ETHICS

Keith W. Tellinghuisen

REAL ESTATE EDUCATIONAL SERVICES

SANTA ANA, CALIFORNIA 92705

REAL ESTATE EDUCATIONAL SERVICES, All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or any other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

…From the Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.

EACH COURSE EXPIRES ONE YEAR FROM DATE OF PURCHASE

Course Tuition CANNOT be Transferred to

Another Person

ETHICS Information Sheet and Student Instructions

IMPORTANT — READ CAREFULLY BEFORE PROCEEDING

This course is approved for Continuing Education credit by the California Department of Real Estate. However, this approval does not constitute an endorsement of the views or opinions, which are expressed, by the course sponsor, instructor, authors or lecturers.

I. COURSE OBJECTIVE: The objective of the course "Ethics" is to point out those areas of conduct which may give rise to fraud or dishonest dealing; and to encourage those business practices which are beneficial to the best interest of all licensees as well as the public they serve.

II. GENERAL INSTRUCTIONS

A. This course is a traditional correspondence (with a downloaded textbook). This course is based on the textbook titled “Real Estate Ethics” Published by Real Estate Educational Services.

B. HOW TO PROCEED:

1. Read the Ethics book paying special attention to the ethical responsibilities of a real estate licensee.

2. Final Examination - No more than 15 hours of Continuing Education credit can be earned in any

24-hour period. a. You can take the final exam online once a day has passed from your date of purchase. b. The final examination can also be taken at our office in Santa Ana, or monitored by a test

administrator in your area. (The test administrator cannot be related by blood, marriage, domestic partnership, or any other relationship to the student taking the exam, which would influence them from properly administering the exam. A test administrator may charge a fee for monitoring your exam.)

c. If using a test administrator, call the Testing Department at Real Estate Trainers (714) 972-2211 or (800) 282-2352 with the name, address and daytime telephone number of that person.

d. You will have a maximum of 15 minutes to complete 15 multiple-choice questions. The test

is open book. A score of 70% (11 questions) or better is passing and entitles you to a certificate of completion.

e. If you test online your exam will be graded immediately and you will know your score. You can print your Certificate of Completion once all courses in your account are completed. With the Certificate/Approval numbers you can renew your license on the DRE website.

If you use a test administrator, when you finish the exam, return it and your answer sheet to the test administrator, who will complete a “Certificate of Test Administrator” form and place the test, the answer sheet and the form into the enclosed self-addressed envelope and seal it (make sure you put the correct postage on the envelope). The test administrator will then mail the envelope to:

Real Estate Trainers, Inc 2428 North Grand Ave., Ste. K Santa Ana, CA. 92705-8708 f. If you pass, we will mail you a certificate of completion within three business days from the

time we receive the exam packet from the test administrator.

g. If you do not pass the final exam, you may take an alternate final exam within your 1-year

enrollment at no additional charge. Simply request an alternate final exam from the Testing Department.

III. REFUND POLICY

A. A student submitting a written request for a refund within 10 days of purchase and returning all

materials unused will receive a full refund less a $10 processing fee. If the materials have been used, an additional amount will be retained by the school. No refund will be issued once the final exam has been requested.

IV. CERTIFICATION

A. Completion of this course, as approved by the California Department of Real Estate, provides credit

for 3 hours of Continuing Education for renewal of a California Real Estate license. (Business & Professions Code 10170.5(1))

V. EVALUATION

A. We invite your suggestions for ways we can improve our courses. Course feedback can be emailed to feedback@retrainers.com. A course evaluation form is also available at the Department of Real Estate website, www.dre.ca.gov; Click on Course and Instructor Evaluation.

COPYRIGHT © 2011 BY REAL ESTATE TRAINERS, INC. ALL RIGHTS RESERVED

No part of this course may be reproduced in any form, electronic or mechanical, including

photocopy, recording, or any information storage and retrieval system.

Ethics

The real estate profession is often thought of as dealing primarily with residential, industrial and commercial property. While a real estate professional needs to know about real property, the real estate profession does not deal first and foremost with real estate, but rather with people. Real estate agents are not valued primarily because of their ability to understand and analyze buildings and land, but rather for their ability to deal with people, to bring together buyers and sellers through successful negotiations. Whenever people need to work together, it is important that they do so ethically. This text will examine:

Table of Contents

Chapter 1. Ethics…………………………………………………………………..5

Chapter 2. Ethics & Agency………………………………………………………9

Section 1. Working With Buyers

Chapter 3. Dealing With Other Licensees……………………………………..18

Section 1. Ethical Advertising

CHAPTER 1

Ethics The word “ethics” comes from the Greek word ethikos, which means “honesty” or “character.” One definition of the term says that ethics is “A system of moral principles, rules, and standards of conduct.”

As long as people have been living together, there has always been a need to develop some system of ethical conduct. There has never been a unanimous agreement on just what exactly constitutes good behavior. In some societies, good conduct is whatever the king or chief says it is. Some have argued that ethical conduct should be determined by pure reason. Others have held that ethical conduct can only be determined by a standard set by God, a standard separate from man himself. Others have argued that the ultimate goal must be whatever leads to the happiness of the individual.

This course will leave these arguments to the philosophers. Perhaps the most widely accepted statement of ethics comes from the Bible (Matthew 7:12), and is known as the Golden Rule. While there are several common translations of this concept, virtually everyone will recognize the words “Do unto others as you would have them do unto you.” Whatever one’s religious faith, or even if one has no religious faith, it would be difficult to argue against the Golden Rule as a beneficial standard for ethical conduct.

The essence of the Golden Rule, and of any honorable system of ethics, is that it is important for each person to consider the good of others, rather than only what is good for one’s self. Certainly, any society would be a better place to live if all of its members always behaved in accordance with the Golden Rule.

Of course not everyone always abides by the Golden Rule. One common distortion of the Golden Rule says, “Do unto others before they can do unto you.” This is a complete reversal of the underlying philosophy of putting others before self. The real estate industry has its own unique distortion of the Golden Rule, which is sometimes called the Golden Rule of Real Estate and says “He who has the gold makes the rules.” While no one disputes the power that buyers have, the logical conclusion of that philosophy is that the seller’s interests mean nothing. Only those with the money can determine what is right and wrong.

How to be Ethical If others always behaved in accordance with the Golden Rule, it would then be much easier for each of us to abide by it as well. It is when one party tries to do what is “good” and the other party turns that to his or her own advantage that the benefits of ethical conduct are called into question. Any adult can relate to the bitter feelings that result when one discovers that a person took advantage of them in selling some product.

Part of the problem results from the conflict of interest that is inherent in any commissioned sales position. The salesperson only makes money when a purchase is made, which leads to the temptation to complete the sale at all costs, regardless of what is really best for the customer. The only way to completely avoid this conflict is to compensate salespeople solely on a salaried basis. Yet experience shows that when compensation is not affected by effort, the amount of effort will inevitably decline. How many top-producers in any real estate office would produce the same results if their income did not increase when their

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production increased? While the elimination of commissions in sales careers is an interesting theoretical discussion, no one with any practical experience expects commissions to disappear any time soon.

It is a fact of human nature that people work harder when they will personally reap the rewards of their efforts. One of the most famous illustrations of this concept is what happened to the Pilgrims when they first came to the New World. When the Pilgrims first arrived and founded the Plymouth Colony, they operated their settlement on a communal basis. They all tilled the soil together and reaped the common reward. The result was that they nearly starved to death in the first winter. The next year, they gave up their communal structure and assigned individual plots to each family, with the result that production increased dramatically and the colony thrived.

How, then, does one deal with this conflict of interest between the salesperson’s desire for a commission and the best interests of buyers and sellers? The key to an effective resolution of this conflict is to develop some sense of perspective by looking at the larger picture. In order to understand this concept, we will divide transactions into two categories: win-lose transactions and win-win transactions.

• In a win-lose transaction, one party gains a benefit while the other party feels cheated. Unethical salespeople will part buyers from their money and leave them with the feeling that they did not get full value for the amount of money spent.

• In a win-win transaction, all parties feel that they got what they wanted. The seller got the money, the buyer got the property (or product) and the salesperson got the commission. In this case, the salesperson has provided a valuable service by bringing together the buyer and the seller and all parties receive a benefit.

Salespersons and brokers can comply with the Golden Rule and still earn a good living if they always try to create win-win transactions. People are most likely to resent paying a commission if they feel that they were the losers in the transaction. On the other hand, if both the seller and the buyer feel that they got what they wanted, they are much less likely to resent paying a commission to the licensee. (Some people will always resent paying any commission, but not all buyers or sellers are always ethical, either.)

Why Be Ethical? Ask a new real estate licensee why he or she decided to get a real estate license and the answer is most likely to boil down to one word: “Money.” People see the high incomes of successful real estate agents and brokers and decide that they would like to achieve similar results. In and of itself, there is nothing wrong with wanting to achieve a higher income. People who earn a high income are better able to support their families and educate their children and pay their taxes, all of which are to the good of society. The real question is what is the cost to society for this higher income. If a salesperson generates a great many win-lose transactions, the salesperson has a high income (at least in the short term), but the real estate profession’s image and reputation is harmed, to say nothing of the cost to society of increasing the number of angry people. Conversely, if a salesperson generates many win-win transactions, the salesperson has a higher income, the real estate profession’s image and reputation benefits, and society benefits from increased ownership of real estate.

Whether a salesperson behaves in an ethical or unethical manner often depends on that salesperson’s time frame. If a salesperson is only concerned with the short-term results of his or her sales activities, it may not make much difference whether or not those activities result in win-win transactions. The salesperson earns the same commission either way. If, however, the salesperson takes a long-term view of his or her career, the importance of generating win-win transactions becomes more apparent. If one looks at the most successful real estate agents and brokers, one will find that the longer the person is in the business, the more referrals he or she gets from satisfied customers and clients.

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People who enter the real estate business in search of a career will soon learn that the most important tool they have is their reputation. Those who have a large base of satisfied customers will reap the rewards in terms of referrals. Those who leave a trail of unhappy clients and customers will reap the results as well. Their clients are going to tell their friends and neighbors to avoid those salespeople at all costs.

One result of this situation is that brokers who are recruiting new salespeople should make every effort to find people who want to make real estate their career, not just a source of quick money. The damage that a “quick-buck “ artist does to the reputation of a real estate office is not worth the commission income generated in the short-run. Added to that is the cost of training a new salesperson, which is much more justifiable if it leads to a career salesperson, rather than a short-term employee.

Excuses Whenever a person violates any rule, it is always a temptation to come up with some excuse for the person’s actions. Violations of ethical standards are no exception to this generalization. People who violate standards of ethical conduct will often find ways to excuse their actions.

Perhaps the most common excuse is that the rule is frequently violated. This is a variation of the common childhood excuse, “But Mom, everybody else is doing it!” No doubt every child tries that at least once during their life, usually with the response, “If everybody else jumped off a bridge, would you have to do so as well?” One may rest assured that the California Real Estate Commissioner would be similarly unimpressed with such an excuse when someone tries to justify unethical conduct in the real estate business.

Another common excuse is, “If I didn’t do it, someone else would.” This stands the purpose of ethical standards and conduct on its head. Instead of considering the welfare of others, one considers only the self. We cannot control the actions of others, but we can control our own actions.

While there are a great many other potential excuses for unethical conduct, they all result in putting the self ahead of others. Such conduct results in a string of win-lose transactions, which can only damage one’s career in the long-run.

Legal vs. Ethical Conduct It should be noted that what constitutes ethical conduct and what constitutes legal conduct are not necessarily the same thing. The goal should be conduct that is both ethical and legal. Many things are both unethical and illegal, such as stealing. There are, however, actions that may not be ethical, but are not illegal. There can even be actions which are ethical, but illegal.

There are many examples of conduct which is unethical, but not illegal. Most of us would agree that an adulterous affair is unethical conduct with respect to one’s spouse. It is another case of putting the self ahead of the other. Yet few of us would want adulterers to be put in jail. This conduct would be a matter for the spouses to work out between themselves, not rising to the level of punishment by imprisonment.

There can be cases of ethical conduct which is illegal. Thankfully, these are rare, but they can happen. Suppose that one owned a diner in the southern part of the United States during the era of segregation (“Jim Crow”) laws which required separation of the races. It was illegal to serve a meal to a black customer, yet doing so would constitute ethical conduct, since it puts the other ahead of the self.

