Chapter 21 - Ethics in Real Estate
At the completion of this chapter, students will be able to do the following:
1) List at least two prohibited acts under the federal anti-trust laws.
21.1 Ethics in the Industry
You're at the grocery store, and the total is $57. You hand the cashier 3 twenties. Instead of handing you back three ones, he hands you three tens. Maybe you don't even notice. Maybe the cash was tucked under the receipt and you shoved it all in your wallet without looking. Later, you're at the coffee shop and go to grab the ones to pay. You don't have any ones, and $30 seem to have appeared out of nowhere. You trace back through your day and realize that the grocery store cashier must have made a mistake. Do you return to the store and give the cashier the money back?
It's a pretty good guarantee that no one is going to come arrest you for stealing $27. Don't go back and you could be $27 richer just like that. But there's the nagging worry that maybe the cashier will get in trouble for a small error. Or just the feeling in the stomach that you know what the right thing to do is, and keeping money that you know belongs somewhere else is not that right thing. That's the difference between ethics and the law.
Laws are the system of rules that are chosen by a country, state or community that are meant to regulate the activities of its members. They are generally enforced by a penalty being applied if they are not followed.
Ethics often hold an individual to a higher standard than the law. They are the principles that govern a person or group's behavior.
The law lets you know what you're allowed to do. Ethics are what let you know the difference between right and wrong!
Both laws and ethics play an integral part to the real estate profession at every level. The agent who is closing on a multi-million-dollar property and the agent who is filling out the paperwork for a potential rental are each affected by laws and ethics, in properly carrying out their tasks.
For a real estate professional, most of the laws that directly affect their business are created on the state and local level. There are also laws on the federal level, called Fair Housing Laws, that have been made to prevent real estate professionals from discriminating against protected classes.
As a real estate agent, you need to get to know the Code of Ethics from the National Association of Realtors. There may be additional codes of ethics specific to a local real estate association that you wish to join. It can also be a great idea to find a mentor in the industry or an experienced agent in your office who is willing to help guide you in making the best ethical decisions in your real estate career.
As we will see when we learn about Fiduciary Responsibility, there are even laws that are written to help guide how you apply your ethics within this profession. Following the law determines whether you will be able to keep your job and license, or potentially be banned from practicing real estate, or even be liable to face financial penalties. But it is having a strong code of ethics that will determine how well you succeed in this profession. So much of what allows an agent's business to flourish is their reputation, and to create a strong reputation, you must let strong ethics guide you.
Moral principles that govern a person’s or group’s behavior.
The system of rules that a particular country or community recognize as regulating the actions of its members and may be enforced by the imposition of penalties.
21.2 Anti-Trust Issues
As we have just seen, while a great many of the laws that you will need to follow as a real estate professional are overseen at the state level, some of the most important laws fall under the federal jurisdiction. In this lesson, we’ll be taking a look at one aspect of regulations that the federal government places on the real estate industry. Like all financial industries, there is a need for rules and laws to make sure that the marketplace remains fair and open. In the real estate industry, these are called the Antitrust Laws.
Antitrust refers to legislation that is meant to prevent monopolies and encourage competition in the marketplace. In the board game “Monopoly,” the strategic player will do anything in their power to take over the board, and try and prevent their opponents from ‘owning’ any property, effectively removing all competition in the game. There are three main types of laws that the Federal Government uses to prevent unfair business practices in real estate. In this lesson, we’ll take a look at those three laws, we will then look at four of the specific practices that are prohibited by these laws, and finally we view some of the penalties that can result from failure to follow these prohibitions.
The Sherman Antitrust Act was enacted in 1890, and does not just regulate real estate, but seeks to prevent all contracts from forming trusts or conspiracies that could hinder trade or commerce, in all financial dealings. Its purpose is to not allow a restraint on trade and to encourage a marketplace that allows for more competition.
Clayton Antitrust Act of 1914 acts as a supplement to the Sherman Antitrust Act, and goes further to prevent anti-competitive practices right from the start. In addition to regulating the formation of trusts and monopolies, the Clayton Act also takes steps to prevent predatory and unfair pricing. Like the Sherman Antitrust Act, it does not deal with just the real estate industry, but there are specific parts of the law that are most relevant to real estate, especially the conspiracy to fix prices, the conspiracy to boycott and imbalance commission splits.
