Business Ethics Practices Codes Conduct

 Business Ethics and Practices
• Ethics is a set of principles or values by which an
individual guides his or her own behavior and judges
that of others.
• For many real estate licensees, the need to make a living
can get in the way of doing what is right. Therefore, it
may be need rather than greed.
• Professional Codes of Conduct
o A trade association is a voluntary nonprofit organization of
independent and competing business units engaged in the
same industry or trade, formed to help solve industry
problems, promote progress, and enhance service.
o Members of NAR must follow the NAR Code of Ethics, which
was created to protect and promote private ownership of
real property, establish and promulgate high professional
standards of education and behavior, and foster respect for
real estate professionals.

 Business Ethics and Practices (continued)
• Antitrust and Unfair Business Practices
o The real estate brokerage industry contains a certain
level of competitiveness.
o Federal and state anti-trust laws prohibit unwarranted
restraints on free and open competition.
o Unfair Competition (Antitrust) Laws
 Federal and state anti-trust laws prohibit unwarranted
restraints on free and open competition.
 Antitrust violations are not just ways of doing business–
they are serious crimes for which the penalties are severe.

• Federal Antitrust Laws
o Federal antitrust laws are created to protect and preserve
business competition.
o The U.S. Congress passed the Sherman Antitrust Act of 1890.
 The act prohibits collaboration between companies and individuals,
when the collaboration has the affect of restraining trade.
 In 1914, the Clayton Antitrust Act was enacted to supplement
the Sherman Antitrust Act.
 Price fixing is the collaboration or agreement of one or more persons
to set a fixed price for goods or services, thereby removing the
ability of a free market to influence prices.
 Boycotting is the deliberate exclusion of a particular business or
group from the benefits of competition and inclusion.
 Allocation of customers occurs when two or more persons or
businesses divide their markets and refuse to compete with each
other.

• State Antitrust Laws
o All 50 states now have some type of antitrust laws,
such as the California Unfair Competition Law, Florida
Antitrust Law, Texas Fair Enterprise & Antitrust Act of
1983, and the Virginia Antitrust Act.
o Each state’s Attorney General enforces the antitrust
laws.
o Civil penalties are often as great as $1,000,000 for
corporations and $100,000 for individuals.

• Unfair Business Practices
o Federal Trade Commission
 The FTC Act’s Three Tests of Unfair Business Practices
• The practice causes a substantial consumer injury.
• The harm of the injury outweighs a countervailing benefit.
• The consumer could not reasonably avoid the injury.
o State Business Practices Laws
 Each state has its own respective laws that address ethical
practices during the operation of a business, whether it is
a sole proprietor or a large corporation.

 Antidiscrimination Laws
• Fair Housing
o Federal Fair Housing Laws
 The federal Fair Housing Act provides protection against the
discriminatory housing practices if they are based on race, sex,
religion, color, handicap, national origin, or familial status.
 Familial status is defined as having at least one member of the family
who is less than 18 years of age or the presence of a pregnant
woman.
 Prohibited Practices
• Redlining is the practice of designating certain neighborhoods as areas
where loans will not be made or at least will not be made to members
of certain groups.
• Blockbusting is a tactic used by some real estate brokers to induce
panic selling by making property owners believe that the character of a
neighborhood is likely to change because members of a minority group
have acquired one or two properties.
• Steering is the practice of directing members of certain racial or ethnic
groups to certain neighborhoods and directing members of other
groups to different neighborhoods.

 Antidiscrimination Laws (continued)
• Federal Fair Housing Laws
o Advertising Guidelines
 The Fair Housing Act also made it illegal for
advertisements of housing offered for sale or rental to
show preference or discrimination based on race, color,
religion, or national origin.
 The Fair Housing Act requires businesses, such as real
estate brokers and real estate lenders, to display the Equal
Housing Opportunity Poster that depicts the equal
housing logo.

