Ch30 Professional Ethics

deceptive if it contains a statement—or omits information—that is likely to mislead consumers acting reasonably under the circumstances or that is material to a consumer's decision to buy or use the product. Deceptive practices could include the following:

False oral or written representations or omissions Misleading price claims Failure to perform promised services Use of bait and switch techniques It's also critical to consider what the ad does not say. Does the omission of certain facts create a false impression in the minds of reasonable consumers? The issue is whether the act or practice is likely to mislead, rather than whether it causes actual deception.

Licensee comments that could create the impression that a tie-in arrangement is being imposed include the following:

"If I'm going to submit an offer for you, I need you to use XYZ Home Inspectors." "I only work with ABC Insurance Company, so you need to call them before we proceed."

Licensee comments that could create the impression that territories or markets are being allocated include the following:

"It could save us both a lot of gas if your firm would concentrate on the north side and ours concentrated on the south side." "This is my neighborhood. Tell them to go someplace else." "We'll take the million dollar listings, since we're equipped to handle them and you concentrate on the starter homes."

Of these, which is LEAST LIKELY to be considered an example of puffing? "Best view in the city" "Exquisite décor that will make your friends jealous" "Feel like royalty in this palatial beauty" "Priced to sell; likely to go quickly in this popular neighborhood"

"Priced to sell; likely to go quickly in this popular neighborhood"

Licensees should never use statements such as the following:

"This is the rate every firm charges." "I'd like to lower the commission, but no one else in the MLS will show your house unless the commission is X%" "Commission rates are generally standard." "This is pretty much the average commission rate being charged."

Puffing and Opinion

"puffing," which is an exaggeration about the quality of a property that may be difficult to back up with proof. For example: "Compared to the sales prices for other homes in the neighborhood, this one appears to be an excellent buy." (Opinion) "This remodeled kitchen will turn you into a gourmet chef!" (Puffing) To prove fraud based on a false statement, it's necessary to show that the person relied on the statement. Because of their non-factual or exaggerated nature, opinions and puffing are not generally considered the type of statements that a reasonable person would rely on in making a decision to buy property. As such, they do not generally fall under the fraud category.

The FTC cautions that not every consumer injury is a result of unfairness. Generally for an injury to be unfair, it must be ____1______or something that _____________________2____________________________

1 substantial (usually involves substantial monetary harm, ex: when sellers coerce consumers into purchasing unwanted goods or services) 2 Could not reasonably been avoided

Fraud is said to be actionable when certain elements are present. To sue for actual or constructive fraud, the plaintiff must be able to prove all five elements:

1. A person makes a false statement of a material fact, or conceals a material fact that they have a legal duty to disclose. 2. The person making the statement knows or should know it is false. 3. The statement or concealment is made with the intent of inducing another to enter into a transaction. 4. The other person relies on the statement, or lack of knowledge of the concealed information, and is induced to enter the transaction. 5. The other person is harmed as a result of entering the transaction.

Bait and Switch

A deceptive sales technique that involves advertising to a consumer with a particular product, service, or rate to attract consumers, then persuading them to accept something less favorable or desired. Most states have consumer protection laws that make this tactic illegal.

Misrepresentation

A false or misleading statement.

material fact

A material fact is generally defined as one that, if known, might have caused a reasonable person to make a different decision. It generally does not apply to a client's confidential personal information, however. Remember that real estate licensees have a legal and ethical duty to disclose any material fact that could affect a transaction. They are also obligated to disclose known latent defects about a property, even if it does not seem them to be material.

Fraud, Constructive

A negligent misrepresentation or concealment of a material fact; when a person carelessly fails to disclose material information, or makes statements that they should realize are false or misleading. Also called Negligent Misrepresentation.

Code of Ethics

A set of principles and standards based on core values by which a professionals are expected to conduct themselves.

blockbusting

A specific type of panic selling, prohibited act under federal and state civil rights law. It is generally defined as intimidating homeowners into selling their homes by suggesting that the ethnic or racial composition of their neighborhood is changing. Homeowners are led to believe that their property values will be lower, the area will experience higher crime rates, and the quality of schools will decline.

Material Fact

A truth that would change the individual's actions if it were known; in real estate, this usually refers specifically to things wrong with the property itself.

