Want to avoid AI pitfalls? Think like a compliance officer

It’s 2024, and real estate professionals have been discussing the use of artificial intelligence (AI) in the industry for quite some time now. Many of these discussions revolve around what AI can do for brokers and agents, aiming to make them more productive and effective, and, of course, how this new technology will undoubtedly make their jobs easier.

While the potential of AI technology is impressive, with its seemingly endless list of tasks it can accomplish — tasks that will only grow in complexity and sophistication over time — I sometimes feel like the only one at the AI party not having a good time. Let me explain.

The following, which may raise more questions than answers, will highlight some compliance issues and suggestions for real estate professionals to consider when utilizing AI in their business operations.

The backdrop

I have wanted to write this article for a couple of years now, hoping that the real estate department in my home state would first issue an advisory to its licensees on this subject. When real estate licensees aim to understand the rules better to comply with them, it’s always best to refer to and lean on any advice or guidance the regulator provides, if available.

This becomes especially crucial when agents and brokers begin exploring outside-the-box methods, engaging in real estate activities not explicitly covered or anticipated by existing laws and regulations governing them. Under such circumstances, some licensees become inadvertent “test cases” until we better understand how regulators will regulate and potentially enforce these activities.

As a real estate compliance consultant and former California Department of Real Estate (DRE) investigator, I have an arsenal of compliance stories to share, each emphasizing the critical importance of abiding by the law or facing the consequences of breaching it.

Given my background in compliance and investigations, I always advocate for my licensed clients to approach their actions with thoughtfulness and caution. Real estate licensees should never jump into anything entirely new without thorough vetting — a practice commonly known as risk management.

Against this compliance backdrop, I start to feel concerned that AI technology might create a slippery slope for some licensees who rely on it too heavily or use it in ways incongruent with existing real estate laws. It’s the abuse of this super technology by bad actors that could put a dent in everyone’s AI plans.

In California, there is currently no law or regulation enforced by the DRE, at least not yet, that covers, limits or restricts the use of AI in the course of licensed activity. Some might wonder, “Why would regulators restrict it?”

It’s a valid question. After all, it’s simply a new, fancier set of tools or technologies at a licensee’s disposal. However, as a compliance-minded person who has witnessed numerous investigations involving unlawful conduct and fraud in real estate, I can’t help but wonder about potential pitfalls.

To be fair, most solutions AI offers seem more beneficial than problematic for licensees. For instance, various AI tools can help real estate professionals efficiently gather and analyze property and market data to benefit sellers and buyers.

Similarly, licensees might use AI to create advertising content, promote their services and reach a wider audience. Another benefit could be assisting licensees with automation, organizing information, creating checklists, and developing systems actually to ensure regulatory compliance.

Looking at just these potential functions, it’s challenging to deny that AI could significantly contribute to making the real estate industry more efficient, productive and even more compliant. I’ve often heard AI compared to the perfect assistant one always wanted, and I can’t disagree.

However, it’s not these AI uses and results that keep me up at night. Instead, when I put on my investigator hat, I tend to fixate on a few compliance issues.

Fiduciary duty, professional responsibility and ethics

One might ask, “What does AI have to do with fiduciary duty, professional responsibility, and ethics in real estate?” Well, that’s precisely the point; it doesn’t. The use of AI by agents and brokers does not change or limit their statutory obligations to principals.

Licensees must continue to fulfill their fiduciary duties, adhere to the standard of care for real estate professionals, and act in the best interest of their principals at all times. In simpler terms, they are still responsible for performing licensed activities in a compliant, professional and ethical manner.

Although AI can perform a myriad of tasks for agents and brokers, it cannot replace the licensee and the duties mandated by law. Put differently, while AI may enable licensees to work faster, smarter and more efficiently, it doesn’t alter the conversations they must have with clients, along with their duty to disclose all material information, to act ethically, and to ensure accurate and reliable information is conveyed.

It is worth noting that in states where unlicensed activity is prevalent and regulators are committed to punishing violators, we might see a legislative or regulatory push to ensure licensees do not use AI tools to mimic human behavior to perform licensed acts.

Examples might include using AI to solicit potential buyers or sellers (a licensed act in California), delivering information to consumers only a licensed person can provide or performing other licensed or quasi-licensed acts.

In essence, AI tools do not change the scope of agency relationships, exempt licensees from their fiduciary duties owed to principals, and cannot replace the work of professionals when it comes to performing acts requiring a real estate license.

Accuracy, accountability and avoiding potential bias

With any reliance on new tools, systems, and technology, real estate professionals must recognize the potential for error. This is not a new concept.

For example, many California real estate brokers rely heavily on software to handle and account for trust funds and prepare accounting records. However, they cannot relinquish control or solely depend on the software, as they remain ultimately responsible for the accuracy of their trust account records, which are only as reliable as the information they input into the software.

Similarly, AI tools may not always yield the correct answers, as anyone can attest with a basic test. While I acknowledge this technology is continually learning and improving, licensed real estate brokers and agents using AI to gather and deliver information to their principals or assist with preparing real estate contracts and transaction documents must still review all information and documents for accuracy and compliance. Why?

The answer is simple: Because a licensed real estate professional is a fiduciary and ultimately accountable for the information they present to their principals and clients.

In an interesting and perhaps less obvious twist, real estate professionals must also consider potential biases inherent in any AI programs used, which could lead to, for instance, unlawful discriminatory practices in the real estate industry.

Again, the technology is not infallible, and licensees cannot blame AI if something goes awry. Therefore, real estate licensees must ensure their AI-powered tools are fair housing compliant and designed to uphold anti-discriminatory standards and practices.

