$4k for lawyer BEFORE even submitting offer? Commercial RE question

[Jacob Chaney]

My partner and I are looking to purchase our first commercial 13 unit property in the Washington, DC area. His real estate agent (who I've never worked with before) insists we need an attorney even before we have submitted our offer.

This is what his letter to the agent said:

"For this representation I can provide a flat fee of $4,000.00.

This flat fee includes the following:

1. drafting/negotiation of LOI

2. drafting/negotiation of purchase agreement

3. participation in due diligence coordination with settlement/title company, oversight of TOPA compliance by seller

4. review/negotiation of loan documents

5. Formation of Landlord entity

6. Drafting/consultation concerning operating agreement for LL entity

7. drafting/negotiation of closing documents

8. attendance at closing

9. supplemental post-closing issues for three months following closing

Does not include: Title insurance, title report, closing costs of settlement agent, appraisal, survey.

Any out of pocket costs (minimal) would be extra."

I can understand spending this money AFTER our offer is accepted (as we will be competing with a number of offers). I'm just not sure we need him this early in the game.

Seems like the services he is offering is a bit redundant. Can anyone tell me if this is S.O.P. for purchasing commercial real estate?

[Joel Owens]

A survey is usually a few grand, appraisal can be up to 3,500, title insurance and report in the thousands and this doesn't include the other fees.

The way we typically do this is to have my buyer sign a confidentiality agreement with the seller or the listing brokerage company. Then we submit an LOI and try to come to an agreement on price.

The books I like to look over ahead of time in detail. This way no money is spent yet traveling if buying out of state etc. If books validate what the listing is saying for cap and income (maybe does 10% of the time) then you are good on price (for now).

Next is the inspection and what that uncovers you will ask for repairs or a price reduction. The inspection will typically be a cheaper component than appraisal, phase one, survey etc.

Attorneys fees of 4,000 are not uncommon but it is unusual they are requesting this before coming to terms on price. Your financing you should have locked up BEFORE making your offer and not after the fact. You need to know what kind of fixed interest rate, will seller hold a second to improve cash on cash, loan amortization, and term of the loan before it is called due. This will give you the spread between your purchase price and the debt you can obtain on the property.

You do not want to spend all the upfront costs before validating the books and want to wait before my buyers and sellers put it "start the lawyer" clock. Title can show up issues as well as the survey and it can cost a lot more than 4,000 to fix some issues that are discovered.

Commercial the costs to close are bigger and the risk is bigger but so are the gains and advantages. Even if you assume a loan rather than get new debt there are usually assumption fees for that along with the lenders attorneys fees they will charge for. Commercial is not where you start nickel and diming to save a buck. Yes it's fine to call around to get the best pricing on surveys etc. as some will be hungry for the business and then big corps will not care and charge a premium.

I have a engineer that goes nationwide and does the cost reserve stable, site inspection, and phase one. Lenders need to approve the person ahead of time as sometimes they like to use their own contacts that they trust. You better believe attorneys are needed when problems arise. My buyers and sellers always obtain legal counsel and we work as a team to do the closing. When spending millions of dollars a few k is nothing compared to mistakes happening and having to unwind a deal or situation post closing.

Even though I am good at what I do I am NOT an attorney. The attorneys draft the technical addendums and forms when issues arise. Each closing I do for multifamily or triple net leasing is property specific. While there are commonalities each one has different things that come up. Validate the books and the condition of the property to get at a price with the seller and look at area and then start shelling out the huge bucks for the other items.