Tuesday, July 17, 2012

Why Curmudgeon does not like real estate closings -- Part I

There are actually several reasons besides my own terrible experiences.

Before getting to my recent experience (that's a teaser for a future post), let me run a few of these other reasons by you.

First, there's no money in it.

In a lot of states, lawyers aren't even involved in the closing of a house sale. Depending on where you are reading this, you may be scratching your head as to why having counsel representing you in the single most important (and expensive) purchase you are likely to make in your lifetime might be necessary.

Still unclear on the concept?

Well, let's see: You put a "contract" in as your bid on the house. Actually, it's not a contract -- it's an offer -- it becomes a contract only if your offer is accepted. But the terms of that contract govern a heck of a lot more than the price you are paying.

The contract governs what financing you will have -- because if you can't get the financing called for in the contract, the seller can go out and try and get it for you. And you'd better cooperate, or the seller will get to keep your "earnest money." And woe betide you if you say you're proposing a "cash" deal -- I've got a specific horror story on that one.

How much "earnest money" are you putting into this deal, anyway? The contract says that, too. In these days where buyers often borrow nearly all of the purchase price (to an old guy like me, anything more than 80% financing is "nearly all") the Realtors' commission might not be accounted for -- but you can bet your last dollar that the Realtor (who is going to have first crack at helping you craft your bid) is going to protect his or her commission. Either he or she knows you've been pre-approved for your financing or you're putting in earnest money that magically equals or exceeds the 6 or 7% commission being charged by the Realtors. (That way, if the deal falls through, the Realtors still get paid.)

So you wind up with a contract -- a complex legal document running to several pages of fine print with all the blanks filled in by a Realtor -- and, now, maybe, if you're in a state where lawyers are even involved, a lawyer finally sees what's been done to you. (Hopefully there's an attorney approval rider that allows your attorney to unwind some of the damage.)

Does the contract call for home inspection? Many states, like Illinois, have a mandatory disclosure statute. A person who paints over the watermarks on his basement walls and fails to disclose that the basement doesn't always stay dry may sell his house -- but he'll certainly buy a lawsuit. Who can do the home inspection? In some states, this is a licensed and regulated business -- in others it's a great way for out-of-work contractors to try and drum up new business. And the contract may be opened up yet again depending on what the home inspector finds. Who's going to handle these negotiations? Who's going to help you decide which issues are legitimate and which are not?

What personal property comes with the house? If you don't specify that the washer and dryer (or, perhaps, even the dining room chandelier) stay with the house in the contract, you'll find them gone when you move in.

There are a million questions that you, the home buyer or seller, have and your Realtor was always there to answer them for you... until the contract was signed. Now they're off trying to earn another commission. Can you blame them? You know how long it took you to find the right house -- or to sell the one you have. But don't worry. You'll see the Realtors again at the closing -- ready to pick up their check.

On a $300,000 house sale, a 6% commission is $18,000. This will probably be split between the seller's Realtor and the buyer's Realtor -- but the $9k each will pocket at the closing table will dwarf the $400 or even $600 that your lawyer will be able to charge.

Attorneys used to make money because they could do lots of closings -- they could be involved in far more transactions than even the most efficient, diligent Realtor. Showing houses takes time, even in the Internet Era. Then the real estate market collapsed. Some lawyers stayed in business by becoming title agents on the side. By producing the title report on the property, they can make three or four times what they might have made on the closing alone -- although still less than the Realtors, of course, on any one transaction).

But, as the volume of real estate closings has declined, their average complexity has increased. After the contract is signed, who's fielding the questions about the house inspection, or working with the bank to get the financing finally in place? The real estate lawyer had better have a real sharp paralegal or secretary to handle triage on these calls.

If, of course, you have a lawyer.

And, speaking of financing, did you realize that all those loan application papers that you fill out are legal documents that can get you in a whole bunch of trouble if you don't fill them out correctly? If you just put in as the mortgage broker suggests, without reference to the actual truth, you may be committing a federal crime. You could wind up in jail.

At the closing, you'll have to execute all those loan documents again.


Assuming it's not because the bank has pulled a switcheroo on you and changed your interest rate or payment terms (although that does happen), the purpose is to make it easier for the government to prosecute you for bank fraud. You didn't lie once, you see, you lied twice -- and you had weeks or months in between to think the better of it, didn't you?

But, except for the risk of federal prosecution for bank fraud, or the risk that the bank might try and defraud you, or the risk that you might not actually be buying the property you think you're buying, or any of the other risks inherent in entering into a contract that will tie up your finances for decades to come, what do you need a lawyer for anyway?

Residential real estate closings are high-risk, low-reward undertakings for lawyers. Realtors are not always truthful -- but they are saints in the heavenly choir compared to the banks. If lawyers could charge an hourly rate for residential real estate closings it would make them more profitable -- and lawyers might wind up, then, making something close to what the Realtors make, or even more, depending on the transaction -- but dealing with lenders and home inspectors and buyers and sellers at their wits' ends would still be highly stressful.

As I was reminded just last Friday....

To be continued....


Empress Bee (of the high sea) said...

i worked in a real estate law firm and yes, we made our money on title insurance. plain and simple. the 500.00 or so fee didn't pay but an hour of attorney time, plus mostly the paralegals did all the work.

smiles, bee

Anonymous said...

Can you put in the contract that you want someone from another country doing your home inspection? I really only want one person inspecting anything I buy and that's Mike Holmes! I'm anxious to hear about buying a house with cash and why this isn't a good idea? Not to mention who on earth can do that anyway?

The Curmudgeon said...

Nice to meet you, Mrs. Holmes (or so I'm guessing).

The general answer to this question is 'it's a contract and you can put in your contract whatever you wish to put in' -- within reason, of course, and as long as it doesn't violate the laws or public policies of the state or municipality where you're proposing to contract. That's yet another reason to seek a lawyer's input at the earliest possible stage, like before you put in a contract....