While the use of real estate lawyer is mandatory in some states, in most states it is optional. I’ve bought four properties and sold one property. For all the transactions, I have never once used a real estate lawyer because California law says using one is not required.
However, even if you live in a state that doesn’t require a real estate lawyer, you may want to consider paying for one.
Let me share several examples with you why getting a real estate lawyer may be a good idea. A real estate lawyer could save you from a lot of pain and suffering, as well as from financial loss.
Why You May Need A Real Estate Lawyer
1) Building Permit Issue
This reason for getting a real estate lawyer is from reader Beth.
I wanted to buy a property that had a building permit issue due to Owner A’s disregard for the law.
Owner A applied for a permit to build a big garage. It was approved with the condition it would be set back further from the road and built closer to the house.
Owner A ignored the city’s wishes and went ahead and built the garage in the spot he wanted. No one from the city noticed because the owner didn’t submit the project for final approval. Therefore, the garage was illegal.
Owner A sold the property to Owner B and Owner B’s lawyer didn’t notice that the garage was set in a location different from that allowed by the permit. When you compare the survey and the permit, it is obvious the garage is in an unapproved location.
Related: Remodel With A Permit Or No? Weighing The Pros And Cons
Time Goes By
Ten years go by and I am the potential buyer of the house (Owner/Buyer C) with the big garage from Owner B. My lawyer discovers that the garage is in an illegal location. This was a day before close. My lawyer lets me know that the city had a right to require the building be torn down or moved back, which would obviously cost a lot of money.
This large garage was an important reason why I wanted to buy this property in the first place. It added greatly to the value of the property. The lawyer for Owner B admitted he was responsible and would apply for a variance, at his own cost. However, I was aware the city may deny the variance and I could lose the garage.
I went ahead with closing after my lawyer asked for a reduction in the sale price and obtaining a written promise from Owner B’s lawyer to complete the process for the variation.
The variance was approved so it worked out fine for me, but anything could have happened.
Related: Is Buying A Fixer Upper Worth It?
2) A Complicated Transaction With An Aggressive Buyer
This reason for getting a real estate lawyer is also from Beth.
At the end of my marriage, our marital home was being sold and we had both already purchased other properties. The people I was buying from had also purchased another home. There was a chain of house closures all closing on the same day.
The marital home being sold was a rural property that had different zoning for different parts. The house structure and one acre of land were taxed one way. The rest of the property was taxed at a lower rate as agricultural land.
The day before closing the people buying from us (Buyer X), started pulling some tricks to help them get a better deal.
Buyer X first asked us to change the way the property was valued and to declare part of the farmland as non-agriculture to get taxed at a lower rate. That was not true and would have been illegal. However, Buyer X’s lawyer (Lawyer X) asked for it anyway and we declined.
Next, Buyer X asked for a price reduction from the amount signed on the sale contract because they felt the property was being unfairly taxed. We declined their offer.
Last Minute Scramble
On the day of closing, when all of my stuff was being loaded into the moving truck, Lawyer X notified our lawyer that Buyer X would not be closing because they had heard the oil tank in the basement was faulty and leaky and caused a hazard. The oil tank was two years old and in good condition and the company that installed it sent the paperwork to both lawyers.
The oil tank ploy didn’t work so Buyer A refused to close stating that they were denied the right to a property inspection and so the price was based on too many unknowns. They agreed to move ahead with the purchase if we agreed to lower the price.
At this point there were many lawyers and real estate agents freaking out because it looked like the chain of sales was going to collapse. My lawyer has a document that Buyer X and Lawyer X had signed and witnessed. One of the things initialed was that the buyer had waived their right to have the home inspected.
Now it is the day after the long line of other houses were supposed to close. All my stuff is in a truck and I am sleeping on a couch at a friend’s house. Buyer X again agrees to close if we lower the price. We refuse.
This is when it gets wild.
The other lawyers and the real estate agents are calling Lawyer X and threatening him with all sorts of things. Lawyer X caves and sends the bank draft, for the amount originally agreed upon, to my lawyer. Apparently he had it all along but Buyer X had told him to keep it.
Lawyer X tells Buyer X what he has done and that it is now closed. Buyer X says that the deal is not closed when the cheque is delivered, but when the cheque is deposited. He orders Lawyer X to stop the cheque from being deposited.
We are now several days out past the original closing date. Everything is a disaster. My lawyer has the cheque but Lawyer X ordered that the deal is not closed until the cheque is deposited and that my lawyer has no legal right to deposit it and Lawyer X was applying to a judge to have the cheque held. My lawyer and his entire law firm became involved with this mess.