The final law we will look at today is the Federal Trade Commission Act, which was also enacted in 1914. This law remedied a problem with enforcing the Sherman Antitrust Act, and operates based on that law along with the Clayton Act. The law establishes a commission, a government body that is given the power to enforce all the antitrust rules that have been established by the other two laws. Since its establishment, the Federal Trade Commission has put into place a large number of regulations that seek to prevent anti-competition practices. These rules apply to many specific aspects of real estate, including how advertising may be worded and what you are allowed to offer your clients.
Let’s look at the four main practices that are prohibited by antitrust regulations.
In a marketplace, there are always two sides. Just like in a real estate deal there are buyers and sellers. These two sides are what create the basic economic principle of supply and demand, which in a free and open marketplace is what sets the price. However, if two or more people, from “the same side”, were to decide to get together and only buy or sell at a certain price, then they would be able to create an artificial price that was not based on supply and demand. This is called price fixing.
Let’s pretend that the real estate market was in a slump. Homes used to sell for $300,000 on average, but now there is too much supply and the highest price any homes are getting is $250,000. If all the homeowners in that neighborhood were to get together and decide that no matter what they would only sell homes at $300,000 or above, then they would be committing price fixing. For real estate professionals, price fixing most often applies to setting commissions and fees. If all the real estate agencies in a neighborhood got together and decided they were going to charge an 8% commission on sales instead of the standard maximum of 6% then they would be guilty of price fixing. Likewise, if selling agents from different companies got together and decided that they would only split commission with buying agents at 0.5% that would be price fixing.
To understand a group boycott it’s important to know that this regulation applies to companies and not individuals. If an individual does not like the practices of a certain airline, and decides against doing any business with them, and encourages everyone they know, to do the same, they are not breaking any laws. However, if a company chooses not to do business with any individual or business, that is their right. But if they get together with other companies and all agree to refuse doing business with that company with the intent of eliminating competition or enforcing business practices that are more favorable to themselves, then they are committing an illegal group boycott. The real estate world is one that is founded on working cooperatively in order to succeed in the industry. To best serve the interests of your clients, and your own interests as well, it will always be necessary to work with other real estate companies.
Let’s look at an example of a group boycott: a new real estate agency comes to town, and their big selling point is that they only charge the low commission of 2%. Because all the existing real estate agencies in the town had been collecting a 6% commission as standard, they are pretty unhappy with the new agency. All the original agencies get together and decide that they will no longer use the Multiple Listing Service, and only share listings privately amongst themselves, effectively blocking the new agency from viewing listings. They agree to do this until the new agency either goes out of business, or raises their commission.
In essence, a market allocation is when businesses make agreements to not compete with each other. Here’s an example of how it might play out in real estate. There are two successful real estate agencies in town. They will each take different halves of the town and will not sell or market in the other half of town. This will allow them to effectively corner the real estate market in their half of town, meaning they will have a great deal of power to set prices and practices and to drive away the competition of small agencies that might try and enter the market.
A Tie-In agreement is when the offer to sell a desirable property depends on the purchase of a much less desirable property. In Monopoly this might play out as one player agreeing to sell the desirable Park Place to another player, but only if they also buy undesirable Baltic Ave at the same price. In the real world, it might be that a building is offered for sale, but when an offer comes in, the buyer is informed that the offer will only be accepted if they also buy a nearby lot, which is zoned in a way that prohibits building or any other use that could be a viable investment.
When a real estate professional is found guilty of violating a state or local law, the most severe penalty tends to be the loss of a license, and while that is far from desirable and they do risk financial consequences from a civil suit, all of that pales in comparison to the penalties that could result from violating the antitrust laws. For instance, violating the Sherman Antitrust Act makes a person guilty of a felony, and as an individual they could face up to a $100,000 fine and three years in jail. A company could be fined up to one million dollars. If a civil suit is brought against a person or business who has violated an antitrust law, then the injured party could receive up to three times the damages which the violations caused.
An agreement between members of a trade to exclude other members from fair participation in the trade.
