Ethics in a Short Sale/REO Market

Feel Like the Rules of the Game Have Changed? Let the Code of Ethics Be Your Referee

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2003 - 2010

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Related Article: AAR Ombudsman Program

In this market dominated by short sale and REO transactions, it is easy to feel like the rules of the game have changed. Clients are stressed and emotional. Transactions are complicated. Timelines are predictably unpredictable. Banks lack transparency. Appraisals pose new problems. Yet the Code of Ethics doesn’t change with market conditions. It plays referee no matter the transaction, calling fouls when people stray from the fundamental rules governing REALTOR® behavior.

CODE FUNDAMENTALS
When you’re not sure what the ethical course of action is, it never hurts to review the Code. Read it online. While REALTORS® should be knowledgeable of the entire Code, those who handle ethics complaints in today’s market see violation allegations that involve certain articles more than others.

CLIENT INTERESTS
REALTORS® pledge themselves to protect and promote the interests of their client. (Article 1)

“Article 1 is the keystone of the whole thing,” says Jim Amdahl, a member of NAR’s Professional Standards Committee and its Interpretations and Procedures Subcommittee. “That’s probably why they put it first!” If you’re facing an ethical dilemma, ask yourself what will best protect and promote your client’s interest.

Ethical lapses occur when “agents are not protecting and promoting their fiduciary duty to the client,” explains Janine Brown, chair of AAR’s Professional Standards Committee. For example, in a short sale, a listing agent might be tempted to bypass the homeowner and present a higher offer to the lender. But in a short sale, “the client is absolutely not the lender,” cautions Amdahl.

Of course, some sellers might prefer NOT to see all offers and counter-offers that occur before closing. If your client has waived (in writing!) your obligation to submit these offers, you are acting in their expressed interest.

HONESTY
This obligation to the client is primary, but it does not relieve REALTORS® of their obligation to treat all parties honestly. (Article 1)

Agents know that they can’t conceal pertinent facts about the property. The Code—and the law—forbid it. But ethical complaints about honesty are usually more subtle.

For example, a seller’s agent might submit a multiple counter offer when there are not actually multiple offers on the table. The Code’s obligation of honesty means that the seller’s agent should explain that though there is only one offer, this form is being used so that the home remains in play. The buyer’s agent might not approve, but the seller’s agent has met the obligation to honesty.

AREA OF EXPERTISE
REALTORS® shall not undertake to provide specialized professional services concerning a type of property or service that is outside their field of competence… (Article 11)

You can adapt your business to address the changing needs of the market, but you can’t simply declare yourself a short sale expert. You need to educate yourself thoroughly about the complexities and risks inherent in these transactions, and you need on-the-ground experience. One class does not make you an expert!

The above-referenced line from Article 11 continues in this way: “…unless they engage the assistance of one who is competent on such types of property or service...” Working under a mentor is one of the best ways to become proficient in a new field. Amdahl reports, “We have a couple of agents [in our organization] who haven’t done [a short sale] but want to. They’ll either refer it to an agent who has or ask to learn at the feet of the people who are experienced.”

The line from Article 11 concludes: “…or unless the facts are fully disclosed to the client.” Remember Article 1’s obligation of honesty. If you are learning while doing, be sure your client understands that.

COMMON ETHICS COMPLAINTS
AAR’s staff fields ethics complaints from the public and from other real estate professionals. Below are some of the more common complaints—and what you can do to avoid them.

AGENT SLOW OR NON-RESPONSIVE
The most common ethics complaint AAR receives is that the agent is non-responsive or that the process is going too slowly. The best way to prevent this type of complaint is to manage your client’s expectations from the beginning of your relationship—especially when working on a short sale. Explain to the client that the timeline for a short sale transaction is much longer than for a “typical” transaction. Inform the client that banks may sit on offers for weeks or months without explanation.
You should also make it a practice to stay in contact with all of the players in this type of transaction—your client, the other agent, the lender and so forth. If your client hears from you regularly, they will feel less frustrated by the process. “A doctor who has a strong bedside manner rarely gets sued,” says Amdahl. “You think that might have something to tell us about real estate?”
AGENT FAILED TO PROTECT CLIENT
Another common complaint is that the REALTOR® failed to negotiate the deal so that the seller was not obligated to pay the difference between the outstanding loan balance and the purchase price as a personal obligation. Similarly, complainants report that their REALTOR® didn’t negotiate the contract in a way that protected earnest money.

There are two important ways to avoid these complaints. First, be sure your client understands that you are not a lawyer, CPA or financial advisor. Always advise your client to seek professional advice—and always offer this advice in writing.

Second, make sure you are educated about the complexities of these transactions. You don’t have to have the answers to legal and financial questions, but your client appreciates it when you know what questions should be raised.
MULTIPLE OFFER CONFUSION
Multiple offers can also lead to complaints. If you are in a multiple offer situation, it’s always smart to review “Appendix IX to Part Four: Presenting and Negotiating Multiple Offers” in the Code.

The appendix advises that while there isn’t one standard approach, there are certain fundamentals that can guide your handling of multiple offers. These include your commitments to protect your client’s interests, to be honest with all parties and to “submit offers and counter-offers objectively and as quickly as possible” (Article 1-6).

Some agents toss around the terms “offer” and “contract” interchangeably, but they are fundamentally different. A contract occurs when the buyer’s offer has been accepted by the seller—when the seller signs the offer to purchase. Be precise in your language so that you do not mislead other agents on the status of the property.
COMMISSIONS
The most common broker-to-broker complaints deal with agents who try to change the commission agreement AFTER an offer has been presented. The Code is clear that such an arrangement must occur BEFORE the offer: “REALTORS® shall, with respect to offers of compensation to another REALTOR®, 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” (Article 3-2).

To avoid this complaint, listing agents working on short sales should be prepared for the lender to ask for changes to the commission structure. Before an offer is made, the listing agent could negotiate to split the rate with the buyer’s agent.

BOTTOM LINE
The Code of Ethics preamble includes the Golden Rule: “Whatsoever ye would that others should do to you, do ye even so to them.” Put yourself in the other parties’ shoes and see if that new perspective clarifies the situation. If you witness unethical action by another REALTOR®, consider submitting the complaint to AAR’s Ombudsman Program (see article that follows).

When in doubt about the right thing to do, call your broker. “Your broker is the first line of defense,” says Brown. “They are responsible for you.” Brokers have access to AAR’s Legal Hotline. They can also contact REALTOR® members and AAR staff who work with the professional standards system on a regular basis.

A referee’s job is to enforce the rules and minimize injury to the players. The Code of Ethics performs the same functions for your real estate transactions. As a REALTOR®, you’ve made a higher commitment to ethics than the general real estate licensee. Know the rules. Pay attention to the referee. And play safe.

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