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Chapter 1 Practice Questions 1.) “A system of ________ ___________, ________, and ____________ ___ _________,” would be

the definition of Ethics.

A. “Natural disasters, weather reports, and government policies.” B. “Disorderly conduct, violence, and mental illnesses.” C. “Love, hate, and relationships.” D. “Moral principles, rules, and standards of conduct.”

2.) If all of its members always behaved in accordance with the __________ ________; then any society would be a better place to live.

A. Golden Rule B. Silver Rule C. Good Rule D. Bad Rule

3.) The only way to compensate people solely on a ________ _______, is to avoid any commissioned sales position of interest that is inherent.

A. State Basis B. Salaried Basis C. Policy Basis D. Catastrophic Basis

4.) While there are many other possible excuses for unethical conduct, the aftermath in putting the self ahead of others. Such conduct results in a number of ___________ ______________, which can only ruin one’s career in the long-run.

A. LostTransactions B. Win-Lose Transaction. C. Money Transactions D. Coconut Transactions

5.)The goal should be conduct that is both __________ and ___________. It should be noted that what constitutes ethical conduct and what constitutes legal conduct are not necessarily the same thing.

A. Victorious and Gratuitous B. Computerized and Technical C. Ethical and Legal D. Wise and Diplomatic

1. ANSWER: D. – “Moral principles, rules, and standards of conduct.” 2. ANSWER: A. – Golden Rule 3. ANSWER: B. – Salaried Basis 4. ANSWER: B. – Win-Lose Transaction. 5. ANSWER: C. – Ethical and Legal

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CHAPTER 2

Ethics & Agency Real Estate professionals earn their income through the establishment of agency relationships. Every time a salesperson or a broker earns a commission or a fee, it is as a result of some form of agency relationship, whether a listing agreement, management contract, or financing arrangement. An agency relationship exists when one person represents another person in a transaction. The agent is the person or firm who represents the principal in the transaction.

Overview of Agency The most common way that an agency relationship is created in the real estate business is when a property owner signs a listing agreement with a salesperson or a broker. It would also be created through the execution of a property management contract. It is now becoming more common for real estate offices to ask for some variation of a buyer’s listing, whereby a buyer gives the salesperson or broker the exclusive right to represent him or her in the purchase of property.

In a sale transaction, the real estate licensee can act as agent of:

• The seller,

• The buyer, or

• Both the seller and the buyer.

The real estate licensee who takes a listing contract from the owner of a property most often acts as agent of the seller. This licensee would be representing the seller in the transaction and would therefore have a fiduciary obligation to the seller. This fiduciary obligation requires the licensee to put the interests of the seller ahead of the interests of all others, including those of buyers and of the licensee personally. As will be discussed later, the licensee has certain obligations to third parties (buyers), such as full disclosure and fair and honest dealings, but the only fiduciary obligation is to the seller.

In some areas (and in some offices) it is becoming a more common practice for licensees to obtain “buyer’s listings,” which authorize the licensee to be the sole agent for the buyer in the buyer’s purchase of a property. In this case, the agent’s fiduciary obligation would be to the buyer. The agent would owe the seller the obligation of full disclosure of material facts and fair and honest dealings, but the higher (fiduciary) obligation would be to the buyer.

Licensees can also act as agent for both the seller and the buyer, but this would be legal and ethical only if it was done with the permission of both parties. The licensee would have to disclose to both parties that the licensee is acting as agent of both parties.

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Ethical Creation of Agency The ethical implications of the agency relationship begin before the agency even starts. The licensee must be careful that unethical means are not used to obtain the listing which creates the agency relationship. Some licensees will overestimate the value of the owner’s property in an effort to obtain the listing. Naturally, a property owner who is considering listing his or her property with one of several licensees will be attracted to the one who claims to be able to get the highest value of for the property. Overstating the property’s value is sometimes seen as a way to gain an advantage in obtaining the listing. The licensee then hopes to get the owner to lower the price at some later date.

It is not always the licensee who overstates the value of the property. Owners will often have an unrealistic opinion of the value of their property. They feel that their home is the best in the neighborhood, perhaps in part because of all the fond memories they associate with the home. It could well be that it is the owner who has an exaggerated sense of the value of the property. The licensee may simply be agreeing with the owner’s expectations in an effort to obtain the listing.

Whether the overvaluation is instigated by the licensee or the homeowner, it would be unethical conduct for a licensee to obtain a listing through an overstatement of the value of the property. In the long run, it is contrary to the agent’s interests as well, since an overvalued property is not going to attract as much attention in the market as it would if it been priced more realistically. New salespeople are sometimes especially tempted to overprice the home in an effort to obtain the listing. They soon learn, however, that a listing contract, by itself, does not create any commission income. If the new salesperson has a great many listings, but they are all overpriced, the salesperson is not likely to see many of those listings translate into closed sales.

Sometimes, licensees are tempted to set the listing price too low, so that they can be assured that the property will sell and generate a commission. They are willing to trade a potentially higher commission for a virtually certain lower commission. The ethical implications of this action are obvious. The property owner is not getting full value for the property, which makes this agency relationship an expensive one indeed.

One of the reasons that people use the services of real estate licensees to sell their properties is to take advantage of a professional’s estimate of the proper market valuation of those properties. An undervaluation damages the principal’s interests by not getting full value for the owner. An overvaluation damages the principal’s interests by reducing the willingness of buyers to consider the purchase of that property. One of the ethical obligations of a licensee is to make a competent valuation of the property and set a realistic listing price.

This discussion should not be taken to mean that a listing price should never be set above a property’s fair market value. Determining the value of a property can be as much of an art as it is a science. It can often be difficult to set a single price as being the market value of a property. Sometimes a price range is more realistic, such as between $240,000 and $260,000, for instance. In such a case, it might well be reasonable to set a listing price slightly above $260,000. Experience has shown that in most situations it is easier to lower the price than to raise the price. Further, a slightly higher listing price allows room for the often inevitable bargaining that goes on between buyers and sellers. While it might be perfectly ethical to list this sample property for $268,000, a listing price of $320,000 would be difficult to justify.

The ethical obligation of a licensee to assist the property owner in setting a realistic listing price carries with it several important implications:

• The licensee must become familiar with the real estate market in which the property is located. This would include the obligation to be aware of recent sales in the area and how the sales prices were influenced by property characteristics, such as lot size, conditions, room counts, etc.

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• The licensee must be aware of recent trends in sales prices. In a rising market, listing prices can be set more aggressively than in a declining market, for instance.

• Licensees should be aware of the recent trends in marketing time, meaning how long the typical property is on the market prior to the sale.

Another ethical implication in the creation of an agency relationship concerns the agent’s obligation to obey the instructions of the principal. This is one of the fiduciary duties the licensee undertakes when agreeing to act as the agent of the principal. There are limits to this obligation to obey the instructions of the principal, however. The agent cannot violate any state or federal law, whether or not instructed to do so by the principal. Examples of instructions from a principal which would violate state or federal law would include:

• A principal might instruct the licensee not to show the property to minority prospects. Compliance with such an instruction would violate both federal and California fair housing laws.

• A principal might instruct the licensee not to inform buyers about specified defects of the property, such as a leaky roof. While a seller’s agent owes no fiduciary obligation to a buyer, there is a duty of fairness and honesty, plus a duty to make full disclosure of all material facts to the buyer. Compliance with such an instruction would operate as a fraud upon the buyer and would violate both ethical and legal standards.

Licensees also need to be aware of the fact that they have disclosure requirements to the principal and to third parties when an agency relationship is created. Specifically, licensees need to disclose, as soon as possible, whether they are acting as agents of the seller, agents of the buyer, or agents of both the seller and the buyer. For instance, a licensee who takes a listing on a property will most often act as agent of the seller only. Upon signing the listing contract, the agent will also give the seller a disclosure form which specifies that the licensee is acting as agent of the seller and which will spell out the agent’s obligations and rights under the agency relationship. This disclosure is usually confirmed when an offer is presented.

When a licensee first begins dealing with a prospective buyer of a property, whether or not the property is listed with that licensee’s office, the licensee must also give a disclosure form to the buyer. This disclosure will reveal whether the licensee is acting as the agent of the buyer, the agent of the seller, or the agent of both the buyer and the seller. This disclosure form will specify the obligations of the agent towards the buyer, whether the obligation is a fiduciary one (if acting as agent of the buyer) or one of honesty and fairness (if acting as the agent of the seller).

Obligations of Agency As stated earlier, when a licensee agrees to act as agent for a principal, the agent has a fiduciary obligation towards that principal. This fiduciary obligation imposes several duties upon the licensee, including:

• A duty of due diligence;

• The avoidance of conflicts of interest; and

• Respecting the confidential nature of information received.

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Due Diligence

The typical listing contract is a bilateral contract, which means that both parties to the contract make promises. The seller promises to pay a commission to the broker upon specified conditions and the broker (along with the salesperson) promises to “use diligence” in procuring a buyer for the property. This promise to use diligence simply means that the licensee will use his or her best efforts and take all reasonable steps to sell the property.

Part of this due diligence obligation would include the need to publicize the fact that the property is for sale. Normally, a broker or salesperson would be expected to have an advertising plan for the property. There is no one standard for how much advertising is enough, but common sense would argue that the licensee should, at a minimum, conduct at least as much advertising for the subject property as for other, similar properties. If the licensee feels that advertising would not be necessary, ethical standards would require that opinion to be disclosed to the property owner.

Along the same lines, a licensee would be expected to promote the sale through other real estate offices in the area. This is normally accomplished through the local Multiple Listing Service (the “MLS”) which is operated by the local board of REALTORS®. It is to the seller’s advantage to have the property included in the MLS, so that all of the members of the board can be looking for buyers, rather than only the listing office.

When a licensee obtains a listing on a particularly desirable property, it can sometimes be tempting not to put the listing on the Multiple Listing Service, so that the licensee will be less likely to have to share the commission with another office. This would be unethical, since it would always be to the seller’s advantage to have as many offices looking for buyers as possible. It would also violate most listing contracts, which obligate the licensee to put the listing on the MLS within a specified period of time. The elimination of this provision of the listing contract can only be done with the express, written permission of the seller, and then only if there would be some advantage to the seller in doing so.

The primary aspect of the licensee’s due diligence requirement is the obligation for the licensee to do his or her “best” in trying to market the property. This is a classic example where the standards of the law and the standards of ethical conduct will differ. It is difficult to codify what constitutes one’s “best efforts” into any meaningful law. Certainly it would make no sense to enact legislation that a licensee who takes a listing must always advertise the listing some stated number of times. Nor would it make sense to enact a law which creates a requirement that the licensee must always conduct an open house for each and every listing. When a listing expires without resulting in the sale of the property, ultimately it is only the conscience of the licensee which can determine whether that licensee has given his or her “best efforts” to trying to sell the property.

Avoiding Conflicts of Interest

One major component of the licensee’s fiduciary obligation to the principal is the avoidance of conflicts of interest, where one action by the licensee would benefit the principal and another would benefit the licensee personally. One common area of conflict of interest involves situations where a licensee is buying or selling property for his or her own account. If a licensee is selling his or her own house, for instance, and takes a listing on a similar home in the same neighborhood, the licensee might be inclined to market his or her own home more aggressively. It is also a conflict of interest for a licensee to purchase a listed property for immediate resale, given that licensee’s obvious interest in obtaining the lowest purchase price possible. Similarly, if a licensee is representing a prospective buyer at the same time that the licensee is personally looking to purchase a home, the licensee might be tempted to purchase the most desirable property personally.

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Real estate offices should establish a company-wide policy regarding these kinds of situations. This policy should address the circumstances under which an associate of the firm can buy or sell property for his or her own account, the circumstances under which an associate can buy a property listed with the firm, and a policy for listing properties owned by associates of the firm. The policy should ensure that, at a minimum, full disclosure is made to the parties dealing with associates buying or selling for their own accounts.

