Fees for Real Estate Closings, Part 1: An Introduction

Setting fees is a tricky business for any attorney in the real estate business.  Is it possible to be fair to both yourself and your client? 

There are two main ways in which a real estate attorney can charge for his or her services:

1. Fixed fee (e.g. "I will charge $500 to represent you in the sale of your home")

2. Hourly rate (e.g. "I will charge $200 for every hour I spend to represent you in the sale of your home")

Each of the above ways of charging has its good and bad points.

Fixed Fee

A fixed fee provides clients with cost certainty, but fixing a fee is also an inexact process.  If a "typical" real estate deal turns messy or complicated (or if the client is very demanding), then the attorney's fixed fee may be insufficient to compensate him or her for time spent on the deal.  On the other hand, if the deal comes off without a hitch, then the client may have overpaid. 

I'd estimate that a "typical" real estate deal -- from start to finish -- involves 5-7 hours of time for the buyer's attorney, and 7-10 hours of time for the seller's attorney.  (The extra time spent by the seller's attorney comes at the stage where the closing documents -- deed, bill of sale, title commitment, survey, etc. -- are prepared or ordered.)  Yet fixed fees are typically set very low -- my unscientific survey of Oak Park real estate attorneys reveals an average fixed fee of between $400 and $550 for representing a seller and $400 for representing a buyer.  (These fees would probably be higher for atypical deals, such as those involving new construction or "for sale by owner" properties.)

How can real estate attorneys keep their fixed fees so low for real estate transactions?  I think there are three reasons:

1. Sellers of real estate must purchase title insurance for their buyers, and a seller's attorney may obtain this insurance from a title company with which the attorney has a relationship.  If this is the case, then the attorney will receive a second payment (from the title company) at closing.

2. An attorney may treat real estate deals as "loss leaders," charging a low fee (and, presumably, doing a good job) in an attempt to encourage the client to use his or her services again in the future (or to recommend the attorney to friends and acquaintances).

3. The attorney may devote little actual time to the client's matter.  I suspect that many high-volume real estate attorneys -- who may handle 500 or more closings per year -- use this approach.  The attorney deals with the client initially and at the closing, but the attorney's assistant (secretary or paralegal) handles all other aspects of the deal (such as preparing the closing documents and even taking client telephone calls).  This can be an efficient way to run a law practice, but it also runs the risk of creating a disincentive for the attorney to interact with the client and devote sufficient time to the client's deal. 

Hourly Rate

Charging by the hour is the traditional method by which attorneys have sought to be paid.  The idea is that an attorney's primary value comes from the application of his or her skill to a specific matter.  As a result, if an attorney charging an hourly rate of $200 devotes 5 hours to your deal, then the attorney should be paid $1,000.

On its face, the hourly rate approach seems fair, since the client is paying for the attorney's actual time spent, rather than paying a fixed fee based on a estimate of time to be spent.  However, many members of the general public dislike being charged an hourly rate, for reasons having to do with uncertainty and the feeling that the attorney may be taking advantage.  This "taking advantage" can be either because the attorney is devoting too much time to the client's matter, or because the attorney is recording his time in an unfair manner, or both.  This latter concern stems from the fact that some attorneys bill on a quarter-hour (15-minute) basis, and may bill .25 of an hour for any amount of time they spend on a matter, even if it is only a couple of minutes.  I think clients hate to see items like this on a legal invoice:

3/10/05: Telephone conference with client regarding real estate closing (.25 hours)

3/15/05: Conference with paralegal regarding client's real estate closing (.25 hours)

Let's say that the billing rate for the above attorney is $200 per hour, and that each of the above conferences lasted 5 minutes.  The client would then be expected to pay $100 for 10 minutes of the attorney's time (thereby raising the attorney's effective billing rate to $600 per hour).

Later this week I'll discuss how I go about setting my fees for representing the seller or buyer of real estate.