Real Estate Sale Negotiation FAQ
A real estate sale negotiator requires a thorough knowledge of the laws and regulations affecting real estate, drafting expertise to convert ideas into a written document that will give legal effect to the agreement reached, and the ability to recognise threats to the legality of the sale (and be able to deal with them if they arise).
Only a qualified lawyer has the ability to properly negotiate the sale of real estate on behalf of a vendor.
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What is real estate “negotiation”?
Negotiation involves conferring or discussing matters with another person, with a view to reaching some form of compromise or agreement.
In real estate matters compromise can be difficult to establish. This is because, what may sound like a good idea in theory, can result in unexpected problems.
(For example, a vendor may agree to allow the purchaser to store goods under the house before settlement day. But what happens if the fuel in a lawn-mower belonging to the purchaser results in a fire that destroys the property? Who will carry responsibility for such risks? Taking such matters into account, and providing legal advice on them, is beyond the capacity of the real estate agent.)
Negotiating on behalf of another person requires special skills. In particular, the negotiator must know the needs of the client, and the legal means by which those needs can be achieved.
The negotiator must also be in a position to advise the client with regard to the legal position of the other party, so that the client can make well-considered decisions.
Knowing the law is one thing, but being able to express and apply it in writing is another. Negotiation requires an ability to convert verbal instructions into a written form that is recognisable and enforceable at law.
Finally, the negotiator must be independent.
It is impossible for a real estate agent to remain impartial in sale negotiations. This is because the real estate agent will lose many thousands of commission dollars if the sale fails to eventuate. This, in turn, places tremendous pressure on the real estate agent to make a sale – any sale at any price – in order to win the commission.
Can real estate agents negotiate?
Many people are surprised to learn that real estate agents are NOT negotiators, and that they are prohibited from engaging in true real estate negotiations. Some of the reasons why real estate agents can never truly negotiate on behalf of either party in a real estate transaction are as follows:
Conflict of Interests
Real estate agents (most of whom are not licensed estate agents at all, but merely agent representatives) operate under the misapprehension that being the “middle man” who works to bring two parties together in a sale in order to win a commission is somehow equivalent to being a negotiator. In fact, the real estate agent is no more than a “facilitator” and as such cannot claim to truly negotiate on behalf of either party.
The goal of the real estate agent is not to represent the vendor, or to protect the interests of the vendor (this is the role of the vendor’s lawyer). The role of the real estate agent is make a sale for his or her principal (the licensed estate agent). The agent is employed to make money for the real estate agency by ensuring that sales take place, and commissions are collected. Thus, the real estate agent will never suggest, for example, that a vendor should take their property off the market for a year until the market improves. The goal is always the same – a sale; any sale at any price in order to win a commission.
When the real estate agent “assists” the purchaser to prepare an offer, or offers the purchaser “advice” regarding the contract, the real estate agent is invariably acting in favour of the purchaser, as against his own vendor client. Alternatively, if the agent gives a purchaser advice that favours the vendor rather than the purchaser, the agent is deceiving the purchaser. Deceiving a purchaser is not in the interests of either party.
Acting in a situation of conflicting interests is standard procedure for most real estate agents, and is a major contributing factor in the poor reputation of the industry.
The real estate sale is a legal and adversarial process
The real estate sale transaction is a legal process, and legal processes in Australia are generally adversarial – in other words, it’s you and your legal representative versus everyone else who is involved in the transaction. Here are some examples:
- Vendor vs Purchaser – Vendors and purchasers are adversaries in a transaction involving rules created by Parliament in the form of laws. Each party is also bound by rules that they have agreed upon, namely the conditions of the contract they have both signed. If everything proceeds according to law and according to the conditions contained in the contract, then the adversarial nature of the transaction is not apparent. However, if one of the parties breaks the law, or fails to honour any of the conditions of the contract, then the parties may become involved in a legal contest as adversaries. Usually, the purchaser will be legally represented by a professional person who is well versed in property law. The real estate agent is a push-over when it comes to arguing legal principles and applying the law to a given set of circumstances.
