Real estate brokers are a chatty bunch, but a few can be draining socially. Discuss the weather, how your pets are handling the pandemic, even the housing market, but these brokers will steer the conversation to one subject, and one subject alone – the residential real estate brokerage Compass.
Compass – the broker will lament – puffs itself up as a “tech” company, but it’s really just another brokerage. And, so, while Compass’s $1.6 billion pot of venture capital money may seem impressive it’s vaguely irresponsible.
As for Robert Reffkin, Compass’s chief executive officer and co-founder…Well, don’t let them get into the youthful-looking Reffkin’s Twitter affirmations – “The bad news is time flies. The good news is you’re the pilot.” – and especially not his aspirations about Compass.
Reffkin is famously ambitious. In 2018, he told an interviewer, “In five years, I think we’ll be in the top 50 markets in the world, and No. 1 in all the U.S. cities – and top three in the international ones.”
Today, as Compass readies to be a publicly traded company this year – the brokerage did an Initial Public Offering filing with the Securities and Exchange Commission last month but did not disclose financials, and it is not known when their stock may trade – the brokers and real estate agents are getting antsy.
“The brokerage community would like them to go public sooner rather than later, because we are getting sick of the Compass blather,” said D.J. Grubb, the Oakland broker behind Grubb & Co. who, nonetheless, blathered (helpfully!) about Compass for an hour.
Once public, Compass will become less an object of fascination, jealousy, scorn and puzzlement from the brokerage community. It will leap into the rat race of quarterly reports along with a handful of competitors, most notably Realogy, which owns Coldwell Banker, Sotheby’s International Realty, the Corcoran Group and Better Homes and Gardens.
Like an over-budget blockbuster movie, Compass may never make money.
(Compass declined to answer questions or make executives available for an interview.)
“The real estate industry, and brokerages in particular are ripe for disruption,” said Gilles Duranton, a real estate professor at the University of Pennsylvania. “That said, I’m not really sure of Compass’s appeal.”
“We assume they are not profitable,” said Jack Micenko, a research analyst at Susquehanna International Group, who added he’s not sure how Compass will ever become profitable.
And yet, it bears watching if the brokerage can be another “Titanic” – the movie, not the ship.
Meet the real estate Chief Evangelist
The year was 2012, and Ori Allon could do no wrong.
The 32-year-old, Israeli-born, Australian-educated software programmer had sold startups to Twitter and Google, the latter company creating an algorithm that is part of the Google search engine.
“Emails arrive daily from venture capitalists with the same basic message,” read a Verge profile of Allon from that halcyon time. “‘Whatever you’re doing next, please take our money.’”
Allon snatched $7 million from investors for his next project, Urban Compass, an impressive sum considering investors, including Goldman Sachs and Founders Fund, had no clue what Allon would start.
“I’m interested in the Uber model,” was the most Allon told Verge about Urban Compass. “Can I disrupt a very analog industry?”
Allon and Reffkin picked real estate as that very analog industry. The former chief of staff to the president of Goldman Sachs, Reffkin set up Urban Compass as a New York City firm.
The pair hired agents to lease commercial building space. When that did not take, Compass gazed at its Manhattan environs and pivoted to luxury-focused residential real estate. What if they spent VC money on recruiting real estate agents who sell so many penthouses and mansions that they are millionaires themselves?
Urban Compass in 2014 plucked from Douglas Elliman a charismatic, South African-born luxury agent in Leonard Steinberg, who had amassed over 2 billion dollars in real estate transactions. Wealthy homebuyers, Compass correctly understood, weren’t calling Steinberg because he worked for Douglas Elliman, but because he was Leonard Steinberg.
“Compass was in trouble before they brought in Steinberg,” recalled Jonathan Miller, a real estate appraiser at Miller Samuel, who publishes reports on the New York real estate market. “That was a sea change. Steinberg was able to recruit, and they have attracted top producers.”
