section 1: the basis of ethics
TRANSCRIPT
SECTION 1: THE BASIS OF ETHICS
Laws are created to insure that a minimum level of service and personal responsibility is met.
Ethics encourage a maximum level of service and personal responsibility by establishing
standards that exceed the law. Ethical behavior enhances the professionalism of the real estate
industry, and maximizes protection for members of the public dealing with real estate licensees.
Code of Ethics of the National Association of Realtors
The most widely accepted Code of Ethics for real estate licensees is the one used by the National
Association of Realtors. If a real estate licensee becomes a member of a local association of
Realtors affiliated with the National Association of Realtors, they automatically, by becoming a
member, agree to adhere to the N.A.R. Code of Ethics. A violation of the National Association
of Realtors Code of Ethics may result in disciplinary action being taken by the local association
of Realtors. A violation of the National Association of Realtors Code of Ethics may or may not
constitute a violation of California law. Standards of Practice serve to clarify the ethical
obligations imposed by the Code of Ethics. Standards of Practice may be cited in a
disciplinary hearing in support of a charge. Even if a real estate licensee is not a member of the
National Association of Realtors, by abiding by both the spirit and intent of N.A.R.’s Code of
Ethics, the licensee can avoid borderline activities and prevent legal liability as well.
ETHICS AND THE LAW
In any instance where a Code of Ethics and the law are in conflict, the obligations established by
the law take precedence. On the following pages activities and behaviors will be described and
then if there are any pertinent articles of the National Association of Realtors Code of Ethics or
provisions of the law they will follow. The objective is to be able to recognize and avoid
conduct that would be likely to result in disciplinary action being taken against the licensee. In
addition, a higher awareness and sensitivity of the duties an agent owes to his or her client, and
others, will be developed.
SUBSTANTIAL MISREPRESENTATION OF LIKELY VALUE
It would be considered unethical conduct to knowingly make a substantial misrepresentation of
the likely value of real property to:
1. Its owner either for the purpose of securing a listing or for the purpose of
acquiring an interest in the property for the licensee’s own account.
2. A prospective buyer for the purpose of inducing the buyer to make an offer to
purchase the real property.
Related provisions of N.A.R. Code of Ethics and Standards of Practice
Article 1 of the National Association of Realtors Code of Ethics provides that……
“When representing a buyer, seller, landlord, tenant, or other client as
an agent, Realtors pledge themselves to protect and promote the interests
of their client. This obligation of absolute fidelity to the client’s interests
is primary, but it does not relieve Realtors of their obligation to treat all
parties honestly. When serving a buyer, seller, landlord, tenant or other
party in a non-agency capacity, Realtors remain obligated to treat all parties
honestly.”
Standard of Practice 1-3, specifically provides that:
“Realtors, in attempting to secure a listing, shall not deliberately mislead
the owner as to market value.”
A violation of Article 1 of the N.A.R. Code of Ethics could result, in the most extreme cases, in
expulsion from the National Association of Realtors. While this would be a severe consequence
of such an action the licensee could continue to practice. Membership in the National
Association of Realtors and compliance with its Code of Ethics is not mandatory in order to be in
the real estate business. Realtors hold themselves out as having higher standards to adhere to as
a result of their Code of Ethics. The fact that a real estate licensee is not a member of a private,
professional association does not mean that they are unethical. Certain disciplinary actions
cannot be taken against them.
Related Law
In the most extreme cases of unethical behavior the probability is good that a law will have been
violated as well. In this instance, while there is no code section dealing specifically with
misleading an owner or buyer as to value, Business and Professions Code § 10176 provides that:
The commissioner may, upon his own motion, and shall, upon the verified complaint
in writing of any person, investigate the actions of any person engaged in the business
or acting in the capacity of a real estate licensee within this state, and he may
temporarily suspend or permanently revoke a real estate license at any time
where the licensee, while a real estate licensee, in performing or attempting to
perform any of the acts within the scope of this chapter has been guilty of any
of the following:
(a) Making any substantial misrepresentations.
The reason it is important to determine if a particular law applies is to determine the level of
discipline that might result. Individuals sometimes refer to a particular behavior as being
“unethical” on the part of a real estate licensee. They follow up by saying, “They should lose
their license for doing that unethical behavior.” Again, unethical behavior does not, in and of
itself, result in suspension or revocation of a license. A provision of the law must be violated in
order for that level of discipline to take place.
REPRESENTING THAT A WRITTEN OFFER EXISTS
It would be considered unethical conduct to represent to an owner of real property, when
seeking a listing, that the licensee has obtained a bona fide written offer to purchase the
property, unless at the time of the representation the licensee has possession of a bona fide
written offer to purchase.
Related Law
A law relating to this issue is found in §10176(j) of the Business & Professions Code. This
section of the law deals with what are commonly called “send-out” slips. This is a business
practice more common in business opportunity brokerage where the licensee gets a buyer to
make a ridiculously low offer on a property so that the agent can use the offer as leverage to get a
property owner to list the property with that agent. The law provides that the commissioner may
suspend or revoke a license for:
“(j) Obtaining the signature of a prospective purchaser to an agreement which
provides that such prospective purchaser shall either transact the purchasing,
leasing, renting or exchanging of a business opportunity property through the broker
obtaining such signature, or pay a compensation to such broker if such property
is purchased leased, rented or exchanged without the broker first having obtained
the written authorization of the owner of the property concerned to offer such
property for sale, lease, exchange or rent.”
