Ethics case
Background of Real Estate Market
Real estate agent, Michael McNally, reviewed the listing information for his latest property for sale, making sure everything was correct before tomorrow’s open house. After several years of slower sales in his east Texas county, the real estate market was getting hot again, although not as intense as in the north Dallas area nearby. Sales of single family houses had risen 10 to 15% from the recession in 2007-2010. Average prices were increasing slightly this year. In fact, the pent-up demand was threatening to overwhelm the current available housing inventory. Some recent properties in the area had received multiple offers the first day on the market, often above asking price.
This house was a 2200 square foot 3 bedroom/2 bath traditional style house in a desirable neighborhood. Very few homes had come on the market in this neighborhood, so there would be a lot of interest tomorrow. The owner, Mrs. Serena Daily, was a family friend and fellow church choir member, who was moving to an independent living community in Dallas to be near her children. Michael wanted to get Mrs. Daily the best possible price for her house so that the move wouldn’t be a struggle for her. Mrs. Daily was a widow, and although she had kept the house in good condition for over 40 years, there were a few problems that she didn’t feel up to correcting. The roof was replaced in 2014, and the house recently passed a termite inspection. However, there were foundation problems, not uncommon in this part of Texas, but visible in the cracks around windows and doors in the family room. Mrs. Daily wanted to sell the house “as is” and carefully noted flaws on the disclosure form.
In determining the recommended asking price, Michael carefully balanced comparisons of similar property against possible costs of fixing the foundation and walls, replacing stained carpet and carpentry on the exterior. The house had been decluttered and professionally cleaned. Mrs. Daily’s grandsons removed most of the pictures and repainted the whole house in a neutral color. The house would show well, and Michael expected a lot of traffic at the open house. Even with the disclosed problems, Michael was sure the house would be a good value priced at $179,500. This was slightly below comparable properties in the neighborhood, which were selling at around $90 a square foot. A quick sale would enable Mrs. Daily to move before the summer was over.
An Unexpected Offer
As Michael was leaving his office, another realtor in his firm tapped on his door. Jason Brown was relatively new to selling real estate, but he was popular in the community and had a reputation for being a “go-getter.” Jason had an offer in his hand.
“Listen, my client just authorized an offer on your new listing on Maple Avenue. They are offering $180,000 ($500 more than the listing price) to buy it “as is”.
Michael expressed his concern to Jason that the client had not even seen the house before making the offer. He pointed out they had not seen the disclosure form, and didn’t know what kinds of repairs would be needed. What if the buyers didn’t have enough money to buy the house and repair it? He was pretty sure the house would be appraised at a high enough value for loan approval, but what if the buyers couldn’t qualify for a loan that would cover repairs and improvements?
Jason was not deterred. “My brother and his wife are moving back from Houston. They’ve put in a couple of offers that were lost to buyers with deeper pockets. My sister-in-law is adamant that we get out ahead of the competition this time and she likes the photos on the website.” Jason handed Michael the contract with an earnest money check for $1500 and an option check for $150. “Here is the option check, so we can have the house inspected within a week if your client accepts the offer”.
Michael promised to convey the offer but reminded Jason that it was too late to cancel the open house. “I still expect to receive other offers tomorrow, so you should come by and look at the house for your clients.”
A New Development
On his way to the door, Michael asked Sylvia, the firm’s administrative assistant to make a copy of the contract and option check for his files. Sylvia looked at the check and chuckled, “My, Jason has been busy. This is the third offer he has submitted checks for today.”
Michael looked again at the check. The account was in the name of Jason Brown. At the bottom of the check he had written “For Pamela and Larry Brown”. Michael asked Sylvia about the other checks. Sylvia replied, “Yes, all three are from Jason’s account and all three say ‘For Pamela and Larry Brown’. It looks like they are making multiple offers. Isn’t that unusual?”
Driving home, Michael pondered the situation. If Jason makes multiple offers for the same client, he probably isn’t serious about all of the offers. It looks like Jason is trying to hedge his offers. Conceivably, all three of their offers could be accepted and Jason’s family could use the 7 day option periods on each to decide which one they actually want to purchase, only being out the option fees on the ones they decide not to purchase. The problem for Michael with Jason’s family’s offer is that if Mrs. Daily accepts their offer, turning down others and taking the property off the market for the 7-day option period, there is a 1 in 3 chance that the buyers will not go through with the purchase…and they haven’t even actually been inside the house or seen the disclosures.
The Meaning of “As Is”
Michael’s open house was busy and productive. At the end of the day Mrs. Dailey received two additional offers, and another realtor called that they had another offer on its way. All three offers were near or slightly above the asking price. If any of the offers closed at the prices offered, Mrs. Daily would have a fair price on her house and no delays on her move to Dallas. Michael compared the terms of the offers as he prepared to meet his client. He noticed that two offers crossed through the “as is” statement and wrote “pending inspection.”
