Introduction to Ethics Flashcards
You may have heard the terms laws, morals, and ethics used interchangeably. They are different, however, and in order to really understand ethical practice, it’s helpful to learn the distinctions. Let’s start with laws.
Laws are rules that are enforced by a local, state, or federal government authority to help create order in society by establishing a “social contract” between citizens and the government.
The “social contract,” in its simplest terms, is the philosophy that individuals, either explicitly or tacitly, consent to comply with laws (sometimes despite their own personal wishes) in exchange for the safety of law and order that the government provides.
Why Laws?
Generally, laws exist to prevent citizens from hurting each other or themselves. If you violate a law, the government is permitted to hand out the punishment it feels fits the crime, and you as a citizen are required to comply.
Of course, if you are wronged by another citizen, the government (aka the law enforcement and courts) is expected to carry out justice on your behalf.
A gavel in front of stacks of books.
Law and the Social Contract
The social contract is what allows the police to throw handcuffs on you when you’re suspected of breaking the law, but it’s also what keeps individuals convicted of breaking the law behind bars away from the rest of the population.
It’s what allows the court to force you to pay a fine for a speeding ticket, but it’s also what allows the court to force another citizen to pay you back any monetary damages they owe you in a lawsuit.
In theory, it’s a mutually beneficial relationship.
Laws only work if we, as a society, agree to abide by them. The looming threat of punishment by our justice system and civil courts is what keeps us in line. As such, it’s the responsibility of all citizens to be aware of the laws.
Ignorance of the Law
As you may have heard before: Ignorance of the law is not an acceptable defense. So when you tell that police officer that you “didn’t know what the speed limit was” when you sped through that intersection, the officer doesn’t care — you’re still getting a big, fat traffic citation. Similarly, you need to be aware of the laws that govern your behavior as real estate professionals.
You can’t simply say, “Oh, I didn’t know that was the law. I’m new to this.”
Laws
Ethics are standards of conduct agreed upon and recognized by a particular group or culture. For example, there are business ethics that pertain to the corporate world. Doctors have a standard of ethics that shape their behavior as doctors.
While laws dictate the bare minimum level of acceptable behavior, ethics dictate what is considered acceptable at a higher level.
We obey laws because if we don’t, we could be incarcerated and/or held financially liable. We behave ethically, however, because it is the right thing to do, whether by society’s standards, by the standards of our industry, or by the standards of whatever group we belong to. Ethics depend on the opinions of others for definition and consensus.
Codes of Ethics
As a real estate agent, you’ll need to not only follow the laws, but also adhere to the codes of ethics agreed upon by your industry. If you belong to an organization like the National Association REALTORS® (NAR), there are consequences for failing to adhere to their Code of Ethics.
Consequences for violating these published codes of ethics can include disciplinary action and loss of membership, as well as potential litigation.
Ethics and Real Estate
A home is the biggest purchase most people will ever make in their entire lives. Think about that. This is the primary investment for the majority of people. As real estate agents and brokers, you are there to facilitate that investment.
The general public places a certain amount of trust in real estate professionals, so it is absolutely vital that you are held to a higher standard of ethics.
Ethics
Morals are the personal values derived from a system of beliefs. Most of us were raised to believe that certain things are right and certain things are wrong. These principles are usually based on religion and philosophy. While morals are generally instilled in us at an early age, our experiences throughout our lives shape and evolve our morals — sometimes a little bit, sometimes a lot, and sometimes not at all.
Belief systems shape our morals by providing guidelines that make it possible for us to make choices and judgments to determine what is right and what is wrong. An example of this is “The Golden Rule,” which is the principle that it is right to treat others the way you would want to be treated.
Moral Compass
Everyone has a “moral compass.” Even people who belong to the same faith or subscribe to the same philosophy can differ in terms of how their personal moral compass guides them. This is because the sum of our experiences as individuals colors how we perceive the world. So, the moral compass may vary between individuals who subscribe to the same faith or philosophy but have very different life experiences.
A hand holding a compass in front of a trail.
