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Ethics for real estate instructors

Posted by John Reed on

Copyright 2006 John T. Reed

Real estate investment education consists of

books

articles

seminars

one-on-one advice



When I first got into real estate investment—as a would-be investor, not a guru—there was no great need for a code of ethics. The various authors and seminar speakers were acting in good faith trying to share their knowledge and experience for a modest amount of money. Those folks made their primary living from investing or brokerage or as lawyers, title officers, loan officers, etc.

There were no full-time gurus then. Nor were there any guys who claimed to be full-time investors, but who made that claim in a different city every day as they frantically ran around the country making expensive speeches year round. Back then, the people writing the books and making the speeches made no great claims of success. Typically, they simply said they had been in the business for decades and said or implied that they knew what they were doing. And they were telling the truth. The really super successful investors and brokers had little or no interest in writing or teaching.

However, in the late 1970s, the real estate investment guru business changed profoundly. Starting with Al Lowry, the business was more or less taken over by full-time gurus. Lowry’s initial seminar and book, How to Become Financially Independent By Investing in Real Estate were legit and restatements of William Nickerson’s How I Turned $1,000 into $1,000,000 in Real Estate in My Spare Time. Nickerson was also legit.

Then, 1979, came Robert Allen who taught a seminar and wrote a book, both of which were called Nothing Down. There is not a single technique in that book that is legal and ethical and practical and profitable.

After Allen, came a deluge of con men.

I created an eight-item Real Estate B.S. Artist Detection Checklist in 1990 and published it in my newsletter Real Estate Investor’s Monthly. That checklist is now at my Web site and has grown to 53 items.

However, it is a checklist of things that gurus should not be doing or of telltale signs of a guy who is trying to con you. The code of ethics below is intended to supplement my B.S. Detection Checklist by contrasting how a legitimate guru ought to behave with the way most of the bad ones do behave. I was inspired to create this by reading about codes of ethics in the medical and securities professions.

Recommended code of ethics



Contrasting bad guru behavior



Comments



Determine and periodically review the suitability of real estate investment for the person in question before making any recommendations to him or her

Say real estate investment is for everyone. That’s a lie they tell to maximize their sales.

Similar to Rule 405 in the securities industry which is also called the “Know your customer” rule or the Suitability rule. Generally, this requires that the advisor know the financial situation, age, personality, goals, training, and experience of the person seeking advice and only recommend investments that are suitable to such an individual. Unfortunately, criminal gurus often seek such information for the purpose of fleecing as much as possible from the person seeking advice. That means it is very important to do due diligence, that is, check out the credentials and character of the guru thoroughly, before you provide this information.

Accurately disclose your true identity and pertinent education, license and/or certificates, and experience to the person seeking real estate investment advice

Give a false name and/or lie about or grossly exaggerate qualifications, experience, and/or success

It is illegal for a guru to misrepresent his qualifications. Here is a law firm article on the subject. Here is Answers.com’s article on the subject. False advertising is outlawed by both state and federal statutes as well as common laws like those discussed at Wikipedia. Some state and federal anti-deception statutes are criminal (permit incarceration and/or fines) in nature. Common law and other statutes are civil (monetary damages and court orders regarding property only) in nature.

Fully disclose any criminal convictions and records of any pertinent official disciplinary action taken against you

Conceal and deny this information

False statements about such matters in conjunction with obtaining money from the person who was lied to are illegal. Silence typically is not illegal unless the guru is asked a direct question in which case he or she must either accurately disclose or commit the crime of misrepresenting. So make sure you ask and get the answers either in writing or in front of a friendly witness.

Disclose all the risks of any course of action you recommend

Either make no mention of risk or falsely claim they will teach you how to eliminate risks or invest without risk.

Investment has two dimensions: risk and reward. It cannot be discussed competently without covering both. But to hear the bad gurus or read their material, you would think investment is one-dimensional: reward only.

Accurately disclose all the costs of investing

Leave out transaction costs, many operating expenses, the value of your time, and income taxes

Real estate investment is almost always far less profitable than the bad gurus claim. They have to leave many, if not most, costs out of their discussions and examples to make it sound more lucrative than it is.

List all properties ever owned

Say or imply that they have owned and/or continue to own or buy many properties but refuse to give the addresses of the properties.

Falsely representing past or current ownership or activity in real estate is illegal. Their refusal to list the addresses is because they are lying about the number, the properties were unprofitable or less profitable than they say or imply or than the public would assume, and/or the deals in question were unethical and/or illegal. They sometimes claim they do not disclose because they want to “keep a low profile” for asset-protection purposes. That’s absurd considering they are constantly telling the world on TV and elsewhere that they have been big financial successes. Most likely, potential litigants would assume they have more money to go after if they keep their property list secret than if they disclose it.

Call the attention of the person seeking advice to current versions of laws that are pertinent to the decision being made

Are ignorant of or refuse to acknowledge pertinent laws that are contraindications to the advice being given.

Real estate investment is one of the most law-related businesses there is. Investors must constantly be knowledgeable about the pertinent laws. They cannot rely on lawyers because there is no such thing as a generalist in the legal profession. All lawyers focus on a particular portion of the law so the investor has to be generally knowledgeable to recognize which lawyer specialists to consult.

Fully disclose any potential conflict of interest or refuse to advise on the deal in question when you have a conflict of interest

Advise students to buy real estate from sellers who are paying kickbacks of various types to the guru.

Kickbacks generally are required to be disclosed by professional codes of ethics and in some cases by statutes. For example, most if not all state laws require licensed real estate agents to disclose that fact in real estate sales contracts where they are buying or selling for their own account. Disclosure is generally not enough for me. I recommend that you not accept investment advice at all from an advisor who has a conflict of interest with you, disclosed or not.

Accurately describe all of the content of any advertised book, seminar, or “mentoring” service

Promise the moon but deliver common knowledge and sales pitches to sign up for additional seminars or “mentoring”

False descriptions of any product or service in the process of selling it are illegal.


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