Delving into Residential Real Estate Law

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From LawHub, this is I Am The Law, a podcast where we talk with lawyers about their jobs to shed light on how they fit into the larger legal ecosystem. In this episode, Aaron Taylor interviews a residential real estate lawyer who discusses malpractice and how real estate practices vary by state.

Aaron Taylor:

Our guest today is Barbara Stewart. She is a solo practitioner in Greensboro, North Carolina who specializes in real estate law. Barbara is a graduate of the University of Texas School of Law. Prior to going to law school, Barbara taught English as a second language for seven years in Japan. Right after law school, she worked in-house at AT&T. She spent much of her time negotiating contracts such as car rentals or satellite launches for the company's purchasing department. Barbara, why did you turn to real estate law after so many years?

Barbara Stewart:

Well, interestingly enough, it was more areas that I knew I did not want to practice. I knew that I did not want to do litigation. I am not a courtroom attorney. In fact, around here the joke is I'm allergic to the courtroom, so it was going to be transactional in some form. My 12 years at AT&T and later Lucent Technologies, I was basically a contracts attorney. I represented the purchasing arm of the company and helped them write their contracts, everything from buying plastic to buying satellite launches and everything in between. This was not what I expected to do in law school. I was thinking more in terms of family law, which now I'm very happy I did not do, but I discovered that contracts was very interesting and enjoyed doing that.

What I'm doing now is mostly real estate and that again was just kind of a fluke. When I left Lucent Technologies, I went to work in a law firm here in Greensboro because a friend of mine was one of the partners there. Went in, again immediately realized I wanted nothing to do with the litigation, which was the major part of that firm and they had real estate and corporate work that needed doing, so that's what I ended up in.

Aaron Taylor:

Tell us more about real estate law. What does that mean, I guess, for someone who just only knows what real estate is in general?

Barbara Stewart:

Well, it's going to mean different things in different states. First of all, I think that's one of the important things for people to understand is that there's only a handful of states left in the country that require an attorney be present and direct a closing, and the closing is, of course, going to be where the person is buying a house and another person is selling a house. North Carolina requires that an attorney either attend or supervise the closings that go on, and in my office there is always an attorney in a closing. Other states use title companies to do their closings, and so being a real estate attorney in those states is probably very different than in North Carolina. They're probably more involved with disputes that come out of real estate issues, dealing with various governmental needs or other needs such as easements right away and so on.

Aaron Taylor:

I teach legal ethics here and we do a couple sessions on the unauthorized practice of law and of course there are a lot of gray areas where you're doing legal work, but being a lawyer isn't necessarily required, like real estate in some places, taxes, things of that nature. So what was the impetus, if you happen to know, behind requiring a lawyer to participate in the closing process?

Barbara Stewart:

That's a good question and there's a lot of discussion here because I believe there's at least one lawsuit pending against the state, challenging our rule that attorneys have to conduct closings. I believe that most states started out the way that we did, but in a lot of states, attorneys actually owned the title companies and so it kind of morphed into a situation where they were overseeing people doing the closings in large numbers and they were further and further away from the process as time went on. Not sure why North Carolina never followed suit. I do know that the real estate attorneys that I know in North Carolina are very vocally against following those rules.

What I can tell you is what I've seen personally, and I'm just going to give you an example. In North Carolina, let's say you're going to refinance your house, say $150,000 loan. You're going to have to have a closing and an attorney will have to conduct it, and then you're going to have to purchase lenders title insurance for the bank, and in North Carolina, the attorney will probably cost you somewhere between $500 to $700 to do the closing and then the title insurance will cost you about maybe $250. Compare that to a state like Texas. Texas is a title closing state, and this one I use because I happened to review my sister's refinance package.

In Texas, that same arrangement, the hundred and $50,000 refinance with lenders coverage in the closing, the closing in Texas will cost you about 300 with the title company. The title insurance premium will be $1,500. You can see that there is a huge disparity between the $250 title insurance premium that North Carolina would require versus Texas. My understanding in insurance premiums is that they're based on claims made, so I have to believe that probably there are more claims for errors in Texas than there are in North Carolina.

Aaron Taylor:

Wow, that's very interesting. So there's a practical value to having lawyers in a room as opposed to just lay people who know real estate or at least seem to know real estate.

Barbara Stewart:

And can't necessarily answer the questions that people have. When I do a closing, it takes about between 45 minutes to an hour, particularly if it's a first time home buyer. I'm going to go through the money information with them. I'm going to go through their note with them and make sure that it's what they expected to see and that they understand the implications. I'm going to talk about the obligations that they're taking on under the mortgage, which North Carolina we refer to as a deed of trust, and as we go through the package and most of these packages are about a hundred pages long, I want to make sure that my clients understand what they're signing. I'm not sure that that happens in a title company situation. As I understand it, most of the people in title companies are not attorneys and cannot give legal advice, so they probably would be unable to give the explanations that I give.