The good lawyers consulted their Law Society and an emergency ruling was made by them. The emergency ruling stated: a deal is closed when the cheque is handed from the buyer to the seller or their agents and not when the cheque is cashed by the seller.
The Lawyer Was Worth It
All of the houses closed and I was only stuck with a larger bill from the mover. My lawyer did not charge me for the extra costs involved. Apparently, I could have sued Buyer X but my lawyer said it would cost me a lot of money and that Buyer X and Lawyer X would fight forever and it would be more trouble than it was worth.
In the end I was only out $700 extra dollars for storage of my stuff on the moving truck. It was not worth my energy to fight with the buyers.
3) An Easement Issue
This reason for getting a real estate lawyer is from me.
After my grandparents died, they left behind an 8-acre piece of farmland in the countryside of Oahu. It was a beautiful property with majestic Waianae mountains in the back and plenty of fruit trees.
Unfortunately, nobody had the time or ability to maintain the property. I lived in San Francisco and my parents were focused on doing other things in retirement. The weeds slowly began to take over.
When I asked my parents why not just sell the property if it’s causing too much hassle, my father said there was an easement issue.
Apparently, the neighbor had access to the property’s front driveway that would force us to create a new driveway if the neighbor decided to cut the entrance off. Because of this easement issue, my father was reluctant to try and sell the property without first sorting things out.
A Real Estate Agent Helped
I decided to find a solution by first talking to a real estate lawyer for free. The real estate lawyer said the issue shouldn’t be a problem, since the easement has been long-standing. Every property owner has a right to enter his or her property in a reasonable manner. He then suggested I speak to a real estate agent who was familiar with easement issues.
I ended up reaching out to a local real estate agent who was knowledgable about easements. The real estate agent drew up a document about the easement and got the neighbor to sign off on it. We ended up selling the property to our other neighbor so she could expand her farming activities.
It’s good to know that in this case, a real estate agent was all that was needed to get the property sold. If we needed a real estate lawyer, we would have certainly hired one.
4) You Get Cold Feet
This reason for getting a real estate lawyer is pertinent for overzealous buyers who realize maybe they are overpaying. This reason is also for buyers who find themselves in an unlucky situation after ratification and want to back out.
Sometimes you want a property so badly that you’re willing to remove your financing and inspection contingencies in your offer. By doing so, you make your offer more attractive compared to another competing offer at a similar price with contingencies.
During the ratification period, which usually lasts between 21 – 45 days, a lot could change. Perhaps you unwisely kept your entire downpayment in the stock market, which proceeded to tank by 30%. Perhaps a week before the closing date, you lose your job. Or worse, maybe you contract a deadly virus that incapacitates you for months.
You must pull out of the deal, but there’s just one problem. Your 3% earnest money deposit (EMD) is at risk because you didn’t have any contingencies. If you’re buying a $1,000,000 property, your EMD is $30,000. Unfortunately, a seller has the right to withhold your EMD if they want to be real sticklers.
Not All Is Lost
Thankfully, your EMD is actually with the escrow company. The escrow company requires both parties to sign off before the seller can get the money. The escrow company is there to protect both parties and to ensure a transaction goes smoothly.
The seller would love to keep your EMD in exchange for wasting his time and missing out on other potential buyers. However, the seller may not want to risk pissing you off because maybe you still might buy the property at a lower price or at a later date. Further, the seller doesn’t want to scare away other prospective buyers if they lose you. If word gets out that they played hard ball, which it will, selling may get more difficult.
As a buyer, you can retain a real estate lawyer to fight to get your EMD back due to extenuating circumstances.
Perhaps by just having a real estate lawyer, the seller may be intimidated enough to release your EMD immediately. If the transaction is in a state that does not mandate using a real estate lawyer, the presence of a lawyer may be more intimidating.
Let’s say the prospective buyer was lying in a hospital bed with a ventilator after going into contract. Instead of going through a stressful and potentially expensive battle to keep a buyer’s EMD, a seller might be kind enough to let you go. If the seller is a local business owner, this type of hardball cruelty may end up costing the seller a lot more down the road.
Before hiring a real estate lawyer, it’s a good idea to see if you can work out a deal with the seller. Otherwise, you might be wasting money. Always try and negotiate in good faith.
5) A Tenant Issue
Although this article has focused on using a real estate lawyer when buying or selling a property, a softball friend mentioned how he hired a real estate lawyer for a tenant issue.
