The Comprehensive Guide to Real Estate Consulting Agreements

What is a Real Estate Consulting Agreement?

A real estate consulting agreement is a common contract in the industry that outlines the specific services a consultant will provide to a client. These types of agreements can be used in any type of real estate transaction between any type of real estate professional or nonprofessional. It can take multiple forms depending on the circumstances and relationships at play. Real estate consulting agreements can be great options for individuals, groups or companies looking to save themselves time and effort in the long run. But these agreements are also crucial in protecting clients from less reliable consultants. For these reasons and others, real estate consulting agreements are essential to the industry.
The purposes of real estate consulting agreements are twofold. First, they create a legally-binding document that lays out the terms of the relationship between a consultant and client. Second, they allow a client to define the terms of the relationship in a way that best addresses their unique needs. In doing the first, the agreement is a legally binding and continuous record of the agreement between two or more parties. Perhaps the most important consequence of this is that it serves as evidence in case of a dispute.
When a client takes the time to draft a real estate consulting agreement , he or she has the ability to customize the terms of the agreement to meet specific needs. For example, the party seeking the consulting services may want the contract to contain specific terms, such as the property location, the length of time the consultant has to complete the project, specific price, compensation details, and so on. By the same token, the consultant may want to be protected from certain types of liabilities or seek assurances that the client has the financial means to support the project.
A real estate consulting agreement, if it is comprehensive enough, can address any number of issues that may arise with a particular project and can be the key to ensuring all involved are satisfied at the end.
Like other types of consulting agreements, it is critical that this document be as comprehensive as possible. The types of terms typically found in a standard consulting agreement are:
Real estate consulting agreements serve crucial roles in the real estate industry. When faced with project too big to handle on their own or needing assistance in meeting a specific goal, clients often turn to consultants. In doing so, it is important they be protected from any issues that might arise in the process. With a real estate consulting agreement, you can ensure you, your clients, and the consultant are protected.

Essential Components of a Real Estate Consulting Agreement

A basic real estate consulting agreement should contain a description of the roles and responsibilities of the parties, what services the consultant is expected to perform, how and when will the scoutr be compensated for those services, confidentiality clauses and indemnification clauses. In addition, a real estate consulting agreement should include a method of determining which jurisdiction’s laws govern the agreement (especially in cross-border transactions) and what remedies the Consultant may seek if the agreement is breached by the principal.
Describing the role of the consultant and the services to be rendered is vital to any consulting agreement. A detailed description here will minimize the potential for misunderstanding as to the specific nature of the services to be rendered.
The payment arrangement between the consultant and the principal can vary widely. Sometimes consultants are compensated on a commission basis – a percentage of the price of the real estate being offered for sale by the consultant, or a percentage of the rental income of the property being offered for lease. Other compensation arrangements include hourly rates or project fees. Whatever the arrangement, however, the payment terms should be clearly described in the consulting agreement.
Confidentiality terms should reflect the practice that the consultant will maintain the confidentiality of sensitive information received through the course of consulting activities. Often, the consultant is hired to find buyers for property owned by the principal. Without confidentiality terms, the consultant could be subject to claims of unfair competition if he or she informs other potential buyers, outside the scope of the consulting arrangement, as to the fact that a particular piece of property is for sale. On the other hand, the consultant may not wish to be bound by this restriction when the principal has offered no compensation other than for consulting services. For this reason, it is useful to provide for differing confidentiality obligations depending on whether the consulting consultant agreement is terminated within or after a particular period of time.
Finally, indemnification terms are often difficult to predict in advance of a dispute. The agreement should provide that the Consultant indemnifies and holds harmless the principal from any claims incurred in connection with the Consultant’s work, to the extent that those claims are attributable to the Consultant’s breach of the consulting agreement.

Real Estate Consulting Agreement: The Benefits

When it comes to real estate consulting agreements, the phrase "what’s in a name?" means little. While advisors can help identify opportunities and offer insights that clients may not be able to recognize on their own, without a well-written agreement, neither party is protected in what can often be a tenuous relationship.
Consulting agreements not only add a level of protection for both parties, but also lay out clear expectations about tasks to be performed, when they should be completed, and how much they will cost. They also include contingency clauses in order to protect both parties in case a conflict arises.
Consulting agreements protect the client to ensure that they receive the services promised to them by the advisor. Many advisors leave information, contacts, and reports out of the scope of their services in order to charge for them or simply complete them at a later date. This can lead to misunderstandings between the consultant and their client. With a signed consulting agreement in place, the consultant is ensuring they will provide the services they have promised to and can’t make excuses later. Conversely, the consultant is also protected from providing services that may fall outside the scope of the agreement.
By laying out the tasks to be completed, the timeline for each task, and expected payment at the end of each section, a consulting agreement protects both parties. It also protects the consultant when a client pays late or doesn’t understand the services being provided. There are many details involved in real estate transactions, and having tasks outlined in writing allows everyone to be on the same page.
Working on a real estate project can often take months, if not years. A consulting agreement protects consultants from clients who want the advisor to work after they have stopped paying for the services or don’t understand how they should be paying. A consulting agreement guarantees that the consultant will be compensated for their entire project and every task, and not just every now and then.