Aaron Taylor:

Of course real estate law, at least at this stage, it's mostly so-called transactional. So what types of documents would you prepare for a typical client?

Barbara Stewart:

If we're doing a closing where the client is obtaining a loan, for example, from let's say one of the major banks in the country, a Bank of America, a Wells Fargo, something like that, I'm going to be preparing the settlement statement. That's probably the most important document to everyone in the room, and that's the one that shows the cost of doing the closing both to the buyer and to the seller. There's a lot of rules and regulations concerning this document, particularly after 2010 and so the generation of it in a way that pleases buyer, seller, and most of all lender is not an easy task. That will, for example, tell them what they're paying for title insurance, what they're paying for homeowner's insurance, for their bank fees, for any incidentals that they may have ordered as far as inspections and so on are concerned. That's probably the major thing that I work on.

In a package, there will be a truth and lending disclosure that attempts to show the impact of the closing costs, a note, a deed of trust, and then a variety of other documents. Most are actually prepared by the bank. I may add some information to them, but I'm not probably going to create them unless the situation I'm in is not a bank lender, but instead the seller financing or a private financer. Then I will create the note and the deed of trust as well. I do usually draft the deed and other seller documents for the sellers. They always have the option here of getting their own attorney to do that or using the closing attorney.

Aaron Taylor:

Are most of the forms that you work with, are they standardized or do you have to recreate them in some way? How does that work?

Barbara Stewart:

No, they're actually very standardized. Even our contract to purchase here is a standard form created jointly by the Realtors Association and the North Carolina bar. My work on those things is generally to change things that need to be changed in the contracts, in the deeds, in the deed of trust and so on. But there are forms to start with and there actually is a software program that I use that can generate all of these documents.

Aaron Taylor:

Now that you're out on your own, how do you find clients?

Barbara Stewart:

They tend to find me, actually. I was with another law firm for 10 years here in Greensboro before I went out on my own, did most of their real estate work and so the realtors that would come to do with their clients to do closings would then come back the next time they had a client. I have a group of realtors who are very loyal to me, and when their clients ask who they should use for their closings, they recommend me. The other way that I find clients, it's a little unusual for an attorney in Greensboro, North Carolina, is that I happen to be fluent in Spanish and right now in North Carolina, that is a tremendous benefit. There are very, very few people who can speak to the very rapidly growing Hispanic population here, and so most of those people have heard about me and when it comes time to do real estate, they come here.

Aaron Taylor:

Do you see any distinctive issues as it relates to representing Hispanic home buyers?

Barbara Stewart:

Yes, there are actually several issues. One of them, of course, is the language barrier. The other issue is that many of the people that come to me to purchase homes are here without documents, and so they're unable to get loans for properties with banks. Many of them save for many years living in a small group all together in a tiny apartment until they've saved enough money, believe it or not, to actually pay cash for a house. I do a lot of cash closings, usually smaller, older homes, very low prices, and people will buy them and fix them up. I see problems as far as people being taken advantage of in the community. Several clients who have come to me after the fact to discover that the house they thought they purchased in fact did not ever belong to the person that sold it to them. I would imagine that's true for any immigrant community. There are people out there ready to prey on them.

Aaron Taylor:

Say an issue like that arises, would that be something you would handle in resolving that issue or would you refer the client to another lawyer?

Barbara Stewart:

If I believe I can help, then I will do it. Again, because truthfully, there are very few attorneys in Greensboro who can speak Spanish. Even though some attorneys have translators, it really is not the same thing. Initially with these clients, I will generally try to help them with their problems themselves, but if it becomes a matter of litigation, then I do refer them to a litigator and sometimes I go with them and translate.

Aaron Taylor:

For the clients you keep, how do you determine what you'll charge?

Barbara Stewart:

That's the hardest part, of course. Closings I have standard prices for. Because it's a fairly competitive area of law here in Greensboro, your prices have to reflect that, but I have one price for cash closings and another price for loan closings. Loan closings would be both purchases and refinances. There should be a third price, I will tell you, for one other category, and that is the purchase of homes that have been foreclosed on. That in itself can be a huge time taker, I guess is the best way to put it. What generally happens with foreclosure homes is that when a bank or Fannie Mae or Freddie Mac or whoever forecloses on the property, the property, of course, goes up for sale on the courthouse steps and usually who purchases it is the bank that holds the loan or the entity that holds the loan.