Conspiring to establish fixed fees or prices for services or products.
An agreement between members of a trade to refrain from competition in specific market areas.
Sherman Anti-Trust Act
Federal legislation including imposition of civil and punitive damages for anti-trust activities.
A contract where on transaction depends upon another.
21.3 Georgia Anti-trust Laws
Although many states have enacted their own version of the Sherman Antitrust Statutes, Georgia is not one of them. Consequently, most prosecutions of trade restrictions in Georgia are based on federal law. Georgia's laws, however, provide alternate methods for dealing with antitrust activities occurring within the State. The following three areas provide the principal means for internal state enforcement:
- General business statutes,
- Statutes dealing with fraud and misrepresentation; and,
- The statute empowering the Georgia Real Estate Commission.
Let’s start with business statutes.
Legal restrictions that apply to any business professional also apply to the real estate professional in Georgia. To avoid antitrust violations, you need to understand the following Georgia statutes.
The Fair Business Practices Act (FBPA) — gives the Governor the power to prohibit business transactions that would result in substantial actual damage to the citizens of Georgia. The Act regulates advertising and restricts activities that encourage consumer transactions. Any licensee who intentionally uses fraudulent or misleading information in an effort to encourage the sale of real property could violate the Act.
So, what is misleading information?
Misleading information may appear in a simple statement to a client or in a public advertisement. In addition, it must have an effect on more than just one consumer and is likely to have an impact upon the consumer public as a whole.
Licensees violate the FBPA when, in order to encourage consumer transactions, they falsely represent aspects of their business practice in a manner that does or could impact the general public.
For example, if a licensee represents to a prospective purchaser that a property has a public sewer when in fact it does not, the licensee has not violated the FBPA. However, if the licensee advertises in the newspaper that ten lots in a subdivision have a sewer connection when she knows they have septic tanks, she has violated both the FBPA and the License Law.
Penalties under the FBPA
There are several penalties under the FBPA that you should be aware of. First, a licensee who violates the FBPA may be subject to a fine of up to $25,000 per violation. If guilty, a licensee may be prohibited from engaging in similar activities. Finally, citizens have the right to bring their own civil actions against violators and, if successful, can nullify all contracts and collect up to three times the amount of his or her loss, plus attorney fees and court costs.
Next, we’ll cover the Uniform Deceptive Trade Practices Act (UDTPA).
The UDTPA is similar to the FBPA. The UDTPA serves as a mechanism to provide penalties for individuals who fraudulently misrepresent aspects of the service they provide to their clients.
The major difference between the FBPA and the UDTPA is that under the UDTPA no actual consumer transaction has to take place for a violation to occur.
The UDTPA potentially has a much broader application than the FBPA.
For example, if three brokerage firms conspire to fix commission rates and then advertise their "competitive rates" in the newspaper, they have violated the UDTPA. The fact that the advertisement contains misleading statements is alone sufficient to prove a violation of the Act. No sale needs to take place and no proof of consumer reliance on the advertisement is required.
Under the UDTPA, conspiring to fix commission rates or to divide geographical territory could result in a lawsuit.
Penalties under the UDTPA include fines, injunction, and anyone bringing a civil action against a wrongdoer can recover three times the amount of his or her loss, plus attorney fees and court costs.
Finally, there are Georgia Laws Prohibiting Fraud and Misrepresentation.
By definition, fraud in Georgia consists of any kind of artifice intended to deceive another. The artifice can be an ”act” or “a failure to act” on the part of the one who is justifiably in a position of trust or confidence.
The nature of the relationship of a real estate licensee to a client automatically creates the duty of loyalty. The relationship to a customer creates a duty of honesty and good faith. A breach of either duty can result in the nullification of a contract, the forfeiture of any commission or other fee owed to the licensee, a civil suit for damages, or sanction of a real estate license by the Commission.
For example, if a listing broker withholds from the seller any important information concerning a prospective purchaser's offer, that omission can result in the failure of a contract on the property and the agent has committed fraud.
Many of the activities prohibited by State and Federal antitrust laws are also fraudulent activities. Since Georgia lacks specific antitrust laws, a licensee is more likely to face an action for fraud than an action for antitrust.
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