Do the Right Thing
Take Time to Consider Commercial Real Estate Ethics.
"I’m in a dilemma," says Christopher E. Hughes, CCIM, president of Hughes Realty Group, Ltd., in Vancouver, British Columbia, Canada, who recently discovered that the two investment properties along a busy stretch of highway he was working to sell were near a proposed rapid transit system station that could affect the property’s resale value—and he didn’t know if the buyer knew. "What is the right thing to do? Should I make him aware of it? There are plans...but it’s not definite," he says. Technically, Hughes says, because his principal is the seller, he doesn’t have to disclose the information to the buyer unless asked. However, "I would think I have to make that judgment call and make a decision to tell [the other] agent," he says.
Like Hughes, many commercial real estate practitioners no doubt face ethical quandaries both small and large in their everyday business, some with legal consequences, others that just may gnaw at the conscience.
"Our business has lots of opportunities not to be ethical, quite frankly," says Don Harlan, CCIM, manager of Harlan, Lyons, & Associates in Denver and an ethics instructor and author who has served on the professional standards committees of the National Association of Realtors (NAR), the Commercial Investment Real Estate Institute (CIREI) and other groups and helped rewrite NAR’s ethics code.
Commercial real estate professionals should be aware of ethical issues—and what can happen when they’re breached.
The years have brought both complexity and deterrents to real estate ethics, observers say. "The issues that confront Realtors today are more complex—there are more dimensions to them—than there were 20 years ago," says Cliff Niersbach, vice president of board policy and programs for NAR and staff liaison to NAR’s Professional Standards Committee.
Nonetheless, developments in recent years have changed the ethics climate, says Ed Craine, CCIM, principal of Smith Craine Finance in San Francisco. For instance, the aftermath of the savings and loan crisis brought improved appraisal and environmental standards. Now, regulated lenders must better document their files and implement quality-control standards. Private lenders such as conduits "have more of a business approach to lending," he says. "Since most transactions have to be financed, that means there’s somebody other than a couple of principals and a couple of brokers" involved.
In addition, "most states now have adopted agency disclosure," says Hal Maxfield, CCIM, SIOR, president of Hal Maxfield Real Estate Company, Inc., in Mansfield, Ohio, who was the 1996 chairman of CIREI’s Professional Standards Committee and has served on similar committees for NAR and the Society of Industrial and Office Realtors (SIOR).
The real estate cycle also can affect whether brokers breach ethics—or whether they report breaches. "If the market is moving along very briskly, it tends to...lessen the complaints, because everyone is making money," says Leil Koch, CCIM, president of Village West Realty, Inc., in Lahaina, Maui, Hawaii, and incoming chairman of CIREI’s Professional Standards Committee. "In bad markets, people get ticked off and tend to follow up on a lot of grievances."
Just what is commercial real estate ethics? "In my opinion, ethics is what makes a person ‘do the right thing’ even if there isn’t a clear legal code in question," says Letty Bierschenk, CCIM, consultation services director of the Bierschenk Group, Inc., in Los Angeles, who has testified as an expert witness on the subject. "There is often a fine line between ‘getting the best business deal for your client’ and taking advantage of the other party."
That leads to what’s frequently at the heart of situations of questionable ethics: money. "The point at which it becomes an issue of ethics is whether decisions are made by the broker where the primary concern is the fee rather than transaction," says Louis J. Peerless, CCIM, president of Peerless Real Estate Company in Cincinnati.
Law and ethics often are mentioned in the same breath and there’s definitely overlap between written ethics codes and the law. "At the same time, the Realtor Code of Ethics imposes duties on Realtors beyond what is required by the law," Niersbach says. While not all aspects of the law are covered, "The chances of tripping over the law are going to be greatly reduced if the code is understood and followed."
In addition, there’s arbitration—binding decisions for disputes over situations such as contract commissions—and remediation, which seeks compromises in such disputes. The following discussion focuses mainly on ethics.
Frequency of Problems.
How often do brokers breach ethics? While there’s no clear-cut answer, a code of ethics survey conducted by NAR in 1997 found that more than two-thirds of the 1,285 respondents reported observing conduct that may have violated the organization’s ethics code. (However, 88 percent of respondents primarily were residential brokers and just 4 percent of respondents called commercial brokerage their primary activity.)