Two types of fraud

Actual Fraud Constructive Fraud

examples of deceptive and misleading advertising could include:

Advertising a property that is subject to an exclusive listing agreement with a sponsoring broker other than the licensee's own without the permission of and identifying that listing broker. Failing to remove advertising (signage, print, electronic, etc.) of a listed property within a reasonable time after the closing of a sale on the listed property or after the expiration or termination of the listing agreement, whichever circumstance is earlier. Advertising a property at auction as being without reserve, when there is a minimum bid or opening bid required. Advertising a property in a manner that creates a reasonable likelihood of confusion regarding the permitted use of the property. Examples of such advertising would be advertising a property zoned single-family as appropriate for multi-dwelling use by using words or phrases such as "apartment," "two units," or "separate living arrangement" unless that use is permitted by the zoning ordinance, a variance from the zoning ordinance, a conditional permitted use, or an existing legal non-conforming use

According to the FTC Act, truth in advertising rules apply to anyone who places an ad. Under the act,

Advertising must be truthful and not deceptive. Advertisers must have evidence to back up their claims. Advertisements cannot be unfair.

Licensees have a legal and ethical obligation to present a true picture in all their advertising. The requirement to be honest and truthful relates to ALL aspects of a real estate professional's dealings with consumers, including:

Advertising services and property in any medium (television, radio, print, Internet, etc.) Disclosing ownership interest or licensee status in advertising and other communication Maintaining accurate and current information on websites Refraining from practices that could mislead, misdirect, or confuse consumers on websites

Fraud, Actual

An intentional misrepresentation or concealment of a material fact; when a person actively conceals material information, or makes statements that they know are false or misleading.

Sherman Antitrust Act Federal Trade Commission Act Clayton Antitrust Act

Believing that fair competition was necessary for the economic health of the country, the federal government began to consider laws to outlaw monopolies and rein in unfair business practices. The earliest antitrust laws

When is an ad unfair? According to the FTC, an ad or business practice is unfair if it

Causes or is likely to cause substantial consumer injury that a consumer could not reasonably avoid; and Is not outweighed by the benefit to consumers.

Negligence

Conduct that falls below the standard of care that a reasonable person would exercise under the circumstances; an unintentional breach of a legal duty resulting from carelessness, recklessness, or incompetence.

The Code of Ethics contains three sections:

Duties owed to clients and customers Duties owed to the public Duties owed to other REALTORS®

(T/F) If a local real estate board publishes a suggested commission schedule but does not mandate that members follow it, it would NOT be considered an antitrust violation.

False

(T/F) Ted and Vicky are brokers at Farmland Realty. Ted takes all of Farmland's listings on the Westside, while Vicky takes all of Farmland's listings on the Eastside. They could be guilty of market allocation.

False

(T/F) The Sherman Antitrust Act was enacted to enhance the regulations contained in the Clayton Antitrust Act.

False

(T/F) You have listed Walter's house, and you notice a water stain on the ceiling. You advise Walter to paint over it before you show the house. This is an example of constructive fraud.

False

Blind Advertisement

Generally speaking, any real estate advertisement that is used by a licensee regarding the sale or lease of real estate or of licensed activities that does not include the broker's name or business name. Prohibited in most states.

panic selling

In a generic sense, panic selling can be defined as scaring homeowners into selling their homes for some reason, for example by suggesting that the new auto plant being built will lower their property values or that the new school superintendent's policies will lead to a decline in the quality of the schools.

Unfairness Policy Statement

It causes or is likely to cause substantial consumer injury that a consumer could not reasonably avoid; and It is not outweighed by the benefit to consumers.

Which federal lawsuit affirmed that the real estate business, which offers the sale of services, as opposed to the sale goods or products, is not excluded from charges of restraint of trade? U.S. v. Long Island Board of REALTORS®, Inc. U.S. v. National Association of Real Estate Boards U.S. v. Prince George's County Board of REALTORS®, Inc.

It was U.S. v. National Association of Real Estate Boards that affirmed real estate agents are not excluded from charges of restraint of trade.

Never use the words "standard," "average," or "going rate" when presenting your firm's commission to a potential client.

Licensees who make these statements seriously jeopardize themselves and their firms. They must learn to explain and, if necessary, defend their firm's prices and other competitive business decisions in terms that are consistent with competition, not conspiracy.

