Real estate risk management is an important concern for agents. Real estate agents are commonly sued for breaching their duty to act in the best interests of their client. To protect your clients’ interests, and reduce your own risk exposure, check out our highly-rated course, Know the Code: Your Guide to the Code of Ethics. Additionally, it’s a good idea to gain a solid understanding of the Code of Ethics and Standards of Practice of the National Association of REALTORs® (NAR). To help you out, we’ve put together an overview of Articles 1–13, as well as links to helpful case examples.
Keep reading to learn how to improve real estate risk management, and avoid getting into trouble with the law, by putting your clients’ interests first. Plus, sign up for McKissock’s Unlimited Learning Pass to access our 1-hour webinar: Why Real Estate Agents Get Sued and How to Mitigate the Risk, presented by Steve Gutstein.
Overview of NAR Code of Ethics: Articles 1–13
The first thirteen articles of the NAR Code of Ethics and Standards of Practice outline ethical guidelines that should be followed by all real estate agents, regardless of NAR membership status. The remaining articles deal with Board of Realtors® proceedings and duties to other Realtors®. Here’s an overview of Articles 1–13:
- Article 1 requires Realtors® “to protect and promote the interests of their client.” In its Standard of Practice 1-2, “client” means persons or entities with which the Realtor® has an “agency or legally recognized non-agency relationship.” See NAR’s thirty-one Case Interpretations of Article 1.
- Article 2 requires honest communications regarding a seller’s property.
- Article 3 requires cooperation between Realtors® “except when cooperation is not in the client’s best interest.” Standard of Practice 3-10 states that the listing agent is only obligated to share property information and property accessibility to other brokers “when it is in the best interests of the client.” See NAR’s ten Case Interpretations of Article 3.
- Article 4 prevents Realtors® from presenting offers, purchasing, or acquiring an interest in any property through self or family members, or the firm’s members and families, or any controlled legal entity without first disclosing their actual position to the “owner or the owner’s agent or broker” in writing before any contracts are signed. See NAR’s six Case Interpretations of Article 4.
- Article 5 prohibits providing professional services concerning a property or its value when the Realtor® has a present or “contemplated” interest without first disclosing said interest to all parties. See NAR’s Case Interpretations of Article 5.
- Article 6 forbids accepting any commission, rebate, or profits from expenditures made on behalf of the client without knowledge and consent. This includes referral fees or financial benefits for recommending real estate products and services to the client, like mortgage financing, warranty programs, homeowner’s insurance, title insurance, etc. See NAR’s six Case Interpretations of Article 6.
- Article 7 prohibits acceptance of compensation from more than one party without disclosing and receiving informed consent from the client. This Case Interpretation of Article 7 involves an undisclosed dual agency, where the listing agent accepted compensation from the seller and buyer without disclosing it to the seller.
- Article 8 requires maintaining a separate trust account for the client’s funds. The Case Interpretations of Article 8 include an example of failing to put a deposit into a separate account.
- Article 9 requires all agreements related to real estate transactions to be written, understandable, and contain all obligations of the parties. Each party must be furnished a copy of the agreement after signing. Realtors® must make reasonable efforts to explain contractual terms to a party before signing.
- Article 10 prescribes interactions with the public.
- Article 11 requires Realtors® to conform to standards of practice and competency towards their clients. Realtors® will not “provide specialized professional services outside their field of competence.” This includes “opinions of real property value or price.” See NAR’s eleven Case Interpretations of Article 11.
- Article 12 requires honesty and truthfulness in all real estate communications (including with clients) and certain disclosures when advertising and marketing to the public. See NAR’s twenty-six Case Interpretations of Article 12.
- Article 13 prevents a Realtor® from practicing law or recommending a lawyer to any party requiring legal counsel. See NAR’s three Case Interpretations of Article 13.
Working with different types of real estate clients
Now that you’re familiar with your ethical obligations to the client, you need to understand the types of real estate clients you may represent. Your client will have a brokerage relationship with you under a written agreement. You may represent the seller, and will owe fiduciary duties to that seller. You may also represent the buyer, and will owe fiduciary duties to that buyer. Fiduciary duties include obedience, loyalty, reasonable care, the disclosure of all material facts, accounting of all funds and documents in a transaction, and confidentiality by not disclosing your client’s financial, business, motivations, or personal affairs. Knowing the different types of real estate representation and agency relations will help you protect your clients’ interests.
Putting real estate clients’ interests first requires promoting and protecting the interests of your clients. This includes disclosing any potential conflicts of interests, or accepting side fees from third parties without informed consent. All written agreements must be understandable and explained to the client before signing, with copies provided to all parties. Documents and funds must be protected. You must be obedient, loyal, use reasonable care, disclose all important facts, provide an accounting of all clients’ funds and transaction documents, and keep clients’ information confidential. To successfully serve your clients—and to protect yourself and your business—follow these guidelines as a best practice in real estate risk management.
Learn more about real estate risk management
Looking for more real estate risk management resources? McKissock offers many continuing education opportunities to help you reduce your risk exposure, better serve your clients, and work toward real estate career advancement. Register for our highly-rated course, Know the Code: Your Guide to the Code of Ethics. Plus, check out our 1-hour webinar: Why Real Estate Agents Get Sued and How to Mitigate the Risk, presented by Steve Gutstein.
To access this recorded webinar, as well as hundreds of other videos, webinars, and job aids, sign up for our Unlimited Learning Pass.
Learn how to protect your clients’ interests, and reduce your risk exposure, by taking McKissock’s highly-rated course: Know the Code: Your Guide to the Code of Ethics.
About the author
Steven Rich, MBA has over three years of experience as a successful real estate agent. He was awarded the Top Condo Salesperson for two of those years by his real estate company. Steven has served as Associate Editor for a real estate magazine and is the author of a 104-page e-book on How to Buy, Develop, Lease, and Sell Real Estate.