"I have a personal opinion that a smaller percentage of the people in the business...are paying attention to ethical standards," says Dudley H. Watson, CCIM, president of Watson & Watson Realtors in Dallas, who is active in ethics and professional standards issues. "There’s a lot more competition in the brokerage business...and when money is involved, people will change their stripes."
Peerless’ take is that "those who do practice their business in an unsavory manner are...overwhelmingly in the minority, but the bad news travels fast—and it hurts all of us."
The real number of ethics breaches in real estate—and commercial real estate in particular—will remain unknown, as many violations are not disclosed. "My general opinion is there’s a lot of things going on that are not reported," although that in itself is a violation of the code, Koch says.
NAR’s survey reports that of the respondents who were aware of possible ethical violations, 26 percent did not report them, for reasons including concern for retribution, too-involved reporting processes, a desire to remain anonymous, and time constraints.
Of the complaints that were reported, not all merited hearings. Local grievance committees typically dismissed half of all ethics complaints received—largely because the allegations did not support a code violation or were found to be frivolous or unfounded, reported another NAR study on professional standards enforcement.
Since CIREI’s code and Professional Standards Committee were created in 1996, just one complaint has gone to a hearing panel, in 1997, says Donn Raabe, CIREI’s director of member services and Professional Standards Committee staff liaison. This likely is because many complaints are handled at local and state levels and CIREI conducts hearings only twice a year, he says, although CIREI is considering scheduling off-cycle meetings as needed.
The most frequently cited complaints to local real estate groups in NAR’s study involved Article 1 of NAR’s code, which covers fidelity to the interests of the client. The next two most frequently cited articles were Article 2, duty to avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to a property or the transaction; and Article 9, duty to ensure that agreements are in writing and specify the terms, conditions, obligations, and commitments of all parties.
Speaking plainly, the most common occurrences are that people are knowingly dishonest, such as making false representations, being intentionally vague, or not making proper disclosures, says Stephen F. Blau, SIOR, senior vice president of McBride National Services in Franklin Lakes, New Jersey. Blau teaches ethics and has served on several professional standards committees and worked on changes in the NAR and SIOR codes.
When comparing commercial and residential situations, "Generally...there are a very limited number of ethics complaints or disputes that arise in commercial as opposed to residential" real estate, says J. Michael Boyd, SIOR, CRE, president of Boyd, Page, & Associates in Houston and chairman-elect of SIOR, who has served as an ethics instructor. However, commercial practitioners comprise only about 10 percent of the industry, he notes. Nonetheless, he says he believes that the level of professionalism is higher in the commercial arena. "You’re dealing with sophisticated businesspeople as clients. They have attorneys. They understand what’s expected as fiduciaries."
However, others note that the commercial practice lends itself to potential problems less likely to arise from residential transactions. For instance, "There’s a category of problems that extend from the fact that many practitioners do not make written compensation agreements with their clients," Blau says. This is more a problem for commercial brokers, he says, because residential practitioners have a highly evolved compensation system that operates through their multiple-listing services.
In addition, when brokers share information, "sometimes brokers will take that information about a transaction and use it to their own advantage and maybe to the disadvantage of the person who was providing the information," says Jerry W. Franklin, CCIM, president of J.W. Franklin Company in Warrensburg, Missouri.
How unethical does behavior get? While confidentiality prevents brokers from discussing specifics, here are some examples:
- Blau offers an "exaggerated and abbreviated" version of one case: An agent’s potential buyer expressed interest in purchasing a property that needed renovations, he says. However, the agent did not submit the offer, instead showing it to her boyfriend, who was a contractor and who subsequently submitted an incrementally higher offer. The boyfriend purchased the property, renovated it, and resold it at a substantial profit, Blau says. The unsuccessful bidder "filed, among other things, an ethics complaint with a local board of Realtors," he says.
As a result of a hearing, the agent was expelled from the board. "That’s the worst case that you’ll find in our profession," Blau says. "People do bad things: they lie, they cheat, they steal."
