Posts tagged: decision

A growing threat looms on the horizon, shaking the real estate industry to its very core. 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 (based on several cases, actually) that’s been brewing for years in court. The TL;DR — Real estate agents are currently 1099/independent contractors and not W2 employees. 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 costs (Read: Agent and staff reductions)

Not all Realtors are 1099, but about 87 percent (according to NAR’s 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 currently $7.25 per hour or $15,000 per year.

However, 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 $15,000 per year.

According to Just Capital and MIT, “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.”

In this livable wage future, each agent would be paid by the broker a base rate of $36,000  per year. 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 their job at a brokerage? How many transactions would be acceptable?

Using national averages according to Zillow, the average home value is $329,000 as of this writing. The average total sales commission for both buyer and seller sides of the transaction is 5.37 percent. Divided by two, that equals 2.68 percent per sale ($8817.20 per side). Based on 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 12 transaction sides per year on average to remain employed. 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. Estimates are that there are currently over two million licensed real estate agents in the US and that there will be roughly 4.5 million housing transactions — thus, 2.25 transactions per agent “available” with this number of agents.

The imbalance in the number 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. Even middle-of-the-road producers who are content selling six homes a year will be removed from office.

The new problem will be staffing desks and 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 have to reduce costs and will inevitably turn to real estate AI to do more of the tedious, monotonous work, just as they have with VAs (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 ChatGPT has a winning model on their hands. 

For example, I asked ChatGPT the type of question an entry-level Realtor might be asked: “Will I need a septic tank inspection before selling my house?” Here is its 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 that a judge will mean the death of hundreds of thousands of real estate agents’ jobs. With the stroke of a pen and the bang of a gavel, 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 RE/MAX will be forced to legally comply or die. 

Companies like to make money. So that they won’t 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 to help them survive and become vastly more efficient in the future.