Q: Attorney James N. Graham is our guest to discuss real estate law and what people often do not understand when buying or selling a home. What are some common misconceptions about selling or buying a home?
A: There are many and a wide variety of aspects that people misunderstand. I tend to put misconceptions into a few broad categories such as first that real estate transactions are simple, second that the system for transferring real estate is transparent, intuitive, and fair, and third that people understand and properly address risks in their real estate deals. There also is a common misunderstanding of the relationship between Realtors, brokers, real estate licensees, clients, customers and attorneys. There also is a surprising refusal to accept black letter legal concepts such as the statute of frauds, time is of the essence, and unenforceability due to vagueness and uncertainty. Where do you want to start?
Q: Let's start with the idea that it is easy to buy a house. Isn't that true?
A: That can be true, but the misconception has a few angles. First, most people won't buy more than a few homes. Despite the fact that these are among the largest deals creating the greatest impact on their lives, they have an unusual confidence in their ability to foresee, understand and appreciate the issues inherent in a real estate transaction. Once they've bought or sold 4 or 5 homes, they feel like they've seen it all. Many of these people haven't even completely read, let alone understood the contracts and very few people have studied contract law in general as well as the legal authority interpreting the specific contracts and the issues that are or can be raised. In order to make an informed decision, you need to understand the contract, you need to understand the law, and you be sensitive to problem areas in each. I've personally been involved with over 800 real estate transactions, and I still see new issues and angles every year.
Q: You don't need to understand real estate law to buy a house, do you?
A: Well somebody on your behalf had better understand the contracts, the law, the stakes and the multitude of complications. Again, these are deals involving hundreds of thousands or even millions of dollars. Contrast income tax preparation. Most people with a positive net worth hire a CPA or other tax professional to prepare their tax returns. A tax return is something done each and every year, and the most likely consequences if a person makes a mistake is that they'll owe a few hundred dollars in interest or penalties. Yet they hire a professional to prepare tax returns rather than trying to do it on their own. Most people do not buy or sell a home more than once a year and the ramifications on their net worth can be devastating. Yet many people do it themselves because they've been through it once or twice before. Others rely upon salespeople for advice. Isn't that remarkable?
Q: But most people don't need an attorney to get the deal closed.
A: That is my point. People are taking more risk with greater stakes than they understand and appreciate. They trust a system that they think they understand. They don't know what they don't know. They base their decision on the fact that they or people that they know have managed to close a transaction without hiring an attorney. If they understood and were generally aware of the problems that arise, they would be much less confident. People should be wary, skeptical and sensitive to the fact that problems can and do arise.
Q: The problems that arise, aren't those rare? Most people are comfortable because deals usually go fine, their agent takes care of everything, and when there is a problem, it seems to be almost inevitable or accidental.
A: Think about my tax return analogy. An audit is fairly rare. But that doesn't mean that one doesn't get value from having professional help. You want someone who has done it many times, who knows the subject matter, and who can spot issues and answer questions. They get the job done better, cleaner, with less risk of audit and with more likelihood of taking advantage of opportunities available in the system. And you don't want to get tax advice from someone whose fee is contingent upon your tax return. You asked whether problems are rare. That depends upon what you mean by a problem in a real estate deal?
Q: Perhaps you can explain what you mean by a problem?
A: There are many. Read the Wisconsin reported cases involving real estate disputes. Each of those disputes arose from a problem. But there are problems that aren't even disputes. For example, many times people are not properly assessing and addressing risks, often out of ignorance or a lack of advice. I consider that a problem. Or a more specific example - a client comes to me because they have accepted an offer to purchase which is contingent upon a few items. The items are entirely within the control of the buyer. What the seller has done, I explain, is to give the buyer an option. That means the buyer can purchase, but the seller can't force the buyer to purchase. An option has value. In any other financial market, the party giving an option expects to receive consideration for that option value. However, in real estate, sellers commonly give buyers free options. Why?
Q: Why?
A: I can explain why, but the more important point is that the client should understand and make a knowledgeable decision rather than just going along because that is the way things usually are done. I don't necessarily recommend against it if the terms are fair and reasonable, but I do insist on having the seller understand what they are doing. I have had many clients come to me after having signed an offer to purchase which was really an unreasonably long free option. They simply did not understand what they were doing and their agent wasn't about to explain it for fear of losing the possibility of a deal.
Q: OK, let's move on, what was the next area of misconception, something about the systemic unfairness?
A: Well we are nowhere near done with the complexity issues, but another of these is that the system may appear to be more fair and transparent than it really is. People often don't understand even the basic definitions of the systemic players: They think a real estate broker is an agent is a Realtor. They think the Realtor they are working with is their agent. They believe statements and representations by an agent and then sign a contract that they haven't read with a broker that they haven't met. There is an ignorance of contract law and an assumption that the forms must be fair and reasonable and therefore that any deal using those forms should be fair and reasonable. It is really strange to me that people who would read the fine print on a $10 grocery store rebate offer will simply trust a real estate salesperson to deal fairly with them when the implications involve thousands and tens of thousands of dollars. Most consumers also have no idea about the differences between the requirements of law and the requirements of the Realtor's code and contracts and how these may affect the consumer.