- Vendor vs Real Estate Agent – The relationship between the vendor and the real estate agent is immediately adversarial because of the nature of the contract between the two. The standard Exclusive Sale Authority used by real estate agents has the effect of making the real estate agent a part-owner of the vendor’s property for the period of the agency. If the property sells, the real estate agent is entitled to a percentage of the proceeds of the sale. If the property does not sell, the real estate agent is entitled to no commission at all. The real estate agent is under enormous pressure to get the property sold within the currency of the Exclusive Sale Authority one way or another. Thus, the primary goal of the real estate agent is to get a sale – any sale, at any price. Many real estate agents see the sale as a goal that must be achieved by fair means or foul. If the real estate agent creates a situation that puts the vendor at odds with the purchaser, or the vendor becomes involved in a dispute with the real estate agent over entitlement to commission, advertising costs, negligence or improper conduct, the adversarial nature the relationship between vendor and real estate agent becomes very apparent very quickly!
- Vendor vs Lender – Lenders, including the largest banks, have been known to be quite unscrupulous when dealing with borrowers. It is for this reason that the Consumer Credit Code (CCC) applies to non-commercial residential home loans. The CCC contains a set of rules which lenders must observe when dealing with a borrower, but these rules are regularly breached. (For example, the requirement for a lender to provide details of the amount required to discharge the vendor’s loan within 7 days of a request being made is routinely ignored.) In addition, there are standards of banking practice that have been adopted by most lenders. If your lender breaks the law or the standards of banking practice, you are entitled to complain or to enforce your legal rights. This will make your lender an adversary.
Negotiating on behalf of a vendor in a real estate transaction requires a knowledge of the law applying to each of the vendor’s potential adversaries, and an understanding of the vendor’s rights in relation to those adversaries. Real estate negotiation also requires a knowledge of criminal law and particularly the law regarding deception. Only the lawyer has the legal knowledge, experience and expertise required to negotiate an outcome that is most favourable to the vendor.
Writing – the estate agent’s downfall
Real estate agents have a major shortcoming when it comes to real estate negotiations – they cannot negotiate on paper.
Why can’t the estate agent cope with written negotiations? It is all comes back to representation. The estate agent does not represent a client in the same way as a lawyer does. Estate agents cannot commit themselves to writing for fear of breaching the Legal Profession Act by illegally providing legal advice (and risking a penalty of imprisonment for 2 years). Written real estate negotiations are easy to prove, and are usually legally binding. Verbal negotiations are difficult to prove, and very difficult to enforce in real estate matters. Only a lawyer has the qualifications, the authority, and the skill to properly represent a client in written negotiations.
Finally, estate agents are not trained to write, and are not expected to be competent in writing. The Vetassess Certificate IV in Property (Real Estate Agency Practice) Examiner Report for May 2006 had this to say when explaining why estate agents had a failure rate in excess of 50%:
“Some candidates are tempted to offer opinions in response to questions. For example, for a case study question on frustration (impossibility of performance), a candidate may offer an opinion such as “the landlord’s insurance policy will pay for the repair of the building”. In these circumstances, the legal basis for any action has been ignored and a pointless digression is initiated into an area this is not particularly relevant to the unit. Needless to state that valuable marks and time are lost when this occurs. Such problems presumably arise because the candidate has not initially identified the legal concept that the case study was designed to examine.
Candidates with weak literacy skills seem to have significant difficulties with the examination in general. Some candidates fail to answer many questions, and when answers are given, they tend to be illegible or even incomprehensible. The prescribed entry requirements for the Certificate IV in Property (Real Estate Agency Practice) include acquisition of competency to ‘read, comprehend and discuss printed information in English and write simple sentences.’“
It is little wonder that so many estate agents struggle with real estate contracts.
Criminal offences when estate agents negotiate
The law prohibits real estate agents from conducting genuine negotiations on behalf of a vendor client. This is because real estate agents are not permitted to offer legal advice or to perform legal work. Section 2.2.2 of the Legal Profession Act 2004 makes this quite clear:
2.2.2. Prohibition on engaging in legal practice when not entitled
(1) A person must not engage in legal practice in this jurisdiction unless the person is an Australian legal practitioner.
Penalty: Imprisonment for 2 years.
