In the brave new world of real estate, many potential homebuyers and sellers are armed to the teeth with gigabytes of research before they even meet a real estate agent. And they may also be toting a formidable list of questions that could challenge the most experienced agents.
When those questions wander into legal territory, there are lines that real estate professionals cannot and should not cross.
While some real estate professionals may attempt to stretch beyond the limits of their licenses to serve clients instead of referring their clients to real estate attorneys, Seattle-based brokerage WaLaw Realty, run by two lawyers, is quite at home in pairing legal expertise with brokerage services.
Marc Holmes is a licensed real estate broker and a lawyer. Along with fellow lawyer and licensed agent Craig Blackmon, he launched WaLaw Realty last summer with the intent of offering low-cost real estate services to homebuyers and sellers. They launched their website in August with the intriguing slogan: "Use a lawyer. Save money."
Instead of a percentage-based commission, buyer and seller clients pay a flat fee of $2,995, most of it due at closing or after six months if for some reason the transaction hasn’t closed. For that price, clients hire both WaLaw Realty and the lawyers’ affiliated law firm Blackmon Holmes PLLC.
On a $300,000 house (about the median sale price for a Seattle-area home in 2009), clients could save up to $6,000. That savings is one of the main reasons people hire WaLaw, according to Holmes, especially because the firm’s clients are generally do-it-yourselfers who already spend hours looking for a new home both online and offline.
"They’ve concluded that they can and want to do these tasks themselves, regardless of whether they have an agent assisting them or not. Thus, it seems like a waste of money to call in an agent to simply write up the deal and collect a 3 percent commission for very little work. Similarly, our seller clients have a ‘for sale by owner’ approach," Holmes said.
"In either case, by using us our clients capture a financial benefit for the work they put in, plus they get an attorney to represent them, which means a much higher level of legal expertise."
Blackmon founded the law firm in 2005 and hired Holmes a year later. They share a legal assistant. In 2008, Holmes became a partner in the company. Later, they decided it would be a good idea to offer their clients brokerage services in addition to legal services. In the spring of 2009, Holmes got his broker’s license and they launched WaLaw Realty soon after.
The brokerage and the law firm are separate business entities. Both lawyers concluded that because each practice was regulated by different state agencies, separation was required under Washington law. As a brokerage, WaLaw Realty is regulated by the state’s real estate licensing laws. Blackmon Holmes is subject to the Rules of Professional Conduct under the state’s supreme court.
WaLaw Realty is not quite a full-service brokerage. Clients are expected to do some of the legwork themselves. Sellers, for example, must prepare and stage the property, compile and prepare marketing materials, and make the property available for showings, inspections and appraisals.
For those who would rather hire these duties out as well, WaLaw either provides references or offers to provide those extra services at $75 per hour. The vast majority of clients don’t need to go beyond the services offered under the flat fee, Holmes said, and those who do rarely need more than a few hours of extra work.
The brokerage breaks down exactly what WaLaw’s clients, whether buyers or sellers, will get for that flat fee and which of Holmes and Blackmon’s firms will handle each task.
"Each business provides distinct and separate services. For instance, WaLaw Realty provides only real estate brokerage services such as home tours, attendance at inspections, preparing comparative market analyses, listing homes in the (multiple listing service), and so on," Holmes said.
Services having to do with the actual transaction process — offers, counteroffers, contingencies, title, closing and any necessary legal advice — are handled by the law firm.
Some states prohibit an individual from serving as both the lawyer and real estate broker for the same transaction. And, of course, no real estate licensees can offer legal services at all unless they are separately licensed to practice law.
"They’re not trained or licensed to provide specific legal advice to their clients and have a legal duty to refer clients to an attorney when they encounter an issue that goes beyond their limited range of legal practice," whereas the law firm obviously doesn’t have that restriction, Holmes said.
"We can draft and review any type of contract document and frequently draft custom provisions for our clients," Holmes said. "However, we make a point of using (multiple listing service) published contract documents so that the agent on the other side of the transaction can feel comfortable presenting the client with the offer we submit," he added.