Confidentiality

Another aspect of the licensee’s duties to the principal is to respect confidential information entrusted to the licensee as part of the agency relationship. While it is unethical and illegal to fail to disclose material information about a property to the buyer of that property, such as the fact that the roof leaks, there are many facts that an agent of the seller would be expected to keep confidential. This can include the reasons for selling the property, minimum acceptable offering prices, and the like. Consider the following example:

Ima Seller lists her home for sale with Broker Charley. Ima tells Charley that she is faced with the possibility of a foreclosure action if she cannot sell the property within a few months. She and Charley agree on a listing price of $200,000 for the home. Ima gives Charley written instructions not to even bring her an offer for less than $175,000. Billy Buyer inspects the property and gives Broker Charley an offer for $160,000. Broker Charley informs Billy Buyer that he is not authorized to even submit an offer for such a low price. Billy Buyer asks Broker Charley, “You are authorized to submit an offer for what minimum amount?”

In this example it should be noted that Broker Charley has two bits of information which must remain confidential. The first is the fact that Ms. Seller is faced with a possible foreclosure on the property. Giving out this information would only serve to reduce any potential buyer’s offering price. The other confidential fact is the Ms. Seller’s minimum acceptable offering price of $175,000. When Billy Buyer asks what minimum price the seller is willing to consider, Broker Charley must not give out the “magic number” of $175,000. To do so would only guarantee that the buyer’s next offer would be for not one penny more than $175,000. Instead, Broker Charley should have Billy Buyer prepare a new written offer before stating whether that offer could be presented. It might be, for instance, that Billy Buyer might make the second offer for $180,000, which would increase Ima Seller’s price by $5,000 more than would have been received if the minimum figure had been revealed.

It should also be noted that the duty of confidentiality extends beyond the expiration of the listing contract. The confidential information obtained when receiving a listing contract must remain confidential even after the property has been sold or the listing has expired. This is the only obligation that extends beyond the expiration date of the listing.

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Section 1

Working With Buyers Qualifying Buyers As stated previously, if a licensee is acting as agent of the buyer that licensee has a fiduciary obligation to the buyer. Even when acting as agent for the seller, however, licensees have important obligations to buyers. While these obligations do not rise to the fiduciary level, it is crucial that the licensee treat all buyers with fairness and honesty.

One of the primary obligations to buyers involves prequalifying buyers. This involves working with buyers to determine the financial capability of the buyer to actually purchase a property. The prequalification process involves working with the buyer and one or more lenders to ascertain whether the borrower will qualify for a loan, and if so, a loan for what amount. This prequalification process will serve to benefit both the buyer and the seller.

The ability to prequalify buyers is one of the primary benefits a real estate licensee offers a property owner who is looking to sell his or her property. Some readers may recall an advertising campaign run by one of the major real estate franchise operations whereby they promised to save homeowners from “looky-loos,” which they defined as people who liked to look at other people’s homes but had no interest (or perhaps no ability) to actually purchase a home. A seller is naturally going to be much more willing to deal with a buyer who can demonstrate the ability to finance the purchase than one who offers only his or her own word about financial capability. This could well end up wasting a seller’s time by negotiating with, and perhaps being in escrow with, someone who cannot arrange the needed financing.

The old saying “Time is money” has particular relevance to home sellers. The longer the seller’s property remains on the market, the more carrying costs (such as mortgage payments) the seller is likely to incur. If a seller enters into an escrow on the sale of a property with a buyer who later finds he or she cannot qualify for the loan, the seller takes the property off the market for the period of the escrow. This would delay the ultimate sale of the property and could cause the seller to make one or more additional mortgage payments that would not have been made had the sale not been delayed.

It is not only the seller who benefits from prequalifying the buyer, however. The buyer benefits as well. A proper prequalification can identify prospective buyers who could not finance any purchase at all, saving that prospect’s time and preventing the disappointment caused by getting his or her hopes up only to have them subsequently dashed by the cold blast of reality. Perhaps more importantly, however, it can give buyers a realistic view of the price range they should consider. People sometimes overestimate the amount of the loan for which they may qualify. They end up looking at homes which exceed their ability to purchase, and have to start over looking at lower-priced homes. A proper prequalification would prevent this waste of the buyer’s time.

This prequalification process imposes upon the licensee the burden to keep up with the financing packages which are available in the marketplace. Years ago, this simply meant keeping in touch with one or two local savings and loan associations. In recent years, there has been a veritable explosion of new real estate lenders and real estate loan alternatives. A licensee who works only with one local lender cannot claim to have engaged in a thorough prequalification process. If a real estate licensee is going to be a professional, much effort should go into the process of constantly researching the financing market. Just because one local lender refuses to finance a particular buyer does not mean that others will not. The

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licensee should make a good faith effort to match each buyer with the lender that can best serve that buyer’s needs.

Qualifying Properties Once the buyer has been prequalified, the licensee owes an obligation to the buyer to prequalify the property. This involves finding a property that would suit the buyer’s needs. It would be unethical, for instance, to show a property to a buyer just to give the seller the impression that the licensee was actively marketing the property which is listed with that licensee. Especially when acting as agent of the buyer, the licensee owes it to the buyer to determine the buyer’s needs and desires.

Part of the ethical obligation of the agent is to make full disclosure of any material facts regarding a property, particularly those which might have an adverse impact on the buyer’s desire to purchase that property. The standard the licensee is required to meet is that the licensee must reveal not only known defects, but also those defects of which the licensee should have known. A real estate licensee is not expected to have all of the knowledge that a contractor or certified inspector should have, but is expected to have a reasonable degree of competence in inspecting properties. For example, a licensee is not expected to be able to inspect a roof with the same expertise as would a roofing contractor, but a licensee should be able to spot signs of water damage or leakage. When such problems are evident, the licensee should inquire of the seller about the condition of the roof and any recent repairs.

A licensee may rely upon a representation of the seller about the condition of the property, so long as there was no reason that the licensee should have known that this representation was false. For instance, if a seller tells the licensee that the roof does not leak and the roof appears to be in good condition to the licensee, the licensee could transmit that statement to the buyer as the seller’s representative. If it turns out that the seller was lying, the licensee would not be liable for passing on that information to the buyer. On the other hand, if the seller states that the roof does not leak, but there are obvious signs of water damage or leakage inside the house, the licensee should inquire about any recent problems and whether they have been repaired. Failure to do so, in these circumstances, could cause the licensee to become liable for damages.

Licensees would also be expected to be familiar with the local real estate market and any problems with are common in that area. If a particular neighborhood is commonly known to have problems with soil settlement, licensees should at least advise buyers to have the appropriate inspections made by a civil engineer. Even though the licensee is not expected to have the personal expertise to determine that the problem exists on the specific property, the licensee would be expected to be aware of problems which are common to that neighborhood.

Some properties are said to be “stigmatized” by their recent history. Licensees have the obligation to disclose any information which might affect the marketability or acceptability of the subject property. For example, California law requires the disclosure to any potential buyer if a death occurred on the property within three years prior to the sale. (Deaths on the property which occurred more than three years prior to the sale need only be disclosed if the buyer specifically asks, at least according to the law.)

There is no legal definition which determines whether or not a property has been stigmatized by its history. Instead, licensees can only rely on common sense and the Golden Rule. If the licensee suspects that a problem might need to be disclosed, it is always safer to disclose it and let the buyer determine the problem’s significance. Factors which might cause a property to be stigmatized could include:

• A highly-publicized murder which occurred on the property, even if more than three years prior to the sale;

• The fact that a previous occupant of the property was a notorious criminal; and 15

• Persistent rumors that the property is “haunted.”

It should be noted that this list is by no means all-inclusive. Further, the agent needs to be sensitive to the concerns of buyers, whether or not the licensee shares those concerns. Some years ago the State of Louisiana enacted legislation requiring real estate licensees to disclose that a property is haunted. While this law does not apply in California, and while the licensee may or may not share the buyer’s belief in ghosts, ethical standards would require disclosure if there is any reasonable expectation that a buyer might consider the matter to be significant to his or her decision to purchase the property.

Kickbacks Real estate professionals are frequently in a position to refer clients to many other businesses. People will ask for recommendations regarding lenders, escrow companies, title insurance companies, pest control inspectors, and so on. Real estate licensees therefore can become a primary source of customers for all of these business entities. Naturally, the thought occurs to these businesses to start offering finder’s fees or referral fees, to encourage licensees to refer their clients to them, rather than the competition.

The acceptance of finder’s fees or referral fees creates at least the appearance of a conflict of interest, if not always an actual conflict of interest. When a licensee undertakes the service of helping a buyer find financing, they are regarded as the agent of the buyer for that part of the transaction and have the obligation to find the best lender for that borrower, not the lender which offers the licensee the highest finder’s fee. The Real Estate Settlement Procedures Act, along with similar California laws, prohibits the payment of referral fees or finder’s fees by federally related lenders. (A federally related lender is a lender whose deposits are insured by the FDIC, which would include all banks and savings and loan associations.)

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Chapter 2 Practice Questions 1.) The licensee would be representing the seller in the transaction and would therefore have a _____________ _____________ to the seller. The real estate licensee who takes a listing contract from the owner of a property most often acts as agent of the seller.

A. Fiduciary Obligation B. Money Market C. Victorious and Gratuitous D. Meaningful Relationship

2.) In order to obtain a listing contract on a property, the agent must not overestimate the value of it, otherwise they have acted ____________.

A. With Quarrelsome B. Justly C. Courtly D. Unethically

3.) A licensee must make a competent valuation of the property and set a(n)_________ listing price. This is one of the ethical obligations of a licensee.

A. Perplexed B. Realistic C. Riotous D. Abominable

4.) One of the ___________ ________ the licensee undertakes when agreeing to act as the agent of the principal, is an ethical implication in the creation of an agency relationship that concerns the agent’s obligation to obey the instructions of the principal.

A. Fiduciary Duties B. Love Affairs C. False Accusations D. Despairing parts

5.)The obligation for the licensee to do his or her “best” in trying to market the property, is the primary aspect of the licensee’s _____ ___________ requirement.

A. Gold Bond B. Truthful Honor C. Due Diligence D. Bypassing Route

1. ANSWER: A. – Fiduciary Obligation 2. ANSWER: D. – Unethically 3. ANSWER: B. – Realistic 4. ANSWER: A. – Fiduciary Duties 5. ANSWER: C. – Due Diligence

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CHAPTER 3

Dealing With Other Licensees

Competition in the Real Estate Industry The real estate industry is like most other industries in that there is a great deal of competition among its members. It is unlike other industries, however, in that there is both a competitive side of the business and a cooperative side of the business. Today, two salespersons who are with different real estate firms may be competing for the same listing. Tomorrow, the same two salespersons may be cooperating in the sale of that (or some other) property. Suppose the first salesperson got the listing contract from the seller, but the second salesperson later found a buyer for that property. If the salesperson who got the listing contract did so through unfair or unethical means, it would be asking a lot of that second salesperson to promote the sale of that listed property with enthusiasm.

Given this paradox between the need to compete with others in the real estate industry and the need to cooperate with others in the real estate industry, there is a special obligation imposed upon licensees to compete in a fair and ethical manner. One is tempted to consider the possibility that the old adage, “What goes around comes around,” was coined by some real estate licensee somewhere. A licensee who earns a bad reputation among other licensees in the community faces the prospect of becoming the “Lone Ranger” of real estate. Other licensees in the community will naturally be reluctant to cooperate with someone who has proven to be unworthy of their trust.

Cooperation Between Licensees As discussed earlier, there is a tremendous advantage to property owners in having a listing agent who will cooperate with other licensees in the area. Far better for the principal to have all of the licensees in the area looking for buyers, rather than just the listing agent. Part of a listing agent’s fiduciary obligation to the seller is to cooperate with other licensees in marketing the property.

One of the results of this part of the fiduciary obligation is that licensees must not delay the process of listing the property on the Multiple Listing Service. Most listing contracts call for the listing to be included on the Multiple Listing Service (the “MLS”) within a specified time period, such as 72 hours. To wait until the last minute to include the listing on the MLS would be unethical, even if not illegal.

As in any competitive situation, there is always the temptation to denigrate the competition. When competing for listings, it is one thing to stress the benefits the seller would gain from listing with your office; it is another thing to emphasize the failings of some other salesperson or some other real estate office. It is always more ethical to stress the benefits offered by you or your firm than to downgrade the abilities of some other office or salesperson. On the other hand, any community is likely to have some unethical real estate agents who would not hesitate to profit at the expense of other licensees or clients or customers. One needs to respond honestly if asked about the practices of such individuals.