Steinberg became the company’s “Chief Evangelist,” Urban Compass became just Compass, and the brokerage pilfered elite agents in Washington D.C., Chicago, Los Angeles and San Francisco.
In 2018, Compass got a stranglehold on the Bay Area market, buying Pacific Union, a San Francisco firm with 54 offices and 1,700 agents that, according to RealTrends, was the fifth-biggest brokerage in the country.
Prior to the Pacific Union buy, Compass raised $400 million from SoftBank, the Tokyo-based mega-VC that also threw bags of cash at Uber and WeWork.
Compass raised more SoftBank cash and snared investments from not just VCs but the Qatar Investment Authority and Canada Pension Plan Investment Board. By 2019, they were the third biggest brokerage nationally, per RealTrends, with just Realogy ($176 billion) and Berkshire Hathaway ($136 billion) netting more than Compass’s $92 billion sales volume.
Reffkin appeared on CNBC that year and compared Compass, then valued at $6.4 billion, to Amazon.
Compass was also sued in 2019 by Realogy for “poaching” agents, years after they were sued by New York-based Douglas Elliman on similar grounds. The lawsuit is ongoing, and Coldwell Banker President and CEO Ryan Gorman told HousingWire he’s happy Compass plans to go public, because “it would bring more transparency to the real estate industry.”
When the pandemic hit last March, Reffkin announced a 15% staff layoff.
But Compass persisted in its growth, for example, adding almost 250 agents in New York state alone during the 2020 second quarter (an 11% jump in Empire State agent headcount) at a time when rival brokerages were cutting back.
The brokerage has enjoyed the strongest real estate market since 2006, according to National Association of Realtors home sale data. Compass said in November that they hired Goldman Sachs and Morgan Stanley to guide them through the IPO process.
Compass’s recognizable name, and the surge in real estate – not just home sale volume but outfits like Rocket Companies and OpenDoor going public – could lure retail investors.
“Maybe there will be some folks who said Compass grew faster than everybody else, and so they can flip the switch and become profitable,” Micenko said.
Check out these splits
Jeff Lowe hardly thought of exiting Berkshire Hathaway Homeservices, where he led Chicago’s most lucrative sales team. But there he was, eating Japanese food with Reffkin at Momotaro in the West Loop, a celebratory meal after Reffkin had flown to Chicago three separate times to court Lowe.
Later that night, Reffkin and Lowe met up with Lowe’s 14-person team at Coda Di Volpe in the Southport neighborhood: the group was now part of Compass.
“Robert Reffkin is a very persuasive guy,” Lowe said, recalling his recruitment by Compass three years ago. “A lot of firms are downplaying the importance of the broker, but Robert really sees the broker as a key component of the future.”
Lowe declined to disclose the commission split he got from Compass, noting that he left for reasons including the brokerage’s overall largesse. (“Our marketing department here is four times larger than other brokerages,” Lowe said.)
But in tandem with marketing, tech platforms (more on that in a sec), and other resources, Compass grew in no small part by upending the split.
Commission income is the beating heart of any real estate brokerage. Realogy reported $4.2 billion in company revenue for the first nine months of 2020, with 77% of that coming from commissions.
A typical model has an agent selling a $1 million home, gets about a 3% commission, or $30,000. The agent splits the commission with the brokerage, keeping 60-70% of that $30,000 and passing on the other 30-40%.
But Compass in “many cases overpaid agents,” Micenko said. The analyst believes Compass’s average split to be 90% agent, 10% brokerage.
Compass propelled commissions upward industry-wide, but only partly. Realogy, who Micenko analyzes, now has an average split of 75/25.
And the more celebrated the agent, the better the split. A top Compass seller in the upper middle class L.A. neighborhood of Silver Lake is known to make a 95/5 split, a Compass agent on L.A.’s rich West Side receives even more than that.
“They’ve bought market share at a very steep cost,” said Michael Nourmand, a broker in Beverly Hills.