Q: And how may it affect them, the law or the forms or the Realtor rules?
A: I'll give 2 simple examples. Regarding the forms, many home sellers are shocked to learn that the form listing contract, approved by the State of Wisconsin, provides that the broker earns a commission even in some cases where the home isn't sold. I have talked to dozens of sellers who had no idea that they could end up owing a commission even if they didn't sell their house. Regarding the Realtor rules, many sellers do not understand the fact that they may owe a commission to a Realtor that they have never heard of, that they did not know was involved in their transaction, and that is arguably owed a commission based upon their offer of compensation via the MLS. There are many instances of brokers suing their clients for a commission on a transaction that never closed. Run a CCAP search on your favorite real estate entity and see how often they've been involved in litigation. Are those cases against their "clients?" Pull the case files, and see what you find. There also are instances where a Realtor has claimed to be owed a commission from a flat fee MLS seller when the seller had no idea that the Realtor was involved in the transaction whatsoever. I would bet in those cases that the seller did not expect that result when he or she signed the listing agreement.
Q: Are you recommending that people not use Realtors?
A: No, I am recommending that people not rely upon Realtors or other real estate sales people for recommendations or advice on contract matters, on risks, on ways to address risks, on rights, on responsibilities, or on their best interests. I have been a broker in the past and was a member of the Realtors. I also had other sales jobs during my life. Sales people provide valuable assistance at selling. If you need help marketing a property, it makes sense to get the assistance of someone with sales experience. Do not rely upon the sales person for contract advice. It is especially unwise to rely upon the sales person to advise you on the advisability of the contract between you and the sales person's employing broker. I would think this would be obvious, but it must not be obvious to many people who sign up with brokers based upon the recommendation of a sales person and without considering the ramifications of the listing agreement.
Q: You think home sellers should hire a Realtor and a lawyer?
A: Home sellers should hire an experienced lawyer who will provide independent advice and who will look out solely for their best interest. As for how to market the property, some of my clients sell for-sale-by-owner, some use a limited service listing on the MLS, and some use a full service real estate broker. Which of these is best for a person to market their property depends upon many factors, and they are all good options for some people depending upon considerations such as cost, time availability and comfort level with showings, and ways offered to expose the listing to the market.
Q: What about home buyers?
A: Home buyers likewise need independent advice. They may or may not need the advice of a buyer agent on what is available in the market. The mistake is in mixing up the two functions. There is the common misimpression that a Realtor can do it all, that advice is rolled into their fees. Although state law prohibits real estate sales people from discouraging the use of an attorney, they may say something to the effect that, "most transactions in Wisconsin do not involve an attorney." The implication is that an attorney is an extra and unnecessary expense. If unnecessary, who is going to provide independent legal advice in the absence of an attorney? The sales person? Obviously not, they are neither qualified nor permitted to do so.
Q: And you don't think people can do it themselves?
A: I know that they can, I just don't think they should. The last time I looked, we had over 2000 appellate case decisions in Wisconsin involving real estate matters. First, consider that amount of legal authority that a person should at least read if not study. More importantly, realize that 2000 disputes isn't even the tip of the iceberg showing the things that can go wrong. The vast majority of mistakes never get litigated and the vast majority of those that do never reach the Court of Appeals. Mistakes happen every day. Attorneys commonly are called to solve problems after other people have screwed up the situation. It is that professional experience even more than reading 2000 cases that cannot be obtained except through hiring an attorney.
Q: How much does it cost to hire an attorney:
A: It varies, some charge an hourly rate and some charge a flat fee. I offer either option, but if you look at the numbers, the typical attorney fee is a bargain. Let's look at an example: Assume a $300,000 house considering a 6% listing. That is $18,000. There are many attorneys in our market who will represent the seller on a flat fee for less than $1,000. If the attorney can negotiate the listing to a 4% listing, pay the brokers $12,000 and the attorney $1,000 and you've still saved $5,000 and gotten independent legal advice. What did it cost? Nothing, in that instance you gained $5,000. People may fear that they get less service for 3% than they would for 6%. With the assistance of your attorney, you should negotiate what you want done, what you will pay for it, and under what terms.
A: It varies, some charge an hourly rate and some charge a flat fee. I offer either option, but if you look at the numbers, the typical attorney fee is a bargain. Let's look at an example: Assume a $300,000 house considering a 6% listing. That is $18,000. There are many attorneys in our market who will represent the seller on a flat fee for less than $1,000. If the attorney can negotiate the listing to a 4% listing, pay the brokers $12,000 and the attorney $1,000 and you've still saved $5,000 and gotten independent legal advice. What did it cost? Nothing, in that instance you gained $5,000. People may fear that they get less service for 3% than they would for 6%. With the assistance of your attorney, you should negotiate what you want done, what you will pay for it, and under what terms.
Q: Any final tips?
A: Buy low, sell high. Get good advisors and pay them enough to keep them happy. Don't take wooden bitcoins. That should about cover it.