Similarly, once a listing is obtained, any licensee would naturally prefer to find the buyer personally, so as not to have to share the commission with another office and/or another salesperson. When presenting two offers, one from the listing agent and another from some cooperating agent, the listing agent cannot be

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completely disinterested in which offer the seller accepts. It would be a natural temptation to criticize the other agent and/or his or her client.

Here again, the agent’s fiduciary obligation to put the interests of his or her principal above those of himself or herself should serve as the guiding light. If cooperating with another licensee would benefit the principal (without harming a third party, such as the buyer), cooperation is in order, even at the cost of a share of the commission. In those (hopefully rare) instances where another licensee’s honesty is legitimately in question, cooperation may not be in the principal’s best interests.

Avoiding Interference In many real estate transactions there will be one agent or salesperson working with the seller and another working with the buyer. Naturally, these licensees will want to cooperate with each other as much as possible to complete the transaction smoothly and successfully. It is important that an agent respect the relationship between the other agent and his or her client or customer. Except in unusual circumstances, a licensee should not directly contact the client or customer of another licensee without the direct permission of the other licensee.

The occasions which may be exceptions to this rule occur when time is of the essence and the other licensee cannot be reached. For instance, if the listing agent (or broker) cannot be reached and a pending offer is about to expire, it may be permissible to contact the owner directly. It should be noted, however, that many Multiple Listing Services have established procedures for obtaining permission to contact another broker’s principal. These should be followed whenever they exist. Other examples of permissible contact (when the listing broker or salesperson cannot be reached) include obtaining information about a listed property or arranging to show a listed property to an interested buyer.

Another occasion where it is permissible to contact the client of another broker is if the broker refuses to tell an agent the termination date that applies to a listing contract.

Commission Disputes The issue of who has earned the commission on a particular transaction is one which all too often creates disputes among real estate licensees. The disputes typically revolve around the issue of who was the “procuring cause” of the sale. In an open listing, only the broker (or salesperson) who is the procuring cause of the sale is entitled to any commission. In an exclusive right to sell listing, the issue is important for a cooperating broker or salesperson who found the buyer, since they must prove that they were the procuring cause in order to share the commission with the listing broker.

While there are several common definitions of what exactly constitutes the “procuring cause” of a sale, most are variations off of the concept that the procuring cause of the sale is the one who originates a series of events which without a break in continuity, results in the sale of the property. This would suggest that if a licensee directed a potential buyer to a property, but did no follow-up and did not diligently pursue the sale, the licensee would not be considered the procuring cause and would not be entitled to the commission or share of the commission.

It should be noted that it is not primarily the desire of the buyer which determines who is entitled to the commission or what is ethical. The entitlement to a commission is determined according to who qualifies as the procuring cause of the sale. There are circumstances where the ethical thing to do would be to share the commission. The local board of REALTORS® will normally have arbitration procedures established to provide a method of resolving commission disputes and determining who was the procuring cause of the sale. The National Association of REALTORS® has established the following list of questions to assist in determining the important facts to consider:

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1. What was the nature of the transaction giving rise to the arbitration request?

2. Was the property listed or subject to a management agreement?

3. Who was the listing agent?

4. What was the nature of the listing or other agreement: exclusive right to sell, exclusive agency, open or some other form of agreement?

5. Was the agreement in writing?

6. Was it in effect at the time the dispute arose?

7. Who was the cooperating broker or brokers?

8. Are all appropriate parties to the matter joined?

9. Is or was the matter the subject of litigation?

10. Were any of the parties acting as subagents? As buyer brokers? In some other capacity?

11. Did any of the cooperating brokers have an agreement, written or otherwise, to act as agent or in some other capacity on behalf of any of the parties?

12. Were any of the brokers (including the listing broker) acting as a principal in the transaction?

13. Were all disclosures mandated by law or the Code of Ethics complied with?

14. Who first introduced the ultimate purchaser or tenant to the property?

15. When was the first introduction made?

16. How was the first introduction made?

17. Did the original introduction of the purchaser or tenant to the property start an uninterrupted series of events leading to the sale (or any other intended objective of the transaction) or was the series of events hindered or interrupted in any way?

18. If there was an interruption or break in the original series of events, how was it caused, and by whom?

19. Did the broker making the initial introduction to the property maintain contact with the purchaser or tenant or could the broker’s inaction have reasonably been viewed by the buyer or tenant as the broker having withdrawn from the transaction?

20. Did the broker making the initial introduction to the property engage in conduct or fail to take some action that caused the purchaser or tenant to choose to utilize the services of another broker?

21. Was there interference in the series of events from any outside or intervening cause or party?

22. What were the brokers’ relationships with respect to the seller, the purchaser, the listing broker, and any other cooperating brokers involved in the transaction?

23. What offers (if any) of cooperation and compensation were extended to cooperating brokers acting as subagents, buyer brokers, or to brokers acting in any other capacity?

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24. If an offer of cooperation and compensation was made, was there a faithful exercise of agency on their part or was there any breach or failure to meet the duties owed to a principal?

25. If the cooperating broker(s) were subagents, was there a faithful exercise of agency on their part or was there any breach or failure to meet the duties to a principal?

26. If the cooperating broker(s) were buyer agents or were acting in a non-agency capacity, were their actions in accordance with the terms and conditions of the listing broker’s offer of cooperation and compensation (if any)?

27. If more than one cooperating broker was involved, was either (or both) aware of the other’s role in the transaction?

28. If more than one cooperating broker was involved, how and when did the second cooperating broker enter the transaction?

29. If more than one cooperating broker was involved, was the second cooperating broker aware of any prior introduction of the purchaser to the property by the listing broker or by another cooperating broker?

30. Was the entry of any cooperating broker into the transaction an intrusion into an existing relationship between the purchaser and another broker, or was it the result of abandonment or estrangement of the purchaser, or at the request of the purchaser?

31. Did the cooperating broker (or second cooperating broker) initiate a separate series of events, unrelated to and not dependent on any other broker’s efforts, which led to the successful transaction?

32. Is there any other information that would assist the Hearing Panel in having a full, clear understanding of the transaction giving rise to the arbitration request or in reaching a fair and equitable resolution of the matter?

Employment Implications A person who holds a real estate salesperson’s license must work for some licensed real estate broker. There are a great many ethical implications which stem from the employment relationship between a broker and a salesperson, or a broker who hires another broker who acts in the role of a salesperson, even though he or she holds a broker’s license.

The relationship between most salespeople and their employing broker is that of independent contractor, rather than that of employer to employee. This is done largely for tax purposes, so that the broker is not responsible for social security and other payroll taxes for compensation paid to salespeople. Be that as it may, it is important to understand that the Department of Real Estate always considers the relationship to be that of employer to employee, primarily because an employer can be held legally responsible for the acts of his or her employees. The Department of Real Estate wants brokers to understand that they are responsible for supervising their salespeople, regardless of the legal nature of the relationship.

Recent years have seen an increase in the number of real estate offices which offer a 100-percent commission payout to salespeople, but charge desk fees and other fees in return. While this employment relationship is neither unethical nor illegal, brokers need to understand that it does not relieve them of their supervisory responsibilities. The broker is still liable for any violations of real estate law by those salespeople.

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Brokers must always be certain that they use ethical hiring practices. Of course, brokers must not engage in any discriminatory employment practices. Federal and state laws both prohibit brokers from discriminating against anyone on the basis of race, color, sex, religion, national origin or familial status. They also must not misrepresent the nature of the relationship, such as by exaggerating the earnings potential or by implying that the position includes a salary when the position is actually paid on a commission-only basis.

It was stated earlier that licensees must be careful not to interfere in the relationship between another licensee and his or her customer or client. Perhaps nowhere is the possibility of violating this ethical requirement greater than between two licensees in the same office. Suppose that Salesperson A shows several properties to a prospective buyer, who promises to contact this salesperson. The buyer returns to the office at some later date, and wants to see a particular property again, but this time Salesperson A is out of the office. It is very common for Salesperson B to show the property to this prospect, who ultimately buys the home. In all likelihood, both Salesperson A and Salesperson B will feel entitled to a share of the commission on the sale. It is important for salespeople to inquire of customers, especially those who simply walk into the office, whether they have already been dealing with a salesperson in that office.

Section 1

Ethical Advertising

Advertising plays an important part in marketing any product, not least of which is the role it plays in the marketing of real property. Advertising provides important benefits both the buyers and sellers. Yet perhaps no area of real estate practice has been as abused as the advertisements used to promote the sale of property. A common theme among comedians is to tell about real estate ads and what the attractive phrases in those ads really mean. We can all agree that it would be deceptive to advertise a house with broken windows as offering “unusually good ventilation.”

Since no one would buy a property based solely on what was published in an advertisement, it is not necessary for each individual advertisement to meet the standard of full disclosure. Advertisements, by their very nature, are expected to emphasize the positive features of the property. The key to an ethical advertisement is that the ad must not be misleading. Prohibited advertising practices would include the following:

• Advertising an especially attractive property which is not actually for sale, or which has already sold, would be deceptive. This acts as what is commonly referred to as a “bait and switch” scheme, whereby a seller attracts customers with something that sounds too good to be true, just to get their attention, then sells the customer something else once they have the customer’s attention.

• The use of a misleading map would be evidence of a misleading advertisement. This could include an ad that implied that the property was closer to a golf course than it really is, for instance.

• An ad for a buyer’s agent which disparages the representation of a seller’s agent would be unethical, as would an ad by a seller’s agent that disparages the representation of a buyer’s agent.

• An advertisement which makes a statement or implication that is clarified only in small print or with asterisks is unethical.

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• “Blind” ads are both unethical and illegal. A blind ad is an ad that does not identify the fact that the ad is run by an agent, rather than the owner of the property.

Many real estate offices deal in rental or other income properties, and will of course advertise those properties. The ethical and legal prohibitions against misrepresentation apply to advertisements regarding income properties as well. These prohibitions include the following:

• The gross income and net income figures from the current owner must be verified by the advertising broker. They should be verified against at least three years of income tax returns and should be analyzed to determine if they include any out of the ordinary factors that are no longer present.

• The net income figures should include reasonable vacancy and collection loss allowances.

• The use of “average” costs, such as for utility expenses, must be avoided if the cost of those items have been increasing over the same period of time. It would be more reasonable, for instance, to base the estimate on the average amount of electricity used, but at current rates.

Another area of real estate practice in California is the sale of business opportunities. This is not the sale of the buildings used by a business, but the sale of the business itself. There are of course ethical standards which apply to advertisements regarding business opportunities.

• As is the case with income properties, licensees who are representing the sale of a business must take care to verify the net income of that business, especially against prior years’ tax returns. To avoid the possibility of forged tax returns, the licensee should also obtain copies of the canceled checks whereby the listed tax liability was actually paid.

• If the net income figures advertised are prior to any salaries for the owner or the family of the owner, that fact should be stated.

It is not unheard of for a small business owner to tell a licensee that he or she has “two sets of books.” One set of books is used for tax returns to the IRS and the other is used for the owner of the business. As a practical matter, one must wonder whether a person who is willing to lie to the IRS might also be willing to lie to an agent or a buyer. It would be unethical for a licensee to participate in this deceptive practice.

Another common area of advertising for real estate offices is in the area of recruiting. These ads must not be misleading either. Examples of misleading recruiting ads include the following:

• Recruiting ads should be under the heading of “Real Estate Salespeople,” and should not be designed to confuse people about the nature of the employment offered. Sales jobs are sometimes run under the heading of “Management Trainee,” for instance, in an effort to attract people who are not looking for sales positions.

• Any mention of specific income levels must be used carefully, as a reader could interpret that figure to be a minimum income level. It would also be misleading to say, for instance, that one could earn $200,000 per year or more if none of the salespeople in the office are actually earning that much.

• Offers of “free” licensing courses must be just that, free. If there are charges for textbooks, or if the course is only free after the student is reimbursed for the costs out of the student’s first escrow closing, the course cannot be ethically advertised as being “free.”