Besides drafting custom contract provisions, Blackmon and Holmes often advise their clients about the legal significance of the seller disclosure statement, negotiate disclosures in their client’s favor, and analyze the preliminary title report to catch any potential issues that might arise, such as easements or encroaching fences.
"We were either able to resolve those issues to our clients’ satisfaction, or at a minimum alert the buyers to these potential issues so that there were no unfortunate surprises after closing," Holmes said.
With the proliferation of distressed properties, clients especially benefit from having a lawyer on their side, he said.
"With bank-owned homes, the banks frequently insist on using their own contract documents, which are drafted entirely in their favor. They also frequently want to control the escrow and title process," Holmes said. …CONTINUED
"Real estate agents in Washington are not authorized to advise a buyer about any aspect of a non-standard contract, which puts their clients at a serious disadvantage when negotiating with the bank."
WaLaw regularly helps buyers purchase short sales and bank-owned (REO) homes. An extra $250 is added to the flat fee in that case because such transactions "require significant additional work," the company states on its website.
The brokerage does not take on short-sale sellers as clients, mainly because those clients don’t want to pay the required flat fee when short sales are so often unsuccessful.
"We regularly hear from agents that clients don’t want to be committed to pay a fee because they might not find a house they want, or, for sellers, their house might not sell. That is absolutely correct, and for clients who feel that way, we’re not the right fit for them," Holmes said.
While WaLaw considered handling short sales on a traditional commission basis, the firm ultimately decided against it. "That simply isn’t consistent with what we want WaLaw to be," Holmes said.
In Bellevue, just across Lake Washington from Seattle, is a somewhat similar operation to WaLaw that is owned by real estate attorney and licensed real estate and mortgage broker Kirk Mulfinger. Mulfinger does take on short-sale sellers, partially because he feels real estate agents don’t always adequately advise clients about the process, he said.
"I’ve seen many instances when agents weren’t even aware of the issues. On the first short sale I did, back when people weren’t even sure what a short sale was, I asked the agent how negotiations went with the bank," Mulfinger said. He asked about the deficiency (the difference between the sale price and what the sellers owe the bank that the sellers might still be required to pay) and the tax consequences of the short sale.
"She said, ‘What’s a deficiency?’ ‘What tax consequences?’ "
Mulfinger founded Mulfinger Law Group in 2000 and Hampton West Real Estate in 2006. He used to offer his brokerage clients a commission-based fee structure — and still does for short-sale sellers — but he now charges a flat fee for his brokerage services: $4,500.
Mulfinger said he has hesitated to advertise his flat-fee brokerage services because he didn’t want to get a reputation as a discount brokerage when he felt that clients were actually getting better service. Hampton West was founded the same year that Seattle-based brokerage company Redfin announced its flat-fee service.
"We don’t really push the angle that you’re getting a broker and a lawyer at the same time," he said. "We’re killing ourselves by not marketing it. We don’t do any marketing — it’s all word of mouth. We have not been busy in the last year. I’m going to revisit that issue."
In contrast to WaLaw, Hampton West is a full-service brokerage. Also unlike WaLaw, when clients hire Hampton West they are not also hiring Mulfinger Law Group.
"The companies have a common owner but they have different names that are branded differently. We don’t market ourselves as the lawyers’ brokerage and we don’t generally cross-refer," Mulfinger said. Because the state of Washington allows brokerages to handle most aspects of a real estate transaction, he said he sees no need to have his clients hire both his companies.
"If they are dealing with the brokerage, we don’t say, ‘Here are some legal duties that you need to go talk to a lawyer for.’ We handle that as part of the transaction," he said.
"I don’t stop knowing what I know and doing what I do as a lawyer even though I’m acting as a broker. I don’t opt out of things; I still make sure we do it right all the time, even though I’m the broker," he added.
In Washington, like its West Coast neighbor California, lawyers are almost never involved in real estate transactions; brokerages usually handle negotiations and document preparation. According to Mulfinger, lawyers are involved in most transactions on the East Coast, but Washington’s regulations aim to save people money by allowing brokerages to handle transactions.
"I’m not sure if it’s always cheaper. It may end up costing more in the long run because of problems that could have been avoided," Mulfinger said.
