Experienced real estate investors have a team of attorneys that they will go to time and time again for every new investment.
Some of the more “exotic” attorneys make their usefulness very obvious from the beginning. We’re talking your zoning attorneys or your securities attorneys here.
If you’re trying to get a development project entitled and need special permission from the local government that includes approvals, neighborhood meetings, and meetings with politicians, a good zoning attorney will prove his worth very quickly to you.
Our zoning attorney has pushed tricky entitlements across the finish line many times and it would be pretty difficult to overlook the value he brings to our team.
Your securities attorney is the professional that allows you to raise capital for your projects legally and without our security attorney’s assistance, we would never have been able to build our investor base and get to where we are today.
Transaction Attorneys are Often Overlooked, but Necessary
The attorney whose contribution might be overlooked by beginner investors is your humble transaction attorney.
This is a bit ironic in a certain sense because this is the first attorney the vast majority of real estate investors will encounter.
Many investors get their start buying smaller multi-family or single family investment properties using their own money.
With no need for regulation D filings, special permit applications, and the like, you haven’t yet had a reason to assemble your team of legal specialists, but…
You won’t be able to avoid the need for an attorney who handles your purchase and sale agreements, closings, and interacts with the other party’s attorney on your behalf.
Selecting the Right Attorney
At first glance, it might not always be obvious to you the kind of protections a good transaction attorney can provides.
Worse yet, lazy or undisciplined attorneys might make it seem like they are just there to show you where to sign the contract and nothing more.
You would be shocked at the carelessness I’ve seen from transaction attorneys representing the other party in deals worth tens of millions of dollars.
Check out the list below to better understand some of the key things a good transaction attorney should be doing.
If your attorney isn’t doing these things, please take my advice and consider making a change. You’ll eventually run into problems.
NOTE: Some attorneys are jack-of-all-trades types and would happily tell you they can represent you for your transactions, draft private placement memorandums, and submit zoning petitions. I can’t speak for everyone’s experience and I’m sure that there are attorneys like that who are extremely well rounded and capable of performing all kinds of different services. That said, in our experience you should strongly consider finding dedicated professionals that stay in their lane, so to speak. An attorney claiming he can perform all sorts of different services might just be desperate for business. That’s probably not a good sign.
1. Contingencies:
The most obvious way, in my opinion anyways, that a good transaction attorney can help you is to button up all of your contracts.
Your offers/LOIs, PSA agreements, closing documents, and any associated riders or addenda should be carefully reviewed by your attorney with each transaction.
While much of this information is generic and interchangeable from transaction to transaction, not all of it is. One of the pieces of a contract that can vary quite a bit from deal to deal will be the contingencies you include when buying a new property.
While we typically draft and come up with our own contingencies if there’s a specific due diligence item we would like to review, we make sure to have our attorney “translate” them into actionable legal language before submitting to the broker or owner.
Standard contingencies you will use, depending on the type of deal, would be due diligence items like record checks and physical inspections or something like a development zoning contingency, which might define the purchase price in terms of how many units or how large of a building is ultimately approved.
2. Title Issues
We had a really promising development project we had an accepted LOI on when our attorney uncovered a previously unknown title defect from the previous property holder prior to the current owner.
The issue seemed small and insignificant – the selling party’s company was misspelled on the deed.
Our attorney reached out to all of the major title insurance companies on our behalf, received confirmation that some of the title insurance companies would indemnify, but others were not willing to do so.
This was a large condominium development with 31 units and total development costs of around $18 million.
Not only could our lenders’ title insurance companies raise issue with it, when we went to sell the condominiums, each individual transaction would run the risk of this becoming an impediment.
On our attorney’s advice, we avoided a deal that looked great on paper, but had some hidden issues beneath the surface.
3. Land Use Agreements and Other Restrictions:
Properties may have hidden restrictions that aren’t immediately obvious without further due diligence.
One example of these kind of restrictions would be land use agreements, which we discussed in our Brownfield Development Explained article.
Land use agreements are put in place where there was previous environmental contamination and may restrict residential uses or even allow no uses at all.
A good transaction attorney will run his own due dilligence alongside you and pull any such legal restrictions.
If they aren’t doing so, they aren’t doing everything they can to protect you.
4. Extensions:
Unexpected things happen that sometimes delay you or the other party’s ability to close in the timeframe you had agreed to.
Sometimes deals will need extensions for one reason or another.
These will typically be negotiated directly between the attorneys as these are legal extensions of your original contract length.
While you or your broker will also be discussing this, only the attorney can actually execute the extension.
A good attorney will also advise you based on their experience on how to negotiate extensions, and where to draw the line in granting extensions if the other party is being unreasonable.
5. Return of Deposit:
Sometimes you find a great deal and have an accepted LOI, but a huge issue comes up during your due diligence phase that had not been previously disclosed and makes the deal no longer feasible.
This should not be a problem 99% of the time, but you’ll run into unreasonable people eventually if you purchase and sell enough real estate.
If your earnest money deposit is being held by the selling party’s attorney or broker, it will be up to your broker to petition on your behalf to have it returned.
If the other party is unreasonable, you’ll be happy if your attorney is knowledgeable, motivated, and has a backbone. They’ll need to fight on your behalf to get the money back.
Wrapping Up
These are just a few of many reasons why you’ll want to invest some time into asking around and getting recommendations for a solid transaction attorney.
If you skimp on this step now, you’ll probably end up regretting it later.
On the other hand, you’ll be very happy with yourself for putting in the time when you see your transaction attorney go above and beyond to protect you.