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Chapter 3 Practice Questions

1.) It is always more ethical to stress the benefits offered by you or your firm than to downgrade the abilities of some other office or salesperson. As in any competitive situation, there is always the temptation to _________ the competition.

A. Impel B. Interlude C. Denigrate D. Entice

2.) They should note that a lot of ________ _________ __________ have established procedures for getting permission to contact another broker’s principal.

A. Multiple Listing Services B. People with Companies C. Additional Servicing Projects D. Other Possible Subjects

3.) A broker is allowed to directly contact the client or customer of another broker, except in ___________ _____________.

A. Vivid Terms B. Breath taking Views C. Cruel Ways D. Unusual Circumstances

4.) If the broker refuses to tell an agent the _______________ ______ that applies to a listing contract, then it is permissible to contact the client of another broker.

A. Ironic Standard B. Public Eye C. Government Policy D. Termination Date

5.) In order to be considered the “___________ ________,” one must be the agent who originates a series of events which, without a break in continuity, results in the sale of the property.

A. “Main Subject B. “Procuring Cause” C. “Immediate Offender” D. “Ultimate Accuser”

1. ANSWER: C. – Denigrate 2. ANSWER: A. – Multiple Listing Services 3. ANSWER: D. – Unusual Circumstances 4. ANSWER: D. – Termination Date 5. ANSWER: B. – “Procuring Cause”

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Appendix A

National Association of REALTORS®

Code of Ethics

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Code of Ethics and Standards of Practice of the National Association of REALTORS® Effective January 1, 1997 Where the word REALTORS® is used in this Code and Preamble, it shall be deemed to include REALTOR-ASSOCIATE®S. While the Code of Ethics establishes obligations that may be higher than those mandated by law, in any instance where the Code of Ethics and the law conflict, the obligations of the law must take precedence. Preamble... 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. They require the creation of adequate housing, the building of functioning cities, the development of productive industries and farms, and the preservation of a healthful environment. Such interests impose obligations beyond those of ordinary commerce. They impose grave social responsibility and a patriotic duty to which REALTORS® should dedicate themselves, and for which they should be diligent in preparing themselves. REALTORS®, therefore, are zealous to and improve the standards of their calling and share with their fellow REALTORS® a common responsibility for its integrity and honor. In recognition and appreciation of their obligations to clients, customers, the public, and each other, REALTORS® continuously strive to become and remain informed on issues affecting real estate and, as knowledgeable professionals, they willingly share the fruit of their experience and study with others. They identify and take steps, through enforcement of this Code of Ethics and by assisting appropriate regulatory bodies, to eliminate practices which may damage the public or which might discredit or bring dishonor to the real estate profession. Realizing that cooperation with other real estate professionals promotes the best interests of those who utilize their services, REALTORS® urge exclusive representation of clients; do not attempt to gain any unfair advantage over their competitors; and they refrain from making unsolicited comments about other practitioners. In instances where their opinion is sought, or where REALTORS® believe that comment is necessary, their opinion is offered in an objective, professional manner, uninfluenced by any personal motivation or potential advantage or gain. The term REALTOR® has come to connote competency, fairness, and high integrity resulting from adherence to a lofty ideal of moral conduct in business relations. No inducement of profit and no instruction from clients ever can justify departure from this ideal. In the interpretation of this obligation, REALTORS® can take no safer guide than that which has been handed down through the centuries, embodied in the Golden Rule, "Whatsoever ye would that others should do to you, do ye even so to them." Accepting this standard as their own, REALTORS® pledge to observe its spirit in all of their activities and to conduct their business in accordance with the tenets set forth below. Duties to Clients and Customers

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Article 1 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 of absolute fidelity to the client's interests 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. (Amended 1/93) * Standard of Practice 1-1 REALTORS®, when acting as principals in a real estate transaction, remain obligated by the duties imposed by the Code of Ethics. (Amended 1/93) * Standard of Practice 1-2 The duties the Code of Ethics imposes on agents/representatives are applicable to REALTORS® acting as agents, transaction brokers, facilitators, or in any other recognized capacity except for any duty specifically exempted by law or regulation. (Adopted 1/95) * Standard of Practice 1-3 REALTORS®, in attempting to secure a listing, shall not deliberately mislead the owner as to market value. * Standard of Practice 1-4 REALTORS®, when seeking to become a buyer/tenant representative, shall not mislead buyers or tenants as to savings or other benefits that might be realized through use of the REALTOR®'s services. (Amended 1/93) * Standard of Practice 1-5 REALTORS® may represent the seller/landlord and buyer/tenant in the same transaction only after full disclosure to and with informed consent of both parties. (Adopted 1/93) * Standard of Practice 1-6 REALTORS® shall submit offers and counter-offers objectively and as quickly as possible. (Adopted 1/93, Amended 1/95) * Standard of Practice 1-7 When acting as listing brokers, REALTORS® shall continue to submit to the seller/landlord all offers and counter-offers until closing or execution of a lease unless the seller/landlord has waived this obligation in writing. REALTORS® shall not be obligated to continue to market the property after an offer has been accepted by the seller/landlord. REALTORS® shall recommend that sellers/landlords obtain the advice of legal counsel prior to acceptance of a subsequent offer except where the acceptance is contingent on the termination of the pre-existing purchase contract or lease. (Amended 1/93) * Standard of Practice 1-8 REALTORS® acting as agents of buyers/tenants shall submit to buyers/tenants all offers and counter-offers until acceptance but have no obligation to continue to show properties to their clients after an offer has been accepted unless otherwise agreed in writing. REALTORS® acting as agents of buyers/tenants shall recommend that buyers/tenants obtain the advice of legal counsel if there is a question as to whether a pre-existing contract has been terminated. (Adopted 1/93) * Standard of Practice 1-9

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The obligation of REALTORS® to preserve confidential information provided by their clients continues after the termination of the agency relationship. REALTORS® shall not knowingly, during or following the termination of a professional relationship with their client:

1. reveal confidential information of the client; or 2. use confidential information of the client to the disadvantage of the client; or 3. use confidential information of the client for the REALTOR®'s advantage or the advantage of a third

party unless:

a. the client consents after full disclosure; or b. the REALTOR® is required by court order; or c. it is the intention of the client to commit a crime and the information is necessary to prevent the

crime; or d. it is necessary to defend the REALTOR® or the REALTOR®'s employees or associates against an

accusation of wrongful conduct. (Adopted 1/93, Amended 1/97)

* Standard of Practice 1-10 REALTORS® shall, consistent with the terms and conditions of their property management agreement, competently manage the property of clients with due regard for the rights, responsibilities, benefits, safety and health of tenants and others lawfully on the premises. (Adopted 1/95) * Standard of Practice 1-11 REALTORS® who are employed to maintain or manage a client's property shall exercise due diligence and make reasonable efforts to protect it against reasonably foreseeable contingencies and losses. (Adopted 1/95) Article 2 REALTORS® shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property or the transaction. REALTORS® shall not, however, be obligated to discover latent defects in the property, to advise on matters outside the scope of their real estate license, or to disclose facts which are confidential under the scope of agency duties owed to their clients. (Amended 1/93) * Standard of Practice 2-1 REALTORS® shall only be obligated to discover and disclose adverse factors reasonably apparent to someone with expertise in those areas required by their real estate licensing authority. Article 2 does not impose upon the REALTOR® the obligation of expertise in other professional or technical disciplines. (Amended 1/96) * Standard of Practice 2-2 When entering into listing contracts, REALTORS® must advise sellers/landlords of:

1. the REALTOR®'s general company policies regarding cooperation with subagents, buyer/tenant

agents, or both; 2. the fact that buyer/tenant agents, even if compensated by the listing broker, or by the seller/landlord will

represent the interests of buyers/tenants; and 3. any potential for the listing broker to act as a disclosed dual agent, e.g. buyer/tenant agent. (Adopted

1/93) * Standard of Practice 2-3

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When entering into contracts to represent buyers/tenants, REALTORS® must advise potential clients of:

1. the REALTOR®'s general company policies regarding cooperation with other firms; and 2. any potential for the buyer/tenant representative to act as a disclosed dual agent, e.g. listing broker,

subagent, landlord's agent, etc. (Adopted 1/93) * Standard of Practice 2-4 REALTORS® shall not be parties to the naming of a false consideration in any document, unless it be the naming of an obviously nominal consideration. * Standard of Practice 2-5 Factors defined as "non-material" by law or regulation or which are expressly referenced in law or regulation as not being subject to disclosure are considered not "pertinent" for purposes of Article 2. (Adopted 1/93) Article 3 REALTORS® shall cooperate with other brokers except when cooperation is 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. (Amended 1/95) * Standard of Practice 3-1 REALTORS®, acting as exclusive agents of sellers/landlords, establish the terms and conditions of offers to cooperate. Unless expressly indicated in offers to cooperate, cooperating brokers may not assume that the offer of cooperation includes an offer of compensation. Terms of compensation, if any, shall be ascertained by cooperating brokers before beginning efforts to accept the offer of cooperation. (Amended 1/94) * Standard of Practice 3-2 REALTORS® shall, with respect to offers of compensation to another REALTORS®, timely communicate any change of compensation for cooperative services to the other REALTOR® prior to the time such REALTOR® produces an offer to purchase/lease the property. (Amended 1/94) * Standard of Practice 3-3 Standard of Practice 3-2 does not preclude the listing broker and cooperating broker from entering into an agreement to change cooperative compensation. (Adopted 1/94) * Standard of Practice 3-4 REALTORS®, acting as listing brokers, have an affirmative obligation to disclose the existence of dual or variable rate commission arrangements (i.e., listings where one amount of commission is payable if the listing broker's firm is the procuring cause of sale/lease and a different amount of commission is payable if the sale/lease results through the efforts of the seller/landlord or a cooperating broker). The listing broker shall, as soon as practical, disclose the existence of such arrangements to potential cooperating brokers and shall, in response to inquiries from cooperating brokers, disclose the differential that would result in a cooperative transaction or in a sale/lease that results through the efforts of the seller/landlord. If the cooperating broker is a buyer/tenant representative, the buyer/tenant representative must disclose such information to their client. (Amended 1/94) * Standard of Practice 3-5 It is the obligation of subagents to promptly disclose all pertinent facts to the principal's agent prior to as well as after a purchase or lease agreement is executed. (Amended 1/93)

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* Standard of Practice 3-6 REALTORS® shall disclose the existence of an accepted offer to any broker seeking cooperation. (Adopted 5/86) * Standard of Practice 3-7 When seeking information from another REALTOR® concerning property under a management or listing agreement, REALTORS® shall disclose their REALTOR® status and whether their interest is personal or on behalf of a client and, if on behalf of a client, their representational status. (Amended 1/95) * Standard of Practice 3-8 REALTORS® shall not misrepresent the availability of access to show or inspect a listed property. (Amended 11/87) Article 4 REALTORS® shall not acquire an interest in or buy or present offers from themselves, any member of their immediate families, their firms or any member thereof, or any entities in which they have any ownership interest, any real property without making their true position known to the owner or the owner's agent. In selling property they own, or in which they have any interest, REALTORS® shall reveal their ownership or interest in writing to the purchaser or the purchaser's representative. (Amended 1/91) * Standard of Practice 4-1 For the protection of all parties, the disclosures required by Article 4 shall be in writing and provided by REALTORS® prior to the signing of any contract. (Adopted 2/86) Article 5 REALTORS® shall not undertake to provide professional services concerning a property or its value where they have a present or contemplated interest unless such interest is specifically disclosed to all affected parties. Article 6 When acting as agents, REALTORS® shall not accept any commission, rebate, or profit on expenditures made for their principal, without the principal's knowledge and consent. (Amended 1/92) * Standard of Practice 6-1 REALTORS® shall not recommend or suggest to a client or a customer the use of services of another organization or business entity in which they have a direct interest without disclosing such interest at the time of the recommendation or suggestion. (Amended 5/88) * Standard of Practice 6-2 When acting as agents or subagents, REALTORS® shall disclose to a client or customer if there is any financial benefit or fee the REALTOR® or the REALTOR®'s firm may receive as a direct result of having recommended real estate products or services (e.g., homeowner's insurance, warranty programs, mortgage financing, title insurance, etc.) other than real estate referral fees. (Adopted 5/88) Article 7

