Recommitting to the NAR Code of Ethics

By Harry J. Lew

Does it bother you that only 20 percent of the public thinks real estate agents have either very high or high levels of ethics? Although members of Congress and lobbyists have lower levels (8 percent and 7 percent, respectively), real estate agents trail lawyers (21 percent) by one point, which is a tough pill to swallow.

Now, scoring low in the Gallup “Honesty/Ethics in the Professions” survey is nothing new. In fact, real estate agents have posted anemic scores since the survey was first conducted in 1977. What’s more, having a negative reputation is not surprising given how infrequently consumers sell or buy a home or how complicated the purchase process is. If something goes awry during one of their rare dealings with a real estate agent, it’s understandable they’d form negative opinions about the industry.

Still, being complacent about the industry’s low ranking in honesty polls is not a good idea. That’s because consumers who think agents have low levels of ethics will, as a result, mistrust their agents. This will produce friction in the sales process, which, in turn, will delay the process of selecting an agent, getting their homes listed, showing their property to potential buyers, and closing deals. All of these delays come with significant financial costs.

Some would argue this situation is a macro problem, which is out of the hands of individual agents and broker/owners. Wrong! Gallup data results from decades of micro consumer interactions with real estate agents. If more agents acted with their clients’ best interests at heart, consumer satisfaction would improve, as would the industry’s ethics ratings vs. other industries.

So what can you do to improve your industry’s ethics standing? Get back to the basics of doing what’s right. How? By putting the National Association of REALTORS^® Code of Ethics at the heart of your business. And if you’re not a Realtor^® adhere to the Code anyway. In either case, embracing the ethical principles upon which the modern real estate industry was built will deliver powerful benefits, including . . .

• More positive consumer word of mouth.
• Faster turnaround from listing to completed sale.
• More referrals from satisfied clients.
• More repeat listings from satisfied clients.
• Fewer consumer complaints and NAR^® regulatory actions.
• Fewer consumer lawsuits and Real Estate Errors & Omissions insurance
• Higher income levels.

As important as all of these benefits are, they pale next to the biggest benefit of all: the satisfaction you’ll feel when clients reward your ethical sales practices with their trust. When that happens, you will see first hand how ethical values and actions differentiate the best real estate agents from the also-rans. Wouldn’t you rather be in the former camp?

Of course, you would, especially when you contemplate the disadvantages of being an unethical agent or broker. Although there may be short-term financial benefits for taking the low road, they come at a high cost: more stress, more worry, more problems in the sales process, more infractions and fines, more consumer hard feelings, and ultimately, more lawsuits and costly E and O insurance claims. Surely, there’s a better way to do business: following the guidelines contained in the NAR^® Code of Ethics.

Although a complete discussion of the Code is beyond the scope of this article, it’s important to review some basic concepts, including:

• The History of the Code.
• The Code’s Structure.
• The Code’s Business Practices (i.e., its articles).
• The Code’s Practice Standards.
• The Code’s Case Interpretations.

Let’s take a close look at each element.

The History of the Code

It’s important to realize that prior to 1900, the real estate industry was essentially “the wild West.” Real estate agents could do business without a license. In dealing with consumers, almost anything was possible: lies, abuse, and speculation. From the consumer’s perspective, it was clear that agents were out to take advantage, making “caveat emptor” essential.

To deal with this situation, the industry formed the National Association of Real Estate Exchanges in 1908, which later became the National Association of REALTORS^®. According to NAR^® Member Education, the NAR^® Ethics Code was adopted in 1913, becoming one of the first business ethics codes to appear after those in medicine, engineering, and law. Even in its early days, the NAR^® Code of Ethics was built on notions of public service, professionalism, and duty to both clients and other brokers. It eventually led to wide adoption of real estate licensing laws, required arbitration of disputes among REALTORS^® encouraged respect for agents’ exclusive client relationships, and increased cooperation between REALTORS^®

Although the NAR^® Code of Ethics has a lot of history behind it, it has been around so long it’s easy to become complacent about it, especially since the industry has experienced so many changes in recent decades. This is why getting back to basics is so important. The ethical values implicit in the code have stood the test of time. Agents who continue to adhere to them will be better equipped to manage disruptive industry change than those who don’t.

The Code’s Structure

The Code of Ethics flows logically and is quite easy to understand. It starts with a Preamble, which lays down some important aspirational values. Then it defines the industry’s Duties to Clients and Customers, Duties to the Public, and Duties to REALTORS^® all expressed via underlying Articles and Standards of Practice.

