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Business ethics: a primer for managers.

Ethics is not just an abstract concept. Virtually every day, a property manager faces clients and tenants negotiating for the best terms and treatments. While paying for a customer's lunch or allowing a tenant to move in a day early may be acceptable to most practitioners, at what point should the line be drawn?

For instance, if a major client asked that a possible physical defect be concealed from tenants in order to lease up the building, would you automatically say "no," understanding that you might lose the business?

In an economically depressed situation, property managers may be tempted to do something that they know is wrong and perhaps illegal and hope that they are not found out.

Although disclosure laws should always supersede one's personal feelings, at times the temptation to violate them can be great. These are the times when property managers need a support network to guide them through the maze of disclosure laws and ethical decisions.

These occasions also present opportunities to inform and educate clients about the consequences and responsibilities of leasing and selling real estate.

If a client sees that a firm is helping to avoid a future lawsuit by insisting that a defect be revealed, he or she may let the firm manage the property and disclose all material defects to potential tenants and buyers. If every professional property management firm that the client discusses the property with asks for a written list of material defects, he or she may decide that disclosure is the best course of action.

Of course, an owner may always choose not to list or reveal the defect. If this is the case, the property management firm would have much more protection from future lawsuits by having a written statement on file from the owner that the property has no material or hidden defects.

Just among friends

An additional problem that property managers face occurs with clients in long-standing relationships who grow to become friends. This is particularly the case with large commercial clients where the necessity for frequent contact is greater.

It is quite natural for a friendship to develop between the property manager and his or her client. In fact, it is likely that if a friendship does not develop, the professional relationship will flounder.

Most business people now expect a high level of professional competency as a minimum requirement for their property manager and would therefore prefer to employ a firm with whom they feel at ease. It is also quite natural for a commercial client to relate to the property manager on a personal level from time to time and to make requests that might put the property manager in a uncomfortable position.

One of the most common problems occurs when clients want to share information with their property manager in the same way they would with a personal friend who is not a business associate. Certain kinds of information can put a strain on the ethics of the property manager.

These situations put the property manager in a situation of either interrupting the client and halting the conversation or dealing with the dilemma of what to do with the information they have been given. Many clients will not understand that their information must be released to any prospects who look at the property, especially if doing so means the loss of a lease and a substantial reduction in profit.

How should property managers handle these delicate situations without losing important business relationships and close friendships as well? The opportunities for these types of ethical dilemmas to arise are more common in property management than in many other types of businesses.

When addressing the concept of ethics in property management, several issues must be explored and certain questions resolved. Questions which normally surface include, "What exactly is ethics?", and "How can the level of ethical behavior by property managers be improved?" The following discussion presents a basic model of ethics as applied to property management, as well as a review of certain practices which can pose ethical dilemmas for property managers.

The basic concept of ethics

The discipline dealing with what is good and bad, right and wrong, or with moral duty and obligation is ethics. A basic model for analyzing ethics is presented in Figure 1.

The sources of ethical guidance should lead property managers to the appropriate beliefs or convictions necessary to determine ethical actions. Most clients, potential tenants, and property owners would agree that property managers should act based upon what is right and wrong and not in the interest of expedience. Because of the possible impact of a property manager's actions on a company's business, however, it is extremely important for a manager to act at all times in an ethical manner.

The model in Figure 1 shows the strength of the relationship between what available sources of guidance suggest is morally correct and what an individual believes to be moral and correct; this is known as "Type I" ethics.

Type I ethics deal with how closely one's own ethical values parallel society's ethical values. Type I ethics relate very closely to the concept of being "amoral." If an individual fails to absorb a sense of the "rightness" or "wrongness" of certain acts from his or her family, surroundings, or society, that person is generally considered to be amoral: lacking of morals.

For example, suppose a property manager believes it is acceptable to keep vital negative information from a prospective lessee despite the fact that almost everyone condemns this practice and disclosure laws may forbid it. In this instance, the property manager would be considered to be unethical in a Type I sense.

Simply having strong beliefs about what is right and wrong and basing them on the proper sources does not, however, make a property manager ethical. "Type II" ethics are the strength of the relationship between what a property manager believes and how he or she behaves.

Put another way, if a manager has been having trouble generating enough cash to pay his or personal bills, he or she may be tempted to take money from petty cash, a decision that he or she considers wrong and that would not be made under other conditions. This would be a Type II ethics violation rather than a Type I.

The difference between ethics

The difference between Type I and Type II ethics should not be confused as "situational." The difference between the two types of ethics is easily and clearly defined by keeping in mind that they pertain to an individual's internal value system.

