The firm, with a war chest of $1.2 billion, is wooing high-profile agents with hefty marketing budgets, slick technology
Compass, a fast-growing residential real estate broker, is still trying to figure out the business. But its free-spending ways are rattling rivals and shaking up the industry.
After a recent $450 million infusion from Japan’sSoftBank Group Corp. , Compass has a war chest of $1.2 billion. That pile of cash has enabled the firm to woo high-profile agents with hefty marketing budgets, slick technology and stock options as it dangles the prospect of an initial public offering.
The firm has lured top talent with some of the most generous commission splits in the business: Some agents received all the sales commission, with nothing going to Compass, on as many as eight of their first deals, according to offer letters.
Other perks include fronting sellers money for staging and cosmetic work, so agents don’t have to dip into their own pockets. It said it is rolling out a bridge loan program for sellers who need to move quickly, helping agents to secure more listings. It has built a tech team of around 300 engineers to support agents. And its software aims to eliminate busywork for agents, enabling them to handle more clients and make more sales.
Amy Bofman, a Compass agent in Boston, said she feels like she’s “a realtor at the Ritz.”
Industry executives say these are programs that many traditional firms can’t afford if they plan to break even. “It doesn’t make sense,” said Bess Freedman, chief executive of New York brokerage Brown Harris Stevens. “Are you a charity or are you a real estate company?”
The firm is one of a current group of startups that has relied on funding from venture capital to grow rapidly without much concern over profits and with an IPO as the end game.
“Short term profitability is something that many of the more modern companies are not as focused on,” Compass CEO Robert Reffkin said.
Clelia Warburg Peters, president of New York brokerage Warburg Realty, likened Compass to the online giant that changed the way people consume everything from books to movies and music.
“What Compass is trying to do is what Amazon has done in retail, making it unsustainable for the legacy companies to compete with them,” she said. “You can only do that if you expect your scale to get great enough that you have the momentum to outlive the disease you’ve unleashed on the industry.”
Yet unlike Amazon.com Inc.’s disruption of retail, Compass hasn’t fundamentally changed the way people buy and sell their homes. The firm still relies on the traditional agent system and the industry’s incentive pay structure. Compass’s basic model doesn’t look much different from old line firms like Coldwell Banker and Berkshire Hathaway HomeServices, which like the startup charge traditional commission rates in the 5% to 6% range.
Other firms have done more to try to change the business model. Seattle-based broker Redfin charges sellers a 1% to 1.5% commission and pays agents a salary. Online real estate agentPurplebricks has also offered bargain commission rates.
New York-based Compass has tried to shake up the industry’s business model in other ways, without much success. When the company launched in 2013, it said it would have “neighborhood specialists” that were paid on salary and it would do rentals, not sales. Compass changed gears a year later to a commission-based model and moved into sales.
Other projects have also stumbled. Last year, the company pulled the plug on a deal to license its technology to a Massachusetts brokerage, a move Mr. Reffkin said was prompted by backlash from his agents who didn’t want competitors having access to their technology. Compass’s efforts to sign up new luxury development projects have been largely unsuccessful. Moves to expand into commercial brokerage haven’t gotten off the ground.
In a companywide email in January, Mr. Reffkin acknowledged missteps with licensing the technology. “When you’re obsessed with opportunity, it’s easy to see it everywhere—and there are some opportunities that are better to wait on, or let pass entirely,” he wrote.
Mr. Reffkin said the company plans to make money through ancillary services like title, mortgage and insurance services, but it’s not clear how.
“We’re not yet at a stage where I have a very clear monetization strategy because we haven’t really talked about it,” said Chief Operating Officer Maëlle Gavet.
Yet Compass has succeeded in raising money from blue-chip names. Investors include Peter Thiel’s Founders Fund, Wellington Management and Fidelity Investments. Mr. Reffkin said the company still has the majority of the capital it has raised.
Compass said it is valued at $4.4 billion, towering over the market capitalization of established competitors like Realogy Holdings Corp., the largest U.S. brokerage and owner of Sotheby’s International Realty, Coldwell Banker and the Corcoran Group brands. Its market cap is about $1.4 billion.
Compass has expanded rapidly through acquisition, including venerable firms like Stribling & Associates in New York and Pacific Union in San Francisco. It now has more than 10,000 agents.
Jeff Barnett, a manager at Alain Pinel Realtors, a 1,300-agent company recently acquired by Compass in the Bay Area, saw the move as survival. “Our margins kept getting thinner and thinner,” he said.
Bigger firms are also feeling the pinch from a weaker housing market and the increasing power of listings aggregators who are driving up fees.
Realogy’s net profit sank by 68% in 2018 from a year earlier as it ramped up commission splits and battled a declining luxury market.
In some markets Realogy has offered agents a higher commission split but charges them a monthly fee, said John Micenko, a senior analyst at Susquehanna Financial Group.
“I definitely keep my eye on competitors who are doing more desperate things and are willing to lose money and don’t seem to have a path to make money,” said Ryan Schneider, Realogy CEO.
Venture capitalist Todd Chaffee of IVP, who has invested in Compass, said the industry left itself vulnerable to a new competitor.
“For the people in the real estate industry, it feels that Compass has an unfair advantage,” he said. “And that’s true.”