• State Fair Housing Laws
o State laws possess the authority to investigate any complaints that are
in violation of the state fair housing laws, and then file an action on
behalf of the individual and pursue compensation from the
discriminating party.
• Practicing Fair Housing
o Although you and your sales associates are not violating the law or
committing discriminatory conduct, you may confront prospective
clients or buyers who are not so conscientious.
o Be aware that housing advocacy organizations and government agencies
occasionally employ testers to inquire with a brokerage about buying or
renting property.
o The best way to avoid failing such a test, of course, is to treat all
applicants alike at all times, regardless of their race, religion, ancestry,
or other protected characteristics.
o Your company Policy and Procedures Manual should present a
consistent approach to greeting people, showing homes, qualifying
prospects, obtaining listings, conducting open houses, keeping records,
and following up with prospects.

• Americans with Disabilities Act
o Congress passed the Americans with Disabilities Act of 1990
(ADA) to provide a clear, enforceable, and comprehensive
national mandate for the elimination of discrimination
against individuals with disabilities.
o A public accommodation is a private entity that owns,
operates, leases, or leases to a place designed to provide
products or services to the public.
o Readily achievable means that something is “easily
accomplishable and able to be carried out without much
difficulty or expense.”
o If necessary, a broker-owner must make reasonable
modifications to the premises to ensure that people with
disabilities have access to the services of the brokerage
business.

 Best Practices of Brokerage Firms
• Overview of Agency
o Terminology
 Agency is a legal relationship created when a broker (agent)
purposely or accidentally is given authority to act for or in
place of another person (principal) when dealing with third
parties (customers).
 In real estate, the principal is the client and could be a seller,
buyer, landlord, or tenant.
 If a principal (client) authorizes an agent (broker) to act on
his or her behalf when dealing with third parties (customer),
this creates a fiduciary relationship.
 A fiduciary relationship implies a position of trust and
confidence.
 Agents represent clients.
 A customer is a person who may be affected by the terms of
an agreement but who is not a part of the agreement.

 Best Practices of Brokerage Firms (continued)
o Agent’s Authority: the scope of authority delegated to the agent
by the principal may vary greatly
 Special Agency: relationship in which a principal delegates limited
tasks or specific duties to an agent under his or her employ
• A special agent is sometimes referred to as a limited agent because this
is the most restricted agency relationship.
• A special agent is a person employed to perform a particular task or
transaction for a specified amount of time.
 General Agency: relationship in which a principal delegates ongoing
tasks or duties to an agent under his or her employ
• A general agent is authorized by a principal to perform all tasks
associated with the continued operation of a particular project.
• A salesperson (also called sales associate or associate licensee) is a real
estate licensee whose license is held by an employing (sponsoring)
active licensed broker.

o Creating Agency Relationships
 When a person hires another to act on his or her behalf, an
agency relationship is created.
 Agreement. An agency relationship may be created by
agreement with or without a written contract.
 A listing agreement is a written contract by which a principal
(or seller) employs a broker to sell real estate.
 Ratification of an agency relationship is created by approving
acts after performance. Ratification means acceptance of an
act already performed.
 An agency relationship can be created by estoppel. Estoppel
is a legal bar that prevents a person from asserting facts or
rights that are not consistent with what was implied by the
person’s previous behavior.

o Terminating Agency Relationships
 An agency relationship can be terminated by the actions of the
parties to the agency or by operation of law.
 Full Performance. Once the property is sold and closed, the agency
relationship with the owner (or the buyer) terminates.
 Expiration of its Term. The agency terminates when the listing or
buyer representation agreement ends. Every employment agreement
must have a definite termination date.
 Mutual Agreement. If two parties agree to make a contract, both can
agree to terminate it.
 Revocation. The client may unilaterally revoke the listing or buyer
representation agreement and fire the broker.
 Renunciation. The broker may unilaterally renounce the listing or
buyer representation agreement and fire the client.
 Operation of Law. Incapacity or death of either the client or the
broker terminates an agency relationship because agency is a
contract for personal services.

