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
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