Whether you are a Realtor or a real estate agent, to prevent lawsuits follow Realtor ethics codes. Here’s why.

Too Many Lawsuits: Real estate agents are often sued for breach of their duty to act in the best interests of their clients.

Lack of Trust: A few years ago, Choice Home Warranty conducted a survey that revealed, “67.5% of Americans don’t trust real estate agents”.

Reduce your risks and exposure to lawsuits by understanding and following the Code of Ethics and Standards of Practice of the National Association of REALTORs® (NAR).

Even if you are a real estate agent who is not a Realtor, this blog post will help you to limit legal exposure. Keep reading to avoid getting sued by clients.

 

Real Estate Code of Ethics History

 

In 1900, U.S. real estate brokerages began and eventually resulted in “dubious practices of home brokerage”. To clean up and organize the real estate profession brokers created the National Association of Real Estate Exchanges in 1908.

The original Realtors Association decided to end dubious practices by declaring:

“The history of the real estate business included rampant land speculation, exploitation, and disorder. It was the era of the fraudulent subdivision, the fake city addition, the multiple “first” mortgage, the “net” listing, and a myriad of other “get rich quick” schemes. It was the era of “caveat emptor” and the Robber Barons.”

In 1913 the original Code of Ethics was adopted to establish principles of competency and honesty when Realtors provided professional services to their clients. It also set up a system to settle disputes between members with their national and local Board of Realtors instead of in a judicial court.

The original 1913 Ethics Code declared:

“The real estate agent should be absolutely honest, truthful, faithful, and efficient. His client is entitled to the best services, loyalty, confidence, and fidelity.”

Even the last revision in 2021 maintains the same principles with its 17 articles called “Standards of Practice”.

Follow Realtor Code of Ethics to Prevent Lawsuits

 

In order to prevent lawsuits by following the Realtor ethics codes, you must understand them.

We will focus on Articles 1 – 13 because the last four articles only deal with the Board of Realtors® proceedings and duties to other Realtors®.

 

Articles 1 – 9    Duties to Clients and Customers

 

The first nine articles prevent lawsuits by following Realtor ethics codes.

 

Article 1 – Protect the client’s best interests while being honest to all parties.

“Protect and promote the interests of their client and honesty to all parties”.

According to its Standard of Practice 1-2, the “client” is a person or entity that the Realtor has an “agency or legally recognized non-agency relationship”.

The Code of Ethics lists 31 “Case Interpretations of Article 1”. They enforce rules designed to protect the best interests of Realtors’ clients.

 

Article 2 – Requires “honest communications” about a seller’s property.

Avoiding concealment of pertinent facts, exaggeration, and misrepresentation. Also, not revealing confidential facts.

View “Case Interpretations of Article 2”.

 

Article 3 – Obligates Realtors to cooperate with each other.

However, NAR makes this exception, “except when cooperation is not in the client’s best interest.”

Standard of Practice 3-10 requires the listing agent to share property information and access to other members “when it is in the best interests of the client.” Also, cooperation with other real estate professionals to advance the client’s best interests.

NAR has 10 Case Interpretations of Article 3.

 

Article 4 – Realtors must disclose any personal interest in a property.

Prohibits Realtors from “acquiring an interest, purchasing, or presenting offers” for his or her self or family members. It also includes the brokerage’s members and families or controlled legal entities without prior written disclosure to the property’s owner (or agent). Basically, make your position or interest in a transaction known when buying or selling.

NAR has six Case Interpretations of Article 4.

 

Article 5 – Requires prior disclosure of the Realtor’s current or “contemplated” interest.

This must be done before providing professional services for a property or its value to all parties.

View NAR’s Case Interpretations of Article 5.

 

Article 6 – Avoid side deals without the client’s informed consent.

Prohibits acceptance of any commission, profits, or rebate from expenditures made for the client without prior knowledge and consent.

This includes financial benefits and referral fees from real estate services or products providers to the client.

View NAR’s six Case Interpretations of Article 6 which include homeowner’s insurance, mortgage financing, title insurance, and warranty programs.

 

Article 7 – Get the client’s approval before accepting compensation from other parties.

Requires the client’s informed approval before accepting compensation from more than one party in a transaction.

Case Interpretation of Article 7 involved undisclosed dual agency.