Sure, a real estate agent can tell a vendor how much a purchaser has offered for the vendor’s property, and can also tell the purchaser that the vendor wants more for the property. But this is not negotiating, this is simply acting as a messenger.
Negotiation involves representation – “standing in the shoes” of the party being represented, and accepting responsibility for that person’s legal well-being. A genuine negotiator must fully understand, not only the law, but also the client’s requirements and how these are affected by the law. And when the negotiations have concluded, the negotiator must be capable of accurately reducing the negotiated agreement into a legally enforceable contract.
Real estate agents are not permitted to draft contract conditions, or to provide legal advice to the parties about the nature and effect of the special conditions or any other part of the contract. How can a person who is prohibited from giving legal advice or performing legal work possibly negotiate in any meaningful way?
Section 2.2.2 even prevents the real estate agent from filling in name and address details in a contract, but an exemption has been created to allow the estate agent to perform this minor task. The exemption can be found in the Estate Agents Act 1980 at section 53A:
53A. Exemption concerning the Legal Profession Act 2004
(1) An agent or agent’s representative is not guilty of an offence against section 2.2.2(1) of the Legal Profession Act 2004 only because he or she fills up–
(a) a standard form of contract permitted by the regulations or approved by the Legal Services Board or a professional association (within the meaning of the Legal Profession Act 2004); or
(b) a contract prepared by an Australian legal practitioner (within the meaning of the Legal Profession Act 2004) or a licensee (within the meaning of the Conveyancers Act 2006).
When a real estate agent “fills up” a blank form by writing the parties’ names and addresses etc. in the blank spaces provided, he or she would be guilty of committing a criminal offence if it were not for Section 53A.
However, most real estate agents ignore their legal position and perform the role of purchaser’s lawyer and vendor’s lawyer in order to get the deal done and the commission secured.
If real estate agents are banned from negotiating, why do they do it?
Real estate agents often call lawyers “contract killers” because they regard a lawyer who advises a vendor against accepting a bad deal as a spoiler.
The most successful real estate agents are those who can prepare an offer for a purchaser, then accept the offer on behalf of the vendor, and have both parties locked into a commission-releasing contract within the space of an hour. If either party complains that the deal is flawed or unfair, they are told by the real estate agent, “Talk to your lawyer, the lawyers will have to battle it out.”
In a very frank discussion about real estate agents and the preparation of contracts, a prominent real estate agent (who requested anonymity) made the following observation:
“No real estate agent is going to let a lawyer talk a vendor out of sale after he’s invested so much time an effort into the conditioning.”
When asked if he would still be interested in having a role in the contract stage of a sale if his commission was paid in advance, (i.e. before the sale had taken place) the real estate agent responded with:
“What for? Why would I need to have anything to do with the contract after the commission’s been paid? Let the lawyers look after it.”
There is only one reason for a real estate agent wanting to be in control of sale negotiations, and that is to bring about a sale – any sale, at any price.
Why is legal expertise so important in negotiations?
Knowing a little bit about the law can be extremely dangerous, and often leads to disaster in real estate matters.
Some real estate agents know that the law can be a dangerous area for those without special training and qualifications, but many are prepared to take risks that their clients can ill-afford.
Misleading and deceptive conduct is so common in real estate that it has become cliche.
Unfortunately, when a real estate agent engages in conduct that disadvantages a purchaser, it is not only the agent who is responsible – in many instances the vendor is regarded as being responsible for the estate agent’s wrong-doing. At the very least, the vendor will probably have to deal with the results of the real estate agent’s behaviour.
A real estate lawyer is a professional who has been trained, not only in discovering and interpreting the law, but also in applying it to specific circumstances and advising non-lawyers on their rights and responsibilities.
A real estate lawyer is both a guide and a helping hand, from the very start of the matter to the very end.
Why are legal drafting skills so important in real estate negotiations?
Drafting is the term used to describe the process of writing down a client’s requirements in such a way that the law will recognise them and protect them.
The real estate lawyer finds out what client needs, offers legal advice as to the way in which these needs can be satisfied, advises as to available options and their consequences, then seeks the client’s decision as to which option should be followed.