• Types of Brokerage Relationships
o Agency Relationships
 Seller’s Agent: broker who obtains a listing from a seller
to act as an agent for compensation
 Buyer’s Agent: broker hired by the buyer to represent his
interests in locating a certain kind of real property
 Agent’s Fiduciary Obligations
• When the broker is an agent, he or she has specific
fiduciary duties and responsibilities to his or her client and
an obligation to act fairly and honestly with customers.
These duties and obligations can easily be remembered by
using the mnemonic OLD CAR.
o Obedience, Loyalty, Disclosure, Confidentiality,
Accounting, Reasonable Care

o Agency Relationships
 Agent’s Fiduciary Obligations
• OLD CAR
o Obedience is the willingness to follow the orders of others.
o Loyalty refers to the duty of a licensee to his or her client’s
best interests first.
o Disclosure refers to any statement of fact that is required by
law.
o Confidentiality refers to discretion in holding privileged
information.
o Accounting refers to the systematic recording of monies in a
transaction and giving accurate reports to the owner(s) of the
money.
o Reasonable care, also known as due care or diligence, refers
to the amount of care that an average, rational person would
take under the same or similar circumstances.

o Limited Agency Relationships
 With limited agency, the full range of agency duties cannot
be delivered to both parties.
 Dual Agency: exists if one broker represents both the
buyer/tenant and seller/landlord in the same real estate
transaction
 Disclosed Dual Agency: dual agency with the informed
written consent of the parties involved
 Intermediary Brokerage
• Intermediary was created to provide brokers with a way to
represent both parties to a transaction and avoid the
numerous pitfalls of dual agency.

o Non-Agency Relationships
 Some states allow a non-agency relationship with customers.
 The non-agency relationships are called recognized statutory
transaction brokers or facilitators and usually have no
fiduciary duties.
 The broker and sales associates can assist either
buyer/tenant or seller/landlord in the performance of
administrative acts and must disclose material facts.
 Administrative acts include showing property, preparing
offers or agreements and conveying those offers or
agreements to the buyer/tenant or seller/landlord and
providing information and assistance concerning professional
services not related to the real estate brokerage services.

• Disclosing Brokerage Relationships
o Virtually every state has passed legislation requiring
real estate licensees to disclose whom they represent
in each transaction.
o Some state laws allow verbal disclosure, while others
require special written disclosure forms to be signed
by all parties outlining the duties and obligations.
o Be sure to go to the state website to determine which
agency or brokerage representation disclosures are
required.

 Prospecting Laws
• Prospecting is the process of identifying potential
customers.
• The majority of sales associates prospect by cold calling
or sending text through mailings, faxes, or emails.
• Do Not Call Laws
o In 1991, Congress passed the Telephone Consumer
Protection Act (TCPA).
o In 2003, the FCC established, together with the Federal
Trade Commission (FTC), a national Do Not Call Registry.
o If a telephone number is on the national Do Not Call Registry
(DNC) list, you may not make an unsolicited telephone call to
that number.
o The fines for violations range from $500 up to $11,000.

 Prospecting Laws (continued)
o Do Not Call Rules
 Real estate licensees may make calls between 8:00 AM
and 9:00 PM.
 Licensees must identify themselves before making the
solicitation, must identify that the call is a solicitation, and
disclose all material information related to the solicited
service.
 Licensees may not use caller ID blocking.
 Telemarketers must scrub their contact lists against the
national Do Not Call registry every month.

o Company Do Not Call Procedures
 A written policy for maintaining a Do Not Call list must be
available upon demand.
 Personnel involved in any aspect of telemarketing must be
trained on the existence and use of the Do Not Call list.
 Requests by called parties not to be called must be recorded
at the time of the request and available upon demand for
disclosure. Requests must be honored for five years from the
time the request is made.
 Anyone making a call for telemarketing purposes must
identify the name of the caller, the name of the person/entity
on whose behalf the call is being made, and the toll-free
telephone number or address at which the person/entity may
be contacted.

• Do Not Fax Laws
o The Telephone Consumer Protection Act of 1991 (TCPA) created the
rules and regulations regarding unsolicited faxes. The TCPA prohibits
the sending of faxes containing unsolicited advertisements.
o Unsolicited advertisements are defined as any material advertising the
commercial availability or quality of any property, goods, or services
that is transmitted to any person without that person’s prior express
invitation or permission.
o Summary of the TCPA Rules
 Sender must have an established business relationship with the recipient
or written consent from the recipient prior to sending unsolicited
advertising faxes.
 Sender must have voluntarily received recipient’s fax number.
 Sender must provide the recipient with the right to opt-out of receiving
future unsolicited advertising faxes.
 Sender must honor opt-outs received from recipients within 30 days of
receipt.