(Y/N) Do antitrust laws prevent you from discussing the commission you intend to offer a cooperating broker?

No

(Y/N) Hank and Russ are both sales agents for Northwoods Realty. At a company meeting, broker Bob told them not to accept any listing for less than 7%. Do you think this in an example of price-fixing?

No

(Y/N) Licensee Jim is trying to juggle too many clients, which is a good problem to have. But Jim is not very organized. He accidentally tells a buyer's agent that the King's house has a new furnace and that the roof was replaced last summer. But it was another property Jim is listing that has the new roof. The King's roof is 15 years old. Is this an example of actual fraud?

No

(Y/N) Louis and Louise are both licensees for LaLaLand Realty. At a company meeting, the employing broker tells them not to accept any listing for less than 7%. Do you think this in an example of price-fixing?

No

(Y/N) Do you think that a so-called "discount" broker is violating antitrust laws if he advertises his commission rate?

No Simply advertising the rate to the consumer is not a violation. Since he's not consulting with any competing broker to set a commission rate, there is no restraint of trade. We'll look at another violation next.

Culpable Negligence

Occurs if a licensee operates in a reckless, careless, and excessively negligent manner. Culpable negligence is negligence for which one can be held legally accountable.

Concealment

Occurs when a licensee fails to disclose information that is material to a decision to a party to whom the licensee has such a duty.

Commingling

Occurs when a licensee mixes client funds with brokerage funds.

Do you think that puffing is illegal? definitely probably not

Probably not

In December of 1969, a civil action was filed in U.S. District Court for Maryland charging the Prince George's County Board of REALTORS®, Inc. with violating Section 1 of the Sherman Antitrust Act. At the time, the Board had about 1,000 agents in Prince George's and surrounding counties, and it operated a multiple listing service that most of the Board members joined. The Board required its members to submit listings for residential property in Prince George's County to the MLS using a recommended fee schedule. The complaint alleged that the Board's activities.

Raised commission rates, maintaining them at an artificial and non-competitive rate. Eliminated price competition. Denied sellers the right to use the services of agents at competitively determined rates of commission (boycotting).

Collusion

Secret agreement or cooperation among people, especially for deceitful or fraudulent purposes.

Licensee Pam has been working exclusively in residential real estate for two years. A satisfied client asks her to list his 40,000-square-foot warehouse for lease. Which statement is TRUE? Select all correct responses. She can ask a colleague at her brokerage with commercial leasing experience to assist in the transaction. She can disclose her lack of expertise to the client and continue with the transaction if the client agrees. She can see if her broker would like to team up with another brokerage that specializes in commercial leasing. She must turn down the listing since it is out of her area of expertise.

She can ask a colleague at her brokerage with commercial leasing experience to assist in the transaction. She can disclose her lack of expertise to the client and continue with the transaction if the client agrees. She can see if her broker would like to team up with another brokerage that specializes in commercial leasing.

Puffing

Superlative statements about the quality of a property that should not be considered assertions of fact.

Competency

The ability to do something successfully or efficiently.

Ethics

The fundamental principles of honesty and integrity that guide a person's behavior.

Licensee Lois has had a listing on Mark's house for months. Buyers aren't interested in purchasing the property, as it is subject to several liens, which Lois had been disclosing. Eager to sell the property, she tells Jake, the latest interested buyer, that there are no liens and the title to Mark's property is good. Which statement is TRUE? This is OK as Lois is looking out for the best interests of her client. This is OK since the liens will be discovered by the title insurance company. This is OK because the seller has promised to pay off the liens before closing. This is not OK since the presence of known liens is a material fact.

This is not OK since the presence of known liens is a material fact.

Licensee Betty accidentally deposited a buyer's good faith deposit into her brokerage's general fund, and her broker used the money to pay the rent on the office. Which statement is TRUE? There is no problem with mixing client and business funds if good records are kept. This was an honest mistake, so it could not be considered fraud. This was fraud since Betty illegally commingled, but her broker did nothing wrong. This was fraud since Betty illegally commingled, and her broker could be held responsible.

This was fraud since Betty illegally commingled, and her broker could be held responsible.

(T/F) A licensee who is careless or negligent and provides inaccurate information or statements could be reasonably accused of fraud.

