Real Estate Transactions: where efficiency and consumer protection collide
Buying and owning land has been an important aspect of society throughout history. The transaction will likely be the biggest investment a person will ever make throughout their life; however, states have been changing their laws to favor efficiency over consumer protections of homebuyers.
Buying a home is likely to be the largest financial investment a person can make in the United States today. Andrew Carnegie said,“More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” Today, over sixty-four percent of United States citizens own real estate according to the United States’ Census.
Real estate is land and an investment, but more importantly, for many people real estate is a home. In order to obtain real estate, several legal transactions must occur; however, the person who is responsible for preparation and execution of the legal documents changes from state to state. In North Carolina, an attorney is required in the closing conference for purchase and refinancing of residential real estate. However, North Carolina is in the minority of states in the United States that require an attorney. Today, only seven statesrequire an attorney at a real estate closing: Alabama, Delaware, Georgia, Massachusetts, New York, North Carolina, and South Carolina. Majority of the states generally allow escrow agents, brokers, title companies, or attorneys to handle real estate closing; therefore, parties involved in real estate closing may not ever interact with an attorney during the transaction, but what do parties miss out on by not involving an attorney?
Generally, the purposeof retaining an attorney for a matter is to seek counsel on legal matters. It is the duty of an attorney to zealously advocate for their client in transactional legal transactions, litigation, and in negotiations. In states that require an attorney participate in the legal transfer of land, “one of the most critical junctures for providing effective legal advice is the pre-contract stage because the contract provides for the blueprint for the entire transaction, binding the parties to the rights and obligations therein.” Indoe v. Dwyer, 424 A.2d 456, 460 (N.J. Super Ct. Law Div. 1980).
Over the decades real estate agents and real estate attorneys have fought over theirrespective roles in preparing the contract for the transaction. Real estate agents have lobbied legislatures and argued their role in the home-buying process promotes efficiency within real estate transactions. In a novel case, a New Jersey court quoted, “real estate agents fear that the doubts that affect people entering into a substantial transactions may unravel perfectly good deals while the lawyers pick nits.” Trenta v. Gay, 468 A.2d 737, 738 (N.J. Super Ct. Law Div. 1983). Attorneys, on the other hand, have argued brokers are inclined to push the parties toward deals that may be against their interests. They further argue that if they are involved early the transaction process, they can restrain further limitations that may occur once the buyer or seller enters into a binding contract. Id.
While real estate agents seemed to have gotten the upper hand nationally, attorneys in North Carolina still handle the majority of the transaction process for the buying and selling of real estate.The North Carolina State Bar has opined that “a non-attorney is engaged in unauthorized practice of law if performing various functions related to a residential real estate closing, including, among others: (1) providing an opinion as to title of real property, (2) explaining the legal status of title to real property, (3) giving advice about the parties’ rights and responsibilities concerning matters disclosed by a land survey, (4) providing opinions or advice regarding the parties’ legal rights and obligations, (5) advising parties with respect to alternative ways for taking title to the property, (6) drafting legal documents, (7) recommending a course of action to a party under circumstances that require the exercise of legal judgment, and (8) attempting to settle a dispute between the parties that will have implications with respect to their legal rights or obligations.”
First, attorneys must write an opinion of the title of real property. North Carolina general statute § 47B-2 requires a title must have a 30-year unbroken chain of title record for it to be marketable. The process itself involves searching through the records of a county’s register of deeds and ensuring there are no liens or claims against the property. The attorney’s job is to then write a legal opinion on whether or not the title is marketable. The opinion then goes to a title insurer to insure the buyer of the real estate. In states that do not require an attorney, the real estate agent will likely notify a title insurance company, which will then perform the title search. Regardless who does the title search, it is likely the homebuyer will get a correct opinion on the marketability of the title since attorneys could face claims of malpractice, and title insurers risk losing money and facing law suits if the title is encumbered after agreeing to insure the title.
Second, attorneys are requiredto “explain the legal status of title to the real property.” This step requires and gives the attorney the opportunity to counsel and educate the homebuyer on the importance of having marketable title, and possible consequences the homebuyer may face in case the title is not marketable. In states that do not require an attorney during the transaction, the title insurance may do it themselves at the request of the homebuyer or real estate agent. Just as noted above, regardless who does the title search, it is likely the homebuyer will get a correct opinion on the marketability of the title since attorneys could face claims of malpractice, and title insurers risk losing money and facing law suits if the title is encumbered after agreeing to insure the title.