Morals
The main differentiating factor here is that:
Ethics are determined by an external group and are standardized.
Morals are held internally and vary by the individual.
An individual’s behavior may be ethical, but not moral in the eyes of that individual. Let’s take a look at some examples.
Scenario: The Public Defense Attorney
Consider the plight of a public defense attorney. An attorney may believe morally that murder is wrong and that those who commit murder should be punished accordingly. However, a public defender is bound by ethics to defend their client in a court of law to the best of their ability even if they know the client is guilty of murder. Is the attorney betraying their personal morals by adhering to professional ethics?
On the one hand, the attorney strongly believes murder is wrong and victims of murder deserve justice.
On the other hand, every American citizen is entitled to competent legal representation. A public defender’s ethical duty is to provide that competent legal representation to ensure the rights of the accused individual are upheld.
In this case, the ethics of the legal profession conflict with the attorney’s personal morals.
Scenario: The Doctor
Let’s consider another example. A doctor may want to comply with the request of a suffering cancer patient and euthanize that patient. However, euthanasia is not generally permitted by the ethical standards of the medical field (and is illegal in most states).
Perhaps the doctor is of the opinion that euthanasia is moral. The doctor may hold the belief instead that allowing the prolonged suffering of a patient who wishes to die is immoral.
In this case, the ethics of the medical profession conflict with the doctor’s personal morals.
Ethics vs. Morals
Life is full of choices, Anthony. We choose how we want to behave. Consider how our approach to behavior differs with regard to law, ethics, and morals:
Why behave lawfully? Because if we don’t, we could be incarcerated, pay monetary damages, and have a criminal record.
Why behave ethically? Because a group to which we belong (e.g., society, professional industry) has deemed it as “the right thing to do.”
Why behave morally? Because our personal values compel us to behave in a way that we deem as being right. In essence: because our conscience tells us to.
Here’s a visual so that you can compare the three.
A chart separating terms labeled laws, ethics, and morals with details of each.
Image description
Review: Laws, Ethics, and Morals
Now that you understand these more abstract concepts, let’s get down to nuts and bolts. We’ll spend the rest of this chapter talking about the NAR Code of Ethics.
What Is a Realtor?
Getting a real estate license does not make someone a Realtor (also written as REALTOR®). That person would simply be called a license holder.
However, most real estate professionals join a board of Realtors, such as NAR or the Arizona Association of Realtors (AAR). The AAR has local associations, too, such as in Tucson, Prescott, etc.
Someone makes the move to become a Realtor because they see the value of belonging to an organization that provides so many benefits, including access to a Multiple Listing Service (MLS).
Realtor Boards
Here are some things that a Realtor board does:
Resolve complaints between members. The board will provide mediation, hold hearings, etc. If there is a commission dispute, members agree not to sue, but instead to go through mediation and/or arbitration.
Decide penalties for members. This could include taking away MLS privileges or requiring extra continuing education. While a Realtor board can discipline members, only the licensing agency (in Arizona, the Arizona Department of Real Estate, or ADRE) can suspend or revoke licenses.
Hear ethics complaints. Unless it’s a violation of license law (in Arizona, the Arizona Revised Statutes or the Arizona Administrative Code), it’s the Realtor board, not the agency (i.e., the ADRE) which hears ethics complaints.
Note: The AAR only has jurisdiction over its members.
Less Likely to Become a Realtor
There are two groups who are less likely to become Realtors:
License holders who work in a rural area where the board does not exist or is too far away.
License holders who practice commercial real estate. They have their own methods of sharing listings with each other. However, the local board is available to them, and some do join it.
A Higher Standard
Realtors are different from other real estate practitioners because NAR’s Code of Ethics and Standards of Practice requires a higher standard than the law requires. If you belong to NAR, you gotta follow this code! That title is a mouthful, so for the purposes of this level, we’ll refer to this document as the NAR Code of Ethics. Sound good? 👍
License Holder vs. Realtor
The NAR Code of Ethics has been guiding real estate industry practices for many, many years. There have even been a few instances in which courts have used the NAR Code of Ethics as their guide to deciding the outcome for an accused party, even when the accused was not a member of NAR!