PRICE-FIXING
It would be considered unethical conduct to state or imply to an owner of a real property during
listing negotiations that the licensee is precluded by law, by regulation, or by the rules of any
organization, other than the broker firm seeking the listing, from charging less than the
commission or fee quoted to the owner by the licensee.
Related Law
Most licensees are aware that they cannot lead the public to believe that real estate commissions
are established by law or the rules of organizations such as local boards of Realtors. What some
licensees are not aware of is that at one point in time, local boards of Realtors did publish
commission schedules. Members of local boards were not just encouraged but were required to
comply with the published schedules. In some states, in the past, the law even made it illegal to
discount commissions. Out of such practices a wide variety of laws arose.
On the federal level, the Sherman Anti-Trust Act provides that such practices constitute a
felony and subject the offending licensee to a fine of up to $100,000.
In addition, on the federal level, a violation of a Federal Trade Commission order would
probably be involved and the offending real estate licensee would be subject to a fine of $10,000
for each violation, and each day of continuing violation could constitute a separate offense.
State law includes the Cartwright Act, which is the state equivalent of the Sherman Anti-Trust
Act and provides a penalty of up to $2,500 per violation. Obviously the real estate licensee who
attempts to receive more income through price-fixing practices can end up losing a lot of money.
Additionally, § 10147.5 of the Business and Professions Code establishes certain requirements
for preprinted compensation agreement forms.
Printed or form agreements fixing real estate licensee’s compensation
(a) Any printed or form agreement which initially establishes, or is
intended to establish or alters the terms of any agreement which
previously established a right to compensation to be paid to a
real estate licensee for the sale of residential real property containing
not more than four residential units, or for the sale of a mobile home,
shall contain the following statement in not less than 10-point boldface
type immediately preceding any provision of such agreement relating
to compensation of the licensee.
Notice: Law does not fix the amount or rate of real estate commissions.
They are set by each broker individually and may be negotiable between
the seller and broker.
(b) The amount of rate of compensation shall not be printed in any
such agreement.
(c) Nothing in this section shall affect the validity of a transfer of
title to real property.
(d) As used in this section, “alters the terms of any agreement which
previously established a right to compensation”, means an increase
in the rate of compensation or the amount of compensation of
initially established as a flat fee, from the agreement which previously
established a right to compensation.
(Operative July 1, 1980.)
MISREPRESENTATIONS REGARDING LICENSEE’S RELATIONSHIP WITH
BROKER OR COMPANY
It would be considered unethical conduct to knowingly make substantial misrepresentations
regarding the licensee’s relationship with an individual broker, corporate broker, or franchised
brokerage company or that entity’s responsibility for the licensee’s activities.
The real estate profession is no longer a business involving only small, neighborhood
establishments. Unfortunately, along with the growth in the size of companies there can be
growth in the nature and extent of abuses that can occur as well. If a real estate company, today,
has an excellent in-house legal staff, for example, a salesperson might be tempted to induce a
person into doing business with him or her because of the excellent legal backing the client will
receive. The question becomes, can that client call the company’s lawyers and get advice? What
exactly is the effect of the excellent in-house legal staff on the level of service the client
receives? Certainly some companies are able to offer more services because of their larger size.
It is important for licensees to know and be able to represent exactly what services will or will
not be provided.
Related Law
§10176 (b) of the Business and Professions Code prohibits:
“Making any false promises of a character likely to influence, persuade or induce.”
If a real estate company has 10,000 licensees associated with it nationwide, it is appropriate to
indicate the total number of licensees. What might be unethical or potentially even illegal would
be to promise a property owner that if he or she lists with that salesperson that works for that
company, that all 10,000 salespeople are going to be working to get the property sold. That is,
unless all 10,000 salespeople are going to view the property and then be in a position to show it
and sell it.
MISREPRESENTATIONS REGARDING DEPOSIT MONEY
It would constitute unethical conduct to knowingly make a false or misleading representation to
the seller of real property as to the form, amount and/or treatment of a deposit toward the
purchase of the property made by an offeror.
Related provisions of the N.A.R. Code of Ethics and Standards of Practice
Article 8 of the National Association of Realtors Code of Ethics provides that:
“Realtors shall keep in a special account, in an appropriate
financial institution, separated from their own funds, monies
coming into their possession in trust for other persons, such as
escrows, trust funds, clients’ monies, and other like items.”
One area where licensees might encounter potential problems is how to handle and what to
disclose about promissory notes that are used as deposits on the purchase of real property. In one
case, a California Appellate Court judge held that a broker, who accepts a promissory note
without disclosing this fact to a seller, violates the law. The judge went on to indicate that a
check implies a promise that the money necessary to make payment is on deposit in the bank and
a crime may be committed if it is not. No such implication attaches to a promissory note, and it
is not a crime if the note is not paid. Even though the broker received no advantage from the
form the deposit took, the lack of disclosure as to the form of the deposit subjected that broker to
liability. Clearly the prudent licensee will disclose to the seller the nature of the deposit money
and will indicate, on the deposit receipt, all of the pertinent specifics.
Related Law
§10176 (e) of the Business and Professions Code provides that the commissioner can suspend or
revoke a license for:
“Commingling with his own money or property, the money or other property
of others which was received and held by him.”
MISREPRESENTATIONS REGARDING BORROWER’S ABILITY TO REPAY
OWNER CARRY BACK LOAN
It would be unethical conduct to knowingly make a false or misleading representation to a seller
of real property, who has agreed to finance all or part of a purchase price by carrying back a
loan, about a buyer’s ability to repay the loan in accordance with its terms and conditions.
