The Code of Ethics - Breaking It Down #2

Today, we tackle Article 2. For those of you wondering how the last scenario turned out, you can find the answer in the comments here.

Article 2 states: REALTORS® shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property or the transaction. REALTORS® shall not, however, be obligated to discover latent defects in the property, to advise on matters outside the scope of their real estate license, or to disclose facts which are confidential under the scope of agency or non-agency relationships as defined by state law.

Before we get into interpretation, let's start with a definition. Latent Defects. What are those? Latent defects are hidden flaws, weaknesses, or imperfections that require a thorough inspection to detect.

Knowing that, we move forward to the Standards of Practices (SOPs) to see how we should interpret the article.

SOP 2-1 says that you are only obligated to discover and disclose adverse factors reasonably apparent to someone with expertise in those areas required by their real estate licensing authority. It does not impose the obligation of expertise in other professional or techinical disciplines.

So, if you find that the basement is flooded, we would expect you to reasonably discover that. If there is a leak in the sprinkler system, we would not expect you to find that. If your seller knows about the leak in the sprinkler system, then it is no longer a latent defect (as it is a known defect) and you need to disclose!

This is the article that also addresses the issue of "non-material" factors. Basically, stigmatized property (ie: ghosts, deaths that occurred, etc). The SOP states that anything deemed "non-material" by law or regulation as not being subject to disclosure are considered not "pertinent" for the purposes of Article 2.

Idaho law states: : “No cause of action shall arise against an owner of real property or a representative of the owner for a failure to disclose to the transferee of the real property or a representative of the transferee that the real property was psychologically impacted.”

It goes on to say if “a purchaser who is in the process of making a bona fide offer advises the owner’s representative in writing that knowledge of whether the property may be psychologically impacted is an important factor in the purchaser’s decision to purchase the property, the owner’s representative shall make inquiry of the owner and, with the consent of the owner and subject to and consistent with the applicable laws of privacy, shall report any findings to the purchaser. If the owner refuses disclosure, the owner’s representative shall advise the purchaser or the purchaser’s representative that the information will not be disclosed.”

Basically, the seller does not have to disclose anything about a "psychologically impacted" property if they don't want to. However, if they decide to disclose information, it must be a full disclosure.

So to sum up Article 2, it's all about DISCLOSURE. So let's test your knowledge:

Mrs. A, a retired college professor, came to the office of REALTOR® B, a cooperating broker, in search of a large house in which she could occupy a small apartment, using the remainder of the building to operate a residential club for graduate students. What she had in mind was a deluxe "rooming house" in which the tenants would have use of a parlor, dining room, kitchen, and laundry. She felt confident, from previous experience in the community, that she could obtain from 10 to 16 "roomers", and indicated that she would be guided in her charges to the tenants by the amount of mortgage payments she would have to make.

Most of the large houses on the market were inadequate. Finally, REALTOR® B located a massive old mansion listed with REALTOR® C that appealed to Buyer A. After repeated visits to the house, and after discussing financing with a local lending institution, Buyer A said she was interested in the house if it could accommodate as many as 11 tenants. REALTOR® B accompanied her for another inspection to check on this point.

By planning double occupancy of the large bedrooms, she found she could accommodate eight roomers. In addition, there were three small rooms upstairs that had been used for storage which REALTOR® B suggested might make acceptable single rooms. Buyer A agreed and the sale was made.

Two months later, the buyer filed a complaint with the local Board, charging REALTOR® B with failing to disclose pertinent facts. The complaint alleged that REALTOR® B knew the buyer was taking on a substantial obligation with the expectation of housing 11 persons in the structure; that REALTOR® B had suggested that three rooms might make acceptable single rooms; and that she had been subsequently advised by the building department that these rooms could not be used as dwelling rooms since the windows were too small to meet code requirements. She had been advised that it would cost $1,480 to replace the windows. She charged REALTOR® B with negligence in not advising her of this deficiency. After reviewing the complaint, the Grievance Committee referred it for hearing to before a Hearing Panel of the Professional Standards Committee.

