I recently completed 40 hours of continuing education to renew my broker’s license, and took these notes during the Ethics class on what I see most commonly abused:
Realtor ® Code Standard of Practice 1-3
A licensee is not permitted to knowingly make a false representation as to the value of a seller’s property in an attempt to secure a listing.
Unfortunately, many licensees frequently violate this ethical standard. Agents often face fierce competition to obtain listings. Consequently, many licensees will knowingly represent to a seller that the listing price of their property should be higher than reasonable facts can justify. This practice is often referred to as “buying the listing”.
The seller, not understanding that a willing buyer will have to pay the inflated listing price, is led to believe that the listing agent suggesting the highest price can actually “get me more for my property” than those agents who may have been fair and honest about the price of the property.
The licensee that listed the property at the inflated price knows that the property will not sell at that price. The licensee then will attempt to beat the seller down in price during the term of the listing in order to bring the price more in line with reality – the reality originally presented to the seller by competing listing agents.
This method of buying listings is to be regarded as a serious ethical violation and should not be practiced by any licensee.
This situation can also arise when a homeowner instigates the overvaluation. Many Sellers often have an unrealistic opinion about the value of their property. Often, that opinion is based on emotion. The seller may have a host of positive memories about living in the property and therefore translate those emotions into placing a higher value on the property than can be statistically justified. Human nature also tends to cause sellers to compare their property to other properties, and in order to justify their choices, they will tend to downgrade the property of others and upgrade their own. This often leads to sellers overvaluing their property, when compared to properties of their neighbors.
Unfortunately, that justification for inflating their pricing often leads to misjudgments about reality.
A licensee who knowingly agrees with sellers who have inflated expectations about value is also engaging in unethical conduct.
However, that does not mean that a licensee should not take a listing on property that is over valued. Rather, the licensee should offer the seller his/her opinion of the realistic value. This may simply be to make the seller aware that if the listing is taken at an unrealistic price, the licensee will attempt to have the seller adjust the price later on.
Misrepresentation in an attempt to secure a listing also occurs when a licensee intentionally undervalues the seller’s property so that the licensee can potentially benefit from the low price by a quick sale.
Realtor ® Code – Standard of Practice 1-12, 1-13 and 3-4
In 2003, the Standards of Practice were amended to require that when entering into a listing contract, a licensee must advise the seller how the commission to be paid by the seller is to be allocated between the listing and selling brokerages. Many licensees ignore this provision.
This code section prohibits this practice and requires that the licensee disclose to the seller exactly how the total fee is to be split.
Without this disclosure the seller would not be aware of the fact that the listing agent is not offering to the selling agent a fee adequate enough to entice the selling agent to show the seller’s property to a potential client.
Many selling agents enter into buyer representation agreements with their buyers that require the payment of a minimum fee. In many of these agreements, the selling agent is not even required to show the buyer a property that does not have a fee at least equal to the minimum fee set forth in the buyer representation agreement.
Realtor ® Code of Ethics – Standard of Practice 1-15
Realtor ® Code of Ethics – Standard of Practice 3-6
Under this standard a licensee is required to disclose the existence of offers on a property in response to inquiries from a buyer or a cooperating broker (with the seller’s approval).
Where such disclosure is authorized the licensee must also disclose whether the offers were obtained by either the listing licensee, another licensee in the listing firm, or by a cooperating broker.
This disclosure is required because if an offer is obtained by the listing licensee or by a licensee of the listing firm, there is the possibility that these offers will be preferential as the listing agent will encourage the seller to accept these offers over others.
This rule requires that buyers and cooperating licensees be made aware of who obtained the offer in order that they can evaluate any potential prejudice that might be involved in any offer that they might submit on behalf of their client for the same property.
Standard of Practice 3-6 also requires that, upon inquiry, a licensee is also required to disclose whether accepted offers have unresolved contingencies. Often listing agents will disclose to a cooperating broker that there is an accepted offer on a property but will not disclose that there are unresolved contingencies.
This lack of disclosure may prejudice the seller if the unresolved contingencies are never resolved. Obviously disclosure of unresolved contingencies would be in the best interest of the seller as it may encourage a back-up offer in the event the primary offer falls apart.
Realtor ® Code of Ethics -Standard of Practice 1-9
As a part of the agency relationship, each licensee has an obligation to respect the confidential information entrusted to the licensee that is obtained by the licensee during the course of the agency relationship. The obligation of confidentiality arises out of the agent’s fiduciary duties of care and loyalty.
The agent’s preservation of confidential information does present some interesting dilemmas; what types of information given in confidence must be disclosed and what types of information may not be disclosed?
Material facts or information about a property must be disclosed. If the seller knows the roof leaks, informs the agent of this fact, and asks the agent to keep the information confidential, then the agent must inform the seller that the information is material and must be disclosed to the prospective buyer.
