By Jeffrey M. Kowalski, Esq.
The real estate brokerage business model has been the same for decades. Brokerage firms hire real estate agents as independent contractors who are on their own for marketing and expenses and get paid solely on commissions from sales. That commission in almost every deal is six percent and has become such a fixed amount that buyers and sellers rarely attempt to negotiate something different.
Over a decade ago, the internet dramatically changed the way consumers interact in the marketplace. Instead of going to a travel agent you could go to Expedia, instead of the mall, to Amazon. Today, in many industries, if you are not doing business online then you simply are not doing business.
Nevertheless, the real estate brokerage industry has so far withstood the attack of the internet. Real estate websites like Zillow and Trulia came out many years ago but their goal was to merely aggregate and simplify the information potentially available to consumers, not to circumvent real estate brokers.
Inevitably, one site is now making an attack on the traditional brokerage business model. Redfin, an online company, actually employs its own local agents. Rather than retain them as independent contractors, the company hires them as salaried employees with fringe benefits and bonuses based on customer satisfaction. Even crazier, the brokerage fee is negotiable and typically nowhere near the standard six percent; the fee is often as low as one and a half percent per party. Redfin also uses the online resources of sites like Trulia, Zillow, or Realtor.com such as interactive map displays, price charts, and market graphs.
Critics have described Redfin not so much as groundbreaking, but as an “arrogant” company willing to do anything in its power to gain a market advantage. One new practice that Redfin is using called “Offer Insights” illustrates that attitude and raises both legal and ethical concerns.
Offer Insights is a tool for a buyer’s agent to post the details of private negotiations between buyer and seller and the reasons why a buyer’s offer was accepted or rejected. Redfin says it is providing market transparency, while competing realtors argue that the practice is an illegal violation of the National Association of Realtors (NAR) confidentiality obligations.
The NAR Code of Ethics prohibits realtors from using client confidential information for any purpose unless the client consents after full disclosure. To define confidentiality, the NAR Code of Ethics defers to state law.
As a general rule, absent some special or fiduciary relationship, there is no duty of confidentiality between two parties. Obvious examples of the type of fiduciary relationship that requires confidentiality are lawyer-client and doctor-patient. It is not quite as clear whether the same level of trust is required in the real estate agent-client relationship.
New York Law does not address the issue squarely, but New York Real Property Law Article 12-A § 443 provides a list of required disclosures in a real estate agency relationship. That section requires both the buyer’s agent and the seller’s agent to tell their client that “the agent has, without limitation the following fiduciary duties to the [client]: reasonable care, undivided loyalty, confidentiality, full disclosure, obedience and duty to account.”
Thus, the angry realtors are likely correct when suggesting that Offer Insights, on its face, would be illegal under state law and a violation of the NAR Code of Ethics. However, the analysis does not stop there. Redfin allows their clients to opt out of the Offer Insight program. Meaning, if the client does not consent to the disclosure, then Redfin will refrain from disclosing private information. So long as the client’s permission is granted with full knowledge of his rights, it would be quite difficult to argue that any confidentiality obligations are being violated.
In addition, the confidentiality protections only flow from agent to client. There generally is no duty to third parties. Thus, there is no fiduciary duty between the seller’s agent and the buyer’s agent and no fiduciary duty between the buyer’s agent and the seller. Furthermore, there is typically no fiduciary duty in a private negotiation between two parties. Thus, the seller could not say that the buyer breached any confidence by displaying the details of the negotiation to the public. In sum, it seems that if there is permission from the buyer to the buyer’s agent to disclose the details of the negotiation, then the practice is legal.
Just because something is not illegal, however, does not mean it is ethical. The crux of the argument from traditional realtors is that it should be prohibited because it just feels wrong. Offer Insights proves that Redfin is willing to go to any length to disrupt the traditional broker business model and illustrates how the tactics of online companies can outpace the legal and ethical frameworks of its governing bodies. Whether you agree or disagree, it seems inevitable that we are going to see an increased attack against the traditional broker business model. It is surprising that it has lasted this long.
Jeffrey Kowalski is an Associate at Boylan Code LLP, concentrating his practice on real estate, general corporate and municipal matters. For more information, please contact Jeff at (585) 232-5300 or jkowalski@boylancode.com.