My friend’s parents have tenants who decided not to pay rent for the past three months. Given major job losses due to COVID-19 and shelter-in-place rules, this is not a surprise. However, if you are a small-time landlord with bills to pay, this is also a tough situation too.
My friend’s parents tried to work out a payment plan with their tenants. However, their tenants decided not to return any phone calls or e-mails. Two months after trying to reach the tenants, the landlord discovered all the locks were changed. The tenants would not open the door when knocked.
Unfortunately, the landlords were left no choice but to hire a real estate lawyer to find a way to reach the tenants and come to an agreement.
A Real Estate Lawyer Acts As An Insurance Policy
When it comes to buying and selling real estate, something always seems to come up. If you have a complicated real estate transaction, hiring a real estate lawyer is a good idea. If you plan on buying a property directly with the listing agent, having a real estate lawyer look over your documents is helpful as well.
Whether you are a buyer or a seller, you can certainly try and see if your real estate agent can solve a conflict first. If the conflict cannot be solved amicably, you can then hire a real estate lawyer to fight for you.
A real estate lawyer may charge by the hour or may charge by the transaction. As a percentage of the total cost of the property, a real estate lawyer should cost 0.25% or less.
For example, if you spend $1,000 on a real estate lawyer to buy a $500,000 property, the lawyer fee is only 0.2% of the total cost of the property. You could probably find a lawyer for only $500, or 0.1%, depending on the transaction.
The more you value peace of mind, the more you should be willing to hire a real estate lawyer. The more complicated the transaction, the more you should retain a lawyer as well.
To recap why you need a real estate lawyer:
- Try seeing if you can get free legal council during the initial free consultation.
- Ask your real estate agent if he or she has experience dealing with legal issues specific to your property or the property you want to purchase.
- If you suspect a difficult transaction, reach out to a lawyer before listing a property or making an offer to see if one is available just in case. You don’t want to wait until a problem arises and then scramble to get a real estate lawyer.
- Many times, disputes can be negotiated on your own or between real estate agents. The key is to be reasonable and respectful. Going to trial is always the last resort.
- When things get ugly, reputations are at stake. You must look beyond the real estate transaction dispute to calculate the true cost of litigation.
Related: 10 Warning Signs To Be Aware Of Before Buying A Property
Readers, if you have more real estate lawyer stories, I’d love to hear them. I’ve been in several disputes before and they’ve all been amicably resolved through respectful negotiation. The key is to be reasonable and find a middle ground. Nobody wants to get into a long, drawn out, and expensive legal dispute.
Robert C. says
Needed a lawyer to buy my last house. The owner had inherited the house, and the original owner built the driveway right over city property without a easement. City found out and made the original owner set up a multiple payment plan with a 75 year lease. When the owner inherited the house he found out about this problem and went to the city to see if he could fix the problem especially the large 2 payments owed in the future. The city agreed to let him pay less money upfront to solve the payments problem, but still only had right for the now 50 year lease. This issue wasn’t disclosed during the purchase discussion, and was caught by my mortgage issuer. The mortgage company said no easement no loan. My real estate agent and lawyer set up a meeting with the city and worked it all out with a permanent easement. The connections my lawyer and real estate agent had with the city made this painless, and the only issue was the delay of my mortgage by 2 months. I ended up closing before the easement was final due to written confirmations by the city they would fix the issue, and the lender agreeing that the problem had been solved. I think I spent less than $1,000 and was worth every penny!
Canadian Reader says
Great article. Our property sale last year was thankfully a smooth transaction. The only thing I learned through that sale was find your own lawyer, not the one recommended by your real estate agent. I’m sure the recommended lawyer was fine, but the lawyer I found on my own through Kijiji (like Craigslist) had an old office, but worked for 1/3 of the fees. We were scared to take this risk because we were threatened that we wouldn’t know if we needed a “good lawyer, until sh*t hits the fan.” We decided to go with the cheaper lawyer anyway because we had valid renovation permits and couldn’t anticipate much risk. But you are right – anything can happen.
It’s a deviation from your today’s topic, but I would be interested to hear your opinion on carrying out major renovations- permit versus no permit.
Thanks for writing!
Financial Samurai says
Good idea! I’ll put the permit versus no permit in the queue. I think it’s a good debate.
Not to continue too far off track, but are permits optional some places? I figured most states/cities (similar to California) publish lists of improvements that do and do not require permits.
Canadian Reader says
There are types of buildings/renovations requiring permits wherever you live. It’s possible to get tradespeople to do desired work without required permits- the debate is about the risks involved with doing this.