However, the current mortgage crisis was created, in large part, from unwholesome lending practices, which were never even commented upon by the closer, who worked for the mortgage broker/banker who originated the loan. In addition, serious title issues that sometimes developed were either unrecognized or insured over --that is, title insurance coverage was issued when it shouldn't have been and the problem was not fixed.  

Cliff Tuttle

Pittsburgh Legal Back Talk

http://www.pittsburghlegalbacktalk.com/

Mar 19, 2009 10:23 PM
#3
Lawton Stokes
Achieve Realty, Inc. - Pittsburgh, PA

Cliff:

There has been a tremendous consolidation in the Pittsburgh residential title business. I agree with you that this has been detrimental to consumers. Unfortunately, since title insurance is such an esoteric field, consumers will never understand these (perhaps unintended) consequences of RESPA.

Thanks a lot for your post. Your blog is great for any practitioner of real estate, whether they are lawyers or realtors and regardless of the state in which they're located.

Apr 01, 2009 01:59 PM