This article explains why the public negatively ranked the honesty and ethical standards of real estate licensees and what licensees must do to improve their image.

Survey says…

The public was asked to rate the honesty and ethical standards of real estate agents (and numerous other professions) in a poll conducted by Gallup in 2008. Unsurprisingly, 83% of voters ranked the ethics of brokers and their agents as “average” or “low.” Only 17% polled rated real estate agents’ ethics “high” or “very high.”

How would you rate the honesty and ethical standards of SFR agents?

  • Low (41%, 28 Votes)
  • Average (32%, 22 Votes)
  • Very high (13%, 9 Votes)
  • High (13%, 9 Votes)

Total Voters: 68

Since 1995, only 15-20% of the public has viewed the honesty and ethics of real estate agents in a positive light. For comparison, the professions that consistently rank lower than real estate agents include:

  • labor union leaders (16%);
  • Congressmen (12%);
  • car salesmen (7%); and
  • lobbyists (5%).

Among those ranking higher are:

  • nurses (84%);
  • police officers (56%);
  • bankers (23%); and
  • lawyers (18%).

When real estate professionals were asked to rate their own ethics in a poll conducted by Wright State University in 2006, 99% said their own ethical standards were “high” or “very high.”  No surprise there.

According to public opinion, real estate professionals are some of the least trustworthy people in society. However, according to their own opinion, real estate professionals are some of the most trustworthy people in society. What do you think of this incongruity, dear reader?

The danger of dilatory disclosures

The consistently booming real estate market has forged the current discrepancy between the public’s perception of real estate agents and the agents’ view of themselves. From 1980 until the financial crisis of 2008, real estate sales volume surged more than ever before and home prices trended ever higher. This phenomenon was driven principally by continuously dropping interest rates. The Millennium Boom created such urgency among the public to buy and sell that an agent’s actual errors and omissions were overlooked by blissfully ignorant clients sensing greatly increased wealth due to rising property values. Anyone holding a license was a genius and nobody thought twice about it.

The perceived scarcity of the housing supply made due diligence less imperative than closing escrow.

As occurs in boom times, the perceived scarcity of the housing supply made an agent’s due diligence obligation less imperative than closing escrow. Thus, amidst the noise of excessive speculation, building, deal making and asset inflation, the honesty and ethical standards of many real estate professionals vanished.

Now that inflated sales volume and prices have silently faded into the jobless Lesser Depression, slippery brokers and agents are being held doubly accountable for their misconduct. Homebuyers and owners traumatized by the financial crisis of 2008 now lack tolerance for any information asymmetry between themselves and the real estate agents from whom they expect an enlightened attitude, full due diligence and sound advice. [For more information about information asymmetry, see the June 2011 first tuesday article, Closing the real estate information gap.]

Home resale agents v. used car salesmen: what’s the difference?

The end goal for brokers of all real estate transactions is the same now as it was before and during boom times – to earn a fee paid on the close of escrow. However, the means by which such a goal is achieved has changed.

For the next 30 years, the emerging real estate practice paradigm will likely reflect a market of modest cyclical sales volume movement in contrast to the booms of years past. Pricing will hug the mean price controlled by annual consumer inflation, California production increases and personal income levels (not interest rates). [For more information regarding the new real estate paradigm, see the May 2010 first tuesday articles, Looking through the window towards recovery: a real estate paradigm shift – Part I and Part II.]

Further, industry customs and trade union forms, not law, have afforded seller’s agents opportunities to withhold information about a property from a buyer until after an offer is accepted. This attitude emerged on the back of past seller dominance fueled by ever lower interest rates. It too will disappear with the rise of the new real estate paradigm.

Industry customs afford seller’s agents opportunities to withhold information until after an offer is accepted.

Such deliberately dilatory behavior directly conflicts with the duty a seller’s agent owes to all prospective buyers to disclose all material facts known and observable (read: readily available to the agent) that might influence a buyer’s decision before he enters into a purchase agreement on the listed property. Such behavior has been accepted for the past three decades, beginning with changes in the way real estate was marketed in 1978 and tolerated through 2008 because of rising property values. [For more information regarding disclosure obligations, see the December 2010 first tuesday article, Holmes v. Summer: dilatory disclosures and the damage done.]