Regarding the Preamble, we have one piece of advice: don’t gloss over it. This brief section provides key concepts that place the industry on an impressive ethical foundation. For example, its positioning of “the land” as a key value helps agents understand the noble purpose they serve. As the Preamble states, “Under all is the land. Upon its wise utilization and widely allocated ownership depend the survival and growth of free institutions and of our civilization. REALTORS^® should recognize that the interests of the nation and its citizens require the highest and best use of the land and the widest distribution of land ownership. “

Other Preamble values include:

• The Golden Rule
• Improving work standards
• Staying informed
• Sharing knowledge with others
• Cooperation with other real estate professionals
• Importance of exclusive representation
• And many more

The Code’s Business Practices

As mentioned earlier, the NAR^® Code of Ethics has 17 articles. They break down as follows:

• Duties to Clients and Customers: nine articles
• Duties to the Public: five articles
• Duties to REALTORS^® three articles

Each article is a powerful statement of ethical principles. For example, Article 1, which defines real estate agents and brokers as fiduciaries, states: “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 to the client 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.”

The Code’s Practice Standards

The Practice Standards are where the ethical rubber meets the road. While the Code’s articles are statements of ethical principles, its Standards of Practice discuss how principles apply to specific areas of your business. For example, there are 16 Standards of Practice under Article 1, dealing with everything from not misleading an owner about market value when attempting to secure a listing to the ability to represent both the seller/landlord and buyer/tenant in the same transaction, but only after full disclosure and with informed consent of both parties.

According to NAR^® you can only be brought up on articles, not standards, violations, although a complainant can cite a Standard of Practice to support an alleged article violation.

The Code’s Case Interpretations

Each article also has a number of so-called “Official Case Interpretations,” which are case studies that describe a precipitating dispute, the facts that emerged during arbitration, and the resulting settlement. If you want to really understand the NAR^® Code of Ethics, reviewing the case histories is crucial. However, be prepared to do some serious reading. Article 1 alone has 31 Case Interpretations.

If you’re a REALTOR^® you no doubt have already participated in mandatory NAR® Code of Ethics training or you will shortly. In that training, you’ll learn about the articles and standards in great detail, which will equip you to implement them in your own business. However, for now, let’s just review five Code Articles that real estate professionals violate most frequently. According to the Virginia Association of REALTORS^®, these include:

Article 1: As mentioned earlier, Article 1 mandates that all REALTORS^® have a fiduciary relationship with their clients. The key Standards of Practice (SOP) are 1-6 and 1-7, which require fast and objective handling of offers and counter offers; 1-15, which allows agents to mention the existence of offers as long as buyers or buyer agents ask and sellers permit it, (the agent must also disclose from whom offers come from), and 1-16, which prohibits listing agents from granting unauthorized access to a listed property.

Article 3: Under this principle, “REALTORS^® shall cooperate with other brokers except when it’s not in the client’s best interest. The obligation to cooperate does not include the obligation to share commissions, fees, or to otherwise compensate another broker.” Five Standards of Practice flesh out the meaning of Article 3.

• SOP 3-1—States that cooperation doesn’t imply a compensation offer exists.
• SOP 3-2—Compensation changes must be communicated to the other broker before offers are submitted.
• SOP 3-3—Brokers have the flexibility to change their compensation method.
• SOP 3-4—Variable compensation must be disclosed.
• SOP 3-9—Cooperating brokers must only give buyers property access under the terms allowed by the seller and listing broker.

Article 9: Here, agents and brokers “shall assure whenever possible that all agreements relating to real estate transactions including, but not limited to, listing and representation agreements, purchase contracts, and leases are in writing 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 to such agreement upon their signing or initialing.”

Article 12: “REALTORS^® shall be honest and truthful in their real estate communications and shall present a true picture in their advertising, marketing, and other representations.” Standard of Practice 12-4 prohibits REALTORS^® from advertising a property for sale or lease without permission of the owner and SOP 12-9 requires them to disclose the firm name and states of licensure on their websites.

Finally, Article 16 prohibits any practice or action that is inconsistent with the exclusive representation or exclusive brokerage relationship agreements that other REALTORS^® have with their clients. According to the Virginia Association of REALTORS^® there are three noteworthy Standards of Practice in Article 16.

• SOP 16-9 requires that agents and brokers make reasonable efforts to determine if another real estate professional has a current, valid exclusive agreement to provide the same type of service to a customer.
• SOP-16-16 mandates that a REALTOR^® can’t use an offer to try to modify the compensation arrangement.
• SOP 16-20 prohibits inducing clients to cancel brokerage relationships when a REALTOR^® leaves the firm.

If you do nothing else after reading this article, consider how you’ve handled the above five Articles in your own business. (Ideally, do the same for ALL the articles.) Are you in compliance with each? If not, think about the risks this poses to your business and reputation. Then consider what it will take to get compliant going forward. This is crucial because each time you push the ethics envelope, you are telling your prospects and customers you’re not fit to be trusted. Not only will this hurt your firm, it also will perpetuate the industry’s low standing in public opinion surveys.

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