Can a strictly short-term profitability strategy win out in the end? That’s the question many in the industry are asking about Compass, and one that was recently posed in the Wall Street Journal’s article, “Compass’s Free-Spending Ways Capsize Real Estate Business.”
“Short-term profitability is something that many of the more modern companies are not as focused on,” Compass CEO Robert Reffkin told the WSJ. But is focusing primarily on the short-term game sustainable for business growth? There are concerns.
The most emphasized are the big-ticket items that Compass is taking on in the name of agent recruitment and retention. Sizeable commission splits and other perks, including funds for seller home staging, a hefty support team of engineers for its tech endeavors, a possible bridge loan program for sellers needing to speed up their move, and extensive transaction-related software—these are some of the costs Compass is fronting, the WSJ reports.
Typically, companies in the software field, focus on the long-term—something that brokerages have trouble with, says York Baur, CEO of MoxiWorks.
“In the software industry, it’s common to invest ahead of revenue. In other words, sacrifice short-term profitability for long-term profitability,” says Baur. “The reason this works in software is that gross margins in software are very good—typically 70-plus percent. That’s not the case with brokerages who typically have about 15 percent gross margins, which means they don’t scale very well financially—it takes forever for you to make your money back, if ever.”
So, how is Compass managing its generous offerings without tipping the boat? After several rounds of funding, the brokerage has amassed a treasure trove of $1.2 billion and has its sights set on a future IPO with preemptive stock offerings through its Agent Equity Program.
Insiders say this is merely the new evolution of real estate brokerages and a boon to agents.
“The brokerage model is changing rapidly. While most real estate technology companies want to weaken the real estate agent, Compass wants to empower them with technology tools that help us save time and ultimately make more money,” says Dana Green, CEO and owner of the Dana Green Real Estate Team at Compass. “I am proud to be part of a company that is building the future of the industry and am most grateful they have my bests interest at the forefront.”
Amy Bofman, a Compass agent quoted in the WSJ article, said she feels like she’s “a REALTOR® at the Ritz.”
Multiple sources believe, however, that these reserves could drain quickly, especially if Compass continues on its path of project investment and subsequent failure, as with its luxury development sign ups and a stalled expansion into the commercial space, as reported by the WSJ.
In contrast, a source familiar with the matter states, “New development at Compass has been largely successful. With more than 80 listings, there are only two companies with more new development listings than Compass in the country.”
Baur believes Compass’ situation is worse than the already-tight profit margins of the brokerages with more traditional spending habits.
“… their aggressive agent recruiting offers mean even worse gross margins—we estimate them to be 9 percent. Our further estimate is that they’re now spending at least $75 million annually on technology—that’s 100 percent of their gross profit,” says Baur. “Additionally, they are going deeper in the hole with all the rest of their operations: lavish offices, huge marketing budget, expensive and top-heavy management structure. It’s a house on fire, financially.”
For some agents and brokers, however, their move to Compass was prompted by their previous brokerage’s inability to maintain sustainable profit margins. This was the case for Jeff Barnett, a manager at Alain Pinel Realtors, a Bay Area, 1,300-agent brokerage that was recently acquired by Compass.
“Our margins kept getting thinner and thinner,” he told the WSJ.
Baur says Compass will need to leverage every penny raised, and more, in order to sustain the business unless the company tones down the spending—a feat he doesn’t believe is attainable.
“They won’t be able to do that because they’ve set such lofty expectations. Remember, money doesn’t buy loyalty and, therefore, retention—only more money does,” adds Baur.
Contacted by RISMedia, Compass declined to comment for this article.
This article was updated with additional commentary on April 22.
Liz Dominguez is RISMedia’s associate content editor. Email her your real estate news ideas at email@example.com.