A real estate licensee has been showing property to a young couple that wants to buy their first
home. They don’t have very much money for a down payment and will need a seller to finance a
part of the purchase price. They have some credit blemishes. They have not been on the job
long and their future employment is uncertain. The listing agent asks the selling salesperson how
reliable the young couple will be if the seller carries back a loan for them. What should the
selling salesperson say?
Related Law
There might be a tendency to make the young couple sound stronger than they perhaps really are.
If the selling salesperson were to “puff” the qualifications of the buyers, a possible legal
violation might involve §10176 (c) of the Business and Professions Code which states that it
constitutes illegal conduct to be involved in:
“A continued and flagrant course of misrepresentation or making of false
promises through real estate agents or salesmen.”
In other words, even though the selling salesperson did not directly misrepresent to the seller, if a
licensee misrepresents to another licensee and then a client relies on that other licensee, the
misrepresenting licensee may be liable. The judicious licensee will not lead a seller to believe,
either directly or through another agent, that a purchaser will be able to handle a loan that the
buyer may not be able to repay.
ALTERING DOCUMENTS WITHOUT PROPER AUTHORIZATION
It would be unethical conduct to make an addition to or modification of the terms of an
instrument previously signed or initialed by a party to a transaction without the knowledge and
consent of the party.
Real estate licensees should avoid making changes in deposit receipts, listing contracts and other
documents without getting such changes acknowledged by the parties who have signed the
document.
Related provisions of the N.A.R. Code of Ethics and Standards Practice
Article 9 of the National Association of Realtors Code of Ethics addresses the issue of written
agreements. It states:
“Realtors, for the protection of all parties, shall assure, whenever possible, that
agreements shall be in writing, and shall be in clear and understandable
language expressing the specific terms, conditions, obligations and
commitments of the parties. A copy of each agreement shall be furnished
to each party upon their signing or initialing.”
Standard of Practice 9 – 1 makes even more specific and precise the ethical provision by
providing:
“For the protection of all parties, Realtors shall use reasonable care to ensure
that documents pertaining to the purchase, sale, or lease of real estate, are
kept current through the use of written extensions or amendments.”
Related Law
§2309 of the Civil Code states that:
“An oral authorization is sufficient for any purpose, except that an
authority to enter into a contract required by law to be in writing
can only be given by an instrument in writing.”
In other words, it has to be in writing to count.
MISREPRESENTATIONS REGARDING REAL PROPERTY IN THE NEGOTIATION
OF EXISTING SECURED PROMISSORY NOTES
It would be unethical conduct as a principal or agent to make a representation to a prospective
purchaser of a promissory note, secured by real property, about the market value of the securing
property without a reasonable basis for believing the truth and accuracy of the representation.
A buyer offers to purchase a property. The down payment is an existing promissory note, owned
by the buyer. It is secured by a first trust deed on real property. The buyer represents that the
total value of the real property, which is the security for the note, far exceeds the amount of the
note. Prior to the seller accepting the offer, what course of action should the agent representing
the seller take?
Related Law
Based on the outcome in the case of Schoenberg v Benner, the agent should carefully investigate
the actual value of that which is being negotiated. In Schoenberg, an agent was held liable for
not investigating the market value of a property, which was the security for a “cash down”
promissory note. In addition, the agent was held to be negligent for not verifying the buyer’s
statements regarding their creditworthiness. An appropriate way to treat an existing note that is
going to be negotiated is to treat it the same way an institutional lender would deal with a new
loan that was being created. The agent should obtain an appraisal on the property. If it is
possible, a credit report should be obtained on the borrower, on the existing note, etc. If a
licensee feels that they cannot perform such functions, referring to the N.A.R. Code of Ethics
may provide guidance.
Related provisions of the N.A.R. Code of Ethics and Standards of Practice
Article 11 of the Code of Ethics addresses what course of action Realtors should take when they
find themselves in unusual transactions.
“Realtors shall not undertake to provide specialized professional services
concerning a type of property or service that is outside their field of
competence unless they engage the assistance of one who is competent
on such types of property or service, or unless the facts are fully disclosed
to the client. Any persons engaged to provide such assistance shall be so
identified to the client and their contribution to the assignment should be
set forth.”
MISREPRESENTATIONS REGARDING CONDITION, SIZE, OR USE OF PROPERTY
It would be unethical conduct to knowingly make a false or misleading representation or
representing, without a reasonable basis for believing its truth;
1) the nature and/or condition of the interior or exterior features of a property
when soliciting an offer, or
2) the size of a parcel, square footage of improvements or the location of the
boundary lines of real property being offered for sale, lease or exchange, and
3) that the property can be used for certain purposes with the intent of inducing
the prospective buyer or lessee to acquire an interest in the real property.
Related provisions of the N.A.R. Code of Ethics and Standards of Practice
Article 2 of the N.A.R. Code of Ethics addresses the issue of disclosure. It also addresses the
issue of what licensees do not have to disclose, or should not disclose. Many licensees believe
that they have to disclose everything. However, by making some disclosures, a licensee could be
acting contrary to the intent of a specific law or be violating an ethical duty owed to another
party to a transaction. Article 2 states:
“Realtors shall avoid exaggeration, misrepresentation, or concealment of pertinent
facts relating to the property or the transaction. Realtors shall not, however, be
obligated to discover latent defects in the property, to advise on matters outside
the scope of their real estate license, or to disclose facts, which are confidential
under the scope of agency duties owed to their clients.”