 

Article 8 – Realtor brokers must maintain a separate trust account for the client’s funds.

Case Interpretations of Article 8 include examples when brokers failed to place a deposit into a separate escrow account.

 

Article 9 – Prepare understandable written contracts containing all obligations.

All real estate transactions must be written, contain all obligations of the parties, and be understandable.

Realtors must explain all contract terms to the parties before they sign. Each party must receive a copy of the agreements after signing. View “Case Interpretations of Article 9”.

 

Articles 10 – 13   Duties to the Public

 

Articles 10 – 13 prevent lawsuits from non-clients by following Realtor ethics codes.

 

Article 10 – Provide equal services to all clients and customers.

Sets up interaction procedures with the public to avoid discrimination. View “Case Interpretations of Article 10”.

 

Article 11 – Realtors must be competent and knowledgeable in their areas of practice.

Requires Realtors to conform to standards of practice and competency with their clients. This includes, “not providing specialized professional services outside their field of competence including opinions of real property value or price.” View Case Interpretations of Article 11.

 

Article 12 – Requiring truthfulness and honesty with all real estate communications.

This includes communicating with clients and presenting a true picture when marketing and advertising to the public.  View Case Interpretations of Article 12.

 

Article 13 – Prohibits Realtors from engaging in the unauthorized practice of law.

View Case Interpretations of Article 13.

 

Realtor’s Fiduciary Duty to Clients

 

Besides NARs 13 articles for standards of practice, the courts and state licensing laws impose a fiduciary duty towards clients.

Whether a Realtor and a real estate agent represent a buyer or a seller the law imposes certain “Fiduciary Duties”. These include:

• Loyalty;
• Obedience;
• Reasonable care;
• Accounting of all funds and documents in a transaction;
• Disclosure of all material facts; and
• Confidentiality by not disclosing a client’s business, motivations, financial, or personal affairs.

In addition, Realtors and real estate agents must know the different types of real estate and agency representations. These include: 

• Buyer representation: When the Realtor or real estate agent represents the buyer and assists with finding properties for the buyer;
• Seller representation: When the Realtor or real estate agent represents the seller as the listing agent or works with the listing agent; and
• Dual agency: This is a controversial, but viable relationship when the Realtor or real estate agent represents both the buyer and the seller. Potential conflicts exist regarding confidentiality and protecting the client’s best interests. I wrote an article about this for a real estate licensing school titled, “Dual Agency: A Slippery Slope”. 

 

Big Block Realty Blog Posts about Ethics

 

We try to educate our Realtors and all real estate agents about real estate ethics. Some of our blog posts include:

• “Advantages for Realtors working with a 100% Commission Real Estate Brokerage”; and
• “Is a “Realtor®” Better Than a “Real Estate Agent”?”;

 

Prevent Lawsuits Follow Realtor Ethics Codes – Conclusion

 

Now that you learned how about understanding the Realtor Ethics Code, let’s summarize all 13 NARS standards of practice articles:

1. Protect the best interests of the client while being honest to all parties;
2. Don’t misrepresent, exaggerate, or hide facts about a seller’s property;
3. Realtors must cooperate with each other unless it’s not in the client’s best interests;
4. Disclose any personal interest in a property;
5. Give prior disclosure of the Realtor’s current or “contemplated” interest in a transaction before providing services;
6. Avoid side deals without the client’s informed consent;
7. Get client’s informed approval before accepting compensation from more than one party in a transaction;
8. Brokers must maintain a separate trust account for the client’s funds;
9. Real estate transactions must be written, contain all obligations of the parties, and be understandable;
10. Provide equal services (no discrimination) to all clients and customers;
11. Realtors must be competent and knowledgeable in their practice areas;
12. No false or misleading advertising; and
13. Avoid engaging in the unauthorized practice of law. 

 

Want to Become a San Diego 100% Commission Realtor?

 

Big Block Realty not only teaches you how to be an ethical real estate agent. We offer our San Diego Realtors a variety of free educational courses and informative blog posts. That’s because we believe educated, informed, and up-to-date Realtors limit their exposure to lawsuits while gaining public trust. 

Contact us to learn about our 100% Commission Plans with no hidden fees.

We also offer Free:

• Training Courses;
• Broker/Attorney Support; and
• Agent Concierge Services.

 

 

Steven Rich, MBA – Guest Blogger

 

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