Disclaimer: This article does not constitute legal advice. Interpretations of the Realtor Code of Ethics may differ from state to state, so you should seek your own legal advice to ensure you follow the correct process.
A client came to David Magua, a top-selling real estate agent in Weston, Florida, asking for advice on a subdivision he had his eye on. The buyer wanted to know: is now the right time to snatch up the property?
“I looked at the subdivision, and I looked at the analytics,” recalls Magua. “And I said, ‘No, I think you should wait. The market’s going down. Rent for a period, and you’re gonna get it for substantially less.’” He was honest but, poof! There went Magua’s $12,000 commission.
This type of situation is one real estate professionals deal with frequently — the responsibility to give honest advice that goes against their own financial interest. In some cases, a deal falling through could mean a Realtor can’t afford their next car or mortgage payment. The stakes are high, and agents are human.
The National Association of Realtors (NAR) has good reason to set ground rules for behavior in the profession. The Code of Ethics & Standard of Practice isn’t an imaginary benchmark, but a meticulous ethical framework.
Based on the concept of “let the public be served“, the code governs the dealings between Realtors, their clients, and the public interest.
While many professional fields have codes of ethics, real estate is one of the only industries in which the code’s sponsoring organization has disciplinary procedures and power. Let’s explore the history of this rulebook, how it gets enforced, the most common types of violations, and the code’s influence on the world of real estate.
What is the Code of Ethics and who does it apply to?
A common misconception among consumers is that real estate agents and Realtors are interchangeable terms.
However, to earn the trademarked title of “Realtor,” a real estate licensee must officially join the National Association of Realtors, the largest trade organization in the country representing 1.3 million members. For context, there are an estimated 2 million active real estate licensees in the U.S.
What does it mean to become a “Realtor”? Well, for one, you have to pay annual dues ($150 per year as of 2019). In addition, a Realtor must:
- Hold an active real estate license in their state and be part of a real estate firm there
- Have no civil judgments imposed on them in the past seven years
- Provide mitigating factors for the association to consider if there’s been any history of criminal convictions in the past seven years
- Agree to continuously adhere to the Realtor Code of Ethics
In other words, abiding by the Code of Ethics is required of all Realtors — but not real estate agents in general. A real estate licensee agrees to follow the code at the time of their application to become a NAR member. Realtors also may be asked by their broker or team leader to sign additional ethics paperwork when they sign on.
NAR Code of Ethics
The NAR Code of Ethics sets the standard for Realtor business practices. Its 17 articles provide standards for conduct with clients and customers, the public, and other Realtors. If a Realtor violates the code of ethics, a complaint can be filed and disciplinary action is taken by the Realtor’s local Realtor association.
In practice, Realtors are required to abide by the Code of Ethics as a way of doing business.
According to the code’s preamble, Realtors “pledge to observe [the code’s] spirit in all of their activities whether conducted personally, through associates or others, or via technological means and to conduct their business in accordance with the tenets.“
The standard of conduct applies in a Realtor’s dealings with:
- Their clients and customers: It’s their duty to protect their client’s best interest, but treat all parties involved in a transaction honestly.
- The public: The Realtor need to meet meeting professional competency standards and standing against discriminatory housing practices.
- Other Realtors: Realtors must refrain from making false or reckless statements about their fellow professionals.
How do violators get caught? Someone would need to file a complaint against the perpetrator. But NAR is a behemoth and trying to take a complaint all the way up would be like sending your small claims gripe to the Supreme Court.
So, like the justice system, enforcement of the NAR standards of practice unfold at a local level first. Disciplinary power is mainly wielded by the 1,200 local Realtor associations across the country.
Realtors with a complaint can bring their grievance to their local association. From there a few different bodies are involved in the process of reviewing the issue. The association’s Grievance Committee screens complaints and passes on violations or arbitration matters to the Professional Standards Committee.
The Professional Standards Committee then conducts a hearing with a panel consisting of 3-5 committee members (this is the Realtor version of “due process”) to determine if there was a violation and to decide on disciplinary action or in the case of arbitration, who is deserving of a monetary award. The Board of Directors at a high level holds the right to review or appeal the committee’s decisions.
Common types of complaints that arise often deal with ethics violations or requests to arbitrate money disputes, such as who is owed commission between Realtors of different firms. The board will typically try to mediate contractual disputes before they go to arbitration (unless both parties in the dispute advise against mediation in writing).
But one major point to note is that the code helps Realtors avoid legal battles by settling disputes through arbitration overseen by the association instead. The types of disputes that qualify for arbitration can be found in Article 17 of the Code.