The Code of Ethics aims to make it a little bit easier for you to make good choices in your capacity as a real estate professional. It demands that you treat ALL parties fairly and honestly — not just those you represent.
Recall that the NAR Code of Ethics requires a higher standard than the law requires. However, if the Code of Ethics and the law conflict, the law takes precedence.
Origins
The NAR Code of Ethics was adopted in 1913 to establish a widely held code for conducting business in a proper fashion. Over time, the Code of Ethics has evolved to keep pace with practices and business concepts that may have changed or developed throughout the Code’s life span.
You may get tested on that 1913 date. Here is a silly memory trick. The Titanic sunk in 1912 (close enough). Think to yourself, “NAR-ver let go, Jack!”
Updated Annually
The NAR Code of Ethics must change with the legal issues and practices of the time to remain relevant and maintain its place as the industry standard. To do this, NAR updates it annually.
Code Content
The Code of Ethics consists of a:
Preamble (an introduction)
17 Articles
These articles cover three main categories of duties:
The first nine Articles are Duties to Clients and Customers
Articles 10 through 14 are Duties to the Public
Articles 15, 16, 17 are Duties to Realtors
Standards of Practice
Some of the Articles are further clarified by Standards of Practice. A Standard of Practice gives an example of how a particular Article has been applied.
NAR Code of Ethics
The complaint filed most often under the code regards Article 12.
Article 12 states agents must be honest and truthful in their communications, advertising, marketing, and other representations.
Gotta Use the Word “Realtor”
The pitfall for license holders is often that, when a Realtor writes ad copy, they are supposed to put the word “Realtor” in the ad somewhere.
Quite a few Realtors have gotten themselves into trouble for failing to disclose the name of their real estate company and/or their professional status as a Realtor in advertisements, which they were using for farming for listings.
Farming means that the Realtors were trying to send out “seeds” in hopes of receiving a “harvest” of listings.
Email Addresses
If a license holder joins a local board and becomes a Realtor, there are email addresses available with the word “Realtor” in the name, as well. This can be a helpful way for Realtors to automatically make their identity as a Realtor known.
You can obtain one of these email addresses by contacting NAR.
Cite Your Sources
License holders have to be honest in all their communications, including advertisements.
Whenever you report a fact in your advertisements or listings, quote the source from which you got the information. This practice can be helpful in lowering your liability if it turns out that what you stated as a fact is actually a piece of misinformation.
Like your school teachers used to say, always cite your sources! 📖
Article 12: Truthful Advertising
Article 16 instructs Realtors NOT to interfere with exclusive representation or agreements.
Basically, do NOT attempt to steal away someone else’s clients. That’s not cool, Anthony!
Parents with their 2 children smiling while sitting on the couch.
Accidental Stealing
Of course, it’s possible that you’ll contact a potential client (who is already represented by someone else) on accident. For instance, a license holder could be farming for listings and mail an advertisement to owners who are already represented.
Realtors should never jump to conclusions. It’s always good to try and sort any issues out with good, old-fashioned communication.
Rather than automatically filing a complaint under the Code of Ethics, the agent who felt that their client was being stolen should try to get clarification from the other agent first.
Check the MLS
To avoid confusing situations altogether, take a careful approach if you do choose to send mailers out to an entire neighborhood and mass-advertise:
Check your MLS. Are any homes in the neighborhood already listed?
If so, remove those addresses from your mailing list.
Customers Who Don’t Disclose
Confusion could also come from the customer’s end. Maybe a customer contacted you and failed to mention that they already have representation. The customer:
May be unsatisfied with their current agent and seeking another agent without properly terminating their first representation agreement.
May not even know they are not supposed to contact other agents.
In these cases, the best thing to do is:
Clarify whether or not there are existing agency relationships. It’s your duty as an agent to make a reasonable effort to find out if a person is currently in a valid exclusive agreement before signing on to work with them.
