How to Tell When Brokers are Cheating You
What really gets under my skin, are greedy brokers who — for the sake of a larger commission — represent both the buyer and seller (or landlord and tenant), and then ultimately shaft one of their clients simply because the broker created a conflict of interest for his or her clients.
Before I begin, you may want to read two blog articles I wrote, one entitled Commercial Leases: Avoid Getting Screwed, and another entitled How to Negotiate Good Lease Terms. Both of these articles set the stage for what I’m about to tell you. In particular, there are good landlords and bad landlords, and similarly, good brokers and bad brokers.
Brokers are Not Attorneys
Bad brokers are those who represent both parties to a transaction, and then say you can save money because they will give you the contracts needed to get the deal done.
When this happens, automatically assume your broker is not looking out for your best interest. That broker is cheating you. Why? Because, they are trying to close the deal as quickly as possible, and the last thing they want, are attorneys who can potentially delay or even cancel the closing. Such brokers fear attorneys, simply because an attorney could warn their client of significant liability or danger. Bad brokers don’t want their client’s knowing such things, because such knowledge could kill a deal.
Standard Forms are a Joke
Bad brokers will tell you that you don’t need an attorney, because they have access to the “standard real estate contracts” in your state. The only time I’ve found such contracts acceptable, is when such contracts are used for sale of a residential property, and only when the buyer has a mortgage. In such instances, you have state and federal laws governing sale of such property and the mortgages, and you have the lenders looking out for their best interest, with the underwriters double-checking everything to ensure their security interest (i.e. the house) is protected.
In almost all other cases, these safety mechanisms are simply not present. For purchasing commercial property, instead of residential property, you have almost no state (depending on the state) or federal law governing the transaction or the mortgage. You will have a lender double-checking docs, but not with the same vigor and standards they apply for residential properties.
It’s even worse if you’re renting or leasing a commercial property or buying/selling a business. In most states, there are no laws governing the lease of a commercial property, and you have no lender watching your back. Buying a business is just as bad — it’s caveat emptor (buyer beware) — unless you happen to have a commercial loan (or SBA loan) as part of the deal. Then, the lender (especially the SBA) will help watch your back. With that said, do you think the SBA will accept “standard forms” from your broker? Absolutely not.
If you’re selling a business, you really need to be careful about “seller financing.” Seller financing is where the seller agrees the buyer of their business can pay over some period of time. The problem is, unless you (i) run a credit check, (ii) have the experience of a lending institution to make credit decisions, and (iii) have some sort of control over a security interest to reimburse you if you’re not paid, you run a very high-risk of losing your money. The general rule I give clients, is to NEVER do seller financing greater than 50% of the deal, and to NEVER do seller financing that you cannot afford to lose in its entirety. If you’re relying on being able to swoop back in to take over the business, what happens if the business is worthless when you take it back?
Do brokers know what documents to provide, to create a security interest in something? Do they know what terms belong in a promissory note or purchase agreement?
Real World Example
The inspiration for this blog article came from a flat-rate contract review I just finished. It was a for a commercial lease. The broker is representing both the landlord and the tenant, and provided the lease to the tenant — who is my client and had the foresight to hire an attorney to review the lease. Here are only a few of the issues I felt were absolutely unacceptable in the lease, and should never have been produced by anyone getting paid by my client, the potential tenant:
- Landlord is in charge of the HVAC and roof, but Tenant is responsible for all costs associated with repairing and replacing the HVAC, as well as any water damage resulting from leaks in the roof.
- Landlord gets all attorneys fees paid if there is a dispute, even if the Landlord loses the dispute or it’s the Landlord fault.
- If Tenant is even 1-day late on the rent, Landlord can come in, kick out the Tenant and has absolutely no duty to find a new renter. And, Tenant is responsible for full term of the lease, even if the Landlord does find a new renter.
- Landlord can use force, without legal process or notice, if Landlord wants to terminate the Lease.
- Anything of significance requires “Landlord approval,” without the requirement that such approval “shall not be unreasonably withheld or delayed.”
- Rent was miscalculated, of course in the Landlord’s favor.
All too often, this firm has to deal with the ramifications of bad contracts thrust upon unsuspecting clients who thought they could trust their broker. I apologize to all the good brokers out there, but if you’re a broker who thinks in your heart of heart that you can actually represent both parties in a transaction and the standard forms are fine for your clients, don’t fool yourself. You’re a bad broker who is only in it for the money.
In a perverse way, I wonder whether I owe a debt of gratitude to all the bad brokers — after all, they are responsible for close to one-half of this firm’s revenue. If all our clients had well-written contracts, there would be very few disputes and lawsuits. Then how would we attorneys be able to put food on our table??!?
Na. Instead, I prefer to leave this world and reach the pearly gates with a clean conscious.
If your broker gave you “standard forms” to complete your complex transaction, and those contracts ended up being terrible for you, not representing your best interests and creating problems for you, talk to us about your options in pursuing a claim against your former broker. It’s a pleasure to go after the bad actors in the small business world, especially those who prey upon the unsuspecting.