However, information that is not material must not be revealed to the prospective buyer. Some examples of confidential information may be the following:
- Seller’s reasons for selling the property
- Seller’s minimum acceptable sales price
- Seller’s current financial condition
- Fact that seller is about to face foreclosure of the property offered for sale
All of the above examples are not material. They are not of such a nature that their disclosure or lack of disclosure to the buyer would affect the desirability or value of the property itself. All of the examples above are information that must be considered confidential under the agency relationship with no reason impelling disclosure.
Realtor ® Code of Ethics: Standard of Practice 9-2
Many contractual agreements today are created through the use of electronic transmissions (email, Internet, fax, etc.). These agreements may be listing agreements, purchase and sale agreements, leases, buyer representation agreements or other transaction contracts.
Due to the fact that in most electronic contractual situations personal contact between the parties is limited, often the terms of the contracts are not explained in the same way as they would be in a face-to-face situation.
As a result, this standard was adopted in 2007 to address the realities of modern real estate practice in which many agreements are created electronically. The point of the rule is simple: the licensee has an obligation to explain and disclose the specific terms of the contract prior to its execution just as would be done in a face-to-face situation.
Realtor® Code of Ethics – Article 11
Realtor® Standards of Practice 11 (1), (2) and (3)
Business and Professions Code 10177 (g)
The practice of real estate involves numerous disciplines that are related, but independent of each other. Just as in the medical profession, a skin specialist should not claim to be a competent brain surgeon. Likewise, a licensee competent in one area of real estate should not claim to be competent in all areas of real estate practice. The Code of Ethics recognizes these separate areas of real estate practice:
- Residential brokerage
- Commercial and industrial brokerage
- Real property management
- Real estate appraisal
- Real estate counseling
- Real estate syndication
- Real estate auction
- International real estate
If any licensee holding a broker’s or salesperson’s license desires to undertake an engagement in areas outside of their expertise, the licensee should engage the services of one who is competent in that discipline. Their identity and contribution to the work should be disclosed to the principal.
Realtor ® Code of Ethics – Article 12
Advertising is an important component of marketing real property. It provides benefits to both sellers and buyers. For sellers, it exposes their property to the general marketplace. For buyers, it identifies properties that may be of interest.
However, advertising is an area of real estate practice that is often abused by misleading ad content. Advertising content does not have to be actual misrepresentation before it may be deemed unethical. Any advertising that misleads is unethical. Ethical advertising is not misleading when read or viewed by the public.
In addition, with all communications to the public, licensees are also required to identify their status as a real estate licensee. This standard applies whether the communication is in the form of advertising, marketing material, electronic communications, or any other form of communication to the public.
The basic standard required of advertising is that it must present a true picture and must not be in any way misleading or untruthful. The following are a few examples of practices that are considered unethical:
- Any ad which relies upon a “bait and switch” scheme. Ads in this category include advertising property that has already been sold, property that is not for sale, or advertising something that sounds too good to be true.
- Use of misleading words, maps, or images that would imply that the property is something other than it actually is. For example, showing a property located on a map near the ocean when, in fact, the property is located a number of blocks from the ocean.
- “Blind” ads where the ad appears to be run by a property owner when, in fact, the ad is being run by a licensee.
- Making any statement in an ad that is clarified only in small print or with asterisks. For example, an ad states 5.5% interest but the small print states that this offer only applies to buyers with a credit score over 730.
- Only licensees who participated in a transaction as the listing or cooperating selling broker may claim to have “sold” a property. This rule prevents a licensee claiming that he/she “sold” a property when in fact another licensee in his/her office may have “sold” the property.
- A recent “white paper” that arose out of a National Association of Realtors ® conference addressed the issue of relisting for-sale homes by temporarily pulling them off the market and then reintroducing them to the market as a “new” listing. The white paper concluded that while to a broker a listing contract is technically “new” each time the property is relisted, to the consumer a “new” listing is a property that is offered for sale for the first time. As a result, this practice can result in confusion and misunderstanding and can mean trouble. Since the NAR’s Code of Ethics requires honest, truthful advertising, and requires that all communications present a true picture in their advertising and representations, that the relisting a property as “new” practice should be viewed as deceptive. Licensees should refer to relisted properties as “back on market” or, “price reduced”. The white paper also encourages MLS services to implement additional listing input categories such as “reintroduced” or “recently relisted”.
Realtor® Code of Ethics – Article 12
A number of modifications and additions to Article 12 have occurred since 2002. Most of these additions or modifications relate to the use of the Internet in the practice of real estate. Prior to 2002, the Internet was not a major factor in real estate practice. However, current real estate practice is heavily reliant on the Internet and as a result, the Code of Ethics has been revised to address the specific issues and challenges raised by the use of the Internet as a vital tool in real estate practice.