Compass hammers out these splits in a low-margin industry.
Realogy and Re/Max, another publicly traded residential real estate brokerage, turned third quarter profits. But the companies ebb and flow between the red and black – largely dependent on the cycles of the housing market. Realogy absorbed a $378 million net income loss for the first nine months of 2020.
Realogy slammed Compass’s splits in its most recent quarterly report as the fantastical machinations of a company burning through VC cash.
“Certain owned-brokerage companies have investors that have historically allowed the increase in market share over profitability,” the New Jersey-headquartered brokerage sniffed, excoriating “competitive models that do not prioritize traditional business objectives.”
Compass has more to worry about than just Realogy. Its two-to-three-year contracts negotiated with agents are beginning to expire, prompting competitors to wonder if Compass can hold on to its envious stable of talent.
“It will be interesting to see if agents stay when the financial incentives of their contract expire,” Nourmand said. “At some point, pay to play will end and they will have to prove that they can retain and recruit agents with market rate agreements.”
Reffkin has at various points dangled the IPO as a carrot for agent retention.
Inman reported that in 2018 and 2019, around 4,200 Compass agents received $70 million in company equity in exchange for deferring part of their commission income.
Compass explained the plan in a 2018 company memo, giving the example of an agent who invests $20,000 out of $100,000 in their commission money, and then gets $26,000 in stock options.
When Compass goes public, the agent can then buy the stock at the preferred share price set back in November 2019 of $154 a share. Given that Realogy closed Feb. 9, 2021 at $17 per share, that price may not turn out to be too preferential.
Another pool of agents deferred some commission income into restricted stock units. Those agents can also buy shares of common stock at the preferred stock price.
Besides having skin in the IPO, Reffkin has also promised the moon to agents.
“Being public will allow Compass to raise capital that we can invest in more tools and more support to help you,” Reffkin wrote in a December company memo, first obtained by The Real Deal. “We will be able to invest more in building toward the Compass North Star: Anything an agent needs, Compass provides.”
But what tools, exactly, is Compass providing?
Did somebody say technology?
In 2016, as he spoke with an Australian Finance Review reporter at Compass’ New York headquarters, Ori Allon was instructed to vacate the meeting room by someone who claimed to have booked the space.
Allon held his ground, politely explaining that he was, well, the person who paid the rent.
As Reffkin toured the country, Allon has kept a lower profile – and his tech focus has also taken a back seat.
With no discernible breakthrough in customer-relations management software or sale processing platforms, Compass’s tech strategy can devolve into executives repeating the word “technology.”
“They spent a tremendous amount of money on a home-grown CRM system,” Micenko said, only to then buy Contactually, a company that built a CRM platform.
In one respect, Compass is playing catch up to Realogy’s tech.
Realogy’s non-commission revenue mostly stems from a platform that shepherds customers through the title and escrow process of buying a house.
Instead of Allon — or Chief Technology Officer Joseph Sirosh, formerly of Microsoft – building a competing platform, Compass bought another company, title and escrow start-up Modus in October 2020.
Compass, which has a tech hub in Seattle and another in Hyderabad, India, calls itself a tech company perhaps because investors value those firms more.
“Almost all VC-backed entrants position themselves as tech companies that happen to be in real estate,” Gorman of Coldwell Banker, said.
Realogy has a market value of $1.8 billion, which is in line with other real estate companies that, Micenko said, are worth roughly eight times their earnings per share.
Companies with a legit tech offering can trade at 20 times their earnings per share or more. Such businesses have something about them that transcends the cycles of real estate, Micenko said. But Compass, like Realogy, Re/Max, Rocket, OpenDoor and all the mortgage lenders to go public in the last six months, is captive to larger market forces.
“Compass is a disruptor by capital, but not by ideas,” said Miller of Miller Samuel.
As Compass has heard during its eight-year history.
The good news for Reffkin is that he is the pilot. The bad news is he needs to once again find new passengers.