11.2: Part II- Ethics and the REALTOR® Code of Ethics

The term "ethics" refers to a standard of principles and moral behavior. A short definition would be "doing the right thing." Are ethics in real estate different from ethics in general? They are extensions of ethics in general that pertain to real estate transactions and relationships.

People face ethical dilemmas at one time or another in most occupations, and real estate is no exception. An ethical dilemma presents itself when a person is faced with two or more choices and must decide which one is the right (or best) course of action. For example, your client asks you to do something illegal, such as misrepresent material facts about a property. Although you have a fiduciary duty to “obey” your client, you also have an ethical obligation and a legal obligation to be honest. What do you do?

In real estate, the REALTORS® Code of Ethics is the “set of principles that members of the National Association of REALTORS® agree to follow. It defines proper behavior toward parties to a transaction, other licensees, and the general public.” (Plain Language Dictionary of Real Estate, 2007)

2023 CODE OF ETHICS AND STANDARDS OF PRACTICE

Adopted in 1913, NAR's Code of Ethics was one of the first codifications of ethical duties set forth by a business group. The Preamble of the 2023 Code indicates that REALTORS® have "a grave social responsibility and a patriotic duty" requiring them to maintain integrity and honor. From this foundation flow the Articles and Standards specified in the Code as they relate to clients, the public, and other REALTORS®. The Appendix of this text contains a copy of the full Code as amended and published in 2023.

https://www.nar.realtor/about-nar/go...code-of-ethics .

According to the REALTOR® Code of Ethics, the REALTOR® owes a duty of care to three groups of people: (1) clients and customers, (2) the public, and (3) other REALTORS®. For each group, the Code provides a number of Articles, and each Article is followed by the Standards of Practice that the REALTOR® agrees to follow.

As you read the following sections, notice how the Code of Ethics aligns with the legal requirements for fiduciary duty that we explored above. Fiduciary duty applies to many individuals and organizations. The REALTOR® Code of Ethics delineates the duties specifically as they apply to real estate professionals.

a. Duties to Clients and Customers (Articles 1 – 9)

Clients and customers refer to buyers, sellers, landlords, tenants, and any other client the agent represents. For this group, the Code provides nine Articles along with their related Standards of Practice. The first and main Article regarding clients and customers indicates that REALTORS® must protect and promote the interests of their client. They must treat everyone else honestly and fairly.

Among the key Articles related to clients and customers are those that require agents to avoid exaggeration, misrepresentation, or concealment of pertinent facts. If this sounds familiar, it's because these actions are illegal when related to advertising, and you read about them previously.

Agents must always work for the client's best interest, even when it may not be in the agent's own best interest. If an agent represents both the seller and the buyer in the same transaction, known as "dual agency," she must be sure to disclose this representation to both clients.

Importantly, REALTORS® are obliged to protect clients' and customers' confidential information.

For details about other Articles and Standards of Practice, refer to the complete Code of Ethics in the Appendix of this text.

b. Duties to the Public (Articles 10 – 14)

The first Article (Article 10) among those related to the duties to the public emphasizes anti-discrimination. Recall that discrimination is not only unethical, but also illegal, as discussed in the previous Module regarding Fair Housing. According to the Code of Ethics, agents shall not discriminate against protected classes, that is, anyone on the basis of race, color, religion, sex, disability, familial status, national origin, sexual orientation, or gender identity. See Article 10 and its Standards of Practice for more details.

Duties to the public also encompass honesty and truthfulness in advertising and marketing. This is especially important; you've seen this emphasized in various areas of law and ethics earlier. Why so important? Advertising and marketing are particularly susceptible to fraudulent and/or misleading information–they're an area of high visibility and communication with the public. And agents engage in advertising and marketing frequently. Agents must be extremely cautious in all advertising and marketing efforts.

Additional Articles regarding duties to the public stipulate that agents must not do anything that could be interpreted as unauthorized practice of law. In short, they need to take care to provide information rather than offer advice.

In this group of Articles, the ways to resolve disputes are also delineated. We'll address these shortly.

c. Duties to REALTORS® (Articles 15 – 17)

The third group to which REALTORS® have ethical duties is other REALTORS®. These Articles (15 through 17) and their Standards of Practice encourage healthy competition within the industry while promoting ethical conduct and professionalism.