Inform the customer that you can’t represent them while they are in a contract with another license holder.
Communicate what happened with the customer’s agent.
Article 16: Respect Existing Agreements
It’s all about doing the right thing, even when no one is looking. Follow your moral compass, and keep a copy of the NAR Code of Ethics nearby as reference material.
Clients and Customers
If you work and act in an ethical way, clients and customers will respect that. If you earn their respect, those people will sing your praises in the community and more business will come to you.
Remember OLDCAR? You owe your clients fiduciary duties. However, with both customers and clients, you must deal honestly and fairly.
NAR Consequences
NAR has a list of consequences for violations of their Code of Ethics as well, which can include:
Letter of Warning
Letter of Reprimand
Required education
Appropriate and reasonable fine
Member put on probation
Membership suspended
Expulsion
Suspension or termination of MLS privileges
License Holders vs. Realtors
Keep in mind, not all license holders are Realtors, so not all have to adhere to this Code. But almost every state has developed laws that parallel what the Code of Ethics says.
Do the Right Thing
Let’s end this chapter with a discussion of the various parties related to a real estate transaction. Who are they, and how do they all work together? Some of this will be a review from earlier in the course.
Licensed Contractors
As a real estate licensee in Arizona, you will be expected to know the basic licensing requirements of contractors in Arizona and the importance of using their services.
Every contractor who does remodeling or construction for a commercial or residential client needs to be licensed and bonded. If a project is going to affect the structure, plumbing, gas, or electrical or mechanical systems, a licensed contractor is required. So if you have clients mention home renovations, help ‘em out by warning them of this requirement.
The state agency that licenses and regulates the activities of contractors is called the Arizona Registrar of Contractors. Some things to know about them:
If they catch someone contracting without a license (first violation), they can impose a maximum fine of $1,000 plus an 83% surcharge.
They retain all license applications and licenses for at least seven years.
Note: Because of the “handyman exemption,” a handy person without a license can perform jobs that cost less than $1,000. However, if an investment property is going to be sold or rented within one year, all work must be done by licensed contractors.
Mortgage Loan Originators
A mortgage loan originator is an institution or an individual that takes a borrower through a review process that will culminate in a loan agreement. Two common types of mortgage originators are mortgage bankers and mortgage brokers
You should expect that your clients will come to you for references of reputable mortgage bankers and mortgage brokers in the area.
The Arizona Department of Financial Institutions (AZDFI) is charged with the licensing, supervision, and regulation of state-chartered financial institutions and enterprises. This includes mortgage bankers, mortgage brokers, loan originators, escrow agents, consumer lenders, and more. Through this oversight, AZDFI ensures the safety and soundness of the financial services industry in Arizona.
On a federal level, the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) created the Nationwide Mortgage Licensing System and Registry (NMLS), a nationwide database of licensed mortgage loan originators (MLOs), and required every state to participate in the registry.
Home Inspectors
The purpose of a home inspection is to locate any physical faults that may affect the safety or value of a home. The home inspection is a vital part of the home-buying process because it can reveal important defects and issues. A home inspection can make or break an entire transaction.
Every buyer should be strongly advised by their agent to get a general home inspection, along with any other inspections the general home inspector might suggest. It’s important your buyer understands that a seller’s disclosure statement does not serve as a substitute for a proper home inspection.
In Arizona, the Board of Technical Registration (BTR) certifies and regulates the practice of home inspectors. It also oversees alarm industry professionals, architects, engineers, geologists, landscape architects, and surveyors.
Pest Management
The Pest Management Division (PMD) is the state agency that licenses, educates, and regulates the pest management industry in Arizona. It is part of Arizona’s Department of Agriculture. The PMD is guided by the Environmental Protection Agency regulations and state statutes and rules.
Everyone Works Together
So many working parts, Anthony! It’s helpful to know what these other professionals do so that you know who to call, and for what reason, to get your clients into the right hands.
Remember, part of competency is staying within your lane. Grow your network so you can do what you do best, and refer as needed in order to be an ethical practitioner!
