Is Compass the next WeWork?

Noah Rosenblatt

Talking Manhattan on UrbanDigs.com
Staff member
lots of lawsuits prob will surface as compass nears ipo - just lots of money there. Hot market, hot sector, crazy year..wouldnt be surprised to see a great ipo but then a halving in the bust. ZG, RDFNB, EXPI stocks been ripping lately. Not sure how this all ends
 

David Goldsmith

All Powerful Moderator
Staff member
Compass accuses Realogy of lying, cheating and stealing

Compass said rival “flooded the market with false information”​


Eighteen months after being sued by Realogy, Compass is striking back, accusing its chief rival of unfair competition, defamation and flooding the market with false information.
In a new court filing, Compass said Realogy’s top executives conspired in a desperate campaign to impede its growth, which ultimately turned agents and homeowners into “collateral damage.”

“They have waged a war of disinformation by deliberately flooding the market with false information about Compass,” Compass said in a counterclaim to Realogy’s 2019 lawsuit. “And they have promoted anti-competitive and retributive conduct to impede the free movement of agents and employees.”

The two brokerages have been in legal tussles since 2015, but the biggest blow came in 2019, when Realogy hit Compass with a wide-ranging lawsuit alleging illicit business practices, “predatory” poaching and price-fixing.
At the time, Compass refuted the allegations and accused its competitor of using the courts to stifle competition. Compass later tried to compel arbitration on the grounds that it is a member of the Real Estate Board of New York, along with Realogy’s Corcoran Group brand. After a judge denied the motion, Compass said it intends to appeal the decision.

In its counterclaim, Compass took a similar approach, arguing that Realogy’s strategy has been “complacency in the face of innovation.” Unable to compete, Relaogy has “sought to stop the bleeding by any means necessary—including lying, stealing and cheating,” the filing said.

With a market cap of $1.78 billion, Realogy’s stock has struggled in recent years. But the brokerage giant reported a record $1.9 billion in revenues during last year’s third quarter, up 20 percent year over year. It reported $145 million profits during the period.
Compass’ counterclaim accuses Ryan Gorman, president and CEO of Realogy Brokerage Group and Coldwell Banker Real Estate, of sending a “baseless email” to contacts in the real estate press, questioning Compass’ integrity and compliance with the law. It said “numerous” other Realogy brokerages have also tried to damage Compass’ reputation by spreading false claims about the compensation and support that Compass gives agents.

In a statement, Realogy denied Compass’ accusation and cited its rival’s “losing battle to hide Realogy’s claims away in arbitration.”
“Compass has now come up with fictional and meritless counterclaims to further camouflage its unlawful behavior,” it said. “We are pleased that the Court has allowed the case to proceed so that we can prove our claims, including this latest attempt to manufacture disinformation about the integrity of our company and our executives.”

As of last year, Compass had 18,000 agents and was the No. 3 brokerage in the country with $91.3 billion in 2019 sales, according to research firm Real Trends. (Realogy was No. 1 with $170.1 billion in sales.) Valued at $6.4 billion after a 2019 funding round, Compass filed confidentiality to go public earlier this month.
But since launching in 2012, Compass has roiled the industry by aggressively recruiting top agents and acquiring smaller firms. (Last week, REBNY fined Compass $250,000 for improperly going after its competitors’ exclusive listings.)

In its counterclaim, however, Compass said Realogy was to blame for “persistent intimidation” and “harassment” of agents who leave to join Compass. And it accused Realogy of refusing to release exclusive listings when an agent departs.
In one case, when a top-producing agent in Malibu left Coldwell Banker for Compass, Coldwell Banker’s regional president Jamie Duran sent a letter “maligning the departed agent,” the suit said. Duran urged Coldwell Banker agents to share the letter with the former agent’s clients. The complaint also cited examples of a Realogy employee threatening to “destroy” a former colleague’s office or make Compass “pay.”

In its counterclaim, Compass said Realogy’s focus on Compass “has bordered on obsession,” yet it hasn’t lifted its “sagging fortunes or reversed the exodus of its most successful employees and agents.”
 

David Goldsmith

All Powerful Moderator
Staff member

Compass to acquire Bold New York​

120-agent firm reps new development rentals including American Copper, 20 Broad​


Compass is acquiring Bold New York, a 10-year-old brokerage with a robust portfolio of rental developments, The Real Deal has learned.
The deal, announced by Bold at a town hall meeting Tuesday, will boost the venture-backed firm’s new development marketing division. Bold CEO Jordan Sachs could not immediately be reached for comment.

With 120 agents, Bold punches above its weight with exclusives that include Metro Loft Management’s 20 Broad (533 units) and JDS Development Group’s American Copper (671 units). It is also marketing Greystar’s Hollingsworth, a 380-unit building on West 37th Street, and Slate Property Group’s 118-unit rental at 222 Johnson Avenue in Williamsburg.

Founded in 2012, Compass has become one of the biggest firms in New York City, with more than 2,100 agents. Nationally, the 18,000-agent firm closed $91.4 billion in 2019 sales, according to Real Trends.

Compass did not immediately return a request for comment.
Despite the strength of the U.S. housing market, New York has seen declining rents, record concessions and high vacancy. In January, Manhattan’s median rent dropped 16.6 percent year-over-year to $3,000, according to data from Miller Samuel. In Brooklyn, the 13.8 percent year-over-year drop to $2,472 was the largest decline since 2008.

Rental brokers have also been squeezed by policy changes over the past couple of years, including New York’s overhaul of rent stabilization and last year’s ban on tenant-paid broker fees.
Many agents have also been frustrated by daily fees to post rental listings on StreetEasy.
Since 2018, Compass has aggressively ramped up growth by acquiring firms around the country. In New York it struck a deal in 2019 to buy Stribling & Associates, one of the city’s last independent firms with 270 agents.

The brokerage industry has been consolidating over the past year. In January 2020 the Corcoran Group officially merged with sister company Citi Habitats. In June, Brown Harris Stevens merged with its sister company Halstead.
Amid the pandemic, Compass has continued to add agents and make acquisitions, most recently striking a deal to buy title startup Modus.

In January, Compass filed confidentially to go public. The SoftBank-backed firm, which has raised $1.5 billion from investors, was last valued at $6.4 billion after a July 2019 funding round.
 

