Listing a Property as Available When It's Under Contract

THE PROBLEMS OF LISTING A PROPERTY AS AVAILABLE WHEN IT IS UNDER CONTRACT

Question:
A listing agent takes a listing for a property and enters the listing in the Metropolitan Regional Information System Inc. (MRIS) database. A cooperating broker procures an offer from a potential purchaser. The seller ratifies the offer. However, the seller asks the listing agent to keep the status of the listing as "active" in the MRIS system rather than updating the listing to indicate that the seller has accepted an offer. The listing agent then calls the Professional Services Department to ask if this violates any rules. The listing agent explained that the seller wanted to encourage backup offers because a contract had previously fallen through on the property.

Answer:
This practice could be a hat trick of potential rules violations. If the listing agent complied with this request, he or she would probably be in violation of the MRIS Rules and Regulations, Code of Ethics and Standard of Practice of the National Association of REALTORS® and the Rules and Regulations of the Virginia Real Estate Board. Michelle Yam of MRIS also has advised me that this practice could potentially violate advertising laws. With the increasing distribution of listing information on the Internet, the potential jurisdiction for complaints about inaccurate listings has expanded beyond these traditional forums for disputes. Some federal agencies such as the Federal Trade Commission are reviewing advertising practices of various industries using the Internet, including the real estate industry. REALTORS® may not understand why such a minor request could have such significant ramifications. However, due to the evolving nature of our industry, what may have once been the REALTOR® equivalent of jaywalking could now have risen to the level of a federal offense.

A fundamental part of any multiple listing system is the need for accurate information about the properties listed in the system. This includes the need to ensure that the information in the system is updated in a timely manner. The MRIS rule for updating the information in a listing within 48 hours of any change is a reflection of this need. When a seller ratifies a contract, the listing agent is obligated to update the status of the listing in the system from fully available ("Active") to under contract ("Contract"), contingent with a kick-out ("CNTG / KO") or contingent without a kick-out ("CNTG / NO KO"). The new status of the listing will depend on the terms and conditions of the ratified contract. If a listing agent fails to update the status of the listing within 48 hours, he or she may face a possible fine from MRIS.

The Code of Ethics and Standard of Practice of the National Association of REALTORS® could be applied to this situation. Standard of Practice 3-6 states the following: "REALTORS® shall disclose the existence of an accepted offer to any broker seeking cooperation." The primary purpose of the MRIS database is to facilitate the offering and acceptance of cooperation between brokers. When the listing agent enters the property into the system, he or she is creating the offer of cooperation to all the other MRIS subscribers who are eligible to accept the offer (i.e., Virginia real estate licensees who may have a potential buyer). Now that we rely on the MRIS database to establish the offers of cooperation that we depend on to facilitate transactions, it is incumbent on the listing agent to use the same means (i.e., the MRIS listing) to notify those agents who may still be seeking cooperation that an offer has already been accepted.

This is only the tip of the iceberg in regard to the problems that could result from the seller's request. Recent changes in our industry have resulted in greater access to the data within the multiple listing system. Brokers are now using virtual office Web sites and Internet data exchange (IDX) platforms to better serve their customers and clients by providing information that in the past was only available to other MRIS subscribers. The information from these listings also routinely appears on the Web sites of third-party aggregators such as REALTOR.com.

The active listing status creates the false impression that the property is still fully available and that no contract has been ratified. In fact, REALTOR.com, homesdatabase.com and the IDX platforms used by brokers would automatically remove the listings from their Web sites if the listing status was changed from active to "Contract," "CNTG / KO" or "CNTG / NO KO." These Web sites do not display information about properties that are subject to a ratified contract. Therefore, a potential buyer could reasonably assume that the seller had not yet accepted any offer on the property if the listing information still appears on one of these other Web sites.

This transforms the problem from a simple issue of failing to update the MRIS listing to potential misrepresentation and false advertising. The display of the listing on these other sites is a result of the false information that was not corrected by the listing agent. In this situation, a listing agent would have actual knowledge that the property was already under contract. If the listing agent agrees to leave the property as active after the listing is supposed to be updated, then the agent would have intentionally misrepresented the actual status of the property.

Other sections of the Code of Ethics and Standard of Practice of the National Association of REALTORS® apply to issues related to advertising and misrepresentation. Article 2 of the Code of Ethics states the following: "REALTORS® shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property or the transaction." It would be reasonable to assume that the status of the property could be defined as a pertinent fact. The presence of another ratified contract could have an effect on a potential purchaser's decision to pursue the property. Therefore, a REALTOR® could be charged with concealing a pertinent fact if he or she followed the seller's request by leaving the listing as active after a contract was ratified.

