This post was updated Sept. 18, 2024.
As any agent or broker knows, real estate transactions involve plenty of paperwork and legal issues.
For one of the biggest investments a person may make in their lifetime, it’s important to follow the rules to a T to protect yourself and your clients.
But even the most earnest real estate agents can accidentally make a false step that could wind them up with an ethics violation, a lawsuit or even revocation of their license. That’s why it’s vital for agents to stay up to date on ethics and legal training so they know what kind of situations they might be getting into.
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Take a look at the following hairy situations agents can get into and what kind of consequences they could have on their careers.
Scenario 1
A potential homebuyer is especially concerned about the risk of termites at a property you’re representing. She asks if the home has ever incurred any damage from termites, to which you respond, “no, none.”
But you fail to mention that there has been evidence of the presence of termites on the property in the past, though they’ve never caused any significant damage to date.
Verdict: You could be at risk of a lawsuit or even losing your license.
Agents who misrepresent a property, mislead clients or fail to disclose property defects quickly make themselves vulnerable to being sued.
If the aforementioned potential buyer ultimately buys the home, then months later starts seeing termite damage on their property and is perplexed as to why, they will likely return to the listing agent and blame them for failing to disclose the presence of termites.
The seller or listing agent could also potentially be liable even if failing to disclose termites to the buyer was unintentional. Other common related items that agents can get into trouble for not disclosing include foundation issues, improvements made without permits or leaks.
Common misrepresentation issues also include property boundaries, problems with roofs, or even an agent’s relationship with the buyer, seller or anyone else involved in the transaction.
Scenario 2
Your buyer is thrilled with the “perfect” home you’ve helped them find and you meet up on a Friday afternoon to collect their earnest money for escrow.
You take their check, put it in a safe interior pocket in your work purse and promptly forget all about the check until you notice it in your purse the following Tuesday.
Verdict: You could be sued and potentially have your license revoked if you have a pattern of similar mishandling of funds.
Earnest money needs to be deposited into escrow in a timely fashion, and agents should not take this lightly. They should also avoid moving money around, not keeping up their books or borrowing money from clients (a big no-no).
The bottom line is, when it comes to handling clients’ money, keep it organized and get it to the appropriate parties as quickly as possible.
Scenario 3
An agent calls you regarding a property you’ve listed, which currently has an accepted offer — with contingencies. The agent wants to know what the status is on offers and contingencies, and you curtly reply, “I’m not at liberty to discuss.”
Verdict: You’ve just committed an ethics code violation.
Article 3 of the Realtor Code of Ethics states: “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.”
As such, you’re obligated to disclose if an offer has been expected and what the current status is in case the agent and their client want to submit a backup offer.
Scenario 4
Your clients are shopping for homes in a new city and want to know crime rates in different neighborhoods to help them make their homebuying decision. So, you generate crime reports with a variety of crime statistics on every neighborhood in the city and provide them to your client.
Verdict: You’ve committed an ethics code and fair housing violation.
Such practices that might potentially sway a buyer toward wanting to live in one neighborhood versus another are considered steering under the Fair Housing Act and the National Association of Realtors (NAR) ethics guidelines.
To avoid a potential slip into steering, agents can suggest listings to clients based on a home’s objective features or price point and refer clients to third parties if they have questions about schools or ethnicities in a neighborhood.
Scenario 5
Your seller receives a buyer love letter in one offer on their home that hits them in a personal way — the buyer couple reveals that they have two kids the same age apart as the seller’s, and the seller now envisions their family growing up in their home.
The seller accepts their offer, and later on, a competing buyer who is single learns that the seller accepted the offer of the other buyer because they had a family.
Verdict: The seller and/or listing agent could be sued, and this is a fair housing violation.
When buyers give away personal details in buyer love letters that might sway sellers, it opens up sellers to liability in a fair housing lawsuit.
At a Realtors Conference in 2020, Barbara Betts, broker-owner of the Betts Realty Group and a director of the National Association of Realtors, the California Association of Realtors and the Pacific West Association of Realtors, suggested that listing agents speak with their sellers about not accepting these kinds of letters at all because of their potential for liability.
Of course, if letters only discuss the merits of the house buyers are hoping to win, that’s a different story. But it’s impossible to know the content of a love letter in advance.
Editor’s note: A ban on so-called buyer love letters was enacted in the state of Oregon at the beginning of January 2022, and was subsequently deemed unconstitutional. Using such letters on either side of a transaction is still considered risky, however, and NAR advises real estate professionals to caution their clients about the potential risks involved in terms of violating fair housing laws, and encourage them to judge offers based on more objective criteria.
Scenario 6
You notice a property pop up in the multiple listing service (MLS) that checks off all the boxes of what your buyer wants in their new home. But, you also notice that the listing agent works at a discount brokerage known for offering lower than the typical cooperating compensation for buyer’s agents.
So, you decided not to alert your client to the listing. There are plenty of other listings out there anyway.
Verdict: This practice could quickly get agents sued if they’re caught, and it’s considered a fair housing violation.
