Real estate business

Compass’s free spending methods capsize the real estate industry

Compass, a growing residential real estate broker, is still trying to figure out the business. But his ways of spending for free shake his rivals and shake up the industry.

After a recent injection of 450 million dollars from the Japanese group SoftBank Corp.

, Compass has a war chest of $ 1.2 billion. This amount of money has enabled the company to woo high-profile agents with sizable marketing budgets, clever technology and stock options as it weighs the prospect of an initial public offering. .

The company has attracted top talent with some of the most generous commission allocations in the industry: some agents received all sales commissions, with nothing going to Compass, on up to eight of their first transactions, according to the letters. ‘offer.

Other perks include vendors’ money for staging and cosmetic work, so agents don’t have to dip into their own pockets. He said he was rolling out a bridging loan program for sellers who need to act fast, helping agents get more listings. He has assembled a technical team of around 300 engineers to support the agents. And its software aims to take the heavy workload out of agents, allowing them to handle more clients and make more sales.

Amy Bofman, a Compass agent in Boston, said she felt like “a real estate agent at the Ritz.”

Industry executives say these are programs many traditional businesses can’t afford if they plan to break even. “It doesn’t make sense,” said Bess Freedman, managing director of New York-based brokerage firm Brown Harris Stevens. “Are you a charity or are you a real estate company?

The company is part of a current group of startups that have relied on venture capital funding to grow quickly without worrying too much about profits and with an IPO as their final goal.

From left to right, Compass CFO Kristen Ankerbrandt, CEO Robert Reffkin and COO Maëlle Gavet.


Photo:

Go Nakamura for the Wall Street Journal

“Short-term profitability is something that many more modern companies don’t focus on as much,” said Robert Reffkin, CEO of Compass.

Clelia Warburg Peters, president of New York-based brokerage firm Warburg Realty, compared Compass to the online giant that has changed the way people consume everything from books and movies to music.

“What Compass is trying to do is what Amazon has done in retail, which makes it unsustainable for incumbents to compete with them,” she said. “You can only do this if you expect your scale to grow large enough that you have the momentum to survive the disease you have unleashed on the industry.”

Yet unlike Amazon.com Inc.

disrupting the retail industry, Compass has not fundamentally changed the way people buy and sell their homes. The company still relies on the traditional agent system and industry incentive pay structure. Compass’s base model doesn’t look much different from older companies like Coldwell Banker and Berkshire Hathaway HomeServices, which like the startup, charge traditional commission rates in the range of 5% to 6%.

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Other companies have done more to try to change the business model. Seattle-based broker Redfin charges salespeople a 1% to 1.5% commission and pays agents a salary. Online real estate agent Purplebricks also offered great commission rates.

New York-based Compass has attempted to shake up the industry’s business model in other ways, with little success. When the business was launched in 2013, she said she would have “neighborhood specialists” who would be paid with a salary and would do rentals, not sales. Compass shifted gears a year later to a commission-based model and went into selling.

Other projects have also stumbled. Last year, the company ended a deal to license its technology to a Massachusetts brokerage firm, a move, according to Mr Reffkin, prompted by backlash from its agents who did not want competitors to have access to it. their technology. Compass’s efforts to sign new luxury development projects have been largely unsuccessful. Attempts to expand in business brokerage have not taken off.

In an email sent to the entire company in January, Mr. Reffkin acknowledged the missteps with the licensing of the technology. “When you’re obsessed with opportunities, it’s easy to see them everywhere – and it’s better to wait for certain opportunities or let them pass completely,” he wrote.

Mr Reffkin said the company plans to make money from ancillary services such as title, mortgage and insurance services, but it’s unclear how.

Compass employees at headquarters. The company is valued at $ 4.4 billion, towering over the market capitalization of established competitors.


Photo:

Go Nakamura for the Wall Street Journal

“We are not yet at a stage where I have a very clear monetization strategy because we have not really talked about it,” said Maëlle Gavet, general manager of operations.

Yet Compass has been successful in raising funds from big names. Investors include Peter Thiel’s Founders Fund, Wellington Management and Fidelity Investments. Mr Reffkin said the company still owns the majority of the capital it raised.

Compass said it was valued at $ 4.4 billion, towering over the market capitalization of established competitors like Realogy Holdings Corp., America’s largest brokerage firm and owner of the Sotheby’s International Realty, Coldwell Banker and Corcoran Group brands. Its market capitalization is approximately $ 1.4 billion.

Compass has grown rapidly through acquisitions, including such venerable companies as Stribling & Associates in New York and Pacific Union in San Francisco. Today it has more than 10,000 agents.

Jeff Barnett, principal at Alain Pinel Realtors, a 1,300 agent company recently acquired by Compass in the Bay Area, saw the move as a survival. “Our margins keep shrinking,” he said.

Large businesses are also feeling the effects of a weaker real estate market and the growing power of listing aggregators driving up fees.

Realogy’s net profit fell 68% in 2018 from a year earlier, as it increased the allocation of commissions and battled a declining luxury market.

In some markets, Realogy has offered agents a higher commission split but billed them a monthly fee, said John Micenko, senior analyst at Susquehanna Financial Group.

“I definitely keep an eye out for competitors who are doing more desperate things and are willing to lose money and don’t seem to have an opportunity to make money,” said Ryan Schneider, CEO of Realogy.

IVP venture capitalist Todd Chaffee, who has invested in Compass, said the industry has left itself vulnerable to a new competitor.

“To people in the real estate industry, it seems Compass has an unfair advantage,” he said. “And that’s true.”

Signs at the company’s headquarters feature case studies of how Compass works with its customers.


Photo:

Go Nakamura for the Wall Street Journal

Write to Katherine Clarke at katherine.clarke@wsj.com and Laura Kusisto at laura.kusisto@wsj.com

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