David Goldsmith

All Powerful Moderator
Staff member

When Compass comes clawing: How the firm’s contracts lock agents in​

The brokerage claims to empower agents above all else. The clawbacks in its contracts tell a different story.​


The nightmare began a year ago.
After rebuffing Compass for several years, a New York agent finally gave into temptation.
“They sold the dream,” said the agent, who spoke on the condition of anonymity and said they were offered a lavish bonus and generous perks. But one year into a three-year contract, the agent, frustrated by what they saw as lack of support from the firm, wanted out.
But it won’t be easy to leave. As far as the agent can tell, if they left, they’d be on the hook to Compass for $400,000.
It’s a startling figure. Yet the agent’s predicament is common in brokerage, where for decades companies have used clawbacks — a contractual provision to recoup already-paid financial incentives from departing agents. But given Compass’ extraordinary growth story, with the firm’s huge recruitment push and industry-leading sweeteners, the problem is particularly pronounced.
More than 20 current and former Compass agents, most speaking on the condition of anonymity for fear of retribution or due to nondisclosure agreements, told The Real Deal they’ve agonized over the financial consequences of leaving. Some agents recounted becoming emotionally and physically distressed when they saw what they would owe. Some wrote the biggest checks of their lives or relinquished thousands of dollars in earned commissions in order to leave the brokerage. One agent said they broke down crying; another vomited.
“Some people feel tied in, and some of them are,” said Mike Golden, co-founder of @properties, a leading Chicago-based brokerage planning to franchise its brand nationally.
The New York agent who owes $400,000 accepts the blame for failing to scrutinize the agreement but said their prospects for repayment are bleak.
Many of the middle-of-the-road producers who joined Compass over the last few years now face repaying these five- and six-figure sums on their own. Though many brokerages compensate agents for lost commissions when they switch firms, the practice is typically reserved for top producers.
“I’m a good agent, but I’m not making $5 million gross commission income,” the agent said. “I’m not Fredrik Eklund here.”
The experiences indicate a troubling pattern to labor experts. The large sums of money agents are on the hook for and the duration of the clawback policy are “incredibly punitive,” said Alexandrea Ravenelle, a sociologist who wrote a book about workplace rights in the gig economy.
“The numbers that Compass is working with here feel, quite frankly, like it’s meant to lock people in,” she said. “I’ve heard of golden handcuffs, but this kind of brings a brand new meaning to it.”
Compass rejected the claim that it locks in agents and said its policies are in line with industry standards.
But the agent accounts run counter to the story the firm tells about itself: that it’s changing the brokerage business and has the best retention rate in the industry because it empowers agents above all else. In a 2018 appearance on CNBC, CEO Robert Reffkin claimed Compass retained 98 percent of agents. “Our only customer is the agent,” he said. “If people weren’t happy, weren’t getting the support and tools they need, then they would leave.”

Losing agents is not an option for Compass right now. The fast-growing firm — which has become the third-largest brokerage in the U.S. by deal volume in less than a decade since launch — is on the cusp of a public offering. In order to be valued as a technology company as opposed to a traditional brokerage, Compass will have to demonstrate explosive growth, which a large headcount helps ensure.
“Agents — and not technology — sell houses. The entire business and investment thesis is based on forward momentum and rapid growth,” said Mike DelPrete, an industry analyst who has studied Compass’ model and argued that agents drive revenue and, ultimately, valuation. “Compass can’t afford to slow down.”

Caught in a contract

One agent in Texas paid nearly $70,000 to leave Compass — half of what they earned in a year.
The agent admitted to being so enthralled by the firm’s offer that they signed the contract without consulting a lawyer. It was only when the agent gave notice that they learned the one-year contract had a three-year clawback that applied to all marketing, administrative and office expenses. In other words, the agent may have signed a contract effective for 12 months, but the agreement stipulated the agent must repay any incentives within three years of receiving the benefits if they leave.
“They told me, if you decide to just stay … all of this will go away,” said the agent. “They knew they had done me wrong … and they were still holding that piece of paper over [my] head.”
Independent contractor agreements vary widely by firm and region, and most residential firms roll back commission splits on pending deals. (For example, a departing agent would receive a 40 percent split instead of, say, 70 percent.) Many firms also seek to recover incentives, including bonuses, marketing dollars and assistant pay. In 2019, the Corcoran Group began recouping a portion of agent commissions. Specifically, for agents receiving a higher split than the company standard, Corcoran asked them to repay the difference for the 18 months prior to their departure. Douglas Elliman claws back incentives paid within 12 months of the agent’s departure. Sometimes firms prorate the amount agents owe when they depart.
Compass’ 12-month contracts claw back the entire amount if the agent leaves within two or, sometimes, three years of receiving the incentives, according to interviews with agents and multiple contracts reviewed by TRD.
“If I sign a one-year contract, I assume it’s a one-year contract,” said @properties’ Golden. “You’re an independent contractor, but you can’t really leave.”
In a statement, Compass said its “contracts are in line with industry standards and are reflective of market norms in use at other brokerages.”
While Compass recruits agents with “above-market fee splits” for year one, it strategically renegotiates at a lower rate, according to a blog post by Alumni Ventures Group, an investor in Compass.
Compass-chart-revised.jpg

Agents must then choose: Stay and accept the lower split, or leave and pay back the sweeteners.
Ultimately, the onus is on the agent to read the contract, said a number of lawyers, brokerage executives and agents.
“It’s a business deal,” said Eddie Shapiro, CEO of Nest Seekers International, who added that Compass has the right to collect money it is owed.
Ravenelle, the sociologist, called the discrepancy between the contract’s term (12 months in many cases) and the length of time when Compass can demand repayment upon disassociation (up to three years) particularly troubling. “That feels like they’re trying to pull the wool over somebody’s eyes,” she said.
Not all who joined Compass were caught off guard. One New York agent said they were fully aware of the terms of the deal and knows they’ll have to repay their signing bonus, which was put toward marketing. “It is an investment,” he said. A number of other agents said they, too, studied their contracts. Many timed their exits to avoid a “disassociation repayment,” Compass’ term for how much agents owe if they depart.
After about a year at Compass, New York-based broker Chester Yow knew he wanted to leave. But to avoid being billed for incentives under his contract, he knew he had to wait until at least March 2020, when his two-year clawback period ended. He described the awkwardness of his interests being at odds with those of his clients and team members.
“You don’t know if you should pull back on your business, [or from] executing new deals that would tie you up even more,” he said. “[But] I can’t control if my clients decide to move ahead.”
Jim Ziltz, an agent in Chicago, returned to Berkshire Hathaway in March 2020 after eight months at Compass. Ziltz, who said he didn’t feel like he was getting the support he was promised, declined to disclose terms of his agreements with Compass and Berkshire.
“What I will say,” he said, “is that any cost that I incurred [for moving to Berkshire] was worth it as an investment in my business and the best interest of my clients.”

Crusader to enforcer

As Compass raised more venture capital, its relationship with its agents evolved.
In 2015, Reffkin — a Goldman Sachs alum who co-founded Compass with Ori Allon — railed against the standard agent-broker relationships. In a blog post, he vowed to reform “unfair” contractual terms that ensnared hardworking agents — his own mother included — by preventing them from switching firms. That year, Compass inserted a key-person clause in its exclusive listing agreements, allowing agents to take listings if they left the firm. That ran counter to the industry standard, in which listings belong to the firm and it’s up to the firm to release exclusives when an agent leaves.
In late 2017, SoftBank invested $450 million, bringing a growth-obsessed mentality to Compass. The brokerage compressed its three-year growth plan into one, Reffkin told Wired magazine in 2018. It stepped up recruiting and began scooping up firms wholesale. Most recently, in February, it acquired Bold New York, a 120-agent firm which specializes in new development rentals.
As Compass got more money from investors, it was able to lure agents with more generous incentives. In recent years, Compass appears to have linked the duration of clawback provisions to the size of incentives.