Article 12 also states that "REALTORS® shall be careful at all times to present a true picture in their advertising and representation to the public." An important test in applying this article is how a reasonable member of the public would perceive the advertisement or representation. This article can be applied to the situation because the information within the multiple listing system is now routinely distributed through other venues (e.g., REALTOR.com, IDX platforms, third-party aggregators) that advertise the property for sale. Anyone viewing the inaccurate listing information through these venues could argue that a listing agent's failure to update the status of the listing created a false and misleading advertisement even in a situation in which the listing was advertised by someone other than the listing agent.

Issues related to misrepresentation and false advertising also may fall within the state licensing regulations. Real estate licensees are prohibited from "knowingly making any material misrepresentation or making a material misrepresentation reasonably relied upon by a third party to that party's detriment" (page 27, Rules and Regulations of the Virginia Real Estate Board). For the same reasons listed above, a potential buyer could file a complaint alleging that any listing agent who agreed with the seller's request would have knowingly made a material misrepresentation.

The potential for ethics and state licensing complaints is less serious than the worst-case scenario for this agent. Michelle Yam at MRIS notes, "Information that appears on the Internet is being looked at by federal agencies. They are looking for any false advertising on the Internet. This practice could be construed as classic bait-and-switch advertising." In particular, the Federal Trade Commission and a number of states have begun examining how real estate listings are advertised on the Internet.

These agencies are reacting to a number of problems that have occurred nationwide. Many Web sites advertise properties for sale weeks or months after the property was already under contract. In some cases these transactions have already settled and other potential buyers are still being misled into believing that a property is fully available. This has resulted in the increased focus on the accuracy of real estate listing data that appear on the Internet, especially in situations in which another purchaser's contract has already been ratified.

Some of the agents I have talked to express concerns about the seller's ability to attract backup offers and to continue to market the property after a contract is received. There is a strong argument to be made that many cooperating agents do not look at listings after the status changes from Active to Contract, CNTG / KO or CNTG / NO KO. It is common practice for MRIS subscribers to search for active listings in the MRIS database when looking for properties to show to potential clients. There also may be bias in the real estate industry against submitting backup offers. Some agents are reluctant to encourage buyers to write a backup offer or to work on a property that is already under contract. However, the tendency of agents to focus on active listings and the bias against being second in line do not justify misrepresentations, false advertisements or intentionally leaving inaccurate information within the MRIS system. Unfortunately, soliciting backup offers is difficult and there is no shortcut in MRIS that will improve a listing agent's predicament in that situation.

Some agents have pointed out that the MRIS listings have a disclaimer that states, "Information is believed to be accurate, but should not be relied upon without verification." MRIS subscribers have argued that this disclaimer should protect them from any responsibility in the matter. This disclaimer was intended to cover those situations in which an inadvertent mistake was made in the system. A listing agent who knowingly leaves inaccurate information in the MRIS database will have a hard time convincing anyone that this disclaimer should absolve the agent of responsibility.

Agents also have argued that they should be allowed to leave the listing status as active if they enter a disclaimer in the remarks section that notes that the property is under contract and the seller is looking for backup offers. In the past this argument may have been more persuasive because only MRIS subscribers had access to the listing information. However, as the listing information from the MRIS database is used by outside entities, this is no longer a solution to the problem. Information from the remarks section or many other fields in the system may not be displayed on all the Web sites and other venues where the MRIS database is reproduced. Two of the most popular sites for our region, homesdatabase.com and REALTOR.com, do not display the remarks section to potential buyers who are accessing their Web sites. Listing agents are aware that not all the fields are displayed when the listing data are aggregated to other Web sites. Therefore, notes in the remarks section cannot be relied upon to properly disclose the existence of an accepted offer.

A few agents, who have called NVAR to determine if a property can be listed as active while it is subject to a ratified contract, have indicated other motivations for leaving inaccurate information in the system. Many agents have expressed an interest in the potential leads that come from the display of a listing on REALTOR.com, homesdatabase.com or other Web sites. However, the prohibition against bait-and-switch advertising was intended to specifically end the practice of advertising products (i.e., the listing) that were not available with the intent of finding potential purchasers for other, different products (i.e., another property). Now that federal regulators may be interested in investigating these cases, the potential repercussions of this type of violation are much greater than before.

Sellers often place agents in compromising positions by asking them to take actions that break or skirt the rules. However, the sellers quickly disappear when the complaints are filed. Therefore, it is the listing agent and his or her firm that may suffer the negative consequences of this practice.