At the hearing, REALTOR® B acknowledged the facts set out in Buyer A's complaint, but advised that the complaint did not state all of the relevant facts. With respect to the house in question, as with many other houses shown to Buyer A, he had made a special check at city hall as to zoning regulations to be sure that the kind of occupancy intended by the buyer would be lawful; that the buyer's specifications were unusual and that in attempting to meet them, he had devoted an unusual amount of time and effort to help her realize her objective; and that he had acted in good faith and had not deliberately failed to disclose any pertinent fact but had, in fact, urged the buyer to consult with an engineer to check with the zoning authorities prior to making an offer to ensure that the property could be utilized as a residential club.

So, what do you think? Did REALTOR® B meet his obligations? Did he do his due diligence? Should he have known that the windows wouldn't meet code? You tell me - in the comments!

Susan Hansen
Member Policy

The F-35 Story

One of Idaho's most significant prospective economic development projects - potentially securing 3,000 jobs - is nearing a decision and we need your help.

The U.S. Air Force has short-listed both Mountain Home Air Force Base and Boise's Gowen Field as possible locations for the F-35 fighter aircraft. These new missions would secure operations at these bases for the next 50 years. This is no small matter, as these two military installations together provide more than $1.0 billion to the Idaho economy each year. If our bases are not chosen, their current missions could face phasing out in coming years, putting jobs and economic benefits at risk.

Here is how you can help: A series of environmental scoping meetings (in an open house format) will be held throughout February. We ask that you attend the most convenient one to learn more about the missions. Comment cards will be available so you can express your support. A schedule of these meetings is attached.

Idaho's bases have already made the short list for these new operations; please help us pass this next critical hurdle.

More information on Idaho's quest for F-35 missions can be found at www.idahof35.com when that site launches on Feb. 5.

NAR Legislative Priorities

NAR 2010 Legislative Priorities The NAR Leadership Team has approved the top 10 list of priorities for this year. This list was developed during the NAR Policy Town Hall Meeting last week. To see the priorities, please visit the REALTOR® Action Center:

http://www.realtoractioncenter.com/realtor-party/documents/2010-Policy-Town-Hall-Top-10-Issues.pdf

Brochure Available on Federal Short-Sale Effort

NAR has issued a brochure to help members understand the federal program for helping troubled home owners undertake a short sale rather than lose their home to foreclosure.

The Home Affordable Foreclosure Alternatives program takes effect on or before April 5 and includes uniform procedures, standard forms, and deadlines for lenders.

Fannie Mae and Freddie Mac are developing their own standards based on the federal program. More resources, including a video on the federal short-sale effort, are online. For more contact Jeff Lischer, jlischer@realtors.org, 202/383-1117.

The Code of Ethics - Breaking It Down

I had the extreme privilege to teach an ethics class last Friday and one of the students had a great suggestion. To help keep the Code of Ethics at the forefront of your mind, we need to keep posting about it.

I thought I had been, but the message isn't making it out there. I've decided that I am going do a weekly series - One article every week. (For those of you actually familiar with the code, that means 17 weeks of fun!)

Best to begin at the beginning (profound, I know). So here we go - Article 1.

Article 1 states: When representing a buyer, seller, landlord, tenant, or other client as an agent, REALTORS® pledge to protect and promote the best 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. When serving a buyer, seller, landlord, tenant or other party in a non-agency capacity, REALTORS® remain obligated to treat all parties honestly.

So, what does that actually mean? The standards of practice below the article attempt to explain.

- You are obligated to uphold the Code of Ethics
- Code of Ethics applies no matter where and how you are conducting business
- Do not mislead people about the value of a property
- Dual agency is okay so long as all parties involved truly understand what that means and implies
- Present offers objectively and as soon as you can
- You must submit all offers - verbal and written - even after you have an accepted offer. Doesn't mean you have to continue to market the property.
- Keep confidential information to yourself - even after the termination of the relationship - unless you are court ordered to disclose or if your client plans to commit a crime
- Competently manage clients' property and protect it against reasonably foreseeable losses
- Fill your client in about your office policy regarding cooperation and compensation
- Let clients know that the existence, terms or conditions of their offer may not be confidential unless the parties agree otherwise.
- Your fees for doing a valuation cannot be dependent upon the amount of the valuation
- If your seller permits it, you will tell other potential buyers about the existence of other offers. If the buyer's agent asks, you must tell them the source of the other offer (you, your office, other brokerage).

