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Exploring Confidentiality and the Law for Real Estate Licensees

Maintaining confidentiality is important for any business. In real estate, confidentiality helps to build trust between licensees and clients. But, sometimes a real estate licensee’s duty of confidentiality might conflict with the law and their obligations to disclose. 

In this blog, we delve into the topic of confidentiality and disclosures. We explore what information real estate licensees need to keep confidential and when it’s necessary to break confidentiality to stay on the right side of the law. 

Understanding Confidentiality in Real Estate

Real estate licensees have a duty to keep certain information confidential. Things such as a  client’s personal and contact information or details relating to real estate transactions (including bank details or financial records) should not be disclosed to third parties. 

As a licensee, if a client explicitly tells you something is confidential, you should also treat it as such. However, there are some exceptions to this, and it’s important to recognize that the law and ethical considerations can override your duty of confidentiality.

Confidentiality vs. Disclosure Dilemmas

NAR Realtor® Magazine recently reported a case where a seller instructed their agent to withhold information from a buyer. This information was about a known defect involving a damaged heat exchanger. The seller not only refused to fix the problem but asked their real estate agent not to disclose it to anyone. 

This case highlights the delicate balance between confidentiality and disclosure that real estate professionals often face. While the seller’s instructions may have stemmed from a desire to protect their interests, it raises ethical and legal questions. The latent material defect could cause serious harm to a homeowner and, in this case, the seller should have disclosed the issue to any prospective buyers. And, if a real estate agent knew about a material defect, the agent should also disclose the information, regardless of their client’s willingness to do so. 

When Disclosure Is Necessary

While confidentiality is crucial, there are instances when real estate licensees must speak up and disclose certain information. Here are some situations where  disclosure is essential:

If you are aware of “Latent Material Defects”

Real estate licensees must disclose any material facts or defects that could impact the value or desirability of the property. This includes structural issues, as well as issues such as leaks and water damage or any other defect that may affect the buyer’s decision to purchase the property. 

When you are legally obliged to

Real estate licensees must comply with all applicable government laws regarding disclosures. Laws vary according to where you live and the different levels of government may have different laws, so be sure to do your homework to find out what laws you must follow.

When safety and security are of concern

If you have any knowledge that could affect the safety and security of the property or the residents, you must disclose this. If you don’t, and there is an incident resulting in damage to the property or injury to a person, you will likely find yourself facing a lawsuit.  

If a client instructs you to disclose something

Real estate licensees should also consider their client’s instructions regarding disclosure. If the client explicitly requests the disclosure of certain information, the licensee should follow their instructions, as long as it is within the bounds of the law and ethical standards.

Codes of Ethics and Professional Standards

The law isn’t the only consideration for real estate licensees. If you want to maintain a professional business, ethical considerations are also a factor. REALTORS® are bound by the National Association of Realtors® (NAR) Code of Ethics and Standards of Practice. This document provides guidance on confidentiality and disclosure. Even if you are not a REALTOR®, the code provides valuable information that can help licensees to maintain a high standard of ethics. 

Standard of Practice 1-9 in the NAR Code of Ethics covers confidentiality and the obligation of REALTORS® to preserve confidential information (as defined by state law). Particularly worth noting is this statement:

“Information concerning latent material defects is not considered confidential information under this Code of Ethics.

Other reasons for disclosing confidential information outlined in the NAR Code of Ethics are:

  • When you are required to because of a court order
  • When the client intends to commit a crime and the information is necessary to prevent it
  • When it is necessary to defend a REALTOR® (or their employees or associates) against an accusation of wrongful conduct

Balancing Confidentiality and Disclosure

It can be difficult to balance confidentiality and disclosure for real estate licensees. Have you ever found yourself in a situation where your client is telling you to keep something to yourself, but you have concerns about ethics or the law?

Maintaining open and transparent communication with clients can help to strike the right balance. Licensees should establish clear expectations regarding confidentiality from the beginning of their engagement. This includes telling them the limits of confidentiality and the circumstances that may require disclosure.

As a licensee, you can also educate clients about their obligations to disclose. This is important for both your protection and theirs, as sometimes a seller just doesn’t realize that not disclosing defects is unlawful. 

Protect Your Real Estate Business

While confidentiality is essential for building trust and maintaining client relationships, the law overrides confidentiality. Real estate licensees must disclose any material facts and defects that could impact buyers’ decisions. Licensees should also keep up-to-date about the laws and regulations specific to your area to ensure ongoing compliance. 

Having the right Real Estate Errors and Omissions insurance can also give you comfort knowing you can obtain help to defend a lawsuit if a claim is made against you. CRES Insurance is a specialist in insuring real estate professionals s and can tailor a policy specifically to suit your real estate business. With CRES E&O + ClaimPrevent®, you’ll even have access to a team of qualified real estate attorneys to help you avoid claims. 

Contact the CRES team at 800-880-2747 to find out more today.

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