Clearly, the Code of Ethics provides three areas where disclosure does not have to be made or
where disclosure should not take place:
1) Not obligated to discover latent defects in the property.
2) To advise on matters outside the scope of their real estate license.
3) Facts, which are confidential under the scope of agency duties, owed to their clients.
Latent defects can best be defined as hidden defects. If a buyer asks, “What is the condition of
the wiring inside the wall?” The real estate licensee cannot see inside the wall and cannot be
expected to make disclosure about that which is hidden.
Similarly, a real estate licensee should not make representations about matters, which are outside
the scope of their real estate license. Many buyers expect real estate licensees to know and tell
them where boundary lines are on the property. This is a matter that is appropriate for another
professional, a surveyor. Standard of Practice 2-1 clarifies this ethical provision:
“Realtors shall only be obligated to discover and disclose adverse factors
reasonably apparent to someone with expertise in those areas required by
their real estate licensing authority. Article 2 does not impose upon the
Realtors the obligation of expertise in other professional or technical disciplines.”
Finally, facts, which are confidential under the scope of agency duties owed to their clients,
should not be disclosed. Examples would be the price a seller is willing to accept below the
asking price, or the price a buyer would be willing to pay over an offering amount. These kinds
of facts should not be disclosed because they constitute confidential information.
Related Law
§2375 of the Civil Code provides that an agent is not obligated to reveal to either party any
confidential information obtained from the other party to the transaction.
§2379 of the Civil Code is even more specific in stating:
“A dual agent shall not disclose to the buyer that the seller is willing to sell
the property at a price less than the listing price, without the express
written consent of the seller. A dual agent shall not disclose to the seller
that the buyer is willing to pay a price greater than the offering price,
without the express written consent of the buyer.”
SECTION 2: DO NOT FAIL WHEN IT COMES TO THESE
FAILURE TO DISCLOSE KNOWN FACTS
It would constitute unethical conduct when acting in the capacity of an agent in a transaction for
the sale, lease or exchange of real property, to fail to disclose to a prospective purchaser or
lessee, facts known to the licensee materially affecting the value or desirability of the property,
when the licensee has reason to believe that such facts are not known to nor readily observable
by a prospective purchaser or lessee.
The language used in the above provision was first used in a 1963 California Appellate Court
case, Lingsch v Savage. It was later reflected in §2785 of the Administrative Code, commonly
called the Real Estate Commissioner’s Code of Ethics, which has been repealed. For years, both
the legal and the ethical standard to which real estate licensees were held was to disclose “facts
known to the licensee”.
Related Law
The standard changed on February 22, 1984, with the case of Easton v Strassburger. In Easton,
the judge stated that:
“A seller’s broker in a residential real estate transaction is under a duty to
disclose facts materially affecting the value or desirability of the property….
Which through reasonable diligence should be known to him.”
At the time of the decision, the reaction of the real estate industry was bewilderment. How could
real estate licensees be expected to disclose facts, which were not even known? Many real estate
licensees felt the judge’s decision was unfair and the standard to be fulfilled was too high. A
careful reading of the decision provides insight as to how the judge arrived at his decision to
elevate the obligation from disclosing “facts known to the licensee” to “facts which through
reasonable diligence should be known”. A basis for the judge’s decision was Article 9 of the
National Association of Realtors Code of Ethics. At the time Article 9 provided, in part, that a
Realtor has:
“An affirmative obligation to discover adverse factors that a reasonably
competent and diligent investigation would disclose.”
The judge went on to include in his decision an Interpretation of the National Association of
Realtors Code of Ethics, which N.A.R. provides in addition to Standards of Practice, to explain
the operation of it’s Code of Ethics. The judge took the following from the Interpretations of the
Code of Ethics, at p. 74:
“Shortly after Realtor A negotiated the sale of a home to Buyer B, a complaint came to
the Board charging Realtor A with failure to disclose a substantial fact concerning the
property. The charge was that the house was not connected to the city sanitary sewage
system, but had a septic tank, whereas the buyer claimed he had every reason to believe
the house was connected with the sewage line.
In a statement to the Board’s grievance committee, Buyer B agreed the subject was not
discussed during his various conversations with Realtor A about the house. However, he
pointed out that his own independent inquiries had revealed that the street on which the
house was located was ‘sewered’ and he had naturally assumed that every other house on
the street for several blocks in both directions were connected. He stated that Realtor A,
in not having disclosed the exceptional situation, has failed to disclose a pertinent fact.
Realtor A’s defense in a hearing before the Board’s Professional Standards Committee
was (1) that he did not know that this particular house was not connected with the sewer;
(2) that in advertising the house he had not represented it as being connected; (3) that at
no time, as buyer B conceded, had he orally stated that the house was connected; that the
fact under discussion was not a ‘pertinent fact’ within the meaning of the Code of Ethics.
The committee determined that the absence of the sewer connection was a substantial and
a pertinent fact in this transaction; that the absence of any mention to this fact in
advertising or oral representation made it no less pertinent; that the failure of previous
owners to connect with the available sewer line was within Realtor A’s obligation under
Article 9 of the code; that he was, therefore, in violation of Article 9.”