Third, attorneys are requiredto “give advice about the parties’ rights and responsibilities concerning matters disclosed by a land survey.” A land surveydetermines whether the house is within the property’s borders, whether there are any encroachments on the property by any neighboring properties, and the extent to which any easements on the property may affect legal title. Up until the mid-1980s, mortgage lenders did not require a survey, but this has gradually changed overtime. When issuing a title insurance policy, title insurance companies will issue an exception to the title unless a survey has been obtained. Since banks insist on borrowers obtaining a clear lender’s title insurance policy covering the face value of the mortgage, it has now become necessary to obtain a survey to satisfy its requirements. Additionally, it is important to explain to the homebuyer that property previously owned by a former homeowner, who had the land previously surveyed, may no longer be in the sole possession of the property because of an easement or another party’s adverse possession of a part of the property. It is the duty of an attorney to explain this process and possible remedies available. Real estate agents would not always be familiar with the variety of the legal rights or obligations that are encountered with land surveys.
Fourth, attorneys are requiredto “provide opinions or advice regarding the parties’ legal rights and obligations.” This broad requirement ensures all involved parties represented by an attorney understand their rights and obligations throughout the home-buying process including, but not limited to: the rights and obligations created by the purchase agreement, effect of a promissory note, the effect of a pre-payment penalty, the rights of parties under a right of rescission, and the rights of a lender under a deed of trust. Therefore, attorneys have a duty to explain their client’s duties and obligation at each step of the process. In states that do not require attorneys to be active in the home-buying process, the parties may or may not be explained their rights at each step by another interested party. For instance, a lender will explain the lendee’s obligations in the contract; however, since the lender is an interested party, they may not verbally disclose all rights of the lendee is entitled to written in the contract. This could lead to parties inadvertently waiving rights they should be entitled to.
Fifth, attorneys have the dutyto “advise parties with respect to alternative ways for taking title to the property.” This can be applied to a variety of situations and special needs of the parties. For instance, an increasing common trendin the United States is people owning joint interest in property. This is because more and more couples are cohabitating than ever before with a twenty-nine percent increase in the number of couples since 2007. With changes in society norms, attorneys have had to adapt on how they approach contracts, financing, and negotiations in real estate transactions. Attorneys, rather than real estate agents, have the legal training to understand benefits and consequences of alternative ways for obtaining marketable title to the property.
Sixth, attorneys are requiredto “draft all the legal documents” involved in the transfer of land. In most states, including North Carolina, attorneys are the only professionals able to draft legal documents. In recent years, real estate agents have been implementing contracts that contain attorney approval clauses in real estate transactions, which gives parties a specified time to consult with an attorney after signing the document. These clauses have created considerable litigation regarding the scope of review an attorney may engage in and the procedures to be followed in disapproving the contract. See Trenta, A.2d at 738 (holding to there is no reason to determine why the defendant’s attorney rejected the proffered contract since the attorney is beholden to the client and the client’s decisions). As a result of attorney approval clauses, several states have allowed real estate agents to draft legal documents for real estate transactions. However, in North Carolina, the North Carolina State Bar has opined that drafting these contracts is still the sole responsibility of an attorney and, therefore, real estate agents may not any legal documents even with an attorney approval clause.
Seventh, attorneys have the dutyto “recommend any course of action to a party under circumstances that require the exercise of legal judgment.” This step encompasses a variety of scenarios as to why an attorney may recommend seeking a legal judgment. In one scenario, a homebuyer may wish to purchase a home that is foreclosed. The attorney may need to take steps, on behalf of the client, to ensure other creditors have no claims or liens to the property. If there are other claims or judgments on the property, the matters can be handled by a separate judgment or by negotiating a price between the parties. In states that attorneys are not required to be involved in the real estate transactions, parties involved will likely have to hire an attorney regardless to settle a claim or to release a property from a lien. The process itself could have been avoided in the first place if the party had involved an attorney to begin with to ensure the property had a good and marketable title.
Finally, attorneys in North Carolina are required, at the party’s request, to “assist in settling disputes between the parties that will have implications with respect to their legal rights or obligations.” This step mostly involves ensuring material elements of a contract are fulfilled. The homebuyer has a right to survey the property, a right to rescind the offer for just cause, an obligation to obtain reasonable financing, and several other rights and obligations. The seller can be obligated to do several actions listed in the contract that was previously agreed upon before the contract was signed. It is the attorney’s duty to ensure that their client knows and understand their rights and obligations to prevent future disputes. While this may hinder efficiency by allowing a party to rescind an offer for good cause, it ensures the parties are knowledgeable about their rights and obligation in one of the most important and expensive transactions of their lives.
Buying and owning land has been an important aspect of society throughout history. The transaction will likely be the biggest investment a person will ever make throughout their life; however, states have been changing their laws to favor efficiency over consumer protections of homebuyers. In those states, real estate agents, brokers, and escrow agents have taken the place of attorneys in legal matters concerning the real estate transaction. In North Carolina, however, the State has continued to place value in protecting the consumers. The State still requires the attorney to represent each party to ensure the parties know their rights and obligations, understand intersecting legal issues that may affect their property, and help resolve any disputes that may occur throughout the transactions. However, with more and more states continuing in the trend to allow other professions to handle the real estate transaction process, it may not be long until North Carolina follows suit.