Sometimes, the only way to win is to avoid the Battle...

This short article is a little bit about strategy, and a lot about understanding motivations when evaluating advice. Even the best advisers need to be aware when a conflict of interest arises and address it immediately.

We recently hosted a seminar on Eminent Domain in our office. There is an area where we do a lot of work in that may be subject to an Eminent Domain action. Many of the Landlords and Tenants in that area didn't really know what that meant or how it might affect them, so I sprang into action. We invited a well respected specialty law firm, invited the stakeholders in the affected area, bought coffee and bagels, and hosted the meeting.

As it turns out, there are specialties within the legal profession. Generally, these specialties exist because there are problems to be solved (at a profit). So, you have divorce attorneys, estate attorneys, real estate attorneys, personal injury attorneys, defense attorneys, and even attorneys that specialize in fighting school systems like LAUSD. These attorneys are able to make a living specifically because there is a problem to be solved, which is big enough that they can earn a living solving that problem.

For example, there would not be an entire cottage industry of attorneys that specialize in fighting LAUSD if LAUSD didn't get things wrong. And based on the size of that particular cottage industry, and the cars the lawyers are driving, they apparently get things wrong on a regular basis.

Take this logic, and apply it to Eminent Domain. For those of you unfamiliar with Eminent Domain, this is the area of law where a government agency can take your land if it is required for the public good. According to the Constitution, they have to pay the often unwilling seller a fair price for the Property. An entire industry of attorneys would not exist if the agencies were in the habit of paying what the Sellers (and apparently a lot of juries) consider to be a fair price.

The typical model for these attorneys is to wait until there is a dispute between what is offered by the Agency and what the Property owner considers to be a fair value. In the vast majority of cases, the attorneys represent the owner and get a percentage between what was originally offered and what they ultimately extract from the Government Agency. This is a contingency fee arrangement, and it generally aligns the attorneys' goals with those of their client.

The more they get for their client, the more they get paid.

In some cases, we as brokers have an ability to help establish value before the Offer comes in from the agency. By establishing a higher value, there is less of a discrepancy between the Offer and what the Owner really wants.

In other words, we help the client win by avoiding the Battle in the first place. Or, at the very least, make the "book ends" between Offer and what the seller thinks the value is start out closer together so there is more of a skirmish and less of a full out legal battle.

The Property Owner would certainly want the assistance of capable legal counsel in this process, but more than likely would arrange an hourly fee agreement in this scenario. This is where the potential conflict of interest comes in...

Look at it this way: It is difficult to provide advice that could drastically cut your own compensation as a service provider. Say a Property is worth $10M, and the agency offers $7M. You are $3M apart. Then, an attorney getting a very reasonable 20% contingency fee stands to make $600k if he can bridge the gap for you. If you can establish value before the Agency begins their appraisal process, and they come in much closer to that $10M number in the beginning, that $600k all but disappears. As the Seller, you just put a significantly larger chunk of cash in your pocket rather than in your attorneys' pocket.

Let's circle back to the seminar I hosted. It was very educational, and provided a much needed frame of reference to the Landlords and Tenants that attended. The only issue where we brokers disagreed with the attorneys was in discussing whether steps should be taken before the Agency performed their own appraisal and submitted an Offer.

I'm not saying they were motivated by personal financial considerations, but I had to consider the possibility that a substantial monetary incentive could influence their approach.

To be fair, in some cases we may not be able to establish value early on. That being said, we certainly wouldn't harm value. In other words, it might help and it really couldn't hurt. Especially if we are working in concert with the attorney while creating a proactive strategy. So why dismiss the idea out of hand?

It's similar to a free lottery ticket. It may not win, but the value compared to the cost is impressive. You don't lose anything by checking the number. In this instance, our goal would be to win the war by avoiding the battle in the first place. However, there is a significant potential profit motive where the attorney certainly benefits more from a battle on the way to winning the war.

As brokers, we obviously deal with conflicts of interest. They can't be avoided. My first mentor said to me "If you're not conflicted, you're not in business. It's all about how you handle the conflict."

There are ways I employ to put my personal goals back in alignment with my client. As an example, when I take a sale listing I often offer a 2 tiered commission structure. I charge less on a direct deal than I do on a transaction where I am splitting the fee. In this way, my client pays less and I earn more when I find the Buyer. Now, in a multiple Offer scenario, our goals are completely aligned. If 2 offers are identical, my client AND I make more money on the direct Offer. Conflict addressed, and resolved.

Please note that I am in no way trying to bash attorneys. Most attorneys I have had the pleasure to work with are both extremely ethical and super competent. A good attorney is worth his weight in gold. So what am I trying to say?

The moral of the story is really simple: Always consider any personal motivations when getting advice. If you can, try to find a way to align your interests back with those of the person providing the advice. In the Eminent Domain example above, my approach as a potential client would be to suggest a structure where the attorney was hired with an hourly wage, but perhaps layer in some sort of a bonus structure based on a shorter rather than a prolonged process. Now, the goals of the client and adviser are more fully aligned.