The judge apparently believed that the concept of a licensee not just disclosing that which he or
she knows but also having an obligation to discover that which is not known and to disclose,
should apply to all real estate licensees in California, not just members of the National
Association of Realtors. Subsequently, the Legislature of the state of California enacted §2079
and §1102 of the Civil Code. §2079 states:
“It is the duty of a real estate broker…to conduct a reasonably competent and diligent
visual inspection of the property offered for sale and to disclose to that prospective
purchaser all facts materially affecting the value or desirability of the property that
such an investigation would reveal…”
The code section attempts to limit the “inspection” to a “visual inspection”. Apparently
establishing a lesser standard than either that provided in Article 9 of the Code of Ethics and its
Interpretations, and the case of Easton v Strassburger. Can a real estate licensee determine if a
property is on sewer or septic with a “visual inspection”? A higher standard than the law would
be desirable for a licensee to adopt.
§2079 goes on to state that the licensee must disclose “all facts materially affecting the value or
desirability of the property that such an investigation would reveal…” What exactly constitutes a
“material fact” has never been clearly expressed, in objective terms, by the law. In a 1973 case a
judge stated:
“A fact is material if it is one which would be likely to affect the principal’s judgment…”
In a 1981 case, a judge restated the concept expressed in the earlier case but then went on to rely
on a more traditional rule:
“The test for determining materiality cannot be stated in the form of any definite rule, but
must depend on the circumstances of the transaction itself. Whether the fact not
disclosed is a material fact is for the jury to decide.”
It may be easier to determine what is not a material fact then what is.
Related Provisions of the N.A.R. Code of Ethics and Standards of Practice
Standard of Practice 2-5, addresses the issue of what does not constitute a material fact.
“Factors defined as “non-material” by law or regulation or which are
expressly referenced in law or regulation as not being subject to
disclosure, are considered not “pertinent” for purposes of Article 2.”
Related Law
A careful exploration of the law and regulations reveals several factors, which have been defined
or referenced as being “non-material”.
In 1990 the Attorney General of the state of California responded to the question, “Is a licensed
real estate agent required or permitted to disclose the location of a licensed care facility serving
six or fewer people to prospective buyers of residential property?” The Attorney General arrived
at the following conclusion:
“A licensed real estate agent is not required to disclose the location of a licensed
care facility serving six or fewer people to prospective buyers of residential
property. We conclude that the location of a licensed care facility is not a
material fact required to be disclosed under California law. Indeed,
volunteering information concerning the presence of a licensed care facility
could violate state and federal law prohibiting discrimination…”
Other areas where the law has addressed the issue of whether a fact is material is AIDS and death
occurring on property. These areas have both been dealt with in §1710.2 of the Civil Code,
which states:
“No cause of action arises against an owner of real property or his or her agent,
or any agent of a transferee of real property, for the failure to disclose to the
transferee the occurrence of an occupant’s death upon the real property or the
manner of death where the death has occurred more than three years prior to
the date the transferee offers to purchase the real property, or that an occupant
of that property was afflicted with Human T-Lymphotropic Virus Type
III/Lymphadenopahty-Associated Virus.”
The language of this code section can be interpreted to mean that no basis for a lawsuit exists for
failing to disclose to a buyer a death on the property so long as the death was three years prior to
the buyer making the offer and so long as the buyer does not ask. Additionally, no basis for a
lawsuit exists for failing to disclose that an occupant of the property had AIDS. While the
Legislature did not come right out and declare such facts to be “non-material” it did state:
“It is the intention of the Legislature to occupy the field of regulation of
disclosure related to deaths occurring upon real property and of AIDS in
situations affecting the transfer of real property…”
Real estate licensees are in an unfavorable position. On the one hand there is tremendous
pressure from buyers to disclose everything about property so that they can make good buying
decisions. On the other hand, some disclosures may violate legal and ethical obligations that
licensees owe to sellers. By making some disclosures, the price and marketability of the
property may be detrimentally affected. Real estate licensees can more easily travel this
dangerous path by continually increasing their legal and ethical knowledge.
FAILURE TO PRESENT WRITTEN OFFERS
It would constitute unethical conduct to willfully fail, when acting as a listing agent, to present
or cause to be presented to the owner of the property, any written offer to purchase, received
prior to the closing of a sale, unless expressly instructed by the owner not to present such an
offer, or unless the offer is patently frivolous.
Many real estate licensees believe that they must present all offers. There may be instances
when listing agents can refuse to present cooperating broker’s offers. First, they may refuse to
present offers when they have an instruction from the owner not to present offers. The second
instance may be when the listing broker finds the offer is patently frivolous.
What may constitute a patently frivolous offer is highly subjective. If a property has a fair
market value of $200,000 and is listed for $200,000, would an offer of $1 be considered patently
frivolous? Most listing brokers would say that it was, and would refuse to present the offer. It
should be noted that an agent for a seller has a general fiduciary duty to make a full disclosure of
all material facts. A cooperating broker calls a listing broker and indicates that he has a buyer
who wants to make a “verbal offer” on the listing. Most listing brokers would consider that offer
“patently frivolous” and tell the cooperating broker to either get the offer in writing or they
would not present it. But what if the asking price and market value of the property were
$200,000 and the seller was extremely motivated? The offer is $250,000, all cash to the seller,
with close of escrow within 24 hours, at a title company of the seller’s choice. Would that seller,
under those circumstances, consider that offer a material fact and want the offer presented?
Related Provisions of the N.A.R. Code of Ethics and Standards of Practice
Standard of Practice 1-6 of the N.A.R. Code of Ethics addresses the issue of presenting offers in
the following fashion:
“Realtors shall submit offers and counter-offers objectively and as quickly
as possible.”
