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Why a Realtor® Thinks AB-5 Should Eliminate the Warm Body Carve-Out For Real Estate

Written by Matt Fuller Posted On Monday, 17 June 2019 05:30

AB-5 is a proposed law that would abolish independent-contractor (IC) status for many ICs in California, while maintaining a huge carve-out for the roughly 200,000 warm bodies with a real estate sales agent license. Dropping this exemption and moving the California real estate industry from an IC-model to an employee model would recognize the reality that real estate brokers supervising real estate associate-licensees (agents) are, by any other name, sales managers supervising salespeople. Eliminating the IC carveout would also eliminate an odd broker incentive that often contributes to a poor consumer experience.

For years, the real estate industry has given lots of chatter (but little action) to increasing the quality of real estate agents (ie, the DANGER report). I can’t tell you how many conferences I’ve attended where broker/owners complain about poor quality agents, while their sales managers back home are likely to give any new licensee (3 online college courses and one state exam are all you need to sell homes in California) a chance. Why?

New agents are usually good for three sales: a friend, a family member, and a phone-call/online inquiry (right time, right place). New agents also have the lowest commission splits -- the highest gross margin to the brokerage. The less expensive those new agents are (no benefits for an IC!) and the easier they are to fire (IC, ding ding!), the better the business environment for the brokerage.

The Main Way A Real Estate Brokerage Makes More Money

A broker has almost no control over market supply. It's true that brokerages make money when a house is sold (retaining a portion of the commission the agent negotiated), but because they have very little control over product (home) supply or quality, a broker's route to more income is to recruit more agents, preferably those who know what they are doing and have a track record to prove it. But if none of those folks are available, any warm body will do.

This is odd and unique to the real estate industry. A typical business owner who wants to increase income usually focuses on making a better product (design/competitive advantage) or delivering a better message (marketing) so that their existing sales team can sell more of their product. If they sell so many that their sales team is overwhelmed, then an owner expands the sales team. They don't
BEGIN by increasing the size of the sales force.

Where Supply Comes From

Real estate brokerages don't increase the overall supply of available homes. Nor does Zillow, or any other website. Brokerages and websites compete to market/sell the supply of homes created by five basic factors: deaths, cohabitations, breakups, births, and relocations. Building more homes also generates supply and requires both government permitting and private developers.

The number of homes sold in America peaked in 2005/2006 and has never recovered. Zillow was launched in 2004. Coincidence? Or proof that national mortgage and housing policy has more to do with housing supply than any slick website that can make up a number about any home in America?

Independent Contractor or Employee?

The CA Supreme Court ruled in a 2018 case known as DynaMax that to be classified as an IC in CA, you must meet all three of the following criteria:

● is free from the company's control. (control test)
● is doing work that isn't central to the company's business. (scope test)
● must have an independent business in that industry. (independence test)

Real estate agents are a real estate brokerage's primary income source (scope) who must comply with specific internal risk management, technology, and sales policies (control) and by definition are typically unable (licensees must be supervised by a broker) to have an independent competing business in the same industry (independence). They should be rightfully classified as employees.
AB-5 puts this 2018 ruling into law with massive carve-outs for a variety of industries, including real estate.

Real Estate is Weird, but...

The real estate industry is unique because of supply issues, not sales issues. Homes are attached to the earth, generally speaking, and creating more supply takes decades or years, not months or days.

One may argue that lack of control over supply should afford a brokerage the carveout so they can more easily adjust the size of their sales force. I would respond that the housing industry isn’t particularly volatile and is filled with great economists who make reliable forecasts for planning purposes.

Until real estate goes from being treated as a hobby anyone can do with minimal training and investment, to a profession that requires deep market/product knowledge, people skills, and a tenacity few other industries demand, consumers won't see a dramatic change in the quality or experience of buying or selling a home in California. Dynamax gave our industry a chance to “raise the bar” but AB-5 will ensure the status quo for consumers.

About Me, Industry Disclosures

I'm an independent real estate broker with almost two decades of experience in the real estate industry. Along with my business partner, I own a boutique San Francisco real estate brokerage, Jackson Fuller Real Estate. We are salaried employees. We have exactly zero real estate agent ICs, but do utilize ICs for specialized services.

In addition to being a member of the National Association of Realtors, I am a member of the California Association of Realtors, and currently serve on its 850+ member Board of Directors. I also serve as the 2019 vice-chair for the CAR MLS policy committee.

I am also a member of the San Francisco Association of Realtors, where I am a Past President (2017), and where I also served on the Board of Directors from 2013 to 2018. Past volunteer leadership roles at the organization also include Chief Financial Officer (2015) and chairing/co-chairing a variety of committees.

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