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.
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:
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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.
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.
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!