In one case, an agent who signed a one-year contract with a two-year clawback received a $28,500 marketing budget, $30,000 bonus and stock options. In another, an agent with a one-year deal and three-year clawback got a bonus of just over $90,000, plus a production bonus, assistant pay, limited-time split increases and a six-figure payment to cover lost commissions from their prior firm.
Other firms have also made lucrative offers to compete for agents. Coldwell Banker offered at least one agent a $200,000 cash incentive that required the agent to stay for five years or else repay it on a prorated annual basis, according to a contract reviewed by TRD.
But industry insiders say Compass’ aggressive recruiting tactics created a culture across the brokerage world in which agents shop for the highest split and biggest bonus for short-term gain. As Compass ramped up recruiting in recent years, some competitors have tightened their own clawbacks to protect themselves from losing agents.
Steve Murray, co-founder of Real Trends, said offering agents cash bonuses and other incentives is “pretty standard” fare. “But the amount of money and the speed with which Compass deployed it, I have not seen that before,” he noted.
Murray said he doesn’t necessarily see clawbacks as harmful to the industry: “It’s not an absolute bar for an agent to go to another brokerage,” he said.
Several agents who didn’t pay up before leaving Compass said they later got bills. Some bills came from Compass’ corporate headquarters in Manhattan. Others came from local law firms or collection agencies.
J. Maggio, a Chicago-based agent, said he got a bill for $20,000 nearly a year after he left Compass for @properties. He dismissed the move as a “scare tactic.”
In a lawsuit filed in January, former agent J. Gregory Maffei accused Compass of billing agents in order “to intimidate, bully, harass and annoy” them.
Len Sherman, who teaches innovation and entrepreneurship at Columbia Business School, said “sweetheart” incentive packages are often clawed back in one way or another, particularly among SoftBank-backed companies he’s studied, including DoorDash and Uber.
“I suspect agents didn’t read the fine print of their contractor agreements closely enough,” he said in an email.
However, labor experts said the fact that the industry has accepted these terms, and the contracts are legally binding, doesn’t justify the practice.
“Saying it’s a norm doesn’t mean that it’s OK,” said Erin Hatton, a sociology professor at University at Buffalo. “This is [an example of] employers coercing workers and leveraging economic power over them in a really big and fundamental way.”
Lawrence Pearson, an employment attorney at Wigdor LLP, said that the contracts brokerages make agents sign would not be allowed under New York’s labor law if agents were full-time employees. But since agents are independent contractors, “it’s more the Wild West, and [companies] can structure things the way that you want,” Pearson said.
Ravenelle said nothing good happens for a company when workers feel trapped.
“You damage your relationships with workers, you damage your relationships with customers, you damage your reputation,” she said. “And, quite frankly, how do you sleep at night?”

IPO at the end of the tunnel

For years, Compass has rallied agents behind the idea that they would benefit from a public offering.
Starting in 2018, it allowed agents who enrolled in an “agent equity program” to convert commission payments into company equity. Between 2018 and 2019, 4,200 agents participated, pouring $70 million into stock options. The firm declined to release updated figures for 2020.
Under the terms of the 2021 agent equity program, Compass is matching 10 percent of the agent’s investment, according to an internal memo.
The program requires agents to re-enroll each calendar year, and those who leave the firm before the end of the year lose any commissions invested that year.
“Just don’t leave!!! They will keep your money!!!” a former Compass agent wrote on Instagram in December. “We had 10% of OUR commission going to the equity program and when we left they said we ‘forfeited it.’”
The promise of stock was particularly resonant with agents in San Francisco, who are accustomed to dealing with tech entrepreneurs. “Those agents are definitely like, ‘OK, I’ll hold out for that payout,’” said the head of a rival firm in California. “There’s that carrot on the end of the stick: ‘I might be able to get stock shares worth $300 a share, and I’m in it for $150.’”
Given that Compass is the first major brokerage to formally offer up equity — rather than reserve stock awards for top producers — most agents are not familiar with the ins and outs of such deals.
“There’s nothing deceitful about them, but they are there to say if you get recruited away tomorrow, you’re not going to get your stock and you’re going to owe us a lot of money,” said the head of another California brokerage. “That’s a Wall Street move.”
Guy Gal, co-founder and CEO of Side, a white-label brokerage, called the agent equity program problematic.
“A good business wins on the value it creates, not the gimmicks and tricks,” he said.
Some agents who participated in the equity program said they did so enthusiastically. It was only when they decided to leave that their views changed.
“I believed in the company, and I totally drank the Kool-Aid,” said a former Compass agent in New York. The agent said they were so proud to be at Compass that they invested 5 percent of all of their commission payments into the agent equity program, totaling nearly $6,000 over two years. The agent said they didn’t realize they’d be leaving money on the table when they quit.
A team in California walked away from $45,000 in stock options when their contract was up for renewal and Compass indicated it planned to lower their split.
“It was a red or blue pill,” one team member said. “Which one [was] going to be less harmful?”

Winner takes all

Compass’ looming IPO means agent retention has become even more of a priority.
One key litmus test is coming up in California. Over an eight-month period in 2018 and 2019, Compass acquired Pacific Union International, Paragon and Alain Pinel Realtors — three top firms with 3,200 agents combined. Many of those agents’ contracts are set to expire in the next year.
“One of the things they’re going to try to convince the market is that they’ve had virtually no departures — and that will always be the case,” said Clelia Peters, president of Warburg Realty and a venture partner at Bain Capital Ventures. “It’s essential that they convince the market to justify what they’re trying to do.”
The clawbacks could alienate talented agents, particularly at a time when Compass needs to scale.
“This can work really well [for the firm] if 90 percent of the market [share] goes to Compass and that’s the only option you have,” said Gad Allon, a professor at the Wharton School who studies competition. “That’s very far from the case.”
For some agents, staying with Compass is the only reasonable option right now.
The New York agent who is on the hook for $400,000 said the prospect of such a large bill is too daunting and offered the experience as a cautionary tale.
“They know what they’re doing. It’s very calculating,” the agent said. “In hindsight, I wish I never got involved.”
 

David Goldsmith

All Powerful Moderator
Staff member

Compass acquires DC-area title firm​

KVS Title has 90 employees who’ve notched 70K settlements​

Compass is taking title.
Ahead of its much-anticipated IPO, the residential firm has inked a deal to buy KVS Title, a title insurance and settlement services firm in Washington, D.C., the company said Thursday. Terms of the deal were not disclosed.
The acquisition brings Compass closer to its goal of providing an “end-to-end” platform for real estate, and it could help drive profits for the VC-backed firm. In a statement, CEO Robert Reffkin said the KVS deal, as well as Compass’ integration of title services, would help agents “grow their businesses and better serve their clients.”
Founded in 2010, KVS Title has 90 employees across six offices in the Washington, D.C. metro area. Its attorneys have completed 70,000 settlements, and it serves clients in California, Florida, Washington state, Maryland, Virginia and Washington, D.C., according to its website.

Compass is the third-largest brokerage based on sales volume, having sold $91.3 billion worth of real estate in 2019, according to data firm Real Trends. It currently has 18,000 agents nationwide.
In January, Compass filed confidential plans to go public. It was last valued at $6.4 billion, after a July 2019 funding round.