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In a transaction, REALTORS® shall not accept compensation from more than one party, even if permitted by law, without disclosure to all parties and the informed consent of the REALTOR®'s client or clients. (Amended 1/93) Article 8 REALTORS® shall keep in a special account in an appropriate financial institution, separated from their own funds, monies coming into their possession in trust for other persons, such as escrows, trust funds, clients' monies, and other like items. Article 9 REALTORS®, for the protection of all parties, shall assure whenever possible that agreements shall be in writing, and shall be 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 upon their signing or initialing. (Amended 1/95) * Standard of Practice 9-1 For the protection of all parties, REALTORS® shall use reasonable care to ensure that documents pertaining to the purchase, sale, or lease of real estate are kept current through the use of written extensions or amendments. (Amended 1/93) Duties to the Public Article 10 REALTORS® shall not deny equal professional services to any person for reasons of race, color, religion, sex, handicap, familial status, or national origin. REALTORS® shall not be parties to any plan or agreement to discriminate against a person or persons on the basis of race, color, religion, sex, handicap, familial status, or national origin. (Amended 1/90) * Standard of Practice 10-1 REALTORS® shall not volunteer information regarding the racial, religious or ethnic composition of any neighborhood and shall not engage in any activity which may result in panic selling. REALTORS® shall not print, display or circulate any statement or advertisement with respect to the selling or renting of a property that indicates any preference, limitations or discrimination based on race, color, religion, sex, handicap, familial status or national origin. (Adopted 1/94) Article 11 The services which REALTORS® provide to their clients and customers shall conform to the standards of practice and competence which are reasonably expected in the specific real estate disciplines in which they engage; specifically, residential real estate brokerage, real property management, commercial and industrial real estate brokerage, real estate appraisal, real estate counseling, real estate syndication, real estate auction, and international real estate. REALTORS® shall not undertake to provide specialized professional services concerning a type of property or service that is outside their field of competence unless they engage the assistance of one who is competent on such types of property or service, or unless the facts are fully disclosed to the client. Any

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persons engaged to provide such assistance shall be so identified to the client and their contribution to the assignment should be set forth. (Amended 1/95) * Standard of Practice 11-1 The obligations of the Code of Ethics shall be supplemented by and construed in a manner consistent with the Uniform Standards of Professional Appraisal Practice (USPAP) promulgated by the Appraisal Standards Board of the Appraisal Foundation. The obligations of the Code of Ethics shall not be supplemented by the USPAP where an opinion or recommendation of price or pricing is provided in pursuit of a listing, to assist a potential purchaser in formulating a purchase offer, or to provide a broker's price opinion, whether for a fee or not. (Amended 1/96) * Standard of Practice 11-2 The obligations of the Code of Ethics in respect of real estate disciplines other than appraisal shall be interpreted and applied in accordance with the standards of competence and practice which clients and the public reasonably require to protect their rights and interests considering the complexity of the transaction, the availability of expert assistance, and, where the REALTOR® is an agent or subagent, the obligations of a fiduciary. (Adopted 1/95) * Standard of Practice 11-3 When REALTORS® provide consultative services to clients which involve advice or counsel for a fee (not a commission), such advice shall be rendered in an objective manner and the fee shall not be contingent on the substance of the advice or counsel given. If brokerage or transaction services are to be provided in addition to consultative services, a separate compensation may be paid with prior agreement between the client and REALTOR®. (Adopted 1/96) Article 12 REALTORS® shall be careful at all times to present a true picture in their advertising and representations to the public. REALTORS® shall also ensure that their professional status (e.g., broker, appraiser, property manager, etc.) or status as REALTORS® is clearly identifiable in any such advertising. (Amended 1/93) * Standard of Practice 12-1 REALTORS® may use the term "free" and similar terms in their advertising and in other representations provided that all terms governing availability of the offered product or service are clearly disclosed at the same time. (Amended 1/97) * Standard of Practice 12-2 REALTORS® may represent their services as "free" or without cost even if they expect to receive compensation from a source other than their client provided that the potential for the REALTOR® to obtain a benefit from a third party is clearly disclosed at the same time. (Amended 1/97) * Standard of Practice 12-3 The offering of premiums, prizes, merchandise discounts or other inducements to list, sell, purchase, or lease is not, in itself, unethical even if receipt of the benefit is contingent on listing, selling, purchasing, or leasing through the REALTOR® making the offer. However, REALTORS® must exercise care and candor in any such advertising or other public or private representations so that any party interested in receiving or otherwise benefiting from the REALTOR®'s offer will have clear, thorough, advance understanding of all the terms and conditions of the offer. The offering of any inducements to do business is subject to the

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limitations and restrictions of state law and the ethical obligations established by any applicable Standard of Practice. (Amended 1/95) * Standard of Practice 12-4 REALTORS® shall not offer for sale/lease or advertise property without authority. When acting as listing brokers or as subagents, REALTORS® shall not quote a price different from that agreed upon with the seller/landlord. (Amended 1/93) * Standard of Practice 12-5 REALTORS® shall not advertise nor permit any person employed by or affiliated with them to advertise listed property without disclosing the name of the firm. (Adopted 11/86) * Standard of Practice 12-6 REALTORS®, when advertising unlisted real property for sale/lease in which they have an ownership interest, shall disclose their status as both owners/landlords and as REALTORS® or real estate licensees. (Amended 1/93) * Standard of Practice 12-7 Only REALTORS® who participated in the transaction as the listing broker or cooperating broker (selling broker) may claim to have "sold" the property. Prior to closing, a cooperating broker may post a "sold" sign only with the consent of the listing broker. (Amended 1/96) Article 13 REALTORS® shall not engage in activities that constitute the unauthorized practice of law and shall recommend that legal counsel be obtained when the interest of any party to the transaction requires it. Article 14 If charged with unethical practice or asked to present evidence or to cooperate in any other way, in any disciplinary proceeding or investigation, REALTORS® shall place all pertinent facts before the proper tribunals of the Member Board or affiliated institute, society, or council in which membership is held and shall take no action to disrupt or obstruct such processes. (Amended 1/90) * Standard of Practice 14-1 REALTORS® shall not be subject to disciplinary proceedings in more than one Board of REALTORS® or affiliated institute, society or council in which they hold membership with respect to alleged violations of the Code of Ethics relating to the same transaction or event. (Amended 1/95) * Standard of Practice 14-2 REALTORS® shall not make any unauthorized disclosure or dissemination of the allegations, findings, or decision developed in connection with an ethics hearing or appeal or in connection with an arbitration hearing or procedural review. (Amended 1/92) * Standard of Practice 14-3 REALTORS® shall not obstruct the Board's investigative or disciplinary proceedings by instituting or threatening to institute actions for libel, slander or defamation against any party to a professional standards proceeding or their witnesses. (Adopted 11/87) * Standard of Practice 14-4 REALTORS® shall not intentionally impede the Board’s investigative or disciplinary proceedings by filing multiple ethics complaints based on the same event or transaction. (Adopted 11/88)

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Duties to REALTORS® Article 15 REALTORS® shall not knowingly or recklessly make false or misleading statements about competitors, their businesses, or their business practices. (Amended 1/92) Article 16 REALTORS® shall not engage in any practice or take any action inconsistent with the agency of other REALTORS®. * Standard of Practice 16-1 Article 16 is not intended to prohibit aggressive or innovative business practices which are otherwise ethical and does not prohibit disagreements with other REALTORS® involving commission, fees, compensation or other forms of payment or expenses. (Adopted 1/93, Amended 1/95) * Standard of Practice 16-2 Article 16 does not preclude REALTORS® from making general announcements to prospective clients describing their services and the terms of their availability even though some recipients may have entered into agency agreements with another REALTOR®. A general telephone canvass, general mailing or distribution addressed to all prospective clients in a given geographical area or in a given profession, business, club, or organization, or other classification or group is deemed "general" for purposes of this standard. Article 16 is intended to recognize as unethical two basic types of solicitations: First, telephone or personal solicitations of property owners who have been identified by a real estate sign, multiple listing compilation, or other information service as having exclusively listed their property with another REALTOR®; and Second, mail or other forms of written solicitations of prospective clients whose properties are exclusively listed with another REALTOR® when such solicitations are not part of a general mailing but are directed specifically to property owners identified through compilations of current listings, "for sale" or "for rent" signs, or other sources of information required by Article 3 and Multiple Listing Service rules to be made available to other REALTORS® under offers of sub-agency or cooperation. (Amended 1/93) * Standard of Practice 16-3 Article 16 does not preclude REALTORS® from contacting the client of another broker for the purpose of offering to provide, or entering into a contract to provide, a different type of real estate service unrelated to the type of service currently being provided (e.g., property management as opposed to brokerage). However, information received through a Multiple Listing Service or any other offer of cooperation may not be used to target clients of other REALTORS® to whom such offers to provide services may be made. (Amended 1/93) * Standard of Practice 16-4 REALTORS® shall not solicit a listing which is currently listed exclusively with another broker. However, if the listing broker, when asked by the REALTOR®, refuses to disclose the expiration date and nature of such listing; i.e., an exclusive right to sell, an exclusive agency, open listing, or other form of contractual agreement between the listing broker and the client, the REALTOR® may contact the owner to secure

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such information and may discuss the terms upon which the REALTOR® might take a future listing or, alternatively, may take a listing to become effective upon expiration of any existing exclusive listing. (Amended 1/94) * Standard of Practice 16-5 REALTORS® shall not solicit buyer/tenant agency agreements from buyers/tenants who are subject to exclusive buyer/tenant agency agreements. However, if a buyer/tenant agent, when asked by a REALTOR®, refuses to disclose the expiration date of the exclusive buyer/tenant agency agreement, the REALTOR® may contact the buyer/tenant to secure such information and may discuss the terms upon which the REALTOR® might enter into a future buyer/tenant agency agreement or, alternatively, may enter into a buyer/tenant agency agreement to become effective upon the expiration of any existing exclusive buyer/tenant agency agreement. (Adopted 1/94) * Standard of Practice 16-6 When REALTORS® are contacted by the client of another REALTOR® regarding the creation of an agency relationship to provide the same type of service, and REALTORS® have not directly or indirectly initiated such discussions, they may discuss the terms upon which they might enter into a future agency agreement or, alternatively, may enter into an agency agreement which becomes effective upon expiration of any existing exclusive agreement. (Amended 1/93) * Standard of Practice 16-7 The fact that a client has retained a REALTOR® as an agent in one or more past transactions does not preclude REALTORS® from seeking such former client's future business. (Amended 1/93) * Standard of Practice 16-8 The fact that an agency agreement has been entered into with a REALTOR® shall not preclude or inhibit any other REALTOR® from entering into a similar agreement after the expiration of the prior agreement. (Amended 1/93) * Standard of Practice 16-9 REALTORS®, prior to entering into an agency agreement, have an affirmative obligation to make reasonable efforts to determine whether the client is subject to a current, valid exclusive agreement to provide the same type of real estate service. (Amended 1/93) * Standard of Practice 16-10 REALTORS®, acting as agents of buyers or tenants, shall disclose that relationship to the seller/landlord's agent at first contact and shall provide written confirmation of that disclosure to the seller/landlord's agent not later than execution of a purchase agreement or lease. (Amended 1/93) * Standard of Practice 16-11 On unlisted property, REALTORS® acting as buyer/tenant agents shall disclose that relationship to the seller/landlord at first contact for that client and shall provide written confirmation of such disclosure to the seller/landlord not later than execution of any purchase or lease agreement. REALTORS® shall make any request for anticipated compensation from the seller/landlord at first contact. (Amended 1/93) * Standard of Practice 16-12 REALTORS®, acting as agents of sellers/landlords or as subagents of listing brokers, shall disclose that relationship to buyers/tenants as soon as practicable and shall provide written confirmation of such disclosure to buyers/tenants not later than execution of any purchase or lease agreement. (Amended 1/93)

