Ethics of a Short Sale (Part 2)

Ethics of Short Sales (Part 2 of 3):A Real Estate Agent’s Ethical Decisions

by Karina Gafford
MilitaryByOwner staff writer

In our previous article, we looked at the ethical decisions involved in the short sale process for a seller; here, we will address the ethical decisions involved in the real estate agent’s part of the short sale transaction. 

The Real Estate Professional Code of Ethics      

In their in-depth study of ethics within the real estate industry, researchers Jeremiah Conway and John Houlihan ascertain that while the concept of "business ethics" may still seem somewhat absurd, a strong code of enforceable business ethics does exist within the real estate industry, and real estate agents themselves are quick to point out when others fail to meet the requisite standard. The inclusion of a code of ethics within the industry helps to elevate the professional status of individuals working within the industry. The assumption can, therefore, be made that if an individual real estate professional fails to adhere to the standard, then other agents will quickly ensure that either the individual is brought to line or that they will not conduct business with that individual again in fear of diminishing their own professional reputation, and also possibly their license; fear of such reprisal, therefore, can help real estate agents make good ethical decisions. 

In another study published in 1990, researchers Dean E. Allmon and James Grant suggest that the professional codes of ethics are not designed primarily to elevate professional reputations and provide a means for excluding those who fail to meet the standard; instead, the professional codes of ethics are designed to simply provide an easy decision-making solution for practitioners within that particular industry. As the researchers explain, when no single code of ethics exist within a culture to provide a single measurable standard, it is easy for lawsuits and challenges to arise within a business-client relationship. When decisions and actions are continuously challenged, then a type of "ethical schizophrenia" emerges; it is impossible to clearly distinguish right from wrong. Having a clear set of boundaries for practices within an industry makes it easier for those working within the industry to make decisions, but what happens when the industry changes drastically, requiring the individual operator to determine right from wrong? Further, what happens when the code of ethics does not extend to all parties involved in a particular transaction?

Applying the Code of Ethics to Unchartered Territories

Over the past few years, the real estate landscape has shifted drastically within the U.S. from a booming industry to one that must handle an inordinate amount of distressed properties. Such a sudden widespread transition within the industry has left many real estate professionals to flounder while navigating the legal and ethical landscape surrounding distressed properties. 

Given the huge change in the real estate industry over the past few years, professionals within the industry are left facing a multitude of ethical scenarios not previously delineated within their code of ethics. When facing such unknowns, the best course of action that real estate professionals can make in order to ensure that they are making the right ethical decision is to weigh the evidence against whether a specific decision requires them to lie, cheat, or steal. It is not incumbent upon the agent to determine the second and third order effect consequences of their actions when considering whether their decision is ethical or not. However, the agent is not the only party involved in the sales transaction of a distressed property. Though no professional code of ethics exists for which the seller or buyer can swear an oath, they too are held to the same standard of ethics where lying, cheating, or stealing in order to gain a personal advantage during the course of the transaction is clearly unethical. 

The real estate agent has both defined legal and ethical codes to consider when conducting any business. For one example, under the Fair Housing Act the agent must not consider gender, race, or sexual orientation when helping find a buyer. According to the same act, the agent may also not disclose whether an area in which an individual is planning to purchase a home is safe. While both of these examples may be prudent and legal on the part of the real estate agent, it is more difficult to determine if they are ethically good. If an individual works with a real estate agent to purchase a home in an area with which he is unfamiliar that happens to have a high degree of gang violence, it is still illegal for the agent to disclose the crime activity in the area as it may influence the individual’s decision to purchase the property. The agent should not misrepresent information, but should present facts in a way where he endeavors to tell the truth. However, as it is illegal to divulge safety concerns, the agent should rationally encourage the individual to review the crime activity with the local police department who can provide the relevant objective information. Should the individual choose to ignore this advice, the agent is not responsible for the consequences of the buyer’s inaction and failure to follow through with his advice. The agent should only be concerned with whether his actions do not involve lying, cheating, or stealing.  

Ethical Decisions Involved in Navigating the Short Sale Process

The real estate agent, similarly, encounters a plethora of ethical decisions to make as she helps the buyer and seller navigate the short sale process. The National Association of Realtors explains the difficulty of holding together what amounts to a length, arduous short sale transaction as,

To the sellers and buyers you serve, being able to masterfully close short sales will make you a hero, a genius, and a saint all rolled into one—a hero for the fearless persistence you show when you hear no (or nothing) from the lender; a genius for being able to understand and explain the changing short-sale guidelines; and a saint for being willing to proceed against the odds, knowing that you won’t be paid unless the transaction closes.  

Facing these considerably high standards in addition to dealing with a less than clear ethical roadmap makes dealing with a distressed property challenging, to say the least.

Real estate agents have a fiduciary responsibility to conduct themselves in a manner that reflects good ethical decision making, even if that will cost themselves financial gain through a commission or portion of a commission. As financial analyst Scott Thompson explains, there are quite a number of ethical decisions particular to the short sale situation that a real estate agent must strive to avoid. For instance, it is the primary obligation of the real estate agent to make sure that the homeowner does indeed wish to leave the house. The agent should not encourage the homeowner to pursue a short sale without first presenting him with the alternative option of a loan modification. Further, the agent needs to make clear to the homeowner the necessity of disclosing all information pertaining to both the house and the hardship situation, as it is unethical to willfully assist the homeowner in deceiving the lender. 

A failure to disclose all accounts in the event of a short sale essentially amounts to stealing from the lender. If, for example, an individual reports a single checking and savings account, but fails to disclose a retirement account that contains a substantial sum, then the lender has only the checking and savings account information to use to determine the extent of the hardship. The lender, in turn, believes no additional sums exist for the purpose of the borrower’s use, and so uses those two accounts to approve the short sale when, had they have known that the borrower still retained a large sum that would permit him to continue to remit payment, then they would not have forgiven the debt. There is no way to deny that this does not amount to predetermined deception and theft on the part of the borrower.

Short sales will remain a viable part of the real estate market while the economy continues to stabilize, as they provide the homeowner with an alternative to foreclosure while similarly providing the lender with a more attractive option than foreclosure, too, as lenders do not wish to have tangible real estate among their holdings. The sheer growth in short sales, however, is staggering. Their projected growth of upwards of 25-percent over the next couple of years, according to Core Logic, indicates the importance of a clear understanding of the ethics involved in short sales. Despite clear professional codes of ethics for real estate professionals in conventional sales transactions, the changing nature of the real estate market in the wake of the global financial collapse suggests that all parties involved in the transaction of a short sale have a considerable number of ethical decisions to make throughout the process. 

Related Articles:

Article 1 of 3: A Seller’s Ethical Decisions 
Article 3 of 3: A Home Buyer’s Ethical Decisions