Thanks to the U.S. housing market’s hot year, Compass reported record revenue from June to October 2020, according to news reports, but it’s not yet profitable on a companywide basis.
Many big brokerages offer mortgage, title and escrow as an ancillary service that helps drive additional revenue to the company.

Realogy Title Group, for example, generated $226 million of the real estate giant’s $726 million in operating EBITDA in 2020, according to the company’s financials. Warren Buffett’s HomeServices of America has a title and escrow network. Keller Williams has an affiliated company, Keller Mortgage.
In recent months, Compass has been on a buying spree: Earlier this month, it scooped up Bold New York, a 120-agent firm that focuses on new development leasing. In January, it acquired Lila Delman Real Estate, a Newport, Rhode Island-based firm focused on the luxury market.

Outside of those brokerage acquisitions, Compass struck a deal in October to buy Modus, a Seattle-based title and escrow software startup that previously raised $12.5 million. And before that, it acquired Contactually, a popular customer relationship manager, as well as the team behind Delectica, an artificial and machine learning company.
 

David Goldsmith

All Powerful Moderator
Staff member

How much Compass paid to scale up​

Residential brokerage spent $300M on acquisitions since 2018​

Since 2018, Compass has spent more than $300 million to scale its business, buying other brokerages and tech companies to support its “end-to-end platform,” according to the company’s IPO filing.
Backed by $1.5 billion in venture capital from investors including Fidelity, Wellington and SoftBank, Compass’ growth story has been unmatched in residential real estate. The brokerage aggressively courted agents after launching in 2012, but six years later, it switched gears and began scooping up firms wholesale.

Generally speaking, Compass’ acquisition strategy is to buy brokerages in markets that are top priorities for recruitment. Recent purchases of technology companies indicate Compass is not above buying a ready-made platform instead of building it in-house.

The S-1 doesn’t disclose the purchase price for all of Compass’ transactions, but it highlights some of the biggest, including two key deals that helped cement its dominance in San Francisco.
Here’s a look at what Compass has paid to scale up since 2018.

Paragon Real Estate | 2018 | $18.9 million​

Compass’ foray into the San Francisco market started with its $15.8 million purchase of Paragon, which had 225 agents and $2.3 billion in annual sales. The deal also had a $5.9 million contingent consideration, based on profitability targets and payable over four years. Compass has paid $3.1 million so far, for a total of $18.9 million.

Pacific Union International | 2018 | $83.3 million​

Compass paid $64.5 million in cash and $3.7 million in stock as part of a blockbuster deal to buy Pacific Union, a 1,700-agent firm with $14 billion in annual sales. The 2018 deal also included a $24.4 million contingent consideration, based on profitability targets and payable over three years. So far, Compass has paid $15.1 million of that amount for a total of $83.3 million.

Platinum, Conlon, Avenue Properties et al. | 2018 | $20.5 million​

Compass spent another $20.5 million on a brokerage acquisition spree in 2018. In addition to Paragon and Pacific Union, it bought Platinum Drive Realty (a 100-agent firm in New York), Conlon Real Estate (with 200 agents in Chicago) and Avenue Properties (with 110 agents in Seattle).

Contactually | 2019 | $26.1 million​

In February 2019, Compass acquired Contactually, a 32-person firm that creates customer relationship management software for the real estate industry. Compass paid $24.5 million in cash at closing and another $1.6 million was earmarked for the “elimination of pre-existing relationships.” At the time of purchase, Contactually and Compass said existing customers would be able to continue using the CRM, though several competitors balked at the idea.

Stribling, Alain Pinel, Delectica et al. | 2019 | $22 million​

When Compass bought Stribling & Associates in 2019, it marked a shift in New York City’s residential industry. Stribling was one of the last major independent firms, and provided Compass with a major boost in sales, with 270 agents and $1.62 billion in sell-side deals in 2018. Also in 2019, Compass purchased San Francisco-based Alain Pinel and Delectica, a New York City-based AI firm.

None of the deals got their own line items, but they cost Compass $14.6 million in cash, plus contingent considerations of up to $13.1 million to be paid out over six years based on profitability targets. Compass has paid $7.4 million so far.

Modus Technologies | 2020 | $70 million​

In October 2020, Compass struck a deal to buy title and escrow startup Modus for $50 million in cash and $20 million in stock, payable over three years and based on transaction-based targets. So far, it’s paid $20 million.

Lila Delman Real Estate | 2021 | $6 million+​

Compass kicked off 2021 by shelling out $6 million in cash for Lila Delman Real Estate, a luxury firm in Rhode Island. The firm, founded in 1964, has 120 agents across six offices. It’s done $6 billion in sales in the past 25 years. The deal includes another $3.7 million “upon meeting certain requirements,” the filing said.

Bold New York | 2021 | $2 million+​

Just ahead of its IPO, Compass scooped up Bold for $2 million. The firm, which has 120 agents, focuses on new rental developments in New York City. The deal includes up to $2 million more in cash for hitting certain business targets.

KVS Title | 2021 | $52.2 million+​

Compass upped its bet on ancillary services, shelling out $52.2 million for KVS Title last month. The Washington, D.C.-based firm has 90 employees. The deal includes an additional $26.4 million in cash “in connection with certain contingencies and compensation related arrangements.”
 

Noah Rosenblatt

Talking Manhattan on UrbanDigs.com
Staff member
Super interesting. Thoughts on their IPO price?Cant seem to find the expected range, but I say it opens 2x over ipo price if they pull off the ipo before the stock bust
 

David Goldsmith

All Powerful Moderator
Staff member

Inside Compass’ S-1: How it measures the upside of its tech​

Prospectus details where firm spends and makes the most money​

Compass’ pitch to investors is all about its agents.
The company’s S-1 — a prospectus that details its financial performance and business strategy filed ahead of an IPO — kicks off with a founder’s letter from CEO Robert Reffkin, who said he started Compass to build better tools for real estate agents like his mom.

“The brokerage model was originally designed to be a one-stop shop for everything an agent needed,” he wrote. But the business hasn’t progressed past the pre-internet era, something Compass is trying to change.
“We are replacing today’s complex, paper-driven home-buying and selling process with an all-digital, end-to-end platform that empowers real estate agents,” Reffkin wrote.
Although Compass has touted its technology as a key differentiator from other residential brokerages, the prospectus describes the agent as remaining central to buying and selling real estate.

“Despite various ‘agentless’ models such as iBuying and for-sale-by-owner, nearly 90 percent of sellers and buyers in the U.S. work with real estate agents,” Reffkin wrote. Last year, more than 5.6 million homes were sold in the U.S., representing $1.9 trillion in value. “We believe that real estate agents are an underserved group of business owners,” he said.

Sticking with the empowerment theme, Reffkin said Compass aims to provide its agents with tools to serve clients and grow their businesses. “At Compass, we are agent-obsessed,” he wrote. “When agents succeed, Compass succeeds.”
The filing also shows where Compass believes it can make its profits, much of which it accredits to its software platform.
Here are six key financial takeaways from the prospectus.

