Due Diligence and the Art of Buying Property: Why an Attorney is Essential in your Real Estate Transaction.
For many of us, a real estate purchase will be the biggest transaction we participate in during our lifetime. When else do we spend hundreds of thousands to millions of dollars on one purchase?
Instead of engaging an attorney when involved in a real estate transaction, however, potential purchasers rely solely on their real estate agent. Numerous states have recognized this is not enough protection for home buyers; instead, more than twenty states have mandated that an attorney must be present at closing. Unfortunately, Montana is not one of these states. Despite the fact that Montana does not require an attorney be involved in your real estate transaction, below are three reasons you should nonetheless hire an attorney.
(1) REAL ESTATE TRANSACTIONS ARE STANDARDIZED WITH FORMS AND EXPERIENCED REALTORS; HOWEVER, THE STANDARDIZED PROCESS IS STILL SUBJECT TO EGREGIOUS ERRORS AND DOES NOT INFORM THE BUYER OF ALL LEGAL IMPLICATIONS.
I can’t tell you the number of clients that have come through our office doors asking for help after they have executed and closed on a real estate transaction. The transaction was completed using only a real estate agent and standardized MAR (Montana Association of Realtor) forms. Although everything went smoothly, either the clients or the agent didn’t do their due diligence and now an issue had popped up years later. Had an attorney been involved, she would have found the issue and advised her client before the transaction was irreversible.
Regardless of how good your agent is, they cannot make a good judgment call on legal questions. And legal questions arise all the time. They arise in simple situations, such as short term rentals, especially now in the era of Airbnb and VRBO, and they arise in complex situations such as potential title disputes. Only a lawyer can tell you with certainty if your plans are feasible. And only a lawyer should help you outside of the normal standardized forms real estate agents utilize.
Additionally, lawyers can continue to represent you throughout the entire real estate process where an agent is typically done when the deal has closed. For example, an attorney can help with construction contracts, zoning requests, property management contracts, etc. Thus, having an attorney on board as early as the Buy Sell will ensure your attorney thoroughly understands your needs and can best represent your interests throughout the entire process.
(2) ALTHOUGH REALTORS ARE TYPICALLY GOOD AT THEIR JOB, MISTAKES DO HAPPEN AND THEY ARE NOT REQUIRED TO HAVE ERRORS AND OMISSIONS INSURANCE IN MONTANA.
In Montana, real estate agents and brokers are not required to have E&O insurance. That means if they make a mistake, which unfortunately does happen, you will have no insurance to rely on for a remedy. But, if you hire an attorney, she can help prevent any mistakes from happening that would require a claim on a real estate agent’s E&O insurance in the first place. As in preventative medicine, attorneys can help you save money through preventative practice.
(3) TITLE INSURANCE, CONTRARY TO POPULAR BELIEF, DOES NOT PROVIDE COVERAGE IN MOST CIRCUMSTANCES.
I recently heard this about title insurance: 95% of homeowners have it, 5% understand what it is. Title insurance’s value in our modern real estate market is debatable at best. However, title defects still certainly exist and it’s an underwriter’s job to find these defects and list them on your policy. These are known as “exceptions” and are not covered by your title insurance. Why? Because “exceptions” are where most of the claims lie – typically in easements, covenants, reservations, etc.
A potential homeowner needs an attorney to explain a policy riddled with exceptions. Title companies do not have a legal obligation to explain your title insurance policy to you. The majority of homeowners do not thoroughly read the policy and the “exceptions,” and if they do, they will have a hard time understanding them without a legal background. The same is true with real estate agents. However, “exceptions” are critical to understand. If you do not understand your exceptions, you could end up with a number of issues, such as an undeveloped road easement through the middle of your building site, covenants that restrict your ability to develop the property or a conflicting survey that means a decrease in net acreage.
If a competent attorney is on board, it’s her job to research the “exceptions” and thoroughly explain them to help you understand what your policy covers and where your rights are potentially in jeopardy. Again, your attorney can make sure no claims need to be made on title insurance and avoid potential pitfalls before they happen.
As they say “the devil is in the details,” which rings especially true for real estate transactions. Hiring a real estate attorney to conduct due diligence on your behalf and ensure the transaction details are perfected shouldbe another necessary expense when buying, trading or selling property. Most attorneys can tailor their scope of work to specific questions or provide general support regarding the transaction, whatever works best for your situation. The more folks you have on your team, the smoother the transaction will be and the better your rights will be protected.