In fact, several Houston-area real estate agents were recently targeted in lawsuits by REX Real Estate when the discount brokerage acquired recordings of agents revealing that they wouldn’t show buyers homes listed by the discount brokerage because of the smaller commission they would receive. Buyers have a right to know about all potential options available to them.
Scenario 7
You list a property and clearly state in the MLS that showings will not be available on the property until a certain date the sellers have specified when they plan to go on an extended vacation.
The day before the sellers were supposed to leave, they mention to you that they left early and have already vacated the house.
A potential buyer had reached out to you wanting to see the house ASAP, so you contact them and let them know you can now show them the house this afternoon, a day before you said on the MLS it would be open for showings.
Verdict: You have violated the Realtor Code of Ethics.
Realtors are obligated under the Realtor Code of Ethics to cooperate with other brokers unless it’s not in their client’s best interest.
By showing the home yourself a day before publicly stating when it would be available to see, you’re misrepresenting the availability of access to the property and going against their obligation to share information about the property and make it available to other brokers.
Scenario 8
You’ve hit a bit of a dry spell and could really use some new leads. You remember an old leads list you have in your database from before you started a texting plan through your CRM and think, “Bingo! Why didn’t I text these leads before?”
You add their cell numbers to your texting campaign plan and wait for those leads to warm on up.
Verdict: You’ve just done something illegal and made yourself vulnerable to a lawsuit.
According to the Federal Communications Commission (FCC) regulations, consumers must give their consent to receive marketing communications. Just because someone opted in to receive communications from you previously does not mean they now want to start receiving new text messages from you.
“That is a major no-no,” Robby Trefethren, an inside sales agent (ISA) coach at Hatch Coaching, told Inman. “You are opening yourself up to major legal and financial liability, and I don’t recommend doing that to anyone.”
Scenario 9
Your client is interested in a property and has poured over the listing multiple times but really wishes they could get a video tour of the home before deciding whether or not to go see it in person.
The only problem is the listing doesn’t have any kind of video or virtual tour of the home with it. You tell your clients, no problem, you can go visit the property for them and take some videos on your iPhone while you’re there to pass along to them.
Verdict: You’ve made yourself vulnerable to a lawsuit.
By recording video footage of a home without the seller’s consent, you’ve given them the option to take legal action against you.
Sure, it’s possible that the listing agent just didn’t have the tech or know-how to create a video tour of the home, but it’s also possible that the sellers did not want to have video footage of their home on the internet. Without asking, you have no way of knowing.
Scenario 10
Some friends of one of your current clients reach out to you because they’re unhappy with their current Realtor, whom they say, “Just isn’t getting the job done.”
Because you are responsible and kind and want your clients to see that you’re willing to help their friends, you tell them you’d be happy to help out and are sorry their current Realtor isn’t doing their job right.
Verdict: You’ve just violated Article 16 of the Realtor Code of Ethics.
If a client already has a representation agreement in place with another Realtor, you’re violating Article 16 by agreeing to work with them before their existing contract with the other Realtor expires.
It is, however, permissible to discuss with someone like this who reaches out to you what you could do to help them once their existing contract expires.
“If they make incoming contact to me, I absolutely can have a conversation about what I will do for them after their contract has expired,” Betts told attendees at the aforementioned Realtors conference in 2020. “You cannot talk about right now. You cannot tell them their Realtor isn’t doing their job.”
Scenario 11
Your clients are selling their home after raising four children in the house they lived in for thirty years. Knowing that there are plenty of families in the neighborhood with young children and hoping to appeal to this demographic, they want to be sure that there’s a sentence in the listing description of the home that says something like, “best for a big crew with at least four kids.”
Because you want to make the transition out of their longtime home as easy as possible, you tell them that of course, you’d be happy to include such a sentence in the listing description.
Verdict: You’ve just committed a fair housing violation and violated anti-discrimination laws.
A listing description cannot target specific types of buyers or specify a preference for a certain demographic or potential buyer, including one that has several children in tow. This violates anti-discrimination laws, specifically the Fair Housing Act.
Rather than try to market a property to a specific demographic that the seller thinks would be interested in it, let sellers know upfront that listing descriptions must remain neutral in their language. However, through staging, there are ways of showing potential buyers all the possibilities a home holds for many types of buyers — single, married and with or without children.
Scenario 12
It’s Tuesday morning and you’re showing a single-family home that you just listed yesterday to a couple in the process of moving to the area.
After walking them through the house, the couple seems excited that it checks all their boxes, but also somewhat suspicious, like the deal might be too good to be true. They ask you, “What’s the catch?”
To reassure them you say, “Don’t worry, there’s absolutely nothing wrong with the house, this is the perfect property. Unfortunately, the husband of the couple selling the home recently lost his job, so they were forced to downsize and need the money soon.” You’re sure your sellers won’t mind you mentioning this fact, since it’s bound to help sell the property quickly to these potential buyers.
Verdict: You’ve just violated Article 1 of the Realtor Code of Ethics.