- A licensee must use reasonable efforts to ensure that any information a licensee provides on a website is current and up-to-date. Often the information presented on websites become stale or out-dated. This standard requires licensees to make reasonable efforts to correct updated or inaccurate information.
- Any website of a Realtor® firm must disclose the firm’s name and states in which the firm is licensed in a readily apparent manner. This standard was added in 2007 as the realities of modern real estate practice involve the use of the Internet and frequently involve firms with multi-state operations. This standard ensures that individuals searching the Internet are informed that the website they have entered is the site of a Realtor® firm.
- Licensees are prohibited from selling or sharing consumer information gathered over the Internet without first disclosing the possibility that such information may be sold or shared. Any disclosures relating to possible shared or sold information must be readily apparent.
- A licensee may not use or display professional designations, certifications, or other credentials to which they are not entitled.
The requirement that licensees present a true picture in their advertising also applies to the URLs and domain names that a licensee might use.
- A licensee is prohibited from engaging in deceptive or unauthorized framing of real estate brokerage websites. Framing means extracting the contents of someone else’s web site and placing that information within a “frame” on the licensee’s web site. The result makes it appear that the information originates on the licensee’s web site.
- A licensee is prohibited from manipulating or presenting the listing content of another licensee in such a way that it produces a deceptive or misleading result.
- A licensee is prohibited from deceptive use of meta tags, keywords, or other devices or methods to direct, drive, or divert Internet traffic or to otherwise mislead consumers. Generally, this prohibited activity relates to “spamming” key words that will result in directing traffic to a site.
- A licensee is prohibited from using URLs or domain names that would present less than a true picture of the licensee or his/her services.
Realtor ® Code of Ethics – Article 12 Standard of Practice 12 (1) and (2)
The Realtor® Code of Ethics states that a licensee may offer “free” services as long as in their advertising and representations to the public the terms and availability of the offered product or service are clearly disclosed.
Example: A licensee, desiring to represent buyers exclusively, advertises in a real estate publication: “Why not use a buyer’s broker? As a buyer, it costs you nothing.” Obviously, the licensee does not intend to work for free. Rather, the seller will be paying the fee. The licensee must disclose to the buyer how the fee arrangement works.
The offering of prizes or inducements is not illegal as long as the licensee clearly discloses the terms and conditions of the offer. Offering prizes or inducements are always subject to the limitations or restriction of state law.
Realtor® Code of Ethics – Article 12 Standard of Practice – 12-6
A licensee offering property for sale or lease that is not listed, but in which they have an ownership interest, must disclose their status as a licensee to the public.
All advance fees received by a broker must be deposited into the broker’s trust fund account. They are not the funds of the broker. They are the funds of the client. If the funds are deposited directly into the account of the broker, such a deposit is deemed embezzlement, and the principal can recover treble damages (triple the normal amount) and attorney’s fees. Once the fees have been deposited into the trust fund account, they cannot be withdrawn except for the benefit of the principal whose funds they are. They may be withdrawn for the benefit of the broker when the agent’s services are completed, and then only upon following required DRE procedures.
A licensee may notice a red flag that demands further investigation and comment to the buyer that the problem can be “easily solved.” Unfortunately, case law indicates that the scenario wherein a licensee, knowing that a “red flag” must be disclosed, discloses the issue and then minimizes the problem is not uncommon. Sometimes it was because of ignorance, and sometimes an attempt to keep the sale together. In giving opinions, licensees expose themselves to liability. If a licensee lacks expertise, an opinion is nothing more than a guess. If the buyer suffers a loss because of reliance on an opinion of their agent, a court generally holds the licensee to the standard of the expertise represented by the opinion.
Example: A licensee points out a crack in the foundation to a buyer and then gives his opinion that the crack is not a problem because cracks of this size are normal for the age of the property. One year later, the cracks enlarge to twice that of their original size. The buyer hires an engineer who determines that the cracks caused by recent construction activity on the adjoining property are being exacerbated by heavy winter rains, and advises that expensive foundation work is required to correct the problem. The buyer sues the licensee based upon the opinion given by the licensee when the foundation cracks were discussed. Undoubtedly, the court would find the licensee liable for the amount of the repairs.
The classic group boycott is also known as a concerted refusal to deal. Such activity is illegal per se. It is characterized by an agreement or combined action among industry members to drive a competitor from the industry by denying the competitor a source of supply or a source of customers. The majority of cases relating to group boycotts dealing with the real estate industry are attempts by the local multiple listing service (MLS) and local real estate board to drive a competitor from the industry. The cases where the conduct is illegal per se are generally those where membership or access conditions to either the real estate board or MLS are directed at improperly coercing the behavior or business practices of third parties.