Standard of Practice 1-7 of the N.A.R. Code of Ethics addresses the issue of when Realtors can
refrain from presenting offers:
“When acting as listing brokers, Realtors shall continue to submit to the seller/landlord
all offers and counter-offers until closing or execution of a lease, unless the seller/
landlord has waived this obligation in writing. Realtors shall not be obligated to
continue to market the property after an offer has been accepted by the seller/
landlord. Realtors shall recommend that sellers/landlords obtain the advice of
legal counsel prior to acceptance of a subsequent offer except where the
acceptance is contingent on the termination of the pre-existing purchase
contract or lease.
Some real estate licensees have perceived that once an offer is accepted that they do not have to
present additional offers. The N.A.R. Code of Ethics distinguishes between presenting offers,
which Realtors must continue to do until closing or unless the seller waives the obligation in
writing and continuing to market the property which obligation ends after an offer has been
accepted.
Standard of Practice 1-8 of the N.A.R. Code of Ethics addresses the Realtors ethical obligation to
buyers/tenants as well:
“Realtors acting as agents of buyers/tenants shall submit to buyers/tenants
all offers and counter-offers until acceptance but have no obligation to
continue to show properties to their clients after an offer has been accepted
unless otherwise agreed in writing. Realtors acting as agents of buyers/tenants
shall recommend that buyers/tenants obtain the advice of legal counsel if there
is a question as to whether a pre-existing contract has been terminated.”
The N.A.R. Code of Ethics raises the dilemma of what to do if, once an offer has been accepted,
a seller receives a better offer, or a buyer finds a property they would rather purchase. The Code
of Ethics encourages the Realtors to have the client seek legal counsel and avoid entering into an
unconditional contract. These are courses of action that are not required by the law. By
elevating the standard to an ethical standard, however, legal consequences may be avoided.
PRESENTING MULTIPLE OFFERS UNFAIRLY
It would constitute unethical conduct when acting as the listing agent, to present competing
written offers to purchase real property to the owner in such a manner as to induce the owner to
accept the offer which will provide the greatest compensation to the listing broker without
regard to the benefits, advantages and/or disadvantages to the owner.
Most real estate licensees have been involved in a multiple offer presentation. Some of those
licensees have come out of a multiple offer presentation feeling as though they were treated
unfairly. One reason can be that the listing agent, or someone in the listing agent’s office, had
one of the multiple offers. If the seller accepts the listing office’s offer, the other cooperating
brokers may feel that the listing agent slanted the presentation to get their offer accepted. One
way a listing broker can slant such a presentation is to tell the seller that if a cooperating broker’s
offer is accepted, the listing broker will have to charge a certain amount of compensation, say
6%, whereas if the listing broker’s offer is acceptable to the seller, the listing broker will be able
to cut the commission, to say 4%.
Related Provisions of the N.A.R. Code of Ethics and Standards of Practice
Standard of Practice 3-4, of the N.A.R. Code of Ethics, requires the following disclosure by
listing brokers to cooperating brokers in multiple offer situations:
“Realtors, acting as listing brokers, have an affirmative obligation to disclose
the existence of dual or variable rate commission arrangements, (i.e., listings
where one amount of commission is payable if the listing broker’s firm is the
procuring cause of sale/lease and a different amount of commission is payable
if the sale/lease results through the efforts of the seller/landlord or a cooperating
broker). The listing broker shall, as soon as practical, disclose the existence of
such arrangements to potential cooperating brokers and shall, in response to
inquiries from cooperating brokers, disclose the differential that would result
in a cooperative transaction or in a sale/lease that results through the efforts of
the seller/landlord. If the cooperating broker is a buyer/tenant representative,
the buyer/tenant representative must disclose such information to their client.”
FAILURE TO EXPLAIN CLOSE OF ESCROW AND OCCUPANCY DATES
It would constitute unethical conduct to fail to explain to the parties or prospective parties to a
real estate transaction for whom the licensee is acting as an agent, the meaning and probable
significance of a contingency in an offer or contract that the licensee knows or reasonably
believes may affect the closing date of the transaction, or the timing of the vacating of the
property by the seller or its occupancy by the buyer.
Probably next to the sales price of property, the next most important factor buyers and sellers is
when escrow is going to close, and when the seller has to move out and the buyer gets to move
in. If there are provisions in the sales contract that might affect the close of escrow, i.e., loan
funding, structural pest control repairs, particular care should be taken to fully explain these
clauses.
Related Law
§ 10177 (g) of the Business and Professions Code allows the Commissioner to suspend or revoke
the license of any real estate licensee who has:
“Demonstrated negligence or incompetence in performing any act for which
he or she is required to hold a license.”
Certainly, matters that can affect the close of escrow or occupancy in a real estate transaction are
within the professional responsibility of real estate licensees.
FAILURE TO DISCLOSE DIRECT/INDIRECT INTERESTS TO SELLERS
It would constitute unethical conduct to fail to disclose to the seller of real property in a
transaction in which the licensee is an agent for the seller, the nature and extent of any direct or
indirect interest that the licensee expects to acquire as a result of the sale. The prospective
purchase of the property by a person related to the licensee by blood or marriage, purchase by
an entity in which the licensee has an ownership interest, or purchase by any other person with
whom the licensee occupies a special relationship where there is a reasonable probability that
the licensee could be indirectly acquiring an interest in the property, shall be disclosed to the
seller.
Real estate licensees are aware of the kinds of direct interests that they do have to disclose. If the
buyer is the listing agent’s mother, that has to be disclosed. Obviously the listing agent is going
to protect and promote mom’s interests more than the client’s interests. The client must be put
on notice to deal at arms length with the agent and his mother in this transaction.