• Anti-SPAM Laws
o The CAN-SPAM Act of 2003 (Controlling the Assault of Non-
Solicited Pornography and Marketing Act) establishes
requirements for those who send commercial email.
o Emails sent as part of an ongoing commercial transaction, called
transactional email messages, are excluded from the Act.
o Types of Transactional Email Messages
 Facilitating or confirming an existing commercial transaction
 Giving notice about product updates or upgrades
 Providing notice about certain changes in a subscription,
membership, account, or loan
 Providing warranty information, product recall information, or safety
or security information with respect to a commercial product or
service used or purchased by the recipient
 Providing information directly related to an employment relationship
in which the recipient is currently involved

• Anti-SPAM Laws
o Items Required in a Commercial Email Message
 A legitimate return email and a physical postal address
 A clear and conspicuous notice of the recipient’s
opportunity to opt-out or decline to receive any future
messages
 Opt out mechanism active for at least 30 days after the
transmission of the message
 Clear and conspicuous notice that the message is an
advertisement or solicitation

 Complete Contracts Carefully
• Be sure to review all contracts for accuracy before accepting and
signing a contract.
• Additionally, your sales associates must never make changes to
contracts.
• Only the principals to the contract can amend or change a
contract.
• In which case, an amendment or addendum needs to be presented
and agreed upon by both parties in the transaction.
 Disclosures
• The purpose of disclosures is to ensure that the consumer, who is
probably making the largest and most important investment of his
or her lifetime, is making an informed decision.
• Disclosures Required in Brokerage Relationships
o The first disclosure will most likely be the brokerage representation
disclosure, letting the parties know their respective roles in the
brokerage relationship.

 Disclosures (continued)
• Disclosures Required in a Real Estate Transfer
o Seller’s Statement of Condition
 Many states require sellers to disclose the condition of the
property (1 to 4 residential units) they are selling prior to
transfer.
 Even if a state does not require a written property
disclosure, a seller may not sell a residential property “as
is” without a complete disclosure of the defect.
 An “as is” clause indicates that the seller will not be
responsible for the cost of repairing any defect—not that
there are no defects on the property.
 Nearly every conceivable condition that may be a material
fact to the sale is covered—in other words, anything
deemed to make the property desirable or salable.

o Natural Hazard Disclosures
 Hazards That May Require Disclosure
• Special flood hazard areas designated by FEMA
o Flood hazard boundary maps show flood zones that are prone to flooding within communities.
o Flood hazard boundary maps are also used in flood plain management and for flood insurance
purposes.
o These maps, developed by the Federal Emergency Management Agency (FEMA) in conjunction
with communities participating in the National Flood Insurance Program (NFIP), show areas
within a 100-year flood boundary, termed special flood hazard areas.
o A special flood hazard area (SFHA) is an area that has a 1% chance of being flooded in any
year.
o A coastal high hazard area is an area that experiences or is predicted to experience
destruction or severe damage from storm surge, waves, erosion, or other manifestations of
rapidly moving or storm-driven water.
o Homes built in the SFHA must have the first floor above the base flood elevation.
o The base flood elevation means the water surface elevation associated with the base flood.
o The National Flood Insurance Act states that federally regulated lenders are required to
compel borrowers to purchase flood insurance in certain designated areas.

o Natural Hazard Disclosures
 Hazards That May Require Disclosure
• Potential flooding in the event of a dam failure
• Forest fire risks and hazards
• Earthquake fault zones
• Sinkholes
o Environmental Hazard Disclosures
 Hazardous Substances That May Be Found on a Property
• Asbestos is a mineral fiber, which has been found to cause
lung and stomach cancer.
• Radon is a colorless gas known to cause cancer.
• Lead, a highly toxic metal, was used for years in products
found in and around homes.
• Formaldehyde is a chemical organic compound found in
building materials, which may be a carcinogen.