The churn and burn sales peaking during the Millennium Boom have now disappeared. A more regular sales market is settling in, making way for thoughtful agents who properly manage client transactions and know much about market conditions.

Old habits die hard

Weighted by their experience in a seller-dominated, deregulated housing market, a supermajority of agents continue to deliberately withhold knowledge they have acquired regarding legal, financial and tax aspects of their clients’ transactions. Said with a straight face — in spite of their educated and practical knowledge of real estate law, finance and taxes — agents argue they are not the “appropriate” professionals to be dispensing advice about such matters directly affecting their client. Old habits die hard as the gatekeepers of real estate struggle to once again become advocates devoted to consumer protection.

A real estate agent retained to assist a seller or buyer is required to share his knowledge about information that might affect a buyer’s or seller’s decision. His duties owed under the trustee-defined agency relationship representation mandate such disclosures, whether or not the agent is confronted with a direct inquiry. [For more information regarding tax and legal advice, see the October 2011 first tuesday article, The Votes Are In: Agents don’t give legal or tax advice? and the September 2011 first tuesday article, Real estate licensees and the unauthorized practice of law.]

Today’s brokers and agents can learn from used car salesmen.

Today’s brokers and agents handling the resale of homes can learn from used car salesmen, who were trusted even less than real estate professionals in 2008. Used car salesmen have learned to consistently make up-front disclosures about the condition of a resale car using vehicle history report services such as CarFax before a buyer commits to the purchase. They reduce a buyer’s risk of an unpleasant surprise by providing a full report from an insured, bonded company with all the information a buyer needs to make a fully-informed decision before going under contract. Thus, the honesty and ethics of used car salesmen in 2011 may well rank higher in coming polls than that of real estate agents.

Reclaiming integrity

Boom-time property marketing creates a corrupt business environment. The confusion generated by the accompanying sense of scarcity produces excessive profits and earnings for sellers and agents. In the collapse, homebuyers feel deceived, damaging any goodwill the real estate industry previously developed.

What can our gatekeepers of real estate now do to improve their credibility and reestablish the legitimacy of their earnings?

  1. Be clear about who you represent. Now is the time for buyer’s agents in particular to drop the patently misleading title of “selling agent,” and vocalize their buyer’s right to know all material facts about a listed property (disclosed by the seller’s agent) and the proposed transaction before making an offer. It is the buyer’s agent who has the specific duty to care for and protect the best interests of his buyer when purchasing a home. The responsibilities of a buyer’s agent (who is “selling” nothing but himself) can only be fulfilled if the agent fights against traditional seller defiance and demands that the seller’s agent (selling the property) make full disclosures prior to acceptance of an offer. Recessions and financial crises are times best fit for such changes.
  2. If you know it, disclose it. Voluntary transparency by seller’s agents about property conditions allows buyers to submit meaningful offers. Transparency by the release of information ASAP is also required by law. Advice will become a competitive standard as we move through this Lesser Depression into a stable real estate market. Delivery of property information by a seller’s agent upon first request from buyers and their agents encourages honesty, eliminates uncertainties and greatly reduces claims of misrepresentation.
  3. Eagerly share your legal and tax knowledge. An agent’s job is not that of a tour guide, merely driving buyers about to see available properties and generating automatic emails from the multiple listing service (MLS). The Department of Real Estate (DRE) requires licensees to complete specific education requirements that equip them with knowledge regarding the legal, mortgage and tax aspects of real estate transactions. Courses in principles, legal aspects, finance and property management are replete with rules of law controlling every sort of conduct between buyer-seller, borrower-mortgage lender, landlord-tenant and agent-client. Sharing this special education with homebuyers and owners is a vital part of an agent’s fiduciary duty, underlining honesty and instilling confidence. [For more information regarding real estate advice, see the September 2011 first tuesday article, Raising the bar of real estate advice.]

Society’s approval of a real estate agent’s professional conduct will improve greatly when people feel they are being properly represented by their agents as knowledgeable advocates. Agents are imparted with the knowledge and tools they need to protect and defend their client when they qualify for and renew their license — they now need only use it.