Articles 15 through 17 of the REALTORS® Code of Ethics emphasize professionalism (Article 15), respect for other REALTORS®' exclusive relationships with clients (Article 16), and the importance of cooperation and collaboration with fellow REALTORS to serve the best interests of clients (Article 17). REALTORS® must make reasonable efforts to work cooperatively with other REALTORS® and facilitate transactions that serve the clients' needs.

REALTORS® are required to communicate with their fellow REALTORS® in a timely and professional manner, particularly in situations involving the presentation of offers, counteroffers, and cooperation in the best interests of the client. In the event of a contractual dispute, REALTORS® are expected to engage in mediation or submit the dispute to arbitration rather than engage in a lawsuit.

Practice Zone

Read this short scenario and answer the questions that follow it. Agent Sally is hosting an open house for one of her clients. Early in the afternoon, Mr. and Mrs. Lee stop by to see the property. They love it! Mr. and Mrs. Lee are already working with another agent, but they tell Sally they are disappointed that their agent didn't tell them about this property. "If your agent isn't doing the job for you," says Sally, "you should consider changing agents." The Lees are glad to hear this, and they tell Sally they will work with her from now on. Based on Article 16, which requires respect for exclusive relationships with clients established by other REALTORS®, what do you think Sally should have done? The original agent for Mr. and Mrs. Lee was Harry Santos. He learns that the Lees have switched agents, and he is not happy. He calls Sally's broker and complains. He says that the Lees’ contract with him has not expired yet! What do you think should happen now? Sally's broker decides to write an email to Harry to try to resolve the conflict. He suggests a few solutions. Write the email from Sally's broker to Harry.

Other Codes in the Real Estate Industry

In addition to the REALTOR® Code of Ethics, other codes of ethics are required by various real estate organizations. What? Are there different ethics for different people? Why not just have everyone follow one Code of Ethics? Because codes relate to specific behaviors that occur or can occur within the context or in situations that are specific to a given occupation or organization. Some actions taken by an agent related to selling a property, for example, might never happen in the mortgage industry. Two important codes of ethics found in the real estate industry are related to appraisal and lending:

• Appraisers must abide by Appraisal Institute's "Code of Professional Ethics" from the Uniform Standards of Professional Appraisal Practice (USPAP).
• Mortgage lenders, mortgage brokers, mortgage bankers, and mortgage loan officers will adhere to their respective organizations' codes of ethics.

A brokerage firm may have its own set of ethics or professional standards in addition to the REALTORS® Code of Ethics. Indeed, some real estate professionals develop their own code of ethics to share with clients so they know what to expect. Sharing the REALTOR® Code of Ethics with clients is always helpful in establishing expectations.

Along the same lines, one resource we highly recommend is Bob Hunt's Real Estate the Ethical Way, which brings ethical behavior to life with current actual situations and dilemmas that occur repeatedly in the daily life of real estate agents. His analyses provide thoughtful and thought-provoking options for resolutions, as well as a sometimes much-needed dose of humor.

Violations, Disputes, and Resolutions

What happens when a REALTOR® violates the law? As with any other person who violates a law, the matter is handled by the district attorney.

What happens when a REALTOR® engages in unethical behavior? Usually, the local Association of REALTOR® convenes a hearing by a committee, often called the Professional Standards Committee, to determine whether a violation has occurred, the seriousness of the violation, and an appropriate outcome.

Disciplinary consequences applied by a REALTOR® association against a member for violating the REALTOR® Code of Ethics could include the following:

• a monetary ($$) fine paid to the organization
• requirement of a professional development education course
• suspension or revocation of membership in the organization
• publication of the member's name on a list of transgressors ("wall of shame")

Dispute Resolution

From time to time, agents disagree about a commission, believe that another agent has engaged in unethical practices that may have harmed their client, or even report that another agent has taken an action that is illegal. How do these disputes and situations get resolved?

The first step is for one agent to attempt to communicate with the other so they can try to resolve the dispute between themselves. If the communication fails or no resolution is reached, the broker has several options to pursue.

If the issue involves a commission dispute, the broker could request an alternative dispute resolution (ADR: see below) such as mediation or arbitration before filing a lawsuit in civil court.

If the issue involves a license violation, the broker could report the offending agent's (called the cooperating agent) broker (called the "cooperating broker") to the California Department of Real Estate (DRE).