As AI is only as good as the data it is fed, regulators should promote that brokers regularly review, cross-check, vet, and validate the outputs of AI platforms and systems to ensure 100 percent accuracy, reliability and compliance with, among other things, fair housing laws.

Disclosure, transparency and data privacy

In my opinion, for real estate licensees to properly use AI technology while staying compliant, they need to disclose to their principals and clients when and how AI tools are used during their interactions and throughout the home buying or selling process.

I believe this disclosure and emphasis on transparency might mitigate potential issues and become a standard practice for real estate professionals with their buyers and sellers. Absent any laws, I suspect regulators might adopt and enforce such guidelines to protect the public.

Along those same lines, consumers should be aware of the type of data collected and analyzed and how it impacts their real estate transactions. With data collection also comes data privacy and security, topics increasingly prioritized by the real estate industry and regulated on state and federal levels.

Considering how AI tools might collect and handle data, in presumably larger amounts than before, regulators should strongly urge agents and brokers to comply with legal, privacy and security standards to protect clients’ non-public information.

Misuse of AI 

Delving into the subject of AI in real estate inevitably leads to concerns about criminals’ utilization of this technology to perpetrate fraud against consumers to obtain non-public data, money and property unlawfully. The real estate industry has long been a target of fraud, but the real issue now lies in AI’s enhancement of criminal techniques to achieve these ends.

The increasing prevalence of deepfake scams and the false impersonation of agents are both astounding and alarming, ultimately making the buying and selling public the biggest victims of these fraudulent activities.

For these reasons, real estate professionals will need to stay informed on how these scams operate, and more importantly, convey that information to their clients from the outset of their interactions. Licensees must remain vigilant, safeguarding both themselves and their clients, as they navigate the process of listing, selling and buying real property.

Regulators would be remiss if they failed to alert the public, stakeholders and licensees in their respective jurisdictions about the different types of AI-enabled scams occurring, how to recognize warning signs, and provide preventative tips to help defend against these advanced forms of fraud. To further the relevance of regulators in this matter, licensees and consumers alike should also be encouraged to report any instances of fraud they encounter.

The takeaway

The discussion of AI and real estate compliance often reminds me of virtual real estate brokerages. Interestingly, in California, many brokerages operate “virtual offices,” not explicitly covered in Real Estate Law.

Until the California Department of Real Estate provided guidance to its licensees, it remained unclear how the department viewed and might potentially enforce this activity. However, without codified rules in this area, these operations and issues are usually examined and investigated case by case.

It is no different here. Brokers and agents are currently using AI technology to perform various tasks in their jobs, and it remains to be seen if any of this activity will lead to non-compliant practices, be exploited by some licensed individuals and firms, and how regulators will respond.

Honestly, it’s too early to predict how exactly AI, and real estate compliance enforced by regulators, will coexist, but a few practical measures don’t have to wait. If you are a real estate professional considering or already utilizing AI in your business, you might consider the following tips to stay on the right side of the law:

1. Cross-check your use of AI against the law. Identify how you intend to use and apply AI in your daily business, ensuring these programs, practices, and products align with existing laws and regulations in your state. This might involve reviewing core principles, including some issues highlighted in this piece and cross-referencing them against the specific legal framework you operate within.

2. Do not dive into something new without doing your homework. As a licensed real estate professional, you have a duty to be diligent and purposeful in your actions. If you have questions, seek answers.

Contact your state regulator and local trade organizations, talk to your supervisors, managing brokers, and colleagues. Look for advisories, real estate bulletins or expert guidance. Stay updated on the law (and any changes), AI technology, potential problems and learn how to mitigate risks or address issues before they arise.

3. Monitor enforcement actions taken by regulators in your state. I have always advised my clients on the value of reviewing and monitoring enforcement actions against agents and brokers. This information provides valuable insight into the regulatory climate, revealing the types of non-compliant activities that lead to violations of the law, how regulators interpret and enforce the law, and the nature and extent of disciplinary actions taken.

It is the old adage of learning from others’ mistakes. Being aware of how licensees get into trouble can help you eliminate compliance blind spots in your own business and increase your chances of avoiding regulatory scrutiny.

4. Stay one step ahead of the fraudsters. Be wary of how bad actors and fraudsters could manipulate AI, and how this might negatively impact the work that you do, your clients and their real estate transactions. To that end, you will need to stay informed on all of the ways in which AI could be harnessed to perpetrate fraud.

Moreover, it will be pertinent that you discuss with your clients the importance of heeding caution when interacting with the parties of a transaction, vetting email communications requesting funds or non-public information, and verifying identities as well as the sources of information received.

In my opinion, licensees must warn their clients upfront, before transactions take place and closing funds are rendered, about the possibility of fraud and the safeguards that must be taken.

Closing note

The story of AI in real estate, including how licensees, along with unlawful perpetrators, will use the technology and its impacts, is still a working draft. My best advice to real estate professionals right now is to stay informed, proactive and thoughtful about how you apply AI technology to your business and practice.

It’s easy to get caught up in the bells and whistles AI can provide, and trust me, I want AI to make real estate licensees and the industry better, too. However, as a compliance consultant, I must also highlight potential drawbacks and remind brokers and agents of the fundamentals required in their roles as licensees.

Real estate professionals would be wise to think like regulators and prioritize compliance when evaluating their use of AI in their business, as well as protecting themselves and clients from the maltreatment of this technology.

Author’s Note: Any opinions or recommendations contained in this article are based on Summer Goralik’s experience working for, and knowledge of the laws and regulations enforced by, the California Department of Real Estate, and must not be considered legal advice. Please consult with a licensed real estate attorney for legal support or clarification.

Summer Goralik is a real estate compliance consultant and former CA DRE Investigator in Huntington Beach, California. Connect with her on LinkedIn.