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* Standard of Practice 16-13 All dealings concerning property exclusively listed, or with buyer/tenants who are exclusively represented shall be carried on with the client's agent, and not with the client, except with the consent of the client's agent or except where such dealings are initiated by the client. (Adopted 1/93, Amended 1/97) * Standard of Practice 16-14 REALTORS® are free to enter into contractual relationships or to negotiate with sellers/landlords, buyers/tenants or others who are not represented by an exclusive agent but shall not knowingly obligate them to pay more than one commission except with their informed consent. (Amended 1/94) * Standard of Practice 16-15 In cooperative transactions REALTORS® shall compensate cooperating REALTORS® (principal brokers) and shall not compensate nor offer to compensate, directly or indirectly, any of the sales licensees employed by or affiliated with other REALTORS® without the prior express knowledge and consent of the cooperating broker. * Standard of Practice 16-16 REALTORS®, acting as subagents or buyer/tenant agents, shall not use the terms of an offer to purchase/lease to attempt to modify the listing broker's offer of compensation to subagents or buyer's agents nor make the submission of an executed offer to purchase/lease contingent on the listing broker's agreement to modify the offer of compensation. (Amended 1/93) * Standard of Practice 16-17 REALTORS® acting as subagents or as buyer/tenant agents, shall not attempt to extend a listing broker's offer of cooperation and/or compensation to other brokers without the consent of the listing broker. (Amended 1/93) * Standard of Practice 16-18 REALTORS® shall not use information obtained by them from the listing broker, through offers to cooperate received through Multiple Listing Services or other sources authorized by the listing broker, for the purpose of creating a referral prospect to a third broker, or for creating a buyer/tenant prospect unless such use is authorized by the listing broker. (Amended 1/93) * Standard of Practice 16-19 Signs giving notice of property for sale, rent, lease, or exchange shall not be placed on property without consent of the seller/landlord. (Amended 1/93) Article 17 In the event of contractual disputes or specific non-contractual disputes as defined in Standard of Practice 17-4 between REALTORS® associated with different firms, arising out of their relationship as REALTORS®, the REALTORS® shall submit the dispute to arbitration in accordance with the regulations of their Board or Boards rather than litigate the matter. In the event clients of REALTORS® wish to arbitrate contractual disputes arising out of real estate transactions, REALTORS® shall arbitrate those disputes in accordance with the regulations of their Board, provided the clients agree to be bound by the decision. (Amended 1/97) * Standard of Practice 17-1 The filing of litigation and refusal to withdraw from it by REALTORS® in an arbitratable matter constitutes a refusal to arbitrate. (Adopted 2/86)

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* Standard of Practice 17-2 Article 17 does not require REALTORS® to arbitrate in those circumstances when all parties to the dispute advise the Board in writing that they choose not to arbitrate before the Board. (Amended 1/93) * Standard of Practice 17-3 REALTORS®, when acting solely as principals in a real estate transaction, are not obligated to arbitrate disputes with other REALTORS® absent a specific written agreement to the contrary. (Adopted 1/96) * Standard of Practice 17-4 Specific non-contractual disputes that are subject to arbitration pursuant to Article 17 are: 1.Where a listing broker has compensated a cooperating broker and another cooperating broker subsequently claims to be the procuring cause of the sale or lease. In such cases the complainant may name the first cooperating broker as respondent and arbitration may proceed without the listing broker being named as a respondent. Alternatively, if the complaint is brought against the listing broker, the listing broker may name the first cooperating broker as a third-party respondent. In either instance the decision of the hearing panel as to procuring cause shall be conclusive with respect to all current or subsequent claims of the parties for compensation arising out of the underlying cooperative transaction. (Adopted 1/97) 2.Where a buyer or tenant representative is compensated by the seller or landlord, and not by the listing broker, and the listing broker, as a result, reduces the commission owed by the seller or landlord and, subsequent to such actions, another cooperating broker claims to be the procuring cause of sale or lease. In such cases the complainant may name the first cooperating broker as respondent and arbitration may proceed without the listing broker being named as a respondent. Alternatively, if the complaint is brought against the listing broker, the listing broker may name the first cooperating broker as a third-party respondent. In either instance the decision of the hearing panel as to procuring cause shall be conclusive with respect to all current or subsequent claims of the parties for compensation arising out of the underlying cooperative transaction. (Adopted 1/97) 3.Where a buyer or tenant representative is compensated by the buyer or tenant and, as a result, the listing broker reduces the commission owed by the seller or landlord and, subsequent to such actions, another cooperating broker claims to be the procuring cause of sale or lease. In such cases the complainant may name the first cooperating broker as respondent and arbitration may proceed without the listing broker being named as a respondent. Alternatively, if the complaint is brought against the listing broker, the listing broker may name the first cooperating broker as a third-party respondent. In either instance the decision of the hearing panel as to procuring cause shall be conclusive with respect to all current or subsequent claims of the parties for compensation arising out of the underlying cooperative transaction. (Adopted 1/97) 4.Where two or more listing brokers claim entitlement to compensation pursuant to open listings with a seller or landlord who agrees to participate in arbitration (or who requests arbitration) and who agrees to be bound by the decision. In cases where one of the listing brokers has been compensated by the seller or landlord, the other listing broker, as complainant, may name the first listing broker as respondent and arbitration may proceed between the brokers. (Adopted 1/97) The Code of Ethics was adopted in 1913. Amended at the Annual Convention in 1924, 1928, 1950, 1951, 1952, 1955, 1956, 1961, 1962, 1974, 1982, 1986, 1987, 1989, 1990, 1991, 1992, 1993, 1994, 1995 and 1996. Explanatory Notes

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The reader should be aware of the following policies which have been approved by the Board of Directors of the National Association: In filing a charge of an alleged violation of the Code of Ethics by a REALTOR®, the charge must read as an alleged violation of one or more Articles of the Code. Standards of Practice may be cited in support of the charge. The Standards of Practice serve to clarify the ethical obligations imposed by the various Articles and supplement, and do not substitute for, the Case Interpretations in Interpretations of the Code of Ethics.

Modifications to existing Standards of Practice and additional new Standards of Practice are approved from time to time. Readers are cautioned to ensure that the most recent publications are utilized.

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Appendix B

Sections 10176 & 10177

Business & Professions Code

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10176. The commissioner may, upon his own motion, and shall, upon the verified complaint in writing of any person, investigate the actions of any person engaged in the business or acting in the capacity of a real estate licensee within this state, and he may temporarily suspend or permanently revoke a real estate license at any time where the licensee, while a real estate licensee, in performing or attempting to perform any of the acts within the scope of this chapter has been guilty of any of the following: (a) Making any substantial misrepresentation. (b) Making any false promises of a character likely to influence, persuade or induce. (c) A continued and flagrant course of misrepresentation or making of false promises through real estate agents or salesmen. (d) Acting for more than one party in a transaction without the knowledge or consent of all parties thereto. (e) Commingling with his own money or property the money or other property of others which is received and held by him. (f) Claiming, demanding, or receiving a fee, compensation or commission under any exclusive agreement authorizing or employing a licensee to perform any acts set forth in Section 10131 for compensation or commission where such agreement does not contain a definite, specified date of final and complete termination. (g) The claiming or taking by a licensee of any secret or undisclosed amount of compensation, commission or profit or the failure of a licensee to reveal to the employer of such licensee the full amount of such licensee's compensation, commission or profit under any agreement authorizing or employing such licensee to do any acts for which a license is required under this chapter for compensation or commission prior to or coincident with the signing of an agreement evidencing the meeting of the minds of the contracting parties, regardless of the form of such agreement, whether evidenced by documents in an escrow or by any other or different procedure. (h) The use by a licensee of any provision allowing the licensee an option to purchase in an agreement authorizing or employing such licensee to sell, buy, or exchange real estate or a business opportunity for compensation or commission, except when such licensee prior to or coincident with election to exercise such option to purchase reveals in writing to the employer the full amount of licensee's profit and obtains the written consent of the employer approving the amount of such profit. (i) Any other conduct, whether of the same or a different character than specified in this section, which constitutes fraud or dishonest dealing. (j) Obtaining the signature of a prospective purchaser to an agreement which provides that such prospective purchaser shall either transact the purchasing, leasing, renting or exchanging of a business opportunity property through the broker obtaining such signature, or pay a compensation to such broker if such property is purchased, leased, rented or exchanged without the broker first having obtained the written authorization of the owner of the property concerned to offer such property for sale, lease, exchange or rent. Real Estate Transfer Disclosure Statement Violations 10176.5.

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(a) The commissioner may, upon his or her own motion, and shall upon receiving a verified complaint in writing from any person, investigate an alleged violation of Article 1.5 (commencing with Section 1102) of Chapter 2 of Title 4 of Part 4 of Division 2 of the Civil Code by any real estate licensee within this state. The commissioner may suspend or revoke a licensee's license if the licensee acting under the license has willfully or repeatedly violated any of the provisions of Article 1.5 (commencing with Section 1102) of Chapter 2 of Title 4 of Part 4 of Division 2 of the Civil Code. (b) Notwithstanding any other provision of Article 1.5 (commencing with Section 1102) of Chapter 2 of Title 4 of Part 4 of Division 2 of the Civil Code, and in lieu of any other civil remedy, subdivision (a) of this section is the only remedy available for violations of Section 1102.6b of the Civil Code by any real estate licensee within this state. Further Grounds for Disciplinary Action 10177. The commissioner may suspend or revoke the license of any real estate licensee, or may deny the issuance of a license to an applicant, who has done, or may suspend or revoke the license of, or deny the issuance of a license to, a corporate applicant if an officer, director, or person owning or controlling 10 percent or more of the corporation's stock has done, any of the following: (a) Procured, or attempted to procure, a real estate license or license renewal, for himself or herself or any salesperson, by fraud, misrepresentation or deceit, or by making any material misstatement of fact in an application for a real estate license, license renewal or reinstatement. (b) Entered a plea of guilty or nolo contendere to, or been found guilty of, or been convicted of, a felony or a crime involving moral turpitude, and the time for appeal has elapsed or the judgment of conviction has been affirmed on appeal, irrespective of an order granting probation following that conviction, suspending the imposition of sentence, or of a subsequent order under Section 1203.4 of the Penal Code allowing that licensee to withdraw his or her plea of guilty and to enter a plea of not guilty, or dismissing the accusation or information. (c) Knowingly authorized, directed, connived at, or aided in, the publication, advertisement, distribution, or circulation of any material false statement or representation concerning his or her business, or any business opportunity or any land or subdivision (as defined in Chapter 1 (commencing with Section 11000) of Part 2) offered for sale. (d) Willfully disregarded or violated the Real Estate Law (Part 1 (commencing with Section 10000)) or Chapter 1 (commencing with Section 11000) of Part 2 or the rules and regulations of the commissioner for the administration and enforcement of the Real Estate Law and Chapter 1 (commencing with Section 11000) of Part 2. (e) Willfully used the term "realtor" or any trade name or insignia of membership in any real estate organization of which the licensee is not a member. (f) Acted or conducted himself or herself in a manner which would have warranted the denial of his or her application for a real estate license, or has either had a license denied or a license issued by another agency of this state, another state, or the federal government, revoked or suspended for acts which if done by a real estate licensee would be grounds for the suspension or revocation of a California real estate license, if the action of denial, revocation, or suspension by the other agency or entity was taken only after giving the licensee or applicant fair notice of the charges, an opportunity for a hearing, and other due process protections comparable to the Administrative Procedure Act (Chapter 3.5 (commencing with Section 11340), Chapter 4 (commencing with Section 11370), and Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code), and only upon an express finding of a violation of law by the agency or entity.