True

(T/F) You're on a listing appointment and the seller asks you "What's the going rate for commission?" You answer, "The going rate is around 7%." You could be guilty of price-fixing.

True

(T/F) Penelope, a licensee at Tom Smith Realty, told seller client Jeff that $140,000 was a reasonable list price. The house sold in two days. Jeff later discovered Penelope's brother bought the house then sold it a month later for $175,000. Jeff accuses Penelope of fraud. Employing broker Tom Smith is liable for her actions.

True Generally speaking, an employing broker can be held legally liable for the acts of their affiliated licensees if the actions are within the scope of their employment. Next, we'll look at some real court cases of fraud

market allocation

Two or more licensees from different brokerage firms cannot divide prospective clients and customers in any way. is a violation of antitrust laws because it limits competition. It could be that they've agreed to split their city into specific territories, or perhaps they've each agreed to handle properties within a certain price range or neighborhood. Even if the agreement seems logical, these actions could result in a restraint on trade because it limits the choices of the consumer, and as you know, any restraint on trade is illegal.

Conversion

When a licensee uses or makes available to her personal or business use funds or other property belonging to another.

Reasonableness

When determining whether or not the practice is likely to be deceptive, the FTC will examine it from the perspective of a consumer acting reasonably in the circumstances, and examining the entire advertisement, transaction, or course of dealing. Rather than focusing on certain words, the FTC indicates that it looks at the ad in context—including words, phrases, and images—to determine what it conveys to consumers.

Buyer's agent, Bill, has actual knowledge of structural damage to the floorboards of a home due to termite infestation. He informs his client that there are no termites in the home. The buyer signs a contract to purchase the property. Could the licensee be susceptible to claims of fraud? No, because he is protected by the "as is" clause in the purchase agreement. No, because he said there were no termites, which could be true at present. Yes, because he knowingly made a potentially untrue statement that could be seen as an inducement to buy. Yes, unless there are visible signs of termites, in which case the buyer should have recognized it.

Yes, because he knowingly made a potentially untrue statement that could be seen as an inducement to buy.

Who could MOST LIKELY be accused of the unauthorized practice of law? a licensee who drafts an addendum to a complicated sales contract a licensee who specializes in residential sales accepts a listing for a commercial building a licensee who signs a sales contract on behalf of their buyer client an unlicensed person who helps a friend find a buyer for their house

a licensee who drafts an addendum to a complicated sales contract In most states, real estate licensees do not have the authority to draft contracts and must use standardized contracts that are made available from local real estate boards or bar associations. In such a case, the licensee could be accused of the unauthorized practice of law. A single real estate license, in most states, allows a licensee to work in both residential and commercial real estate. A licensee can sign a contract on behalf of a client if the client authorizes them through a power of attorney. Without that, the licensee may be committing fraud, but they are not practicing law. Finally, remember that a license is not needed to help a friend find a buyer as long as that person does not accept compensation, Besides, that would be the unauthorized practice of real estate, not the unauthorized practice of law.

Many real estate firms utilize an ______________________ that lists all of the companies with which the broker has any type relationship and that provide any sort of real estate products or services. This disclosure will state that the client is under no obligation to use any of these companies when purchasing insurance, hiring a home inspector, obtaining a mortgage, etc. The form may explain that there are other companies that provide the same services. The purpose of the affiliate disclosure is to avoid any possible claim of a tie-in agreement against the broker.

affiliate disclosure form

When may a person use the term REALTOR®? after becoming a member of the National Association of REALTORS® after closing their first successful transaction as soon as the person passes the state real estate license examination upon the sponsorship of their employing broker

after becoming a member of the National Association of REALTORS®

The Federal Trade Commission Act of 1914

allows the Federal Trade Commission (FTC) to act in the interest of all consumers to prevent deceptive and unfair acts or practices.

What is another word to describe a specific type of panic selling? blockbusting channeling redlining steering

blockbusting

This was considered a test case to determine whether Section 1 of the Sherman Antitrust Act could be applied to alleged illegal activities of a local board of real estate brokers. This particular case was settled with a ______________ which is a binding agreement through which the accused party, in this case, the Board, consented to change its behavior, but admitted no misconduct.

consent decree

Code of Ethics and Standards of Practice of the National Association of REALTORS®

contains statements intended to advise, guide, and regulate behavior while working in the world of real estate.

