Lawyers and Residential Real Estate Transactions: What Happened?

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)."