His Hampton West firm basically does everything other real estate brokerages are allowed to do, but as a lawyer, he said he believes he can offer a higher-quality service.
"We think it’s the best representation that our clients can get. We handle our (brokerage) clients just as we would our law clients. We disclose, make sure our clients know any consequences. If it’s bad news, we tell our clients the bad news. We don’t try to gloss it over because they need to make an informed decision about whether they should go ahead with the transaction," Mulfinger said.
That ethical duty is part of what these two Washington brokerages say sets them apart. The vast majority of brokerages are only paid if a home actually sells.
"We get paid whether or not the client buys or sells, so we have less motivation to seek a quick deal," Holmes said.
"We don’t say this to antagonize agents and we truly believe that most agents would never put their own interests ahead of their clients. However, the conflict exists when compensation is strictly tied to a successful closing." …CONTINUED
According to the Bureau of Labor Statistics, in 2008 only about 0.23 percent of lawyers, or 1,800 nationwide, specialized in real estate. Of those, there are no readily available statistics on how many also have a broker’s license. According to the National Association of Realtors’ 2009 Member Profile, 2 percent of membership reported they had a full-time legal career before joining the real estate industry.
Some states have relaxed requirements for lawyers seeking to obtain a real estate license.
To obtain a Washington state real estate broker license, for example, attorneys with at least one year of real estate transaction experience are exempt from a two-year sales experience requirement.
In New York state, lawyers are exempt from the educational and experience requirements required of other applicants. Other states, including Missouri, Massachusetts and Florida, also have specific exemptions for lawyers.
In Texas, lawyers can act as real estate brokers without even obtaining a broker’s license, as long as they don’t plan to open their own brokerage and supervise agents, according to John D. Eckstrum, chairman of the Texas Real Estate Commission.
Nevertheless, Eckstrum said he doesn’t necessarily recommend that lawyers take advantage of that exemption.
"A transaction could be very complex and I’m not sure if the lawyer would be as well-versed (as a broker) in, for example, an investment property. What are the comparables? (Could the lawyer handle issues with) utilities? Insurance? Taxes?" Eckstrum said.
"I’m not sure lawyers would have that information at thir fingertips like a broker would by doing it every day, though it doesn’t mean they couldn’t do it."
The Texas commission, which regulates real estate licensees in the state, also has a broker-lawyer committee composed of both brokers and lawyers (though none who are both) that draws up those boilerplate contracts that most brokerages use in the state.
In contrast to Texas, Illinois law provides that the lawyer in a transaction for a specific home cannot also be the real estate agent or broker.
"The thought behind that is … that’s a clear conflict. There’s a conceptual difference between selling and representing," said John O’Brien, chairman of the board of the Illinois Real Estate Lawyers Association and the president of the Illinois Bar Association.
"The lawyer’s job is one of absolute loyalty to his or her client, and that’s a somewhat different concept than trying to sell stuff. The ethics of a Realtor are not the same as those of a lawyer."
"You have a fiduciary responsibility in a real estate transaction and you have a fiduciary responsibility as an attorney. The functions may be different — you could be working on a will or a real estate transaction — but I don’t see a difference of responsibility," Eckstrum said.
In the case of the Washington brokerages, each has decided to deal with that particular issue differently.
"I don’t serve as both a real estate attorney and a broker in the same transaction. I have clients who I have represented as both, but have tried to be very clear about whether I’m their broker or attorney," Mulfinger said.
"The real issue is avoiding conflict of interest. If I did something wrong as their broker, they would have a claim against their broker. And if I were also their attorney, would I advise them that they have a claim against me?"
Holmes acknowledges that he routinely warns new clients of that exact scenario as an example of an unlikely, but conceivable, conflict of interest.
"If that were to happen I would have to withdraw as their attorney and recommend that they seek out different counsel," he said.
Nevertheless, he added, "The potential for malpractice is inherent in any professional relationship, whether it be with a real estate agent, a lawyer, a doctor or any other service provider."
This weekend, WaLaw Realty is expanding to bigger digs. And they’re planning to hire an agent who doubles as a paralegal.
What’s your opinion? Leave your comments below or send a letter to the editor.