Ethical & Moral Issues in Real Estate

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A seller must disclose negative information about the property being sold.
A seller must disclose negative information about the property being sold. (Image: Brand X Pictures/Brand X Pictures/Getty Images)

Large amounts of money are at stake in real estate transactions, and emotions can run high. Transactions often involve individuals with varying levels of sophistication, and it may be tempting to take advantage of naivete. All parties involved -- buyers, sellers and their brokers -- need to be aware of potential ethical and moral issues.

Disclosures

One ethical dilemma involves real estate disclosure forms. Many states require a seller to disclose the property's defects when the seller lists it for sale. Sellers must give potential buyers information such as whether the house has ever been infested with mold, whether the house is connected to the public sewer, whether there is an underground oil tank on the property and whether the house has been used to manufacture illegal drugs. A seller may be tempted not to disclose material defects that devalue the home.

Inspections and Repairs

Home inspections raise another moral issue. Once a house is under contract, the buyer can have the house inspected. The inspector, who often comes recommended by the buyer's real estate broker, sometimes exaggerates the repairs that the house needs. The real estate brokers recommend contractors who will do the work and wait to get paid out of the closing. The seller ends up paying, by contributing her equity at closing, for cosmetic work that the buyer's lender did not require.

Dual Representation

Another moral issue inherent in some real estate transactions is dual representation, in which one broker represents both the buyer and the seller of the property. Selling at a higher price is in the best interest of the seller and the broker, while buying at a lower price is in the best interest of the buyer. The National Association of REALTORS' "Pledge of Performance and Service" requires a REALTOR to disclose the potential conflict of interest to all the parties, and the deal can go through if both buyer and seller agree.

Unauthorized Practice of Law

Completing a real estate transaction involves signing a number of contracts, yet buyers and sellers don't always hire attorneys to review documents before they sign them. Instead, they rely on the advice of the real estate agent or the escrow specialist at the title insurance company. Non-lawyers should refrain from offering legal advice, or they put themselves at risk for a charge of unauthorized practice of law.

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