Real Estate Agents and Ethics – Why Real Estate Agents Should Disclose Financial Ties
Real estate agents, in most cases, have completed a lengthy education course, hold at least a bachelor’s degree, and typically must pass a licensing exam to sell or lease real estate legally. To be a realtor, one must also obtain specialized knowledge in particular financing, insurance, and inspections.
There are two different types of realtors. The first is a realtor that works on their own. This type of realtor most often starts out working as an assistant to a brokerage firm where they learn the business side of real estate. As the agent progresses, they take on more responsibilities until they master the art of real estate sales and continue to pursue this education until they become self-employed. Once a realtor becomes self-employed, they are then referred to as a “broker.”
Most local real estate boards require realtors to have some form of certification. These forms of credentials vary from state to state. To be certified by your local board, brokers must complete the Broker Disclosure Document (BDD). The BDD is typically a four-hour long training program given in classrooms, conferences and seminars. Many states require new agents to pass the BDD before being allowed to sit for a licensing examination. These licensing examinations are based upon the Broker Liability Law and involve detailed ethics training.
Because there is a great deal of education and training involved in becoming a licensed realtor, there are a number of unethical practices that realtors are required to adhere to. Some unethical realtors work within their own association and do not advertise or make any referrals to other realtors. Other unethical brokers coordinate marketing strategies with sales representatives and other licensed brokers within their association.
The typical realtor will earn approximately twenty-five to thirty percent commissions from selling a house through an agent. This commission is contingent on the final price that is paid to the realtor by the seller when the transaction closes. However, in some states, a portion of the final price goes to the realtor for being an “in absentee” on the closing transaction. The typical realtor does not have an incentive to sell a house at a higher price than what it would if the agent had recommended it to the seller.
Another ethically questionable practice by realtors is making referrals to national franchise association boards and other national real estate associations. In one national survey, ninety-one percent of realtors were affiliated with national realtors associations. Many unethical realtors funnel money from a national association to their realtor office to pay them for their campaign contributions and expenses. Most states have rules against this, but no state has ever passed a law specifically targeting the problem.
The realtor must document the transaction clearly and accurately for tax purposes. The realtor must prepare and maintain all of the necessary documents needed to facilitate a successful audit by the IRS. These include the sales contract, sales agreement, closing statement, tax return, and mortgage deed. The realtor must not sign the mortgage documents or provide consent for the release of any of these important documents.
Unfortunately, there are honest and law-abiding realtors who are nevertheless being exploited by unscrupulous realtors. A recent case in point involves a Florida realtor who was paid cash upfront by the seller to close the deal. He did not receive the full commission as the seller indicated, and he misrepresented the value of the property to the buyer. As a result, he was charged with four misdemeanors and is now in jail awaiting sentencing.