A person who consistently exhibits unethical behavior because he or she doen not have the same sense of right and wrong as the majority of society and does not truly recognize that an action is wrong is unethical according to Type I ethics.

Individuals who realize and believe that their actions are wrong as defined by society in general or by their profession specifically and choose to take the actions anyway have violated Type II ethics.

Both types of ethical violations are wrong and unacceptable, and the question of whether one is worse than the other is a moot point. However, attempts to correct all types of unethical violations in the same way will be unproductive if the reasons behind the unacceptable behaviors are different.

One individual may need to be retrained almost completely in terms of what is right and what is wrong. Another individual may already understand that his or her actions were wrong and may simply need to be reminded that certain actions will not be tolerated.

Ethics can be positively or negatively affected by the behavior and advice of what psychologists call "significant others." In the field of real estate management, these "significant others" include professional associations, peers, employers, and other executives.

The Institute of Real Estate Management's "Code of Professional Ethics of the CERTIFIED PROPERTY MANAGER[R]" exists to provide guidance to those engaged in property management, although its wording is general rather than providing specific standards of practice. IREM also requires that all applicants for membership complete an ethics course. Other real estate associations have adopted their own ethical codes, which might apply to property managers.

The purposes of codes of ethics are twofold. First, they can present a clearer picture for local property managers with respect to ethical problems that come up time and time again in their area and provide added guidance for them in their decision making.

Second, they send a positive message to current and prospective clients. Negative word-of-mouth can be very damaging to a property management firm and a strong, published code of ethics available to the public can be a powerful, inexpensive advertising tool.

Unethical practice in property management

Most people would agree that to do what one believes is wrong is unethical. However, it is usually in the specific area of Type II ethics that property managers fall short. An appreciation of the nature of unethical practices can assist the real estate profession in refining an appropriate individual ethical code which best serves the interest of both parties.

Following are several unethical practices that property managers are likely to encounter during the course of a career in real estate. Awareness that such practices are probable should prove useful in developing an individual code of ethics.

* Bribes. Sometimes an unethical client may suggest that the management of a desirable property would be assured if certain "gifts" were received. Acceding to this suggestion amounts to bribery. Although it may be difficult to pinpoint when a reasonable gift or "incentive" becomes a bribe, the client's suggestion that a gift is necessary makes the ethics of the situation, at best, questionable.

A tenant may also suggest that they would be willing to sign a lease in exchange for certain "favors." If concessions are included in the lease, they generally pose no ethical conflict, but "under the table" gifts are another matter. In addition to the ethical factor involved, the property manager should always remember that one bribe has been given, it is likely to be expected in all future transactions.

* Criticizing competition. Many would consider it unethical to try to close a deal by making a statement such as: "Let me manage your properties because you really don't have a quality choice elsewhere." This statement is negative and certainly not very professional. When reference is made to the competition, it is usually best to take a neutral position.

Actual facts about competing property management companies should be stated objectively and completely enough to give a true picture. Where competing companies are of good quality--and that usually is the case--it is best to cast the management decision as a choice between two or more acceptable alternatives.

* Lying. In terms of a property management contract, a lie is saying something that is not so in hope of obtaining either a property to manage or a tenant for available space.

The temptation to claim "that little bit extra" for a property may be too great to resist. To some, this is only "puffery," or exaggeration. To others, it may be what they consider a justifiable lie because the owner really needs the tenant. One example of a "lie" would be to claim to have a tenant lined up for a spot in a new building in order to attract other tenants when, in fact, the lease is under negotiation and has not been signed.

To the prospective tenant, the claim is a lie, whether sensed at the time it is heard or determined later. Like most unethical practices, this is also bad business. It diminishes chances for repeat business and favorable "word-of-mouth." No property manager's career or property management company's longevity can be sustained on exaggeration and lies.

* Divulging confidential information. Property managers who deal in commercial properties are constantly in contact with people who compete against each other. At times they are given a great deal of information about a firm's operations so that they will be able to make the proper recommendations on a potential building or lease arrangement. This information is privileged and should never be divulged.

The temptation to use such information to gain an advantage over a competitor may be great. But how will a potential client be able to trust a property manager who would give out information that was given in confidence?

That property manager will likely suffer a loss of faith and business, from both the client the information was given to and the client the information was about. Long-term benefits accure to the property manager who treats privileged information in the completely confidential manner it was given.

* Handling maintenance and repair work. A professional property manager is often allowed a great deal of flexibility in scheduling maintenance and repair work on the properties managed. A temptation may exist to give work to friends or colleagues even though they may be somewhat more expensive than their competitors.

