Property Grunt

Monday, June 06, 2005

Lawyers and landlords.

In this weekend's New York Times Real Estate secetion Pat Healy did a fantastic article on lawyers who embezzle from their own clients escrow accounts.

There has been a pattern of real estate lawyers who have violated the trust of their clients by pilfering from their escrow accounts and down payments. Motivation ranges from gambling debts to just plain old greed. A game of musical chairs is played by unscrupulous lawyers who rip off of one account and then cover up their tracks by transeferring to the victimized from another escrow account creating a nasty cycle of abuse.

The article makes several points that I wish to address the first being that solo practices seem to be more vulnerable to these situations.

Mr. O'Donnell, the prosecutor, said his office later traced the first thefts to 1999. To steal from home buyers, he took their 10 percent down payments. To steal from sellers, he stood in for them at the closing, then took a portion - or all - of the proceeds. Like many lawyers caught stealing from escrow funds, Mr. Rosen ran a solo practice. He had an assistant, but no internal accountants looking over his shoulders or legal partners whose careers could be undermined by Mr. Rosen's actions.

A large firm already should have a system of checks and balances. If someone is messing up the program, there are others around that lawyer to pick up the ball and also there should be a larger reserve fund to take care of any financial oversights incurred by the negligent lawyer. I want to make it clear that a big firm doesn't guarantee that no abuses will occur within their ranks but they do have a bigger infrastructure and resources to deal with these issues. There is nothing wrong with solo practices. I know many lawyers who operate in that fashion who are quite successful but they are quite smart in their dealings since they either have a specialty or have a select group of clientele they service.

Now besides his referral system why would anyone go to Mr. Rosen? Simple. He was cheap.

He charged a modest flat fee for steering a deal through contract and closing, often attracting clients who didn't want to hire a lawyer but couldn't navigate the process of buying and selling a home in New York without one.

You get what you pay for folks. One of the advantages of paying a higher price for service is that you can demand the best service. If your lawyer is dropping the ball you can demand that somone replace your lawyer. In New York real estate you need to have a lawyer because of the contracts and other legal issues that come with the territory. There is no way around it and it would be foolish to try to circumvent this requirement. You might as well get the best. Sure it might cost you a pretty penny but the alternative is helluva lot more expensive.

I found this part of the article most intersting.

"I moved here from Dallas, Tex., and when we sold our house there, there were no lawyers involved," said Ron Tamir, another of Mr. Rosen's clients. "I thought, 'What's the big deal?' I ran into my next door neighbor, and I said, 'You know a good lawyer?' "

Eleanor Danziger, 82, hired Mr. Rosen as she prepared to sell her home in Woodmere and move to Manhattan. After the closing, Ms. Danziger still had to perform a few minor fixes to bring her home up to code, so the buyers agreed to set aside $50,000 of the purchase price in an escrow account and release the money once the work was done. When the work was finished in June, Mr. Rosen said he would send Ms. Danziger the $50,000, she said. It never came.

"When we went to his office, we were not impressed," she said. "It was less than modest. My son is an attorney, so I know what a substantial practice can be. But this was like, by the seat of the pants. He wasn't making his money from the fees. He was making his money from the other stuff."

Ms. Danziger should have asked for and interviewed at least 5 other lawyers and get references from them. A lawyer is going to play a key role in executing your deal and you need to find the best which takes time and effort. But it takes more time and effort to get out of the jam a really bad lawyer has put you in.

Ms. Danziger should have also trusted her instincts. If she felt that Mr. Rosen's less than modest office maybe indicative of the quality of his work she should have ditched him immediately.

People, do not be afraid to offend somone if you feel your well being is at stake even it is based on a hunch. I have done this many a time even at the risk of losing a client. I had one situation where another broker pulled a bait switch on me which required my client to sign a fee agreement for a rental deal. I pulled out my client out of that situation immediately. My client was beyond annoyed and I know I looked like a complete idiot. But I didn't care. If that scum bag broker played games on me with the fee agreement there would be no telling what other chicanery she had in store for us. It all ended well since I found him a place.

Its important to find out what your rights are when dealing with a lawyer and find out what powers they have and how you can control them. It is also best to create a paper trail especially with funds and oversee any transfers of the funds to confirm their existence and that the lawyer has done their job. The best thing to do is consult other lawyers about this subject and to talk to their referrals and get a better idea of the character and level of ability of this individual.

But other than putting an explosive device around your lawyer's neck ala Battle Royale or having a team of ninja assassins stalking your lawyer's every move there is really no way to protect yourself a 100%.

As one former client put it.

There's no way to guard against something like that happening to you," Mr. Thaler said. "If someone's out to defraud you, they're going to win every time."

Those of you who wish to play landlord and think you are going to make a killing. Please read this article from New York Times Magazine from the Lives column titled Getting Real Estate.

This article clearly demonstrates that landlords especially first timers will always be stalked by Murphy's law. So what motivates someone to do all of this?

Ms. Cachin best sums it up.

I'm doing this for my daughter and my unborn son. I still think that if I can hold out, I will make a huge gain, and they will have something. That is the hope.