The instructions given by the client must then be put into writing, with such precision as to allow a third party to read them, understand them, and follow them without a dispute arising as to how they should be interpreted.
For example, a special condition drafted by a real estate agent and inserted into the contract for a property being purchased by a client of ours read as follows:
“The vendor agrees to the erection of a fence between the two properties.”
The problem with this special condition is that it does not state WHO is to erect the fence, who will bear the COST of erecting the fence, what TYPE of fence is to be erected, WHEN the fence is to be erected, exactly WHERE the fence is to be erected, and what will be the CONSEQUENCES if the fence is not properly erected by the due date. Even when the appropriate condition is drafted, the lawyer acting for the vendor may want to negotiate further – for example, the vendor may not agree to cancellation of the contract as the consequence for non-performance, and may change this to allow for an additional payment of an agreed amount.
Fortunately, the client had the contract checked before it was signed. We changed it so that both parties knew exactly where they stood.
What if negotiations are needed after sale but before settlement?
The real estate agent drops out of the transaction as soon as the contract has been signed.
This is because the real estate agent has nothing whatsoever to do with the legal processes involved in taking the sale from the agreement stage to the completion stage. This task falls to the person who has the legal expertise to keep things on track – the lawyer.
Negotiation invariably continues, well after the contract has been signed. The purchaser may want to occupy the property before settlement, the vendor may want to bring settlement forward, loan approval may be held up and an extension of time is required, the purchaser has found a tenant and wants to come to an arrangement with the vendor – and so on.
All of these matters must be negotiated so as to ensure that the parties’ interests are protected, and the only person capable of doing this is a qualified lawyer.
How does Lawyers Conveyancing negotiate on behalf of vendor clients?
Lawyers Conveyancing is a Legal Best Practice law firm, quality endorsed to the exacting requirements of ISO 9000 as it applies to law firms through LAW 9000. Our sale system is certified as “Best Practice” because it complies with all of the requirements of LAW 9000, particularly those regarding conflicting interests, consumer satisfaction, strict legal compliance, transparency and accountability. Our system is also required to pass internal audits and formal external audits.
This is the way a LAW 9000 law firm conducts genuine real estate negotiations on behalf of its vendor clients:
- The first thing we do is to remove the real estate agent from the negotiations. This is because the real estate agent is an adversary, and not an ally, when it comes to negotiations, due to his pecuniary interest in bringing about a sale. For example, if the vendor refuses to sell at a low price, and the real estate agent will not be paid unless a sale takes place, the real estate agent’s interests are in conflict with those of the vendor. (For more on this aspect, see “The real estate sale is a legal and adversarial process” above.)
- We allow the real estate agent to assist the purchaser to complete a non-binding “Bid To Buy” form, by which the purchaser informs us of the details of their offer. When we receive the “Bid To Buy” form we contact the vendor and inform them of the offer details.
- If the purchaser’s bid is acceptable to the vendor, we prepare the vendor’s offer to sell the property to the purchaser on the terms as set out in the “Bid To Buy”. We do this by preparing a formal Contract of Sale of Real Estate (using the standard form contract document prescribed by legislation), having it executed by the vendor, and submitting it to the purchaser or the purchaser’s lawyer for acceptance.
- If the purchaser’s bid is not acceptable to the vendor, we obtain the vendor’s instructions, advise the vendor as to how those instructions can be fulfilled through negotiations and the drafting of any appropriate special conditions, and we inform the purchaser or their lawyer accordingly. Negotiations continue as per 3. and 4. until agreement is reached, or all attempts to conclude an agreement have been exhausted.
This procedure is simple, fair and transparent. It is also quick, because it avoids the “middleman” (the estate agent) and prevents time-consuming mistakes, misunderstandings, and unnecessary procedures associated with estate agency policies and procedures.
Why don’t conveyancers negotiate for their vendor clients?
Corruption in the conveyancing industry
Conveyancers in Victoria rely heavily on real estate agents for referrals, and many are involved in corrupt client trafficking schemes. Some lawyers also have very questionable relationships with real estate agents involving payments or gifts in return for client referrals.