Evaluating the Offers
Michael scheduled a meeting with his client, Mrs. Daily, and presented all of the offers to her. All had financing pre-approval letters saying they were qualified to purchase a home in that price range and all had requested 7 day options for $150. Mrs. Daily decided she wanted to go with the offer from Jason’s clients because it was the highest price. Michael made it very clear what he knew about the buyer’s making multiple offers and that they might not go through with the deal but she decided to go ahead and accept that contract.
Michael called Jason with the news. There was a pause on the other end of the phone, and then Jason chuckled nervously. “Wow, I wasn’t sure we would get a favorable response. I’ll get back to you after I talk to my brother and schedule the inspection”.
Post Inspection Counter-Offer
The following Friday, Jason called Michael with a response. “Based on the inspection, we want to amend our offer to $145,000. We want the foundation repairs made before closing, and we also want a $5000 allowance for new carpeting. My sister-in-law also expects your client to split closing costs”.
Michael suspects that Jason is trying to low-ball Mrs. Daily and the maybe even the owners of the other houses they had made offers on if they were accepted also. He gets out his copy of the Code of Ethics and Standards of Practice of the National Association of Realtors to see if there is a breach of conduct.
Quotes From Applicable Sections From the Code of Ethics and Standards of Practice of the National Association of Realtors:
From the Preamble:
Realtors, therefore, are zealous to maintain and improve the standards of their calling and share with their fellow Realtors a common responsibility for its integrity and honor.
Realizing that cooperation with other real estate professionals promotes the best interests of those who utilize their services, Realtors urge exclusive representation of clients; do not attempt to gain any unfair advantage over their competitors and they refrain from making unsolicited comments about other practitioners.
From Article 1:
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. This obligation to the client is primary, but it does not relieve Realtors of their obligation to treat all parties honestly.
Standard of Practice 1-9:
The obligation of Realtors to preserve confidential information (as defined by state law) provided by their clients in the course of any agency relationship or non-agency relationship recognized by law continues after termination of agency relationships or any non-agency relationships recognized by law. Realtors shall not knowingly, during or following the termination of professional relationships with their clients:
1) Reveal confidential information of clients; or
2) Use confidential information of clients to the disadvantage of clients; or…
Applicable Sections From a Texas Real Estate Commission’s One to Four Family Residential Contract:
7. Property Condition:
D. ACCEPTANCE OF PROPERTY CONDITION: “As Is” means the present condition of the Property with any and all defects and without warranty except for the warranties of title and the warranties in this contract. Buyer’s agreement to accept the Property As Is under Paragraph 7D(1) or (2) does not preclude Buyer from inspecting the Property under Paragraph 7A, from negotiating repairs or treatments in a subsequent amendment, or from terminating this contract during the Option Period, if any.
23. Termination Option: For nominal consideration, the receipt of which is hereby acknowledged by Seller, and Buyer’s agreement to pay Seller $ _______ (option Fee) within 3 days after the effective date of this contract, Seller grants Buyer the unrestricted right to terminate this contract by giving notice of termination to seller within _____ days after the effective date of this contract (Option Period). Notices under this paragraph must be given by 5:00 pm (local time where the Property is located) by the date specified. If no dollar amount is stated as the Option Fee or if Buyer fails to pay the Option Fee to Seller within the time prescribed, this paragraph will not be a part of this contract and Buyer shall not have the unrestricted right to terminate this contract. If Buyer gives notice of termination within the time prescribed, the Option Fee Will not be refunded; however, any earnest money will be refunded to Buyer.
Picking up the Pieces
Michael brought back the news of the Brown’s counteroffer to Mrs. Daily. She was quite disappointed and angry for not accepting the other offers. “I’ve lost six days when we could be showing the house to other buyers, and it’s clear the Brown’s original offer was not serious. What can I do now?”
After calming his client, Michael spent the rest of the afternoon reaching out to the realtors representing the other offers to see if they were still interested in the property. He also began scheduling another open house, just in case none of the rejected offers did not reappear. Although he was frustrated with Jason Brown, he still has to work with him, so Michael pondered whether to say anything to Jason or their other colleagues.
Discussion questions
1. 1. Who are the stakeholders affected by the potential sale of the house?
2. 2. What potential conflicts of interest do you see in this situation?
3. 3. What is the relationship between the “as is” and the “option” clauses in the contract, and what is the resulting effect?
4. 4. Was there anything illegal about the buyers making multiple offers? Was it unethical?
5. 5. Do you think Jason’s attempts to renegotiate the offer after the home inspection are ethical?
6. 6. Based on the Code of Ethics and Standards of Practice of the National Association of Realtors, what do you think Michael should have done? What should Jason have done?
7. 7. Were there any other unethical issues discloscgoed in the case…maybe involving confidentiality?