Every ______________, _______________ in the form of trust or otherwise, or ______________, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony... A conspiracy can involve as few as two competing members of the same trade.

contract combination conspiracy

Employing broker Ben accepted a commission check at closing. Affiliated licensee Lori was supposed to get half of that check for finding a buyer for the house. Instead, Ben deposited the check into his personal account and used it to pay off his late Visa bill. This is an example of collusion. commingling. concealment. conversion.

conversion.

Fraud

deliberate act with the intent to deceive or with reckless indifference to the truth. any form of deceit, trickery, breach of confidence, or misrepresentation by which one party attempts to gain some unfair or dishonest advantage over another. Failing to disclose information you're required to disclose can be a form of fraud. Fraud also includes actively concealing information and making false or misleading statements. Fraud falls into two broad categories: Actual fraud Constructive fraud

It is important to note, however, that an ________________ is generally ______________for the acts of affiliated licensees and employees if the actions are ______________________________________, regardless of whether the employing broker knew about the actions or not.

employing broker legally liable within the scope of their employment

It is perfectly okay to own a real estate company and an insurance company, do home inspections, and be a mortgage broker, and so on. You or your firm can offer all of those services to any consumer. While that is perfectly legal, you may not______________________of that service on any buyer or seller. If you do sell the house or the property, the mortgage, the homeowners insurance, and any other service to go along with it, you must __________________

force the use You cannot require one with the other. For example, you may not say to a buyer, "If you buy a house through us, you have to get your mortgage through us." You can make it incredibly convenient for them to get their mortgage through you, but if they choose to go across town and get it somewhere else, that's their business. If you try that, it is a tie-in arrangement. disclose, disclose, disclose

Antitrust

is a business activity that attempts to monopolize, contract, or conspire (or any of these things together) in a way that negatively impacts another's ability to do business

Failure to account

is a form of conversion that occurs when a licensee is required to produce money or property belonging to another in the normal course of business and either cannot or will not produce.

Constructive fraud

is a negligent misrepresentation or concealment of a material fact. When information is not disclosed or false statements are made unintentionally, it may be considered constructive fraud. Here, the false statements or failure to disclose is the result of carelessness or negligence, rather than intent to deceive. This is also called negligent misrepresentation. Any type of fraud may constitute grounds for possible civil action for damages.

Actual fraud

is an intentional misrepresentation or concealment of a material fact. Actual fraud is also when a person actively hides information, or makes statements known to be false or misleading. When any of these is done with an intent to deceive, it constitutes actual fraud. example: if the seller's agent advises the sellers to paint their basement before showing the home in order to hide the smell of mold, and neither the licensee nor the homeowner discloses the mold problem, both are guilty of fraud.

A blind advertisement

is any real estate advertisement used by a licensee that does not include the broker's business name. Most states prohibit blind advertisements, as they could mislead consumers into thinking that the property is for sale by owner.

Misrepresentation

is simply false or misleading information. Misrepresentation could involve any of the following: Documents, such as an altered pay documentation or false information on applications Misstatements, such as telling a buyer a property is 3 acres when it is not Omission, which is failing to mention or disclose information is more than mere puffing, which is an opinion that is not necessarily intended as a representation of fact, such as "best customer service in town!" When a misrepresentation is made to a consumer with the intent to deceive, it is a form of fraud and can result in prosecution. Note that written disclosures or fine print may not necessarily be sufficient to correct a misleading representation.

Culpable negligence

like negligence misrepresentation, occurs if a licensee operates in a reckless, careless, and excessively negligent manner. Culpable negligence is negligence for which one can be held legally accountable.

When showing a listing, a licensee is asked about the condition of the basement. Without having seen the basement, the licensee says that, to the best of her knowledge, the basement is free of dampness. In fact, the basement leaks steadily whenever it rains. This is most likely an example of actual fraud. bait and switch. negligence. no error, since she had never been in the basement.

negligence.

A licensee is generally __________ to any party for false information that the licensee's client provided to the licensee and the licensee in turn provided to another party in the transaction, unless the licensee had _______________ that the information was false or the licensee acted with ______________________

not liable actual knowledge reckless disregard for the truth.