Even if the licensee only occupies a special relationship where there is a reasonable probability
that the licensee could be indirectly acquiring an interest shall be disclosed. This would be like
when an agent has worked with an investor client over a period of years and in many transactions
sells the investor client one of his listings. Who is the licensee going to be protecting and
promoting the interests of in the transaction? The seller, who represents one transaction, or the
investor client who the licensee anticipates having many additional transactions with in the
future. Should such an indirect interest be disclosed to the seller as well?
Related Law
§ 10176 (d) of the Business and Professions Code provides that the Commissioner may
temporarily suspend or permanently revoke a real estate license where a real estate licensee has
been guilty of:
“Acting for more than one party in a transaction without the knowledge
or consent of all parties thereto.”
Additionally, § 10177 (o) of the Business and Professions Code addresses the disclosure
necessary to buyers in a similar manner, making it a violation of the law to fail:
“To disclose to the buyer of real property in a transaction in which the
licensee is an agent for the buyer, the nature and extent of a licensee’s
direct or indirect ownership interest in that real property. The direct
or indirect ownership in the property by a person related to the licensee
by blood or marriage, by an entity in which the licensee has an ownership
interest, or by any other person with whom the licensee occupies a special
relationship shall be disclosed to the buyer.”
Related Provisions of the N.A.R. Code of Ethics and Standards of Practice
Article 4 of the N.A.R. Code of Ethics addresses the issue of direct interests in the following
manner:
“Realtors shall not acquire an interest in or buy or present offers from
themselves, any member of their immediate families, their firms or any
member thereof, or any entities in which they have any ownership interest,
any real property, without making their true position known to the owner or
the owner’s agent. In selling property they own, or in which they have any
interest, Realtors shall reveal their ownership or interest in writing to the
purchaser or the purchaser’s representative.”
Additionally, Article 5 of the N.A.R. Code of Ethics addresses the issue of indirect interests in
the following manner:
“Realtors shall not undertake to provide professional services concerning a
property or its value where they have a present or contemplated interest
unless such interest is specifically disclosed to all affected parties.”
FAILURE TO DISCLOSE INTEREST IN RELATED ENTITIES
It would constitute unethical conduct to fail to disclose to a principal for whom the licensee is
acting as an agent, any significant interest the licensee has in a particular entity when the
licensee recommends the use of the services or products of such an entity.
With the development of “full service” real estate companies, many firms now offer, in addition
to real estate brokerage services, such services as; escrow services, mortgage services, insurance
services. In one court case, a broker was found guilty of a violation of law, even though he did
disclose a financial interest in the affiliated company, because he conditioned the real estate
transaction on the use of that specific company.
REFUNDING DEPOSIT MONEY WITHOUT SELLER CONSENT
Unethical conduct would include, the refunding, by a licensee, when acting as an agent for
seller, all or part of an offeror’s purchase money deposit in a real estate sales transaction after
the seller has accepted the offer to purchase, unless the licensee has the express permission of
the seller to make the refund.
In one instance, a broker was held liable for returning a buyer’s deposit, without the seller’s
written consent, when the buyer did not approve a well inspection on a property being purchased.
In instances where the contract calls for approval of inspections, disapproval cannot be claimed
arbitrarily, unreasonably or capriciously. The standard of a reasonable person will be used to
determine whether approval should have been granted. Licensees are cautioned regarding
returning deposits to buyers in such circumstances.
SECTION 3: CODES TO DO BUSINESS BY
BUSINESS AND PROFESSIONS CODE SECTIONS
REFERENCED IN THE PRECEDING DISCUSSION OF ETHICS
The acts and omissions on the preceding pages, while providing examples of behaviors, which
would be considered unethical, might also constitute violations of Sections 10176 and 10177 of
the Business and Professions Code. While encouraging a higher standard than the law is
attained, to insure that compliance with the law is observed the text of § 10176 and § 10177 is
provided.
§ 10176 B. & P. Code. Investigations; conduct of business; grounds for suspension or
revocation
The commissioner may, upon his own motion, and shall, upon the verified complaint in writing
of any person, investigate the actions of any person engaged in the business or acting in the
capacity of a real estate licensee within this state, and he may temporarily suspend or
permanently revoke a real estate license at any time where the licensee, in performing or
attempting to perform any of the acts within the scope of this chapter, has been guilty of any of
the following:
(a) Making any substantial misrepresentation.
(b) Making any false promises of a character likely to influence, persuade or induce.
(c) A continued and flagrant course of misrepresentation or making of false promises
through real estate agents or salesmen.
(d) Acting for more than one party in a transaction without the knowledge or consent of
all parties thereto.
(e) Commingling with his own money or property, the money or other property of others
which is received and held by him.
(f) Claiming, demanding, or receiving a fee, compensation or commission under any
exclusive agreement authorizing or employing a licensee to perform any acts set forth
in Section 10131 for compensation or commission, where such agreement does not
contain a definite specified date of final and complete termination.
(g) The claiming or taking by a licensee of any secret or undisclosed amount of
compensation, commission or profit or the failure of a licensee to reveal to the
employer of such licensee, the full amount of such licensee’s compensation,
commission or profit under any agreement authorizing or employing such licensee to
do any acts for which a license is required under this chapter for compensation or
commission prior to or coincident with the signing of an agreement evidencing the
meeting of the minds of the contracting parties, regardless of the form of such
agreement, whether evidenced by documents in an escrow or by any other or different
procedure.