Ramping up revenue​

Compass’ revenue more than doubled between 2018 and 2019, as the firm broke into new markets and expanded through acquisitions of other brokerages. The firm generated $884.7 million in 2018 and $2.4 billion in 2019. Bolstered by the hot U.S. housing market in 2020, Compass’ revenue hit $3.7 billion in 2020, up 56 percent year-over-year.

Deals, deals, deals​

Compass' gross transaction value

Compass’ gross transaction value
Compass’ sales volume jumped 55 percent last year to $151.7 billion, up from $97.5 billion in 2019. (In 2018, sales volume was $33.7 billion.) The number of transactions rose 66 percent between 2019 and 2020 to 144,784.

How many agents?​

Of its 19,385 agents, Compass considered about 9,368 “principal agents” — meaning they are team leaders or work independently — as of Dec. 31, 2020. Compass said it has retained 90 percent of principal agents over the last three years; 30 percent of them are enrolled in “Compass Anywhere,” meaning they’re fully mobile and don’t have a designated desk.

The bottom line: 88 percent of agents use the Compass platform at least once a week and 66 percent use it daily.

Internal measures​

Compass’ S-1 also disclosed an internal metric called “net platform contribution retention,” which measures its platform’s ability to make the company money year-over-year. “Platform contribution” is defined as revenue after expenses — in other words, how much money Compass keeps after paying agent commissions. The contribution grows as a result of increased commission dollars, “enhanced economics” with agents, and when agents and clients pay for additional services like title and escrow.

The Compass Platform

The Compass Platform
Per the filing, Compass’ “net platform contribution retention” was 105 percent in both 2018 and 2019. It jumped to 118 percent in 2020, due to agents who joined in 2018 and were counted for the first time. (A key caveat is the calculation includes only principal agents who have been using its platform for at least five quarters.)

About the losses​

In the S-1, Compass disclosed $1.1 billion in cumulative losses as of Dec. 31, 2020. But on an annual basis, the losses narrowed last year. Compass lost $223.8 million in 2018, $388 million in 2019 and $270.2 million in 2020. It cut at least $10.3 million in costs due to the Covid-19 pandemic, including slashing 15 percent of its staff.

Where’s the spend?​

Sales and marketing was the big-ticket item in 2020, accounting for $407.9 million worth of expenses, up from $382.8 million in 2019 and $174.3 million in 2018. That bucket includes advertising, employee compensation, agent acquisition incentives and costs associated with programs like Compass Concierge, where the brokerage fronts sellers money for home repairs. Its R&D spend in 2020 was $146.3 million, up from $56.7 million in 2018. Its lease costs were $110.2 million last year.
 

David Goldsmith

All Powerful Moderator
Staff member
There have been rumours that due to some disappointing IPOs Compass would go the SPAC route. But now some are proclaiming SPACs demise.
 
Like WeWork, Compass is backed by billions in VC money and claims to be a "tech company" rather than a Real Estate firm. But also like WeWork, there doesn't really seem to be any revolutionary tech involved, and they seem to just be throwing tons of money at acquiring market share. In addition, a lot of what are being bought as "assets" are somewhat ethereal - you buy a Real Estate Brokerage with X number of agents, but none of them have binding contracts or non-compete agreements so you could lose them at any time.

Historically when the market goes down and agent's income decrease, the first place they seem to blame isn't the market or themselves, but the firm they work for, and as a result a lot jump ship. You also see a lot leave the business altogether in favor of more mainstream jobs where they are not independent contractors and receive benefits, don't pay double FICA, etc.

Now they seem to be losing the executive talent they recruited as wunderkind and scrambling to get new talent in new positions while not filling the vacated job slots



If the entire market sees a huge drop in transaction volume (which is looking more likely every day under this Coronavirus/Credit Crisis/Global Recession/Stock Market meltdown) can a firm seems to be following in WeWork's footsteps survive?
I so agree, where is the technology. As far as I can see they have only bought agents, some of who I know have regretted signing that two year agreement.
 

David Goldsmith

All Powerful Moderator
Staff member

Compass slams REBNY with antitrust suit​

Brokerage alleges trade group conspired with Elliman and Corcoran to “thwart” its business​

The Real Estate Board of New York represents the interests of the city’s many residential brokerages. Compass says it’s not one of them.
The brokerage alleges in a new lawsuit that REBNY has conspired with Douglas Elliman and the Corcoran Group to “thwart” its business in New York City. The complaint was filed in federal court for the Southern District of New York Friday afternoon. (Elliman and Corcoran are not defendants in the case, but are cited throughout.)

Compass said it was bringing the suit to “halt REBNY and its co-conspirators’ anticompetitive scheme, release from their market dominance, and reinvigorate the competitive process.”
At the core of the tension is the universal co-brokerage agreement (UCBA), which dictates how agents share listings. Compass alleges the UCBA and the REBNY committees tasked with enforcing it are being weaponized by Corcoran and Elliman to stymie Compass’ growth in a bid to keep the legacy brokerages and the trade organization on top.

Meanwhile, REBNY — and Compass’ competitors — have claimed that the firm has repeatedly violated the agreement. In January, REBNY fined Compass $250,000, citing “repeated violations” of the agreement for improperly pursuing competitors’ exclusives. Compass managers were also required to undergo further training to learn about the agreement and REBNY’s code of ethics.

The complaint focuses on part of the agreement that governs communications between agents and their sellers if they move to a new firm. Specifically, agents are barred from further contact with their clients if they leave the firm where the exclusive listing agreement was signed.

Compass claims this provision is enforced in a “discriminatory manner” against it, and claims this “directly limits” its recruitment efforts and ability to grow its market share in New York City.
The firm singled out Howard Lorber, Elliman’s executive chairman, as being particularly “instrumental” in getting the provision adopted.

While Compass has been in legal spats with competitors on and off since launching in 2013, its suit against REBNY is a direct rebuke of the industry’s main trade group at a particularly sensitive time for the IPO-bound brokerage.
“Compass’ lawsuit is surprising, disappointing and misplaced,” REBNY president James Whelan said in a statement. “Compass’ point of contention is with New York State law. Instead, Compass takes issue with REBNY co-brokering rules which are based on current State law and which Compass has helped shape and enforce.”

REBNY hasn’t been sued by a member since 2004.
Compass agents and executives sit on several of REBNY’s residential committees, which oversee policies including the universal co-brokerage agreement. REBNY’s residential members must follow the agreement to access its syndicated listing feed, the Residential Listing Service.

Three Compass employees are part of the REBNY committee dedicated to the regulating and enforcing the agreement: Valentina Shenderovich, Compass’ associate general counsel; Emily Whitney, senior legal counsel for the firm; and Rory Golod, Compass’ regional president of the Tri-State area, who has been on the committee for at least two years, according to a source familiar with the matter.

In its complaint, Compass argues that Elliman and Corcoran have “disproportionate” representation on REBNY boards that allows them to “control any policy or rule changes.”
Representatives for Compass and Elliman declined to comment. A spokesperson for Corcoran called Compass’ claims “fiction,” and pointed to Compass’ continued efforts to force its parent company’s lawsuit against it into arbitration at REBNY. “Yet, Compass now claims Corcoran is supposedly conspiring with REBNY,” the representative said.