A common example of this type of activity occurs when brokers in a given market area act in concert to drive a “discount broker” competitor from the market or to influence the competitor’s business practices in an anticompetitive manner. The Fifth Circuit Court of Appeals in Park v. El Paso Board of Realtors affirmed the presence of such an illegal group boycott. The plaintiff licensee offered to list sellers’ home with the MLS for a flat fee. At trial, the plaintiff introduced evidence that competing licensees had tried to impose punitive splits on the plaintiff, made disparaging remarks about the plaintiff to potential customers, and refused to show the home that the plaintiff had listed. The jury found for the plaintiff. The conduct of the competing licensees was found to be a boycott of the plaintiff. The appeals court affirmed this trial court’s decision. The licensee defendants were found liable per se under the Sherman Act for damages suffered by the plaintiff competitor; The defendants tried to drive the competitor from the market by damaging his reputation and refusing to treat the competitor’s listings in the same way as other listings.
This does not mean that a REALTOR® board or an MLS cannot impose certain justified requirements on membership which would obviously exclude some people. Cases in this area are analyzed under the “rule of reason” standard, as opposed to being declared illegal per se. Thus, exclusions of industry members from either a local MLS or real estate board have been upheld if the MLS or board could show that membership exclusions were designed to reasonably protect the integrity of the organization and to accomplish a legitimate goal.
Federal courts have upheld the denial of a broker from board membership when such broker failed the requirement of having a “favorable business reputation.” The courts have also upheld the requirement that local board membership may be a requirement for MLS membership. In contrast, the courts have concluded that restricting MLS membership to only firms that maintained an active real estate office open during all business hours, had a favorable credit report, or had purchased stock in the local MLS had violated the provisions of the Sherman Act under the rule of reason test. These and other similar types of restrictions were deemed a group boycott under the act.
A tying arrangement has been defined by the Supreme Court as the conditioning of a sale or purchase of one product to the sale or purchase of another product. The effect of a tying agreement is to extend the seller’s market power in the tying product into the market for the tied product. Tying agreements are illegal per se under antitrust cases.
Perhaps the most common example of a tying agreement in the real estate industry is the common practice known as a list-back agreement. Under this type of agreement, a real estate agent agrees to sell property to a builder upon the condition that the builder list all of the homes built on the property with that same agent.
In 2005, the Department of Justice (DOJ) filed a complaintin federal court to stop the National Association of REALTORS® (NAR) “from maintaining or enforcing a policy that restrains competition from brokers who use the Internet to more efficiently and cost effectively serve sellers and buyers, and from adopting other related anticompetitive rules.”
According to the DOJ, the essence of the NAR Virtual Office Web Site (VOW) “opt out” policy was anti-competitive. The policy was aimed to restrict Internet competition and specifically aimed at discount brokers. This was accomplished by permitting MLS brokers to selectively or generally withhold their clients’ listings from VOW operators by means of an opt-out right. Basically, the VOW policy allows traditional brokers to block the customers of targeted competitors from using the Internet to review the same set of MLS listings that the traditional brokers provide to their customers.
In May, 2008, the National Association of Realtors ® reached a settlement with the Department of Justice. Both the DOJ and NAR claimed victory in the case. As part of the settlement, NAR is not able to exclude online brokerage firms from joining Multiple Listing Services. The settlement assured that the real estate information is shared equally among all brokers and prevents traditional brokers from deliberately impeding competition.
However, the settlement did not give complete open access, as it preserved the right of seller clients and brokers to determine whether or not listings are displayed on other brokers’ websites. It also gives sellers the right to prohibit certain features, such as home-value estimates and blog posts to accompany the display on VOW’s.
The real estate industry will surely face similar challenges as greater pressure regarding commissions is exerted by the public. The rapid rise in real estate prices led to larger commissions, but the percentage charged on most transactions remained rather stable. In a declining market of short sales and foreclosures, commissions decline as well. The commission issue, along with the increased consumer access to information about properties for sale over the Internet, will undoubtedly make the real estate industry a target for antitrust actions for years to come.
NEVER use the following dangerous words and phrases. These are examples of words or phrases that would permit a judge or jury to find that a licensee had engaged in illegal antitrust activity. (Note: These phrases are taken from the Antitrust and Real Estate Compliance Program for REALTORS®.)
- “No one else will cooperate unless you accept the listing on these terms. “
- “Before you decide to list with XYZ Realty, you should know that because they are a discount broker, other REALTOR® board members would not show their listings.”
- “This is the rate every firm charges.”
- “If you valued your services as a professional, you wouldn’t cut your commissions.”
- “Before you list with XYZ Realty, you should know that nobody works on their listings”
- “I would like to lower the commission rate, but the board, as a rule…. “
- “This is the rate that everyone charges.”
- “The MLS will not accept less than a 120-day listing.”
- “I would like to lower the commission, but no one else in the MLS will show your house unless the commission is X%.”