(h) The use by a licensee of any provision allowing the licensee an option to purchase in
an agreement authorizing or employing such licensee to sell, buy, or exchange real
estate or a business opportunity for compensation or commission, except when such
licensee, prior to or coincident with election to exercise such option to purchase,
reveals in writing to the employer the full amount of licensee’s profit and obtains the
written consent of the employer approving the amount of such profit.
(i) Any other conduct, whether of the same or a different character than specified in this
section, which constitutes fraud or dishonest dealing.
(j) Obtaining the signature of a prospective purchaser to an agreement which provides
that such prospective purchaser shall either transact the purchasing, leasing, renting
or exchanging of a business opportunity property through the broker obtaining such
signature, or pay a compensation to such broker if such property is purchased, leased,
rented or exchanged without the broker first having obtained the written authorization
of the owner of the property concerned, to offer such property for sale, lease,
exchange or rent.
§ 10177 B. & P. Grounds
The commissioner may suspend or revoke the license of any real estate licensee, or may deny the
issuance of a license to an applicant, who has done, or may suspend or revoke the license of, or
deny the issuance of a license to, a corporate applicant if an officer, director, or person owning or
controlling 10% or more of the corporation’s stock had done, any of the following:
(a) Procured, or attempted to procure, a real estate license or license renewal, for himself
or herself or any salesperson, by fraud, misrepresentation or deceit, or by making any
material misstatement of fact in an application for a real estate license, license
renewal or reinstatement.
(b) Entered a plea of guilty or nolo contendre to, or been found guilty of, or been
convicted of, a felony or a crime involving moral turpitude, and the time for appeal
has elapsed or the judgment of conviction has been affirmed on appeal, irrespective
of an order granting probation following that conviction, suspending the imposition
of sentence, or of a subsequent order under Section 1203.4 of the Penal Code
allowing that licensee to withdraw his or her plea of guilty and to enter a plea of not
guilty, or dismissing the accusation or information.
(c) Knowingly authorized, directed, connived at, or aided in, the publication,
advertisement, distribution, or circulation of any material false statement or
representation concerning his or her business, or any business opportunity or any land
or subdivision (as defined in Chapter 1 commencing with Section 11000 of Part 2)
offered for sale.
(d) Willfully disregarded or violated the Real Estate Law Part 1 (commencing with
section 10000) of Part 2 or the rules and regulations of the commissioner for the
administration and enforcement of the Real Estate Law and Chapter 1 (commencing
with section 11000) of Part 2.
(e) Willfully used the term “realtor” or any trade name or insignia of membership in any
real estate organization of which the licensee is not a member.
(f) Acted or conducted himself or herself in a manner which would have warranted the
denial of his or her application for a real estate license, or has either had a license
denied or a license issued by another agency of this state, another state, or the federal
government, revoked or suspended for acts which if done by a real estate licensee
would be grounds for the suspension or revocation of a California real estate license,
if the action of denial, revocation, or suspension by the other agency or entity was
taken only after giving the licensee or applicant fair notice of the charges, an
opportunity for a hearing, and other due process protections comparable to the
Administrative Procedure Act Chapter 3.5 (commencing with Section 11340),
Chapter 4 (commencing with Section 11370), and Chapter 5 (commencing with
section 11500) of Part 1 of Division 3 of Title 2 of the Government Code, and only
upon an express finding of a violation of law by the agency or entity.
(g) Demonstrated negligence or incompetence in performing any act for which he or she
is required to hold a license.
(h) As a broker licensee, failed to exercise reasonable supervision over the activities of
his or her salespersons, or, as the officer designated by a corporate broker licensee,
failed to exercise reasonable supervision and control of the activities of the
corporation for which a real estate license is required.
(i) Has used his or her employment by a governmental agency in a capacity giving
access to records, other than public records, in such a manner as to violate the
confidential nature of the records.
(j) Engaged in any other conduct, whether of the same or of a different character than
specified in this section, which constitutes fraud or dishonest dealing.
(k) Violated any of the terms, conditions, restrictions, and limitations contained in any
order granting a restricted license.
(l) Solicited or induced the sale, lease, or the listing for sale or lease, of residential
property on the ground, wholly or in part, of loss of value, increase in crime, or
decline of the quality of the schools due to the present or prospective entry into the
neighborhood of a person or persons of another race, color, religion, ancestry, or
national origin.
(m) Violated the Franchise Investment Law Division 5 (commencing with section 31000
of Title 4 of the Corporations Code) or regulations of the Commissioner of
Corporations pertaining thereto.
(n) Violated the Corporations Code or the regulations of the Commissioner of
Corporations relating to securities as specified in Section 25206 of the Corporations
Code.
(o) Failed to disclose to the buyer of real property in a transaction in which the licensee is
an agent for the buyer, the nature and extent of a licensee’s direct or indirect
ownership interest in that real property. The direct or indirect ownership in the
property by a person related to the licensee by blood or marriage, by an entity in
which the licensee has an ownership interest, or by any other person with whom the
licensee occupies a special relationship shall be disclosed to the buyer.
Conclusion
There is the law. There are ethics. Often these concepts are confused. The object of this course
has been to assist real estate licensees to gain clarity in what is meant in the real estate profession
by the word ethics.
One measure of consumer satisfaction, in any business, is repeat business. In an informal survey
of 100 real estate boards, regarding repeat business, it was reported that only 7% or less, of
sellers listed their property with the agents with whom they had bought the property.
By striving to attain ethical goals, while complying with the law, real estate licensees may very
well be developing the ability to increase the level of repeat business they experience, while
increasing the level of service they provide the public.