A licensed conveyancer or lawyer who invests money in cultivating a “referral relationship” with a real estate agent is unlikely to do anything that could jeopardise that relationship. As real estate agents need to control the contract in order to control the vendor the majority of licensed conveyancers, and those lawyers who are in referral relationships with estate agents, quite readily hand control of the negotiation and contract drafting stage of the transaction to the real estate agent.
It is arguable that a professional person whose role it is to provide legal advice and legal assistance to a client in a legal transaction is guilty of professional misconduct if they delegate this role to an untrained, unqualified lay-person estate agent. Unfortunately, the industry regulators are too distracted by individual consumer complaints to take a more proactive role in this area.
Avoidance of responsibility
Licensed conveyancers have always competed with lawyers on the basis that they offer cheap services. However, it is difficult to offer cheap services and quality services at the same time, particularly if overheads are inflated by regular bribe payments made to real estate agents.
One way a conveyancer can lower their overheads is to reduce their exposure to risk, by passing some of their responsibility to the real estate agent. By passing control, and therefore responsibility, for the negotiation and contract stage of the sale to the real estate agent, the conveyancer is able to save time, reduce service quality, minimise professional risk, and maintain a positive relationship with the real estate agent.
Responsibility evaporates when it transfers
Now, here is the most amazing aspect of this transferal of responsibility. While the conveyancer passes the responsibility to the real estate agent, the real estate never really accepts it. The responsibility disappears, leaving no-one to take responsibility when things go wrong.
Here’s how it works:
- The role of negotiator passes from the conveyancer to the real estate agent. If the vendor complains that a special condition inserted into the contract of sale by the real estate agent has been poorly drafted, with the result that the vendor must now pay for thousands of dollars worth of repair work, the conveyancer will claim to have had no knowledge of the special condition because it was drafted by the real estate agent, without the conveyancer’s knowledge.
- When the vendor complains to the real estate agent, the real estate agent tells the vendor to discuss the matter with the conveyancer. The real estate agent will also point out to the vendor that the vendor signed the contract, and that this indicates that the vendor knew about the special condition.
- The conveyancer supports the real estate agent (remember, the ongoing relationship with the real estate agent is of more value to the conveyancer than the one-off relationship with the client) by telling the vendor that the real estate agent is not a lawyer, and cannot be expected to know how to draft special conditions with precision.
- If the vendor wants to take the matter further, the conveyancer explains that a lawyer will have to become involved, as conveyancers cannot give legal advice that goes beyond simple “conveyancing work”.
- The vendor client finds that neither the real estate agent, nor the conveyancer will accept responsibility, and that somehow the vendor himself is responsible, for having sign the contract without fully understanding it.
The situation is similar where the vendor uses an “old-school” lawyer who operates in the same manner as conveyancers (these lawyers are becoming fewer, as most have converted themselves to conveyancing businesses as licensed conveyancers, or have moved from conveyancing into other areas of law).
Can you give an example of an unusual real estate negotiation?
This is an example of true real estate negotiation. It highlights the need for legal knowledge, tact, and the ability to anticipate the needs of the parties:
“The House That Sold Twice”
When settlement was only two weeks away, the client telephoned and asked, “What do you do when your purchaser dies suddenly?”
We explained to the client that the property should be put back on the market immediately.
We knew that, in the circumstances, there would have to be an inquest into the death, and that it would take some time before the deceased purchaser’s estate would be in a position to settle. We also knew that the Executors of the estate would be faced with the problem of having to pay stamp duty on the new purchase, and then having to arrange for the property to be sold, and the proceeds returned to the estate.
We advised our client that, in these circumstances, the Executors would probably welcome an offer to cancel the contract, and we sought his instructions for further negotiation.
The property went back onto the market, and sold for the same price. The new contract was drafted with a special condition that stated that the sale was subject to the cancellation of the original contract.
The solicitors for the Executors entered into negotiations with us, and it was eventually agreed that our client would be paid a lump-sum, plus costs, in return for immediate cancellation of the original contract. For the Executors, this was a much cheaper option than proceeding with the purchase. For our clients, the lump sum and payment of costs made the fresh sale a very worthwhile exercise – a win-win situation.
