Code of Ethics Case Study: Article 5

The Code of Ethics of the National Association of REALTORS is the gold-standard that sets REALTORS apart from real estate licensees.  Article 5 of the Code of Ethics states:

REALTORS shall not undertake to provide professional services concerning a property or its value where they have a present or contemplated interest unless such interest is specifically disclosed to all affected parties.

Below is a case study taken from the National Association of REALTORS.  You’ll also find, following, the conclusion of the hearing panel.

Contemplated Interest in Property Appraised

Seller Anders and Buyer Bright were negotiating the sale of an apartment building, but couldn’t agree on the price. Finally, they agreed that each would engage an appraiser and they would accept the average of the two appraisals as a fair price. Seller Anders engaged Realtor® Coughlin as his appraiser, and Buyer Bright engaged Realtor® Douglas. Both Realtors® were informed of the agreement of the principals. The two appraisal reports were submitted. The principals averaged the two valuations and made the transaction at the price determined.

Six months later, it came to the attention of Seller Anders that Realtor® Coughlin was managing the building that he had appraised. Upon making further inquiries he learned that Realtor® Coughlin, for several years, had managed five other buildings owned by Buyer Bright, and that he had been Buyer Bright’s property manager at the time he accepted the appraisal assignment from Seller Anders.

At this point Seller Anders engaged Realtor® Eastland to make an appraisal of the building he had sold to Buyer Bright. Realtor® Eastland’s valuation was approximately 30% higher than that arrived at six months earlier by Realtor® Couglin.

These facts were set out in a complaint against Realtor® Coughlin made by Seller Anders to the local Board of Realtors®. The complaint charged that since Realtor® Coughlin was an agent of Buyer Bright; since he managed all of Buyer Brights’s properties; since he had become manager of the property he had appraised for Seller Anders in connection with a sale to Buyer Bright; and since he had not disclosed his relationship to Buyer Bright, he had acted unethically, and in the interest of his major client had placed an excessively low valuation on the property he had appraised for Seller Anders.

At the hearing, Seller Anders also brought in a witness who stated that he had heard Buyer Bright say that he had made a good buy in purchasing Seller Anders’s building because Seller Anders’s appraiser was his (Buyer Bright’s) property manager.

Buyer Bright, appearing as a witness for Realtor® Couglin, disputed this and protested that he had paid a fair price. He substantiated Realtor® Coughlin’s statement that management of the building formerly owned by Seller Anders was never discussed between them until after it had been purchased by Buyer Bright.

It was concluded by the Hearing Panel that whether or not management of the building was discussed between Buyer Bright and Realtor® Coughlin prior to its purchase by Buyer Bright, Realtor® Coughlin had a logically contemplated interest in it as a property manager in view of the fact that he had served as property manager for all other properties owned by Buyer Bright.

In view of this contemplated interest, he was bound by the terms of Article 5 to disclose this interest to his appraisal client, Seller Anders. He had failed to do this, and so was found in violation of Article 5 of the Code of Ethics.