(Corcoran’s parent, Realogy, sued Compass in July 2019, alleging that Compass engaged in “illicit” business practices and “predatory” poaching. Compass filed a countersuit this January, accusing the company and its subsidiaries of unfair competition and defamation.)
Tensions over listings between the firms, and REBNY’s involvement, are longstanding. It was previously reported that REBNY fined Compass $1,000 in 2018, but the complaint disclosed the total fines REBNY levied against the firm for UCBA violations that year was $34,000. Beyond the charges, competing firms have been urging the trade organization to take further action against Compass for years.

In a heated 2018 meeting, REBNY president John Banks and brokerage heads discussed Compass’ alleged practice of giving its new recruits a form to share with clients to urge them to transfer the listing to their new firm. (In New York, when a client decides to sell their home, they sign an exclusive listing agreement with the brokerage, not the agent. When an agent switches firms, bringing their exclusive listings with them often becomes a point of negotiation.)

The meeting, which was attended by Douglas Elliman’s Howard Lorber and Halstead’s Diane Ramirez among others, was the second meeting among REBNY leadership and brokerage heads regarding the issue in a matter of months.
At the time, Ramirez said REBNY’s residential brokerage board of directors was taking action by introducing changes to the UCBA to include more specific rules and penalties in order to ensure greater compliance.

In the complaint, Compass says it was barred from participating in the process: Golod was allegedly turned away from a 2019 meeting in which revisions to the UCBA were to be discussed. (Golod was trying to attend in the place of Compass’ designated representative, who was unable to attend due to personal reasons, according to the complaint.)

The new measures, which penalize inaccurate data and bad business behavior, were adopted in early 2019. In the complaint, Compass argued the revisions were made to prevent property owners from choosing to continue working with their agent at their new firm, and in doing so hamper Compass recruitment efforts and stifle competition.

Compass also alleged that Corcoran and Elliman frustrated its attempts to recruit specific agents by refusing to release former agents’ listings even when Compass offered to pay “exceptionally generous offers,” but would “routinely” release listings when agents moved to a firm other than Compass.
Compass is seeking damages for lost business, defined in terms of recruitment and sales. The brokerage disclosed $270 million in losses last year and a 56 increase in revenue in its IPO prospectus.
 

David Goldsmith

All Powerful Moderator
Staff member

Compass hit with another lawsuit from former agents​

Complaint accuses brokerage of fraud, misleading agents​

Compass is once again facing allegations of fraud by former employees.
A lawsuit filed by two agents in Northern California alleges that Compass defrauded them out of millions of dollars in sales and commissions, HousingWire reported. The suit also claims that the New York-based brokerage reneged on its promises to give agents shares in the company. The plaintiffs are seeking class-action status for their suit.

The complaint was filed by Lisa and Todd Sheppard, a sales team from Sonoma County. The couple alleges that Compass persuaded them to join in 2018 by offering a signing bonus, marketing budget and office space. But the lawsuit claims that instead, the brokerage deducted expenses from their commission on each sale.
Compass also allegedly deducted from the couple’s commission if the team made less than the standard 5 percent rate for each home sale. That rate is usually split 50/50 between the buyers’ and sellers’ agents.
The Sheppards further allege that Compass misled them on the terms of the stock shares. They allege they received an “inferior level of stock” as opposed to the company’s shares of common stock.

It’s the latest lawsuit filed against Compass, the tech-focused brokerage that went public last month.
In January, former Compass agent J. Gregory Maffei filed a suit in California alleging Compass used “unfair, unlawful and fraudulent business practices” designed to gain market share.
Compass has allowed agents to invest commission payments into company stock. But Maffei alleged the model is nothing more than an “unlawful Ponzi scheme or a get-rich-quick scheme,” the complaint read. “Compass’ agents were pressured to give up hard-earned money to invest in Compass.”
 

David Goldsmith

All Powerful Moderator
Staff member

What If Compass Is Basically Just Like Every Other Real-Estate Brokerage?​

Except with a nicer logo and an over-leveraged IPO.​

Last week, a deeply confused swath of the real-estate universe had a chance to get an answer to a long-running mystery: Is Compass an industry-disrupting technology platform, or just an old-fashioned brokerage with good branding and a lot of cash? The New York–based company made its stock-market debut Thursday after an eight-year sprint in which it went from a few agents in New York to more than 19,000 across 45 cities, becoming the second-largest residential brokerage in the country. SoftBank’s Vision Fund and a few other investors had stuffed the company full of venture capital to fuel its expansion and create the impression that the company was the tech-forward future of real estate. Skeptical observers saw Compass more like a residential analogue to WeWork — a well-financed, stylish start-up with a business model that, when you squinted past the marketing, didn’t seem all that different from what came before and certainly didn’t merit such a lofty valuation. The IPO was an opportunity for disinterested investors to assess the shares and would provide clarity. And yet the market’s verdict, in the hours after Compass’s founders rang the opening bell, was a resounding We’re not sure.

Let’s start with the positive for Compass: Its new $7.4 billion market cap is roughly four times larger than that of Realogy, a holding company that owns Century 21, Coldwell Banker, and Corcoran, among others, and which has twice as much revenue as Compass. This valuation suggests that the mere possibility of disrupting the multitrillion-dollar housing market, at a moment when the competition for homes couldn’t be hotter, was enough to make investors want a piece of Compass at a premium.

But $7.4 billion is, in many ways, a disappointment. A day before going public, Compass and its underwriters, sensing resistance from investors, announced they were slashing the company’s hoped-for valuation of $10 billion — a little like a broker chopping the price on a Brooklyn brownstone on the eve of its open house after hearing chatter that it wouldn’t get any bids at the asking price. (Roughly a third of the new shares were set to be purchased by SoftBank, Compass itself, and the family of one of its co-founders.)

So, what to make of Compass? Robert Reffkin co-founded the company in 2012 after running a gauntlet of American upper-crust institutions: an undergrad degree and M.B.A. from Columbia, followed by stints at McKinsey, Lazard, a brief time in the George W. Bush administration, and eventually Goldman Sachs, where he served as chief of staff to future Trump economic adviser Gary Cohn. Worth some $500 million after the IPO, he is now among America’s wealthiest Black entrepreneurs and has said that he hopes to run for mayor of New York one day. (To eliminate any infinitesimally lingering concern that Reffkin is an underachiever: He has raised more than $1 million for various charities by running marathons in all 50 states.) From Compass’s earliest days, he was insistent that it wasn’t a real-estate company. His co-founder, Ori Allon, was an Israeli tech entrepreneur who sold his first start-ups to Google and Twitter and once posed alongside Reffkin in a T-shirt bearing his Twitter handle. Allon told the Verge in 2012 that he was done creating small companies to sell to other companies and instead wanted “to build something really, really big.”