If the issue involves a criminal matter, the broker should report the cooperating agent's broker to the District Attorney.

Commission Disputes. What steps should a real estate agent follow in the event of a commission dispute with another agent? He or she should consider the following steps, bearing in mind that these may vary depending on local laws, brokerage policies and culture, and the nature of the dispute.

1. Review the Agreements. Begin by carefully reviewing all written agreements that are in place regarding the commission. This may include listing agreements, buyer-broker agreements, or any other relevant documents. Pay attention to the terms, conditions, and commission splits specified in these agreements.

2. Consult Brokerage Policies. Consult the respective brokerages' policies and procedures for handling commission disputes. Brokerages often have internal procedures to address such issues and may provide guidance on resolution.

3. Document Everything. Keep thorough records of all communications, agreements, and any supporting documentation related to the transaction. These can serve as evidence in the event that the dispute later escalates.

4. Open Communication and Negotiation. Initiate a respectful and open line of communication with the other agent involved in the dispute. Share concerns and reasons for the dispute while maintaining professionalism and courtesy. Such open conversation can lead to a compromise that is a win for both parties. Furthermore, this approach does not involve a cost for either agent.

5. Seek Mediation. If direct communication does not resolve the issue, consider involving a neutral third party, such as a managing broker or a mediator, to facilitate a discussion and find a mutually agreeable solution. Mediation can often lead to a compromise that both parties can accept. This non-judicial (non-court) approach is somewhat more formal than a conversation, and the parties commit to being bound by whatever compromise is reached. A professional mediator may charge a fee.

6. Seek Legal Counsel. If the dispute remains unresolved and the commissions are substantial, seek legal counsel. An attorney experienced in real estate matters can provide guidance on the legal aspects of the dispute and help clarify the parties' rights and obligations.

7. Seek Arbitration. If communication and mediation have not resolved the dispute, consider arbitration; taking the matter to a professional arbitration service to have a decision made is binding to both parties. This non-judicial proceeding is similar to a court hearing; a professional arbitrator presides over the hearing and makes the final decision. The outcome may be considered a win or a loss for either or both parties, depending on the decision. Note that arbitration services can be costly.

8. Litigation. As a last resort, if all other methods fail to resolve the dispute, consider litigation, that is, file a civil lawsuit to take the matter to a court of law to have a legal decision made by a judge. Filing a civil lawsuit leads to a judicial (meaning by a judge) resolution, which will have permanent public records. Litigation is typically expensive and lengthy (months or years) and is frequently viewed as a loss for both parties due to court costs and legal fees.

Throughout the resolution process, regardless of the approach, both agents must take care to adhere to the REALTORS® Code of Ethics. Also, they must give their clients' interests priority, ensuring that the dispute process does not have a negative impact on them or the transaction.

REALTORS®

Most local associations of REALTORS® have a Professional Standards Committee, called an Ethics Committee in some places, that is charged with investigating and evaluating complaints against their members. The process followed when a complaint is filed against a member consists of the following:

• Step 1: Someone (an agent, client, or member of the public) files a charge (complaint) against a REALTOR® member for allegedly violating the Code of Ethics (COE) or the CRMLS Rules and Policies.
• Step 2: The complaint with alleged violation is reviewed and researched by the Grievance Committee members. The grievance committee makes recommendations to forward to the Professional Standards Committee for hearing. The grievance committee can remove or add violations to the complaint before forwarding to the Professional Standards for hearing.
• Step 3: If the complaint meets the standards required for a disciplinary hearing, then the hearing is scheduled.
• Step 4: A hearing is conducted by the Professional Standards Committee, and the complainant and respondent bring evidence to support their case.
• Step 5: The complainant and respondent will have the opportunity to present their evidence at the Professional Standards (mediation or arbitration) hearing, including bringing witnesses.
• Step 6: If the Professional Standards hearing panel finds the respondent in violation of the COE, it can apply disciplinary actions to the member in the form of a warning, reprimand (published), fine (published), required education, suspensions or expulsion (published) from the association and/or CRMLS.

Practice Zone

Answer the following: The first step in resolving a commission dispute is always for the agents to try to resolve it themselves. Why? Why do some disputes go to the district attorney and others go to a Professional Standards Committee? Why are some unethical actions also illegal and other unethical actions are not?