Business Management

My Attorney Just Sent Me a HUGE Bill! (& How to Avoid a Similar Fate)

Expertise: Real Estate Investing Basics, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Landlording & Rental Properties, Business Management, Personal Development, Flipping Houses, Commercial Real Estate
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As you get into larger real estate transactions, attorneys are necessary to close deals. In most cases, they add lots of value and earn their fee. However, their fees can be very high, and you need to find ways to keep them in check.

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Let me start by saying that I’m not bashing my attorney friends. When it comes to putting together big real estate deals,  they’re absolutely necessary. But today I’d like to discuss the lesson I learned on my last deal where I was hit with huge unexpected legal fees.

So let's get started. What does your lawyer actually do—and what do you need him or her for? Before I dive into this, it's important to keep in mind that if you're doing deals that involve more than $500,000 in loans, the banks will make you pay them to hire a lawyer to draw up documents and represent their interest on the deal. I have yet to see anyone get around this. This is what's called a bank appointed attorney, and the borrower (you) has to pay the fee.

To better understand how to keep legal fees in check, we need to talk about what an attorney typically does in a transaction. Watch the video for all of them, but here are a few:

1. Create and Review Contracts

In some states, attorneys draft and negotiate the contracts for all transactions. For larger deals in all states, there is most likely an attorney review period before contracts get signed. This is a necessary involvement, but you should make sure that they’re not spending too much time on this. If you can, try to use a standard contract in this situation to minimize the time spent reviewing the contract. Also, make sure your attorney doesn’t spend too much time quibbling over small points in the agreement. Going back and forth with the other attorney over points that really don’t matter in the grand scheme of things can burn up plenty of hours.

Related: The Questions You Should Ask Your Potential Real Estate Attorney

2. Zoning and Municipal Representation

Many deals will have a little bit of hair on them from a local municipal standpoint. Your deal may not be zoned for the right use. You may need help negotiating with the town over your plan for the property—or you may just want to get in front of the powers that be in the town to make sure they know they have your support as a local landlord.

Attorneys who know the local codes and do regular business in town can be invaluable. This way, you make sure you’re in compliance with local laws. Having someone who’s local can help when you need to reach out and get in contact with certain individuals needed for your project.

There are a few more tips: Watch the video to hear them all!

So what can you do to keep these legal fees in check?

Figure out the hourly rate

Before getting involved, make sure that they disclose their hourly rate in writting. In most states, this is required as a part of an engagement letter. Also, see if they’re willing to negotiate that rate with you. They might not like this, but everything is negotiable. If you plan to buy more deals in their town, make sure they know that you may be a repeat customer.

Related: Tips & Tricks From an Attorney: Here’s How I’d Protect My Real Estate Assets

Try to lock them into a fixed rate instead of an hourly rate

They may not want to do this, but this will help you avoid getting hit with a huge bill at the end. If you are fairly clear on the scope of work you need, you should be able to get them to bid that work at a flat rate. Make sure that you know what’s in and out of the scope of work that they’ll be performing for a fixed rate. This is where we got in trouble with the deal we just closed. The attorney got outside the scope of work and started billing his hourly rate on top of the flat rate he quoted.

Have Them Regularly Disclose Legal Fees

Make sure you know exactly how much time they’re putting in. Have them regularly disclose this information to you with monthly invoices. This is where we got sunk on our recent deal. The attorney had been putting in lots of hours and didn’t tell us about it until the 11th hour. Although it was slimy for him to ring up a large tab and not disclose it, his engagement letter didn’t require him to do so.

Do Whatever You Can Yourself!

There are a lot of things that you can do on your own as a seasoned investor. You can review the loan documents and the agreement of sale and send your attorney your thoughts. Our attorney was on a weekly conference call with our bank (at their request), but I could have taken his place on that call. By taking on more responsibility, you can avoid building up hourly fees.

Be sure to watch the video for more tips!

Let me know what you think in the comments below. Are their any attorneys out there who watched the video that care to comment? I’d love to hear from you! 

Matt Faircloth, co-founder and president of the DeRosa Group, is a seasoned real estate investor. The DeRosa Group, based in historic Trenton, New Jersey, i...
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    Henry Salinas
    Replied over 2 years ago
    Wow, thanks Matt! I know it’s not easy to admit having to bite the bullet, but your advise is very helpful and although not usually obvious, but practical. Also I doubt that your lawyer friends watching your video would be less reluctant to notify you if they are doing mediocre tasks that can be assigned to you for the best of your financial interest. It just means we have to stay up a few more hours reviewing docs and not passing on the task to someone else. Again, thanks for the heads up! – Henry
    Jessie Huffey from Sandpoint, Idaho
    Replied over 2 years ago
    Good topic to explore. I recently bypassed a certain attorneys services because he wouldn’t provide an exact quote for a very specific deal. Also, get your attorney to notify you Before they put in hours with an explanation of what they plan to accomplish during that time and then ask what parts of that can you complete yourself. Don’t agree to pay for hours that are not previously discussed.
    Colin March Rental Property Investor from Portland, ME
    Replied over 2 years ago
    I’ve never had a bank insist on an attorney, even on loans above $500k. However, I did make the mistake of using an attorney on my first deal because I didn’t know any better. They did simple title work that could have been done more cheaply with the title company and they spent hours reviewing the existing residential leases as if they were 10-year commercial leases. I mean, who cares if a $700/month tenant breaks the lease? I’ll keep their deposit and find a new tenants in days–I don’t need an expensive lawyer to spend time on trivial issues. But that still leaves the issue about why this author’s banks are requiring an attorney.