The idea, broadly speaking, was to devise a “human network” (at the time, Adam Neumann was pitching WeWork as “a physical social network”) that would change the way people bought homes. Urban Compass, as the company was known in its first iteration, aimed to be a one-stop shop for New York apartment-searching, and Reffkin and Allon hired a team of brokers who weren’t called brokers. They were “neighborhood specialists.” Rather than receiving commissions, they received full-time salaries, while Urban Compass promised to take lower fees than a traditional broker.

It didn’t work. The best agents, especially those who worked on home sales, rather than rentals, still wanted to work on commission and wouldn’t join the firm. In 2014, the company pivoted: Instead of eliminating the need for brokers, the rebranded Compass would embrace them, creating a suite of technologies — “AI-Driven Renovation Visualization,” “AI-Driven Client Prospecting Recommendations,” open-house planning tools — that would make brokers more efficient, allow them to push through more sales, and ultimately make everyone more money.

But the true pivot was toward a start-up model that has proved its merits in a variety of industries — drowning your less-capitalized competitors in cash. Compass has lost more than a billion dollars — numbers that would have been nearly unthinkable for a start-up a decade ago, but which wouldn’t even make an executive at Uber or WeWork blush. The cash fire was enabled by SoftBank and others, which invested more than $1.5 billion, a large chunk of which has gone toward buying market share. To move into new areas, Compass has made a habit of simply buying existing local brokerages and subsuming them. It has poached top brokers from other agencies by offering equity, a larger cut of every commission, an assistant, and a bespoke logo produced by the company’s marketing team, among other perks. The pitch has tended to work, even if the rapid expansion could be problematic (picture a poster-size advertisement featuring two young, white, hair-gelled brokers in suits, grinning on a brownstone stoop, above the word “HARLEM”) and has led to numerous lawsuits from competitors alleging nefarious poaching tactics.

The tech platform was part of the Compass pitch, too, and the company claims that 88 percent of its agents use its software at least once a week. What isn’t clear is how much good the tools actually do. A young agent, just starting out, might find them useful, but a good broker can walk into an apartment and immediately tell you how much it’s worth without an algorithm. Plus what most buyers and sellers want most of all is someone to hold their hand: A broker’s ultimate skill is in convincing people to make one of the biggest financial transactions of their life.

What Compass did offer to the brokers it recruited, beyond financial promises, was a premium brand. While probably no one has ever chosen to buy through Coldwell Banker because they liked the logo, the ethos at Compass was to build the Nike of real estate. In certain corners of Cobble Hill and Silver Lake, a Compass sign came to signify what kind of home was inside: sophisticated, tasteful, architecturally and aesthetically aligned with a sleek sans serif font. (Many other agencies rebranded after Compass’s emergence: In 2018, Pentagram, the legendary design firm, was brought in to modernize both Halstead and Brown Harris Stevens.) Image is more or less everything to high-end brokers, and a well-branded agency with a tech-forward persona was at least as practically useful as some code that could produce “AI-Driven Renovation Visualizations.”

Looking at the S-1 document Compass filed with the SEC, I was transported back to the fall of 2019, when WeWork tried to go public. In the aftermath of that implosion, Compass’s chief financial officer sent an email to employees insisting that their company was different. And yet Reffkin began the S-1 by talking about how he started the company for his mom, a former real-estate agent — the kind of personal touch any good broker adds to a sale. Compass opened the document with a series of sleek photographs showing smiling people in front of laptops at dining tables in well-appointed homes, as if they were about to DocuSign a lease or loan document. This level of storytelling was, perhaps, necessary given the particulars of the underlying business. On paper, Compass looks like a traditional brokerage, albeit one with huge losses, and it leaned heavily on pumping up its tech bona fides — the word “platform” appears in the S-1 286 times. I couldn’t help but notice that Compass has no board members from the real-estate world, a blind spot it shared with WeWork. (The Compass board does include the CEO of a luxury digital-media company and the CFO of LinkedIn.) I’ll note briefly that the board of directors at Theranos also had no doctors.

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The Compass IPO was buoyed by two pandemic booms — home sales are up, as is the market for hot young tech-centric companies. Even WeWork is trying it again. The global financial system is sloshing with liquidity, and newbie investors are stuffing their stimulus checks into Robinhood accounts rather than putting them toward a mortgage that feels unaffordable. Stocks at the nexus of real estate and tech (Redfin, Zillow, and Opendoor) have had a good pandemic, and multibillion-dollar valuations loom for Doma, a start-up that digitizes home-sale closings; Hippo, which offers insurance; and OfferPad, which is attempting to streamline the buying and selling process. Side, a direct Compass competitor with a broker-focused platform of its own, just went from a valuation of $160 million two years ago to $1 billion, despite the fact that the company has annual revenue of roughly $30 million to $50 million.

While all of these companies have promised to disrupt the home-buying industry in one way or another, none has dramatically changed the business. Compass is no exception. Unless you care about selling your home through a broker who hands out sleeker-than-average business cards, the consumer-facing process of working with Compass is scarcely different from that of any other brokerage. If Compass hopes to reach profitability, it will face pressure to stop lavishing its agents with incentives. In a widely circulated investor note, David Trainer, an analyst at New Constructs, wrote that “Currently, the company looks more like a traditional brokerage with flashy marketing, whose only advantage is a virtually unlimited ability to burn cash” and added “SoftBank needs this IPO more than investors do.” Many of the hot real-estate stocks have faded as the far side of the pandemic comes into view and fears of housing frothiness emerge. On Monday, Compass stock took a nosedive and dropped in value by more than 10 percent. The market’s lukewarm response to Compass indicates investors are willing to give it a chance. But it’s now hard to see the company as anything more than the latest execution of a modern business playbook: Why disrupt an industry when you can simply buy into it?

Last week, a deeply confused swath of the real-estate universe had a chance to get an answer to a long-running mystery: Is Compass an industry-disrupting technology platform, or just an old-fashioned brokerage with good branding and a lot of cash? The New York–based company made its stock-market debut Thursday after an eight-year sprint in which it went from a few agents in New York to more than 19,000 across 45 cities, becoming the second-largest residential brokerage in the country. SoftBank’s Vision Fund and a few other investors had stuffed the company full of venture capital to fuel its expansion and create the impression that the company was the tech-forward future of real estate. Skeptical observers saw Compass more like a residential analogue to WeWork — a well-financed, stylish start-up with a business model that, when you squinted past the marketing, didn’t seem all that different from what came before and certainly didn’t merit such a lofty valuation. The IPO was an opportunity for disinterested investors to assess the shares and would provide clarity. And yet the market’s verdict, in the hours after Compass’s founders rang the opening bell, was a resounding We’re not sure.

Let’s start with the positive for Compass: Its new $7.4 billion market cap is roughly four times larger than that of Realogy, a holding company that owns Century 21, Coldwell Banker, and Corcoran, among others, and which has twice as much revenue as Compass. This valuation suggests that the mere possibility of disrupting the multitrillion-dollar housing market, at a moment when the competition for homes couldn’t be hotter, was enough to make investors want a piece of Compass at a premium.