Okay, so those are the basics. Now let's test your knowledge... Let me give you a hypothethical...

Client A, an army officer, was transferred to a new duty station and listed his home for sale with REALTOR® B as the exclusive agent. He moved to his new station with the understanding that REALTOR® B would obtain a buyer as soon as possible. After six weeks, during which no word had come from REALTOR® B, the client made a weekend visit back to his former community to inspect his property. He learned that REALTOR® B had advertised the house: "Vacant - Owner transferred" and found an "open" sign in the yard. Client A found that REALTOR® B never had a representative at the property but continually kept an "open" sign in the yard. Client A discovered that the key was kept in a combination lockbox and when REALTOR® B received calls from potential purchasers about the property, he simply gave callers the address, advised that the key was in the lockbox, gave them the combination, and told them to look through the house by themselves and to call him back if they needed other information or wanted to make an offer.

Client A filed a complaint with the Board of REALTORS® detailing these facts and charging REALTOR® B with failure to protect and promote the a client's interes by leaving Client A's property open to vandalism, and by not making appropriate efforts to obtain a buyer.

REALTOR® B's defense during the hearing was that his advertising of the property was evidence of his efforts to sell it. He stated, without being specific, that leaving keys to vacant listed property in lockboxes and advising callers to inspect property on their own was "common local practice".

So what do you think? Did he violate the Code of Ethics? Weigh in!

Posted by Susan Hansen - ACAR Director of Member Policy

IBR Article on ACAR's program

FHA Changes Announced

In October 2009, FHA announced that its capital reserve fund had fallen below the congressionally mandated level of 2 percent. The drop in capital reserves has led Congress and the Administration to call for changes to strengthen FHA.

On January 20, 2010, FHA announced major changes to ensure its long-term financial soundness. FHA is trying to balance three fundamental objectives: 1) financial soundness of the FHA insurance fund – ensuring that its capital ratio returns above 2 percent, 2) fulfilling its mission of serving borrowers not adequately served by the private sector and 3) facilitating the recovery of the housing industry and the over-all economy.

NAR has met with the Commissioner on several occasions to discuss the state of the housing market and to underscore FHA’s invaluable role. By all accounts the new changes are a victory for home buyers. FHA has carefully balanced the need to make financial reforms with the need to keep FHA available to a large segment of consumers. This is evident by retaining the 3.5 percent minimum down payment requirement and allowing the up-front mortgage insurance premium to be financed.

FHA announced changes in the following areas:

· The upfront mortgage insurance premium (UFMIP) will increase to 2.25 percent up from 1.75 percent. Contrary to reports, FHA will continue to allow the financing of the UFMIP.
· Borrowers with a credit score below 580 will be required to have at least a 10 percent down payment. The minimum down payment will remain at 3.5 percent for all other borrowers.
· FHA will seek legislative authority to increase the annual premium (currently capped at .55 percent). Over time, increasing the annual premium may allow FHA to reduce the up-front premium.
· Seller concessions will be reduced to 3 percent from 6 percent.

FHA will make the following lender enforcement changes:

· FHA will implement credit watch terminations at lender underwriting.
· Public reporting of lender performance through scorecard system will be implemented.
· FHA will implement, through notice and comment, indemnification against lenders. Indemnification will be expanded beyond fraud and misrepresentation.
· FHA will seek legislative authority to enforce indemnifications against direct endorsed (DE) lenders.
· FHA will seek legislative authority to sanction lenders nationwide based on performance of local branch.
· FHA is an integral part to the continued recovery of the real estate industry and the overall economy. NAR will continue to work with FHA, the Administration, and the Congress to ensure FHA can fulfill its mission while providing for the safety and soundness of the insurance fund. NAR is committed to assisting FHA as they balance risk management with creating homeownership opportunities across the country.