Concealment

occurs when a licensee fails to disclose information that is material to a decision to a party to whom the licensee has such a duty. Typically, a licensee must disclose any fact, report, or rumor concerning the transaction to the principal. If the licensee is aware of the ignorance of a customer about a subject, the licensee may have a duty to speak as well.

Commingling

occurs when a licensee mixes client funds with brokerage funds.

Conversion

occurs when a licensee uses or makes available someone else's funds or property for their own personal or business use.

The Federal Trade Commission also addresses the illegal practice of bait and switch.

occurs when an advertiser makes an alluring but insincere offer to sell a product or service which the advertiser, in truth, does not intend or want to sell. The intent is for consumers to switch from buying the advertised product or service to buying something else, usually at a higher price or in some way more advantageous to the advertiser

False or misleading advertising

occurs when one disseminates or causes to be disseminated any false or misleading information by any means for the purpose of offering any real estate for sale, lease, or rent.

Collusion

occurs when someone forms a scheme with another or designs with another intending to defraud a third party.

Still, a real estate licensee, however, should be very cautious about stating unsubstantiated opinions. In special circumstances, _____________________________. A court may allow recovery based on opinions stated by an expert hired to give advice, or a person who has superior knowledge and is acting in a fiduciary relationship. Someone who states an opinion that they don't actually believe may also be held liable.

opinions may be actionable

Filing false documents

or unauthorized documents in the public record such as liens, contracts, or deeds is a form of fraud.

Federal Trade Commission Act

passed in 1914, creating the Federal Trade Commission (FTC) as the nation's consumer protection agency. The stated mission of the FTC is to Prevent business practices that are anticompetitive or deceptive or unfair to consumers. Enhance informed consumer choice and public understanding of the competitive process. Accomplish this without unduly burdening legitimate business activity. purpose was to prevent unfair methods of competition in commerce.

Who is required to follow the provisions of the NAR Code of Ethics and Standards of Practice? all appraisers and real estate agents who participate in a residential property transaction all real estate licensee any real estate licensee who participates in a residential property transaction real estate licensees who are members of the National Association of REALTORS®

real estate licensees who are members of the National Association of REALTORS®

Antitrust laws

regulate business activities in general, concluding that any restraint of trade practices are so injurious to competition that they could never be justified as anything but unreasonable and, therefore, illegal

A tie-in agreement, also called a tying agreement or tie-in arrangement

results when someone tries to make one transaction or agreement contingent on a second transaction or agreement.

Seller Susie tells her agent that there have been leaks in a bathroom wall from some faulty plumbing, but that the leaks were repaired and that there haven't been any other problems with those pipes. She tells agent Alan not to disclose this information to the buyers, since the problem has been fixed. The agent should say nothing, since he owes the duty of loyalty to the seller. say nothing about the leak, even if asked. tell the buyers about the leak but emphasize that the leak was a minor issue. tell the buyers about the leak and that the buyers are entitled to request an inspection.

tell the buyers about the leak and that the buyers are entitled to request an inspection.

Hank and Jeanine run brokerages on opposite sides of town. They decide they can save a lot of money on gas if they concentrate on their side of town only. Hank agrees to send customers interested in north side properties to Jeanine if she will send him any customers interested in south side properties. This is an example of territory allocation. blockbusting. price-fixing. redlining.

territory allocation.

Sherman Antitrust Act of 1890

the first federal law outlawing practices considered harmful to consumers, such as monopolies. At the time, large corporations accused of anticompetitive practices were organized as trusts, hence the name of the act. Of primary concern with this law is collusion between two or more persons or organizations to limit competition, set artificial price controls, or—through fraud or misrepresentation—attempt to gain an unfair advantage.

collusion

two or more persons or organizations to limit competition, set artificial price controls, or—through fraud or misrepresentation—attempt to gain an unfair advantage.

Clayton Antitrust Act of 1914

was passed to enhance the Sherman Antitrust Act by prohibiting specific anticompetitive practices. For example, it bans mergers and acquisitions as well as price discrimination that lessens competition and creates a monopoly in any line of commerce. It also provides for more stringent penalties to businesses who do not abide by these laws. also authorizes private parties to sue for damages when they have been harmed by conduct that violates either the Sherman or Clayton Act. This can lead to a court order prohibiting the business from further anticompetitive practices.