Ominously for most national residential real estate companies, the end of the Burnett vs. NAR class action trial in late October, with an emphatic victory for the plaintiffs, could be just the beginning of what may be years of new lawsuits, award rulings and major changes to how business is conducted.
Boots-on-the-ground REALTORS® were not on trial, and it was never even hinted that they do not provide invaluable service to prospective homebuyers. Indeed, Michael Ketchmark, lead counsel for the plaintiffs, made it a point to tell the jury that the case had nothing to do with individual agents, that it was the policies and procedures of their companies that were on trial.
Ketchmark barely exhaled after the verdict before filing another, much larger class-action suit against several more national brokerage firms. Copycat lawsuits in different states may well follow.
Watching from the sidelines and breathing sighs of reliefs are the major real estate portals. Not only are they likely safe from inclusion in litigation because they have no formal ties with the National Association of REALTORS® (NAR) or MLSs, but they stand to potentially be the big winners, should future trial outcomes be the same as Burnett vs. NAR.
During earnings reports and in interviews and emails over the last few days, CEOs of some of the biggest portals in terms of website visitors addressed the Burnett trial outcome and its potential ramifications on their businesses.
“We could be seeing the biggest change to the residential real estate industry in history,” said CoStar’s Andy Florance. “Sitzer-Burnett and other class-action lawsuits are challenging the legality of the buyer broker commission rule, which requires the homeseller to pay the homebuyer agent’s fee.”
Florance noted that Burnett and other class action lawsuits could result in devastating judgments, in the multiple billions of dollars.
“Several defendants have already agreed to collectively pay $138 million in settlements and to make changes to the rule,” he said. “The first-generation real estate portals leveraged the buyer broker commissions rule to divert listing leads from all the agents in the market to a small handful of agents who are then required to split their commissions with the portal.
“Many agents strongly resent that model. Now that Homes.com is one of the most heavily trafficked portals, there is a strong and viable alternative for lead generation available to agents that does not require commission splits.”
Before Zillow CEO Rich Barton commented in the Nov. 1 earnings call, he first addressed shareholders in a letter discussing the Burnett trial outcome and future litigation.
“We expect the Sitzer/Burnett lawsuit will likely be tied up in court for years. We expect industry changes resulting from this lawsuit, or ones like it, will involve commission transparency and negotiability provisions similar to those seen in several of the settlements plaintiffs entered into with other real estate franchisors in advance of the Sitzer/Burnett trial.
Then during the earnings call Barton expounded further.
“Buyers agents represent the buyer’s interest throughout this complex and often intimidating process of purchasing a home, which is the biggest purchase most people make in their lifetime and which has ended up being for most homeowners their largest financial asset,” he said.
“Similar to other infrequent high-complexity, high-stakes transactions, independent representation in real estate is important. As an analogy, investment bankers don’t represent both the buyer and the seller in an M&A deal because it makes no logical sense that one advisor could effectively represent the best interest of both parties. In fact, dual agency, where the same individual listing agent represents both parties, is harmful enough in the real estate transaction that it’s already been banned or substantially restricted in eight states.
“In the U.S., buyers deserve and most need their own independent council, and for most buyers, this means a dedicated agent. There is always a DIY or do-it-yourself segment of any industry, and we fully support DIY. Zillow was founded on the principle of free and fair access to real estate information and listings, and we have not wavered. But indulging for a moment, in a future scenario where buyer’s agency does go away, we have high confidence that Zillow will remain in a strong position, potentially even stronger, because then the U.S. market would likely transition to a structure we observe in several international geographies where a very large portal or two offer a pay-to-play inclusion, a sort of a digital classified advertising analogy. In this scenario, Zillow would be a favorite to become the leading digital listings marketplace.”
Art Carter, CEO of CRMLS, which is aligned with the Nestfully portal, wasn’t surprised by the ending, but felt the jury did not spend enough time talking about the issues, and that consumers will be worse off going forward if appeals fail.
“We expected the verdict and were prepared for the verdict,” he said. “I think if there’s anything that’s a little bit of a shock it’s how quickly the jury came back. Two hours of deliberation didn’t really seem like it was enough time for them to really give consideration to some pretty significant issues to be discussed, so that was the only surprise we had out of it.”
Carter allowed that the national portals will have a potential opportunity to gain from the verdict as buyer brokers scramble.
“The portal wars are interesting,” he said. “The sheer hubris that these companies are showing right now, especially the ones that feel like they’re up and coming, it’s just amazing to me. They tout these differences to the agent base. At the end of the day, it’s about giving the consumer what they want out of the process, and that should be the focus of these companies as we move forward. I don’t feel like it is, and if anything, what we’re trying to do at Nestfully is bring a better engagement between the brokerage community and the consumer.”
Whether or not the portals will be able to serve consumers better after the verdict than they were before was also something Carter mused about.
“Let’s be honest, they’re all focused on the agent, and they’re all focused on the agent’s pocketbook,” he stressed. “The only way that they’re focused on the consumer is how their connection to the consumer can lead them to more money out of the agent’s pocket. It’s the truth…where’s the money in being consumer-focused?”
Carter insisted that Nestfully will serve consumers well.
“The consumer wants somebody responsive,” he said. “They want somebody there to answer their questions. Listing agents are notoriously bad at answering leads. That’s statistically been proven time and time again, and so working with the brokerage community to get agents in front of consumers that are more responsive is definitely something that we want to do.”
In an emailed statement, realtor.com® wrote, “There is much to play out in terms of the appeals process, and it remains to be seen what the practical implications are.
“A home is often a person’s most significant asset, and we support a system where all buyers and sellers have appropriate representation and advice from their buying or listing agent. At realtor.com®, we are the most trusted brand by real estate professionals, in part because we support consumers on both sides of the market, connecting buyers with a buying agent who acts on their behalf, and by connecting sellers to a listing agent who can best sell their home.”