A more prudent way to handle all maintenance and repair work is with a well-documented bidding procedure. If friends and colleagues do good work, then they may be informed that their prices are somewhat out of line. If prices are somewhat out of line. If prices are dropped, they can then be hired without doing an injustice to the firm's clients.

* Managing property for out-of-town owners. A property management firm may be tempted to devote more time and attention to the property of in-town owners who see their properties on a daily or a weekly basis. The "out-of-town" properties are not neglected, but neither do they receive top priority.

Special care must be taken to schedule all necessary work on a priority-need basis rather than by the location of a building's owner. Word from disgruntled tenants may reach the owner, who will realize that he or she is at the bottom of the firm's list. Each property maintenance request should be considered on its own merits without regard for in-town or out-of-town ownership.

Do property managers face special problems?

Pressures to perform are often greater on a property manager than on many other firm employees. Most property managers are paid on a percentage basis for the leases they obtain and the rents they collect. The other employees and support staff know they will get a paycheck at the end of the week or the month even if they are in a slump.

Property managers know that if they are not filling their properties with strong, reliable tenants they will soon have no income. In many offices, the results of each property manager's individual efforts may be widely known throughout the company. In fact, contests are sponsored to increase revenue for the property management company by publishing the success or failure of each individual property manager.

The property manager's individual reputation may also suffer if he or she is no longer viewed as a high producer capable of bringing in tenants and contributing to the success of a property. Another factor closely related to this type of problem is the feeling that each property manager must produce constantly and consistently.

For example, if a member of the office support staff slacks off, the work can probably be taken care of elsewhere, at least temporarily. But a fall-off in work from an individual property manager can have a proportionately larger impact on the profitability of the company. Because property management requires much more of an individual effort, the feelings of isolation are also greater for the property manager than for an employee involved in work that is more of a group effort.

The potential for ethical problems to occur increases as the degree of employee supervision is reduced. There are few other professions which permit as much freedom and independent action as real estate. Property managers especially must often make decisions relating to lessors and lessees quickly and independently of their bosses. This factor compounds the ethical issues that property managers must deal with on a daily basis.

In most cases, the ethical decisions property managers must make are not monumental ones. Typical concerns might include whether to tell a potential tenant about community perceptions of certain economic conditions or about other available building or office space.

One last note

Unethical conduct is often illegal. Hundreds of companies are sued each year for false or misleading statements made during their agents' presentations.

When disparaging statements about the quality of a competing property management company are made, the implication is that the individuals associated with and responsible for that company are dishonest or incompetent. Such statements can result in private individual lawsuits for personal defamation of character, as well as to business lawsuits.

In addition to lawsuits, the Federal Trade Commission can impose a cease-and-desist order or an injunction on companies that engage in unfair or deceptive practices through their agents.

Ethical behavior is both good for business and good for an increase in management contracts and tenants. A habitual lack of ethical principles in dealing with clients is likely to be discovered. This discovery could result in embarrassment, lost properties, and possibly termination of employment with the company.

Each property manager should formulate an ethical code, in line with Type I and Type II ethics, and continually strive to apply that code in an effort to avoid unethical practices.

The code of professional ethics for CPM[R] members strives "to establish and maintain public confidence in the honesty, integrity, professionalism, and ability of the professional property manager." Addressing the issues discussed in this article openly will help the property management profession achieve these goals.

JPM single-article reprints available

Did you read an article in the Journal that you would like your staff to see?

JPM articles are excellent as educational tools for your property management staff, your marketing staff, and your leasing specialists. Articles from the Journal also provide your clients with a better understanding of the sound management techniques that you have implemented.

The Journal can provide reprints of articles that were of special interest to you at a reasonable cost. Articles can be reprinted in full color or in black and white. Orders must be for quantities of 100 or more. For details and quotes on prices, please call the JPM advertising assistant at (312) 329-6064.

[Arthur Sharplin is distinguished professor of management in the Department of Management and Marketing at McNeese State University, Lake Charles, Louisiana.]

[Shane R. Premeaus is professor of marketing in the Department of Management and Marketing at McNeese State University.]

[Mary Jo Binning is assistant professor of marketing in the Department of Management and Marketing at McNeese State University.]

[Lawrence F. Worley is assistant professor of quantitative methods in the Department of Economics and Finance at McNeese State University.]
COPYRIGHT 1992 National Association of Realtors
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:real estate managers
Author:Sharplin, Arthur; Premeaus, Shane R.; Binning, Mary Jo; Worley, Lawrence F.
Publication:Journal of Property Management
Date:Sep 1, 1992
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