But $7.4 billion is, in many ways, a disappointment. A day before going public, Compass and its underwriters, sensing resistance from investors, announced they were slashing the company’s hoped-for valuation of $10 billion — a little like a broker chopping the price on a Brooklyn brownstone on the eve of its open house after hearing chatter that it wouldn’t get any bids at the asking price. (Roughly a third of the new shares were set to be purchased by SoftBank, Compass itself, and the family of one of its co-founders.)

So, what to make of Compass? Robert Reffkin co-founded the company in 2012 after running a gauntlet of American upper-crust institutions: an undergrad degree and M.B.A. from Columbia, followed by stints at McKinsey, Lazard, a brief time in the George W. Bush administration, and eventually Goldman Sachs, where he served as chief of staff to future Trump economic adviser Gary Cohn. Worth some $500 million after the IPO, he is now among America’s wealthiest Black entrepreneurs and has said that he hopes to run for mayor of New York one day. (To eliminate any infinitesimally lingering concern that Reffkin is an underachiever: He has raised more than $1 million for various charities by running marathons in all 50 states.) From Compass’s earliest days, he was insistent that it wasn’t a real-estate company. His co-founder, Ori Allon, was an Israeli tech entrepreneur who sold his first start-ups to Google and Twitter and once posed alongside Reffkin in a T-shirt bearing his Twitter handle. Allon told the Verge in 2012 that he was done creating small companies to sell to other companies and instead wanted “to build something really, really big.”

Robert Reffkin, founder and CEO of Compass. Photo: Cate Dingley/Bloomberg via Getty Images
The idea, broadly speaking, was to devise a “human network” (at the time, Adam Neumann was pitching WeWork as “a physical social network”) that would change the way people bought homes. Urban Compass, as the company was known in its first iteration, aimed to be a one-stop shop for New York apartment-searching, and Reffkin and Allon hired a team of brokers who weren’t called brokers. They were “neighborhood specialists.” Rather than receiving commissions, they received full-time salaries, while Urban Compass promised to take lower fees than a traditional broker.

It didn’t work. The best agents, especially those who worked on home sales, rather than rentals, still wanted to work on commission and wouldn’t join the firm. In 2014, the company pivoted: Instead of eliminating the need for brokers, the rebranded Compass would embrace them, creating a suite of technologies — “AI-Driven Renovation Visualization,” “AI-Driven Client Prospecting Recommendations,” open-house planning tools — that would make brokers more efficient, allow them to push through more sales, and ultimately make everyone more money.

But the true pivot was toward a start-up model that has proved its merits in a variety of industries — drowning your less-capitalized competitors in cash. Compass has lost more than a billion dollars — numbers that would have been nearly unthinkable for a start-up a decade ago, but which wouldn’t even make an executive at Uber or WeWork blush. The cash fire was enabled by SoftBank and others, which invested more than $1.5 billion, a large chunk of which has gone toward buying market share. To move into new areas, Compass has made a habit of simply buying existing local brokerages and subsuming them. It has poached top brokers from other agencies by offering equity, a larger cut of every commission, an assistant, and a bespoke logo produced by the company’s marketing team, among other perks. The pitch has tended to work, even if the rapid expansion could be problematic (picture a poster-size advertisement featuring two young, white, hair-gelled brokers in suits, grinning on a brownstone stoop, above the word “HARLEM”) and has led to numerous lawsuits from competitors alleging nefarious poaching tactics.

The tech platform was part of the Compass pitch, too, and the company claims that 88 percent of its agents use its software at least once a week. What isn’t clear is how much good the tools actually do. A young agent, just starting out, might find them useful, but a good broker can walk into an apartment and immediately tell you how much it’s worth without an algorithm. Plus what most buyers and sellers want most of all is someone to hold their hand: A broker’s ultimate skill is in convincing people to make one of the biggest financial transactions of their life.

What Compass did offer to the brokers it recruited, beyond financial promises, was a premium brand. While probably no one has ever chosen to buy through Coldwell Banker because they liked the logo, the ethos at Compass was to build the Nike of real estate. In certain corners of Cobble Hill and Silver Lake, a Compass sign came to signify what kind of home was inside: sophisticated, tasteful, architecturally and aesthetically aligned with a sleek sans serif font. (Many other agencies rebranded after Compass’s emergence: In 2018, Pentagram, the legendary design firm, was brought in to modernize both Halstead and Brown Harris Stevens.) Image is more or less everything to high-end brokers, and a well-branded agency with a tech-forward persona was at least as practically useful as some code that could produce “AI-Driven Renovation Visualizations.”

Looking at the S-1 document Compass filed with the SEC, I was transported back to the fall of 2019, when WeWork tried to go public. In the aftermath of that implosion, Compass’s chief financial officer sent an email to employees insisting that their company was different. And yet Reffkin began the S-1 by talking about how he started the company for his mom, a former real-estate agent — the kind of personal touch any good broker adds to a sale. Compass opened the document with a series of sleek photographs showing smiling people in front of laptops at dining tables in well-appointed homes, as if they were about to DocuSign a lease or loan document. This level of storytelling was, perhaps, necessary given the particulars of the underlying business. On paper, Compass looks like a traditional brokerage, albeit one with huge losses, and it leaned heavily on pumping up its tech bona fides — the word “platform” appears in the S-1 286 times. I couldn’t help but notice that Compass has no board members from the real-estate world, a blind spot it shared with WeWork. (The Compass board does include the CEO of a luxury digital-media company and the CFO of LinkedIn.) I’ll note briefly that the board of directors at Theranos also had no doctors.

The Compass IPO was buoyed by two pandemic booms — home sales are up, as is the market for hot young tech-centric companies. Even WeWork is trying it again. The global financial system is sloshing with liquidity, and newbie investors are stuffing their stimulus checks into Robinhood accounts rather than putting them toward a mortgage that feels unaffordable. Stocks at the nexus of real estate and tech (Redfin, Zillow, and Opendoor) have had a good pandemic, and multibillion-dollar valuations loom for Doma, a start-up that digitizes home-sale closings; Hippo, which offers insurance; and OfferPad, which is attempting to streamline the buying and selling process. Side, a direct Compass competitor with a broker-focused platform of its own, just went from a valuation of $160 million two years ago to $1 billion, despite the fact that the company has annual revenue of roughly $30 million to $50 million.

While all of these companies have promised to disrupt the home-buying industry in one way or another, none has dramatically changed the business. Compass is no exception. Unless you care about selling your home through a broker who hands out sleeker-than-average business cards, the consumer-facing process of working with Compass is scarcely different from that of any other brokerage. If Compass hopes to reach profitability, it will face pressure to stop lavishing its agents with incentives. In a widely circulated investor note, David Trainer, an analyst at New Constructs, wrote that “Currently, the company looks more like a traditional brokerage with flashy marketing, whose only advantage is a virtually unlimited ability to burn cash” and added “SoftBank needs this IPO more than investors do.” Many of the hot real-estate stocks have faded as the far side of the pandemic comes into view and fears of housing frothiness emerge. On Monday, Compass stock took a nosedive and dropped in value by more than 10 percent. The market’s lukewarm response to Compass indicates investors are willing to give it a chance. But it’s now hard to see the company as anything more than the latest execution of a modern business playbook: Why disrupt an industry when you can simply buy into it?
 
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