The Cooperative Nature of Real Estate
Congrats on being a little more ethical than you were when you began this chapter (maybe)! And look at you – you’ve explored some messy situations and learned how NAR can help you navigate them!
But before you leave this chapter behind, let’s review some of the important terms, concepts, and principles you’ve learned along the way.
Key Term
Here is the key term you learned in this chapter:
ethics
standards of conduct agreed upon and recognized by a particular group or culture
Key Concepts & Principles
Here are the concepts and principles you’ll want to master from this chapter.
Laws, Ethics, and Morals
A chart separating terms labeled laws, ethics, and morals with details of each.
Image description
License Holder vs. Realtor
Getting a real estate license does not make someone a Realtor. That person would simply be called a license holder.
Because not all license holders are Realtors, not all license holders have to adhere to NAR’s Code of Ethics. But almost every state has developed laws that parallel what the Code of Ethics says.
NAR Code of Ethics
A table of the NAR Code of Ethics Duties to Clients and Customers, the public, and realtors.
Image description
The Cooperative Nature of Real Estate
There are a bunch of other professions related to real estate: contractors, mortgage loan originators, home inspectors, etc. These professions are all regulated, just as yours is. It’s helpful to know what these other professionals do so that you know who to call, and for what reason, to get your clients into the right hands.
Chapter Summary
Let’s get this party (I mean chapter) started with some straight talk about liability, which is the state of being responsible for something.
As an agent, you’re gonna have a lot of liability. That means that there are a lot of things that, if you mess them up, you can be held legally responsible for. It’s probably the biggest thing you have to worry about, and it’s what puts agents at risk of dealing with some serious consequences.
Causes of Liability
The following reasons help explain why you could be vulnerable to others taking legal action against you.
Money When thousands (and hundreds of thousands!) of dollars are at stake, people are less likely to "just let it go" if they feel that they have been wronged.
Details
We’re talking multiple clients, calendars full of important dates, and loads of legal documents. Sometimes things fall through the cracks or errors are made.
Boundaries
There are many boundaries license holders can’t cross. That means you should always act according to your fiduciary duties and never give legal advice that you’re not qualified to give.
Vicarious Liability
Brokers are vicariously liable for the license holders that are employed under them. Vicarious liability makes one liable without wrongful intent and even though they did not commit the actual, physical act or omission that directly generated the damage.
If you have a child, it’s kinda like when you have to apologize for them making brutally honest observations in public. 😳
Liability
Risk isn’t just a board game. It’s also an element in practicing real estate. Liability, E&O, ACTOR – it’s all part of learning what the risks are, as well as how to navigate them. The more you know, the better prepared you’ll be.
But before you leave this chapter behind, let’s review some of the important terms, concepts, and principles you’ve learned along the way.
Key Term
Here is the key term you learned in this chapter:
liability
the state of being responsible for something
Key Concepts & Principles
Here are the concepts and principles you’ll want to master from this chapter.
Causes of Liability
Let’s review why you could be vulnerable to others taking legal action against you:
Money: When so much money is at stake, people are less likely to “just let it go” if they feel that they have been wronged.
Details: We’re talking multiple clients, calendars full of important dates, and loads of legal documents. Sometimes things fall through the cracks or errors are made.
Boundaries: There are many boundaries license holders can’t cross. That means you should always act according to your fiduciary duties and never give legal advice that you’re not qualified to give.
Vicarious Liability
Brokers are vicariously liable for the license holders that are employed under them. Vicarious liability makes one liable without wrongful intent and even though they did not commit the actual, physical act or omission that directly generated the damage.
ACTOR
The Acronym ACTOR for the approaches to risk management.
Image description
Insurance
Insurance is another risk-management tool. There are lots of types, including:
General liability (aka public liability)
Workers’ compensation
Casualty
Surety bonds
Fire and extended coverage
Flood
Business interruption
Renter’s
Commercial
Hazard
Contents and personal property
Errors and ommissions (E&O)
Chapter Summary