- "The worst case I saw where a real estate professional was found at fault," Bierschenk adds, "was where she directed escrow to release a buyer’s deposit to the seller, even though the buyer had requested an extension of time because he had not received several important documents which he needed to perform his due diligence."
- Peerless relates a leasing situation in which he was advised that the listing broker’s property owner insisted that Peerless’ client should fund all brokerage fees, while Peerless’ client thought the costs should be shared. Peerless soon learned from the listing broker of another proposal on the table from a less economically strong user that had no cooperating broker. It was implied to Peerless that the fee would determine how the broker would advise his client, he says. "In order to best represent our client’s interest in getting control of the property, we recommended that our client essentially bite the bullet, gain control, and fund the total fee to the listing broker," he says. However, he says, brokers should be getting the strongest possible tenants for clients: "The broker’s fee should not be a determining factor in which [one] of noncomparable opportunities should be pursued."
Know the Code
Written standards of ethical behavior come from organizations’ various ethics codes. "We like to think of ourselves as being professionals, and we want to represent the highest level of service and knowledge and performance and integrity," Boyd says. "It makes sense to have a written code."
NAR adopted its code in 1913. Today, organizations such as CIREI maintain similar codes. Too numerous to list here, CIREI’s 17 articles range from promoting the interests of clients to making true representations in advertising and to the public. Courts have upheld NAR’s code as valid due process, Raabe says. (For a copy of CIREI’s code, visit the library section of CIREI’s Web site.)
Codes continue to evolve. For instance, an NAR advisory group is developing numerous changes in ethics enforcement processes; SIOR also is refining its code "to make it more applicable to commercial transactions," Boyd says, addressing situations such as leasing that are not covered specifically in the NAR code.
Complaints about ethics violations are filed with various boards and committees at local, state, and national levels—depending on the circumstances and the players—which make decisions about violations and dole out punishments.
When groups include not just commercial brokers, it’s important that the panel understands the business. "You try not to have all residential people hearing a commercial dispute," Koch says. "The business practices and standards of practice are different."
Local boards reported that no ethics violations were found in about a quarter of all cases, NAR’s survey reveals, while respondents said that two or more articles of the code were violated in more than half the cases.
For those found in violation of ethics standards, a range of disciplines is possible. For instance, CIREI’s process includes warnings, reprimands, education, fines not to exceed 10 times annual dues, probation, suspension, and expulsion, Raabe says.
Practitioners found to have violated NAR’s code were required to attend ethics education programs roughly half the time, the study reports. About a third of the time, violators received letters of warning or reprimands. Harsher punishments were rare: In less than two cases out of 10, violators were required to pay fines; probation occurred in 4 percent of cases and suspension in 2 percent; no respondents reported expelling a member for code violations.
While many in the industry say they believe the disciplines for ethics violations are adequate, some suggest going further.
"I think they should have larger fines to really get the message through to people," suggests Hughes, who has served on his local professional standards arbitration board.
Koch says he’d like NAR to have the ability to publish violations and names of violators. "That would be our biggest deterrent," he says.
However, Blau disagrees. "That would be absolutely the wrong thing to do," he says. "I think that the publication of names and the dissemination of findings in any other than a generalized context is absolutely inappropriate. What that in essence does is it punishes somebody twice."
Training Is Key
The best way to head off ethics problems, those in the industry advise, is training. "We can’t legislate or legally require good behavior," Harlan says. However, "I think you can teach good ethical behavior."
Most real estate professionals get some ethics-related training, but often not in large doses. While groups’ professional standards committee members usually have mandatory training, "The only time people in the trenches get that training is when they sign up" for sessions, Koch says. However, some ethics training is included NAR’s general training.
Overall, as commercial brokers continue to face situations on the job that could result in unethical behavior, Peerless offers a version of the Golden Rule to keep in mind: "Do not do unto others as you would not have them do unto you."
Ultimately, Hughes took that to heart—he mentioned the possible development relating to the proposed transit line to the buyer’s agent, who informed the buyer. Nonetheless, the deal closed in late September, Hughes says. "I believe I did the right thing."