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(g) Demonstrated negligence or incompetence in performing any act for which he or she is required to hold a license. (h) As a broker licensee, failed to exercise reasonable supervision over the activities of his or her salespersons, or, as the officer designated by a corporate broker licensee, failed to exercise reasonable supervision and control of the activities of the corporation for which a real estate license is required. (i) Has used his or her employment by a governmental agency in a capacity giving access to records, other than public records, in such manner as to violate the confidential nature of the records. (j) Engaged in any other conduct, whether of the same or a different character than specified in this section, which constitutes fraud or dishonest dealing. (k) Violated any of the terms, conditions, restrictions, and limitations contained in any order granting a restricted license. (l) Solicited or induced the sale, lease, or the listing for sale or lease, of residential property on the ground, wholly or in part, of loss of value, increase in crime, or decline of the quality of the schools, due to the present or prospective entry into the neighborhood of a person or persons of another race, color, religion, ancestry, or national origin. (m) Violated the Franchise Investment Law (Division 5 (commencing with Section 31000) of Title 4 of the Corporations Code) or regulations of the Commissioner of Corporations pertaining thereto. (n) Violated the Corporations Code or the regulations of the Commissioner of Corporations relating to securities as specified in Section 25206 of the Corporations Code. (o) Failed to disclose to the buyer of real property in a transaction in which the licensee is an agent for the buyer, the nature and extent of a licensee's direct or indirect ownership interest in that real property. The direct or indirect ownership in the property by a person related to the licensee by blood or marriage, by an entity in which the licensee has an ownership interest, or by any other person with whom the licensee occupies a special relationship shall be disclosed to the buyer. The commissioner may not deny or suspend the license of a corporate real estate broker if the offending officer, director, or stockholder has been completely disassociated from any affiliation or ownership in the corporation. Suspension Without Hearing for Fraud, etc., in Obtaining a License 10177.1. The commissioner may, without a hearing, suspend the license of any person who procured the issuance of the license to himself by fraud, misrepresentation, deceit, or by the making of any material misstatement of fact in his application for such license. The power of the commissioner under this section to order a suspension of a license shall expire 90 days after the date of issuance of said license and the suspension itself shall remain in effect only until the effective date of a decision of the commissioner after a hearing conducted pursuant to Section 10100 and the provisions of this section. A statement of issues as defined in Section 11504 of the Government Code shall be filed and served upon the respondent with the order of suspension. Service by certified or registered mail directed to the respondent's current address of record on file with the commissioner shall be effective service.

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The respondent shall have 30 days after service of the order of suspension and statement of issues in which to file with the commissioner a written request for hearing on the statement of issues filed against him. The commissioner shall hold a hearing within 30 days after receipt of the request therefor unless the respondent shall request or agree to a continuance thereof. If a hearing is not commenced within 30 days after receipt of the request for hearing or on the date to which continued with the agreement of respondent, or if the decision of the commissioner is not rendered within 30 days after completion of the hearing, the order of suspension shall be vacated and set aside. A hearing conducted under this section shall in all respects, except as otherwise expressly provided herein, conform to the substantive and procedural provisions of Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code applicable to a hearing on a statement of issues. Grounds for Disciplinary Action - Mobilehome Sales Violations 10177.2. The commissioner may, upon his or her own motion, and shall, upon the verified complaint in writing of any person, investigate the actions of any licensee, and he or she may suspend or revoke a real estate license at any time where the licensee in performing or attempting to perform any of the acts within the scope of Section 10131.6 has been guilty of any of the following acts: (a) Has used a false or fictitious name, knowingly made any false statement, or knowingly concealed any material fact, in any application for the registration of a mobilehome, or otherwise committed a fraud in that application. (b) Failed to provide for the delivery of a properly endorsed certificate of ownership or certificate of title of a mobilehome from the seller to the buyer thereof. (c) Has knowingly participated in the purchase, sale, or other acquisition or disposal of a stolen mobilehome. (d) Has submitted a check, draft, or money order to the Department of Housing and Community Development for any obligation or fee due the state and it is thereafter dishonored or refused payment upon presentation. Referral of Customers for Compensation 10177.4. Notwithstanding any other provision of law, the commissioner may, after hearing in accordance with the provisions of this part relating to hearings, suspend or revoke the license of a real estate licensee who claims, demands, or receives a commission, fee or other consideration, as compensation or inducement, for referral of customers to any escrow agent, structural pest control firm, home protection company, title insurer, controlled escrow company, or underwritten title company. The term "other consideration" as used in this section does not include: (1) Bona fide payments for goods or facilities actually furnished by a licensee or for services actually performed by a licensee, provided such payments are reasonably related to the value of the goods, facilities or services furnished; (2) Furnishing of documents, services, information, advertising, educational materials, or items of a like nature which are customary in the real estate business and which relate to the product or services of the furnisher and which are available on a similar and essentially equal basis to all customers or the agents of such customers of the furnisher;

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(3) Moderate expenses for food, meals, beverages and similar items furnished to individual licensees or groups or associations of licensees within a context of customary business, educational or promotional practices pertaining to the business of the furnisher; (4) Items of a character and magnitude similar to those in subsections (2) and (3) which are promotional of the furnisher's business customary in the real estate business, and available on a similar and essentially equal basis to all customers, or the agents of such customers, of the furnisher. Nothing in this section shall relieve any licensee of the obligation of disclosure otherwise required by this part. Fraud in a Civil Action 10177.5. When a final judgment is obtained in a civil action against any real estate licensee upon grounds of fraud, misrepresentation, or deceit with reference to any transaction for which a license is required under this division, the commissioner may, after hearing in accordance with the provisions of this part relating to hearings, suspend or revoke the license of such real estate licensee.

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Ethics Practice Test 1

1. “A system of ________ ___________, ________, and ____________ ___ _________,” would be the definition of Ethics.

A. “Natural disasters, weather reports, and government policies.” B. “Disorderly conduct, violence, and mental illnesses.” C. “Love, hate, and relationships.” D. “Moral principles, rules, and standards of conduct.” ANSWER: D. – “Moral principles, rules, and standards of conduct.”

2. If all of its members always behaved in accordance with the __________ ________; then any society would be a better place to live.

A. Golden Rule B. Silver Rule C. Good Rule D. Bad Rule ANSWER: A. – Golden Rule

3. The only way to compensate people solely on a ________ _______, is to avoid any commissioned sales position of interest that is inherent.

A. State Basis B. Salaried Basis C. Policy Basis D. Catastrophic Basis ANSWER: B. – Salaried Basis

4.) While there are many other possible excuses for unethical conduct, the aftermath in putting the self ahead of others. Such conduct results in a number of ___________ ______________, which can only ruin one’s career in the long-run.

A. LostTransactions B. Win-Lose Transaction. C. Money Transactions D. Coconut Transactions

ANSWER: B. – Win-Lose Transaction.

5.) The goal should be conduct that is both __________ and ___________. It should be noted that what constitutes ethical conduct and what constitutes legal conduct are not necessarily the same thing.

A. Victorious and Gratuitous B. Computerized and Technical C. Ethical and Legal D. Wise and Diplomatic ANSWER: C. – Ethical and Legal

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6.) The licensee would be representing the seller in the transaction and would therefore have a _____________ _____________ to the seller. The real estate licensee who takes a listing contract from the owner of a property most often acts as agent of the seller.

A. Fiduciary Obligation B. Binding Contract C. Victorious and Gratuitous D. Meaningful Relationship

ANSWER: A. – Fiduciary Obligation

7.) In order to obtain a listing contract on a property, the agent must not overestimate the value of it, otherwise they have acted ____________.

A. With Quarrelsome B. Justly C. Illegally D. Unethically

ANSWER: D. - Unethically

8.) A licensee must make a competent valuation of the property and set a(n)_________ listing price. This is one of the ethical obligations of a licensee.

A. Perplexed B. Realistic C. Riotous D. Abominable

ANSWER: B. - Realistic

9.) One of the ___________ ________ the licensee undertakes when agreeing to act as the agent of the principal, is an ethical implication in the creation of an agency relationship that concerns the agent’s obligation to obey the instructions of the principal.

A. Fiduciary Duties B. Love Affairs C. False Accusations D. Despairing parts

ANSWER: A. – Fiduciary Duties

10.) The obligation for the licensee to do his or her “best” in trying to market the property, is the primary aspect of the licensee’s _____ ___________ requirement.

A. Gold Bond B. Truthful Honor C. Due Diligence D. Bypassing Route

ANSWER: C. – Due Diligence

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11.) A listing contract must remain confidential even after the property has been sold or the listing

price has ___________.

A. Decreased B. Risen C. Expired D. None of the following

ANSWER: C. - Expired

12.) The _________ and the __________, is the prequalification process that will serve to benefit both of these people.

A. Teacher and Learner B. Buyer and the Seller C. Husband and the Wife D. House and the Neighborhood

ANSWER: B. – Buyer and the Seller

13.) As long as there was no reason that the licensee should have known that this representation was _________. A licensee may rely upon a representation of the seller about the condition of the property.

A. Acceptable B. False C. Factual D. Degrading

ANSWER: B. - False

14.) The agent is deemed to be the agent of the buyer for that part of the transaction, when a licensee helps a buyer obtain ___________.

A. Work B. Furnishings C. Information D. Financing

ANSWER: D. - Financing

15.) It would be asking a lot of that second salesperson to promote the sale of that listed property with enthusiasm, if the salesperson that got the listing contract did so through ________ or ___________ means.

A. Unfair or Unethical B. Candid or Equitable C. Rich or Poor D. Ecstatic or Bewildered

ANSWER: B. – Unfair or Unethical

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Ethics Part 2 Practice

1.) It is always more ethical to stress the benefits offered by you or your firm than to downgrade the abilities of some other office or salesperson. As in any competitive situation, there is always the temptation to _________ the competition.

A. Impel B. Interlude C. Denigrate D. Entice ANSWER: C. - Denigrate

2.) They should note that a lot of ________ _________ __________ have established procedures

for getting permission to contact another broker’s principal.

a. Multiple Listing Services b. People with Companies c. Additional Servicing Projects d. Other Possible Subjects ANSWER: A. – Multiple Listing Services

3.) A broker is allowed to directly contact the client or customer of another broker, except in ___________ _____________.

a. Vivid Terms b. Breath taking Views c. Cruel Ways d. Unusual Circumstances ANSWER: D. – Unusual Circumstances

4.) If the broker refuses to tell an agent the _______________ ______ that applies to a listing contract, then it is permissible to contact the client of another broker.

a. Ironic Standard b. Public Eye c. Government Policy d. Termination Date ANSWER: D. – Termination Date

5.) In order to be considered the “___________ ________,” one must be the agent who originates a series of events which, without a break in continuity, results in the sale of the property.

a. “Main Subject b. “Procuring Cause” c. “Immediate Offender” d. “Ultimate Accuser” ANSWER: B. – “Procuring Cause”

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6.) The licensee would not be considered the procuring cause and would not be entitled to commission or share of that commission, if a licensee directed a potential buyer to a property, but did not ________-____ and did not diligently pursue the sale.

a. Win-Lose b. Grow-Up c. Follow-Up d. Call-Up ANSWER: C. – Follow-Up

7.) It is NOT primarily the desire of the ________ which determines who is entitled to the commission or what is ethical.

a. Appraiser b. Contractor c. Seller d. Buyer ANSWER: D. – Buyer

8.) Continuing to advertise an especially attractive property after that property has already been sold would tend to operate as an unethical “_____ and ______” tactic.

a. “Bait and Switch” b. “Smooth Criminal” c. “Loss and Win” d. “Peace of Mind ANSWER: A. – “Bait and Switch”

9.) Charge desk fees and other fees in recent years have seen an increase in the number of real estate offices which offer ______ commission payout to salespeople.

a. 25% b. 50% c. 100% d. 75% ANSWER: C. – 100%

10.) Perhaps nowhere is the possibility of violating this ______ _____________ greater than between two licensees in the same office. Licensees must be careful not to interfere in the relationship between another licensee and his or her customer or client

a. Actual Problem b. Ethical Requirement c. Unfortunate Misunderstanding d. Simple Procedure ANSWER: B. – Ethical Requirement

11.) The use of “_________” costs, such as for utility expenses, must be avoided if the cost of those items have been increasing over the same period of time.

a. “Cheap” b. “Average”

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c. “Expensive” d. “Moderate” ANSWER: B. – “Average”

12.) By their very nature, ________________, are expected to emphasize the positive features of the property.

a. Advertisements b. Appraisers c. Sales Agents d. Brokers ANSWER: A. – Advertisements

13.) These ads are known as, “_______” ads. They are both unethical and illegal.

a. “Community” b. “Deaf” c. “Neighborhood” d. “Blind” ANSWER: D. – “Blind”

14.) These ads must NOT be misleading. A common area of advertising for real estate offices is in the area of ____________.

a. Sales b. Judgment c. Recruiting d. Appraising ANSWER: C. – Recruiting

15.) Offers of “_____” licensing courses must be just that, ______.

a. Free b. Rented c. Sold d. Trained ANSWER: A. – Free

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