They then put this property into what they call their REO inventory, real estate owned is what it stands for, and then they put the properties for sale. Dealing with those properties is very difficult. First of all, you're generally dealing with just a few law firms on the seller side who do warehouse work. They're trying to move hundreds of houses, and so they have very strict rules about what can and can't be done. HUD PUD is the best example of that. Trying to make HUD happy is a job all by itself, but all of those require a whole lot more coordination with the seller, more time. Usually the seller wants to see the settlement statement five days before the closing. I don't charge extra for those, but I probably will in the future because they are more time-consuming.

Aaron Taylor:

I guess going back to your career evolution, what are some of the primary challenges you have faced in starting your own firm?

Barbara Stewart:

Learning how to run a business I think is the most important thing. I had no idea that I was going to do this. It was just kind of a series of events that resulted in my deciding that I was going to go out on my own. I was very fortunate in finding an office space with a friend who had her own law firm, and we shared it for a year until she merged with another firm. I now have another friend in here who also has her own law firm and we share the space, so that worked out well. But things like bookkeeping, buying supplies, keeping up with all of the different bills and so on. One of the biggest mistakes I made was in hiring a web building company and they built a terrible website and charged me an arm and a leg for it. So that was a lesson learned.

Those are the types of things that when you've never run your own business before, and I never had, I've spent a lot of time learning and still am. I have to always keep in mind that every decision that I make is the decision for the company.

Aaron Taylor:

As a solo practitioner, I know one of the distinctive challenges is oftentimes that clients can't pay. How do you handle that issue? How do you charge clients? And then do you have a lot of clients who simply at the end of the job or well into it realize that they simply can't afford the legal services?

Barbara Stewart:

Well, first of all, one of the nice things about being a transactional real estate attorney and doing real estate closings is that you get paid at the closing table like everyone else. My charges go on that settlement statement along with everyone else's charges, and I actually issue a check to myself at the end of the closing when I'm dispersing to other people. I always get paid in that situation. In my business side, I think I probably end up doing quite a bit of pro bono work, and particularly when I'm working in the Hispanic community, I have a hard time charging people that I know are having difficulty enough paying for their basic needs. If I can help them and I can do it without needing to get a fee, then I'm going to do it.

Aaron Taylor:

Are you finding that a lot of new attorneys are starting real estate law practices, because it looks relatively simple from the outside?

Barbara Stewart:

Here in North Carolina, I think there's an idea among law students that if they can't find a job in a law firm, they can always set up shop themselves and practice real estate. They can do closings. What I think they don't understand is the extent of the risk of malpractice in the area of real estate. Just to give you an example, my office mate here that I share office space with does securities and employment law. My malpractice premiums are three times what hers are because I do real estate. Real estate malpractice premiums are probably among the highest of any type of law because there are so many mistakes that you can make. I think it's important for law students to understand that it's not an easy area. It's not something that you can do by yourself. You really need to understand the difficulties of it. I always call it putting together a thousand piece jigsaw puzzle where all the pieces are green.

Aaron Taylor:

Would you mind sharing how much your malpractice premium is?

Barbara Stewart:

That's a good question. I want to say it's about $4,000 a year.

Aaron Taylor:

What are the types of mistakes that real estate attorneys commonly make that can drive up malpractice?

Barbara Stewart:

I see everything from an incorrect legal description on a document. I had a closing a few years ago, and when we looked at the deed that had been done deeding the property into the seller, the legal description was for a property two blocks away from where the house was located. That had actually been the legal description that had continued to be used for about four different transactions. In other words, somebody wasn't paying attention and looking to see whether the legal description was actually the correct legal description. That's one error that we see is incorrect legal descriptions. Another big error is not making sure that deeds of trust have been canceled on properties, mortgages for most people, not paying off old deeds of trust and having them come back. There's just a myriad of things.

Judgments. When you are doing, for example, the sale of a property in ... I guess the best example is a short sale situation. A short sale is where somebody owes more on their property than the price that they're going to get for it. So they negotiate with the bank to take less money in order for the sale to go through. The problem that we see here is that you not only have to negotiate with the bank, but if there's a second mortgage, you have to talk to them too. If there are any outstanding judgments or liens on the property, all of those have to be addressed before the closing can happen and clear title can be given. Those are things that people miss, and that's the kind of thing that causes the problem because frankly, when the title company gets a call to pay a claim on the title insurance, they're going to turn around and they're going to put a claim against the attorney's malpractice insurance if it was in fact the attorney's fault.

Every time I do a closing, I'm putting my reputation and my malpractice insurance on the line, and there is always a chance that I could make an error. I fortunately have not had any situations, knock on wood, yet, but there's just a lot of places along the way, a lot of descriptions, a lot of numbers, a lot of communications in every closing, and a lot of places where you can miss the boat.

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