Article 1 of the Realtor Code of Ethics states, “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.”
That duty to protect the interests of one’s client includes not revealing a client’s confidential information, such as their current state of finances and employment status.
To reassure buyers in this type of situation, an agent might remind potential buyers that their sellers have disclosed everything they know about the property and that a qualified inspector is sure to turn up anything else that might cause them concern.
Scenario 13
Your seller tells you he’s had a series of stressful days — his car broke down and his dog got sick — and it’s going to be very challenging for him to move out by his scheduled closing date.
So, as his protector in all things real estate, you ask the buyer’s agent if he can have a two-day extension on moving out of the house. After checking with the buyers, their agent says they’re happy to give your seller the two-day extension. Problem solved, and now you look like a superhero to your seller!
Verdict: You’ve just violated Article 9 of the Realtor Code of Ethics.
Whenever a verbal agreement is made during a transaction, according to Article 9 of the Realtor Code of Ethics, Realtors should also “assure whenever possible” to record such agreements in writing that are “clear and understandable” to all parties.
What if the buyer had later decided they did not want to allow the seller more time in the house, and noted that the agreement was not in writing? There would be no record that the request had ever even been made and no proof to hold them to that agreement.
Scenario 14
Wow, 2023 was a rough year for your small family-run brokerage with all those buyers and sellers running away from the market in the face of high mortgage rates.
Luckily, you’ve got a brilliant idea to make back some extra money in the next few years: sign long-term contracts with homeowners, in which you give them a small initial payout to receive exclusive rights to represent them in any future transaction. And your brokerage also gets an extra 3 percent payout if the homeowner cancels the agreement or changes ownership of the property in any way.
As it looks like mortgage rates will decline in upcoming years and move consumers to transact more, you realize you’re sitting on a gold mine — cha-ching!
Verdict: You could be at risk of a lawsuit; in some states these practices are illegal.
If this scenario sounds familiar, it should.
MV Realty has been sued by several states for deceptively engaging in such contracts with thousands of homeowners across the country. The brokerage’s “homeowner benefits agreement” stipulates that the brokerage will pay between $300 and $5,000 for the exclusive right to list the homeowner’s home — unfortunately, in some cases, those agreements have also enabled the brokerage to obtain liens on those homes, unbeknownst to the homeowners. After all those lawsuits, MV Realty recently filed for bankruptcy.
The bottom line is, these types of agreements are predatory, especially for financially strapped homeowners who may be desperate to get cash quickly — without fully understanding the implications of what they are signing.
Scenario 15
You’re a busy luxury agent with a loyal client base. On any given day, you really don’t have time to deal with new clients who aren’t going to deliver at least a $5 million transaction to your business.
That’s why, when a Section 8 recipient approaches you about helping them to find a new home, you tell them that you only deal with the luxury end of the market, and therefore, can’t be of service to them.
Verdict: You’ve committed a fair housing violation and are at risk of a lawsuit.
It’s true that, in general, agents can pick and choose what clients and listings they accept. However, Section 8 holders are a protected class, which means that an agent cannot deny them their services.
Therefore, although a luxury agent may not typically accept business on transactions lower than $5 million, if someone who is a Section 8 recipient contacts them for their services, they are required to assist them. Several of Douglas Elliman’s luxury agents were recently hit with a discrimination lawsuit for refusing service to a Section 8 recipient, who was searching for housing in New York City that would accept her Section 8 voucher.
Scenario 16
As a developer, it’s not easy marketing somewhat undesirable lots of land that may be prone to flooding, for instance, or don’t already have water, sewer or electrical infrastructure. So, you try to be honest and open with potential buyers upfront, providing your majority Spanish-speaking potential buyer pool with documents in Spanish that explain the state of the land.
But, really, you’d rather make a larger profit on these lots, if possible, so you go ahead and let the mortgage arm of your company provide the same, largely Spanish-speaking buyer pool with important loan documents in English — so that, if they don’t quite understand the fine print and end up defaulting on the loan, you can go ahead and resell those lots at a mark-up after they have to foreclose.
There’s plenty of available real estate out there anyways, and you’re sure they’ll find another opportunity eventually. Right?
Verdict: This is illegal and you could be at risk of a lawsuit
Mortgage lenders have a duty to ask potential borrowers what language they prefer in official documents, according to regulations from the Federal Housing Administration and the Federal Housing Finance Agency. This helps to avoid deceptive or predatory lending by ensuring that potential borrowers fully understand the language in a contract.
The Texas-based developer and lender Colony Ridge Development was recently hit with a lawsuit by the Consumer Financial Protection Bureau and the Department of Justice that alleged the developer “exploited language barriers” by not providing borrowers with a language option on lending documents.
Additional resources
- Got commission questions? This compliance expert has answers
- 8 non-negotiables for business ethics in 2024
- Dual agency is gaining momentum. Should you walk the tightrope?
- 5 easy ways to stay in your lane during a transaction
- The real estate agent’s ultimate guide to fair housing
- 22 common agent practices that violate the Realtor Code of Ethics
