Real Estate AI Is The Executioner, Not the Judge
A growing threat looms on the horizon, shaking the real estate industry at its very core.. There has not been a better solution for an industry-wide business model for how a brokerage is organized and run; however, the inevitable changes seem to be coming sooner than later. Is this a worst case scenario? Perhaps. Is there enough truth and data to be plausible? Yup – I believe reality lies somewhere in the middle of our risk spectrum. And no, the real threat is not AI.
An Exemption Problem
There’s a legal battle (several cases actually) that’s been brewing for years in court. TheTLDR: Real estate agents are currently 1099/independent contractors, and not W2 employees and many in leadership believe that will change when the government forces realtors to become W2 employees. Currently, the industry has been riding on an “exemption” for the classification of the industry, brought about by the mighty and long lasting power of the National Association of Realtors (NAR) lobby in Washington, which is second only to the NRA in size. (Good work team RPAC;)
Cutting Cost (Read: Agent and Staff Reductions)
Not all realtors are 1099. But about 87% (according to a NAR 2021 data) are independent contractors. When the government “asks” that the designation change to W2, agents will HAVE to be paid minimum wage. Federal minimum wage is: $7.25/hr, or $15k/year. But most believe that due to a number of factors, this will increase significantly soon. So consider the living wage for the sake of this discussion since few of us in the industry could (or would) live on the minimum wage of $15k/year.
“For one full-time working adult with no children in 2022, the national average living wage is $17.46 per hour – or $36,311 annually” per Just Capital and MIT.
In this livable wage future each agent would be paid by the broker a base rate of $36k/yr. Friends – there is no 1099 brokerage that will keep all its agents if this happens. The cost is simply too great.
Agents vs Math
What would it take for an agent to keep her/his job at a brokerage? How many transactions would be acceptable?
Using national averages according to Zillow the average home value is $329k as of this writing. The average total sales commission for both buyer and seller sides of the tansaction is 5.37%. Divided by two = 2.68% per sale. ($8817.20 per side) With this math, the average agent needs to sell five transaction sides per year to pass break even for the cost of the base. Assuming the industry is in business for profit, in my estimation, agents would need to do around twelve transaction sides per year on average to remain employed. And making matters more difficult, with a hovering recession, we are not in a 2021 boom economy, either. There are too many agents. The number of agents exploded nationwide in the last two years. Estimations are that there are currently over 2M licensed real estate agents in the US, and that there will be roughly 4.5M housing transactions – thus 2.25 transactions per agent “available” with this number of agents.
The imbalance in numbers of agents and lack of proceeds to support so many agents will create massive layoffs of crummy agents who entered the market during the boom and don’t have the necessary skills to survive these conditions, and even middle of the road producers who are content selling six homes a year will be removed from office.
Side note: Hey OG’s! Do you recall “Raise the bar” and did you support the cause? Now is your time to shine!
The new problem, will be staffing desks, phones and getting repetitive tasks done that were previously taken care of by entry level 1099 agents.
The AI Answer
Real Estate brands, teams and brokers will need, no, HAVE to reduce cost, and will inevitably turn to RealEstate AI to do more of the tedious, monotonous work, just as they have with VA’s (Virtual Assistants). In addition,the easy lead qualifying and simple Q and A solutions are a far more dependable, accurate and inexpensive alternative to 1099 desk, chat and phone staff. The huge industry trade shows (if they still exist) will be jammed with new untested AI tools that promise to be the all in one printer. Caveat emptor – failure is always an option. But Chat GPT has a winning model on their hands. For example, I asked Chat GPT the type of question an entry level realtor might be asked: “Will I need a septic tank inspection prior to selling my house?” Here’ is it’s very on point and scarily impressive answer. Chat GPT gave me good advice.
The End Will Be Swift
AI may be viewed as the executioner, however, in this case it’s likely the judge that will be the death of hundreds of thousands of real estate agent’s jobs. With the stroke of a pen, the bang of a gavel at the end of the 1099 exemption for Realtors© will signal a new era in real estate.
There are a few companies today such as Redfin that are already built for this model and will likely thrive during the transition. However, the bulk of today’s massive brokerages like EXP, Keller WIlliams and Remax will be forced to legally comply or die. Companies like to make money – and so they wont die, they will pivot, and look for the most cost effective method to continue making money. That solution has been handed to them in the form of ChatGPT and other AI (like, you know, Revaluate) to help them survive and become vastly more efficient into the future.