Common Mistakes and How to Avoid Them

The most common pitfalls we see in practice with respect to real estate consulting agreements are as follows:
Scope of Services
You should clearly define what services you will be providing in exchange for a fee; nothing more, nothing less. Often, real estate consultants want to help at the outset of a project, often not understanding the extent of fee exposure they face; however, once the consultant is engaged, if they are billed at their full rate, the client can be overbilled if the scope of services is too broad and the real estate consultant goes beyond what was intended by the parties.
Responsibility
More than once we have seen consulting agreements lay the obligations of the real estate consultant on the developer. Real estate consultants are generally excluded from the responsibility of supervising the construction of a project. They may have checking and double-checking responsibilities, however, they should never be responsible for supervising the construction. Having said that, keep in mind that if during the course of the project the real estate consultant discovers something that doesn’t look right, they should bring it to the attention of the developer.
Limiting Liability
Real estate consultants should try to limit their liability in the consulting agreements to only those damages which are direct, or caused by the negligent actions or inactions of the real estate consultant.
Termination of Consulting Agreement
If the consulting agreement is terminated by the developer upon 30 days’ notice, how does the real estate consultant get paid for work performed up to the point of termination?
Payment
The agreement should include language specifying that, in the event of a default by the owner on the loan, the real estate consultant will continue to receive payment from the lender until they are fully paid. This will discourage the lender from interfering with the real estate consultant’s ability to be paid.

Guidelines for Negotiating a Real Estate Consulting Agreement

When negotiating a real estate consulting agreement, the consultant should start by clearly communicating their goals and objectives with respect to the project and any compensation structures being considered. For example, an hourly fee which is capped at a certain amount may be appropriate for one type of project while a percentage of the overall purchase price would make more sense for a different kind of project. The client, for its part, should focus on identifying the type of services that it needs and tailor the structure of the agreement according to its goals for the project. For example, a percentage compensation structure may dissuade the consultant from pursuing or recommending appropriate alternatives for the client, due to a loss of commission upon termination of the contract . Conversely, an hourly rate may be too high for a simple project. The ideal agreement will balance the objectives of both parties and provide clarity on the scope of the project and the nature of the compensation. Apart from the structure of the agreement and the payment terms, essential elements of the negotiation process include: Real estate consultants have a great deal of leverage at the outset of the agreement negotiations. Once the deal is struck, however, the consultant takes on a financial risk as a result of the many of the contingencies in the agreement. Further, once a commercial real estate consultancy is established in a city, other parties often hire them on a referral basis.

Legal Issues Within Real Estate Consulting Agreements

Legal considerations must be taken into account when drafting a consulting agreement. This applies to such issues as whether the deal as presented to the client is actually a license and not a franchise, and what the effect is of a lease arrangement. However, except in the case of large-scale national apartment operators, most real estate program sponsors should be able to come to an acceptable solution to these types of issues through their counsel without jeopardizing product rollout and/or market entry.
Several legal issues are critical.
First, the agreement must comply with applicable state laws, including real estate licensing laws. While consultants are rarely required to obtain a license to operate as real estate consultants, several states have licensing requirements for anyone seeking to buy or sell residential real estate, which may include a consultant. In addition, while consultants are rarely categorized as "real estate brokers" under state statutes, there can be a fine line between obtaining a license and providing consulting services. Additionally, in some states, the general contractor form of license may be required.
Second, the agreement should include dispute resolution mechanisms. Parties should consider using arbitration to resolve disputes. Courts may be hard-pressed to enforce certain rights, such as a waiver of jury trial or limits on non-economic damages, where the wronged party is a consumer or even a small business. If a carve-out exception to arbitration is permitted in order to pursue injunction relief in court, parties should consider carefully the types of injunctions that can be sought in the state in which the project is located.
Third, the agreement must be equitable and conscionable. Courts will not enforce unfair penalties. Damages provisions should be limited to be no more than a multiple of any liquidated damages. A common rule of thumb is to limit damages to three times any liquidated damages amount that may be assessed.

Sample Template and Standard Practices

A good starting point for finding sample templates for real estate consulting agreements is searching online databases for professional organizations for real estate consultants and associations for real estate agents and brokers. There you will find members who have authored articles on consulting agreements in the past or who have been quoted. It is common for these associations to provide members with resources to assist them in their business practices. In addition, you can search the websites of real estate law firms, business law firms and law associations. Attorneys specializing in business and real estate law may have made their templates available on law firm websites to assist clients (and potential clients), especially if the firm has a high volume real estate law practice.
Real estate consulting agreements are not standardized, so if you are going to use an existing template, it is important to make sure that it meets your specific needs and state’s laws. If you reside in a different state than the consultant, it is critical to review specific state laws on real estate licensing and qualification requirements for real estate consultants and agents, and the scope of work you intend for the consultant. If you are unsure which state laws apply, contact the state agency that oversees real estate agents and brokers as well as commercial brokers and agents . Some states refer to a real estate consultant as a sales agent. In some cases, a real estate agent may be registered as a consultant as well so be cautious to define the difference in the agreement so that you do not run into any licensing issues.
The aforementioned websites may also have real estate consulting agreement templates. If you find a real estate consulting agreement template that is close to your needs, it is recommended that you tailor it by using a word processing software not editor to get the format and language just the way you want it while maintaining all other important aspects of agreement that are not customizable. Do not simply strike through and write over anything you want to change, as this will limit your ability to count on a copy of the agreement that is already typed out. When making revisions, re-review each article carefully to ensure that you have made the changes as you intended and that they make sense within the context of the agreement.
Depending on the model you choose for the agreement, you may still want to consider having an attorney draft the real estate consulting agreement. If you are going to payment fees, making the investment for legal services may make more sense than spending time to proofread or even rewrite an existing template from an unverified source.