o Environmental Hazard Disclosures
 Hazardous Substances That May Be Found on a Property
• Mold and mildew are microscopic organisms found outdoors and
indoors.
• Hazardous waste includes materials—chemicals, explosives,
radioactive, biological—whose disposal is regulated by the
Environmental Protection Agency (EPA).
• Methamphetamine (meth) is a potent synthetic drug that is a stimulant
of the central nervous system.
• Some states require a disclosure if discharges of oil may have affected
the property.
• When land is subdivided for residential use, the presence of any
transportation pipelines on or under the property must be disclosed in
some states.
• Federal and state agencies have identified certain areas once used for
military training and which may contain live ammunition as part of the
ordnance—or military supplies—from past activity.

o Additional Disclosures
 Smoke Detectors. Be sure your sellers comply with state smoke
detector compliance regulations.
 Megan’s Law: Megan's Law is a very well-intentioned law that is
designed to prevent crimes against children.
 Condominium Disclosure: Most states require sellers to disclose,
usually in the sales contract or a property disclosure statement, if the
unit is located within a common interest development (condominium
project, planned development, or stock cooperative).
 Pest Control Inspection: The law does not require that a structural
pest control inspection be performed on real property prior to
transfer.
 Home Inspection Notice: A borrower who wants an FHA loan for any
residential property of one to four units must receive and sign the
notice called The Importance of a Home Inspection.

o Additional Disclosures
 Advisability of Title Insurance: In an escrow for a sale (or
exchange) of real property where no title insurance is to
be issued, the buyer (or both parties to an exchange) must
be advised in writing to obtain title insurance or to have
the abstract examined.
 Commissions: States have different disclosures regarding
commissions. A common one is that commissions are
negotiable.
 FIRPTA Disclosure: When nonresident aliens and foreign
corporations buy and sell real estate located within the
United States, the Foreign Investment in Real Property Tax
Act (FIRPTA) applies.

o Stigmatized Property
 A stigmatized property, as defined by the National Association of
REALTORS®, is “a property that has been psychologically impacted by an
event which occurred, or was suspected to have occurred, on the
property, such event being one that has no physical impact of any kind.”
 Typical stigmatized properties are those where there have been
murders, suicides, or occupants with AIDS or HIV.
 Real estate licensees must be very careful when making disclosures
about stigmatized properties.
 In some states, a seller does not have to disclose to a potential buyer
that a death occurred on the premises.
 However, in other states, the seller must disclose to the potential buyer
that a former owner or occupant died in the property and how the death
occurred, if the death happened within a certain period of time (usually
3 years) before the potential buyer purchases the property.
 However, even in states where disclosure is required, there is no
requirement to disclose it if the former owner or occupant had or died
from acquired immune deficiency syndrome (AIDS).

• Disclosures in Financing
o One of the purposes of financing disclosures is to help
consumers become better shoppers for loan and
settlement services.
o Truth in Lending Act (Reg Z) Disclosures
 The Truth in Lending Act requires lenders to disclose the
important terms and costs of their loans, including the
annual percentage rate (APR), finance charge, the payment
terms, and information about any variable-rate feature.
 The finance charge is the dollar amount the credit will
cost.
 The annual percentage rate (APR) is the relative cost of
credit expressed as a yearly rate.

• RESPA
o The Real Estate Settlement Procedures Act (RESPA) applies to
all federally related, one to four unit residential mortgage
loans.
o The lender must furnish a copy of a Special Information
Booklet, together with a Good Faith Estimate (GFE) of the
amount or range of closing costs to every person from whom
the lender receives a written application for any federally
related loan.
o Affiliated Business Arrangements
 Affiliated business arrangements (ABAs) are business
relationships in which a person in a position to refer business
to a provider of real estate settlement services has an indirect
or direct ownership interest in that provider and refers
business to that provider (either directly or indirectly).

• RESPA
o Affiliated Business Arrangements
 Required ABA Disclosures
• Disclosure/notice is given to the consumer at or before the
time each referral is made and the customer is supplied
with information concerning the services provided and an
estimate of what those services will cost them;
• The consumer is not required to use any particular provider
of settlement services (that is, the consumer is not steered
or required to use an affiliated entity providing mortgage
or other settlement services); and
• The only thing of value that is received from the
arrangement (other than reasonable payments for goods,
facilities, or services actually furnished) is a return on the
ownership interest.

Business Ethics Practices Codes Conduct

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