Per the Code of Ethics and Arbitration manual, sanctions for a violation may include:
- A fine not to exceed $5,000
- A letter of reprimand
- The requirement that the respondent attend an education course
However, one thing a hearing panel or association cannot require is a written apology from the violator.
What rules does the Code of Ethics set?
The Code of Ethics for real estate has existed in some form for over 100 years. The original Code of Ethics (drafted, ahem, for quote “Real Estate Men,” ironic considering now 63% of all Realtors are female) was adopted in 1913 as a much leaner list of rules.
Over time it’s been revised and revised to reflect new developments and the industry as it stands today. But the most recent version, amended as recently as 2019, still reflects the original principles of honesty, competency, and settling disputes with the board rather than court.
The 2019 Code of Ethics consists of 17 articles covering different areas of conduct that each feature several of what are called “Standards of Practice,” or specific ground rules Realtors are held against.
“I try to keep to these standards, if not higher,” says Magua. “You’re dealing with people’s money. You’re dealing with probably their biggest asset. I’d always rather keep a good relationship with the client, be truthful, and keep to what my ethics tell me to do. I’m there to be a concierge. I’m there to direct. And I’m there to give unbiased good advice.“
Let’s take a look at the Code of Ethics from a bird’s-eye view. If you’re unclear on a rule or are using this as a guide for your own conduct as a Realtor, please consult the full Code.
Realtor Code of Ethics Preamble
The preamble to the Code of Ethics sets what NAR describes as the aspirational objectives of moral conduct. Think of it like the Realtor mission statement, rallying cry, or anthem. The preamble even cites the Golden Rule, “Whatsoever ye would that others should do to you, do ye even so to them.“
The philosophical and therefore subjective nature of the Preamble means that it cannot be used as grounds for disciplinary action against a Realtor. That’s what the 17 articles to follow are for.
Duties to Clients and Customers
Article 1: Protect the best interests of the client.
Article 2: No misrepresentation, exaggeration, or hiding facts about the property at hand.
Article 3: Realtors should cooperate with each other unless it’s not in the best interest of the client.
Article 4-5: Disclose any personal interest in a property.
Article 6-8: No recommending services for a kickback or collecting money under the table. Keep client funds separate from your own.
Article 9: All documents pertaining to the transaction should be presented to the buyer/seller in understandable terms.
Duties to the Public
Article 10: No denying services on the basis of discrimination.
Article 11: Provide clients with competent services only within a Realtor’s professional scope.
Article 12: No false or misleading advertising.
Article 13: Don’t break the law.
Article 14: Cooperate with the Realtor board’s investigative proceedings if charged with a violation.
Duties to Realtors
Article 15: No false or misleading statements about other Realtors.
Article 16: Don’t solicit clients that have already signed an exclusive listing agreement with another Realtor.
Article 17: Contractual disputes will be mediated or arbitrated by the Realtor Board.
The Realtor Code of Ethics: A North Star for the Profession
Honesty as a policy? Not in the rogue world of real estate — at least, that’s the perception held by many Americans who question the authenticity of real estate professionals.
In a recent survey on how trustworthy consumers view various professionals, Realtors beat out only two others for the least-trusted award: politicians and car salespeople. And we all know Danny Devito in Matilda isn’t exactly a show of character worth striving for.
Just 11% of participants in the survey said they believe Realtors can be “completely trusted.” Meanwhile, only around 20% of respondents to Gallup’s Honesty and Ethics survey consistently give the real estate field “high” or “very high” marks.
The source of the distrust? It could be stories of backroom deals among real estate players, deceptive tactics that fly under the radar, or the nightmare that was the 2008 subprime mortgage crisis where many consumers felt mislead by the real estate industry.
Helping people buy and sell homes is a big job with wide-ranging impacts. The Code of Ethics is organized real estate’s way of holding professionals in the field accountable to certain standards and showing the public they’re not turning a blind eye.
As NAR CEO Bob Goldberg told Inman in response to the reported survey results on trustworthy professionals: “Consumers can feel confident that the Realtor they choose to work with has taken the voluntary step of agreeing to abide by a code of ethics developed with public protection and trust in mind.“
If you’re not willing to play nice, then you better hope a fellow, good-faith citizen Realtor doesn’t take you up with the board. The last thing you want is your name and photo publicly shared with your local association members. And yes, NAR will go there.
Looking for more information about a profession in real estate? Check out the steps to get a real estate license next.
Source: Hubspot Sales