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This is Matt Russell, and today we are breaking down the real estate broker compass.
We have Jeff Collette, founder of Aon Capital Partners, back as a guest.
You may remember his breakdown on Goosehead.
And we thought it was fitting to cover another flavor of a broker.
Now, Compass itself is a fascinating business and... historically a controversial stock.
It was founded in just 2012 by Robert Refkin.
And Compass has scaled in that short period of time. to become the largest real estate brokerage in the United States.
So Jeff and I cover the history, some of those early pivots.
But I'd argue, most importantly, we get into the critiques of Compass.
Whether those are fact or fiction, what has changed since the early days and whether it's agent commissions, operating leverage in the business, the Zillow suit, There is a ton of interesting stuff around Compass today.
And that's before you get into the tech stack. the infrastructure, the idea of controlling such a large percentage of the market with top agents...
It's a very fascinating story. It's one I will definitely be watching closely moving forward.
And Jeff's insight here, I think, is particularly interesting in terms of how he frames this business the opportunity, and how you could see a broker potentially emerge from being historically a commodity business. to maybe something more powerful than that.
So please enjoy this breakdown of Compass.
All right, Jeff, we have you back to talk about a brokerage again this time. looks a little different than Goosehead.
We have Compass, which is in the real estate space.
We can get to how different this is and all the nuances of real estate.
But I thought a good place to start would just be the simple description of Compass. that you would give to someone walking on the street.
They understand what a real estate broker does.
But what is Compass out to do differently?
What was the ethos of what makes Compass a little bit different than the rest of the real estate? brokers out there.
And if you were to describe the value prop to agents or for the business, how would you best capture that?
Yes, absolutely. At its core, Compass really has four key advantages that reinforce each other and our advantages for its agents, the first being its proprietary, fully integrated software platform. second the national scale that it has third a dense network of top agents and lastly exclusive listing inventory depth,
Just to quickly hit on these, firstly, starting with the platform, they're the only major brokerage that's built this end-to-end software stack.
Everything from CRM to marketing to transaction management. integrated together in a mobile first way that's designed specifically for agents that are very often on the go. they get more done in less time with less support staff and the brokerage itself that ties into the software runs more efficiently.
Importantly, this gives them a very unique edge when it comes to AI because it controls that platform. across the different point solutions and the data, it can do... things that others can't like automate, not just content creation, but workflows, follow up and client engagement.
They have a major AI initiative that's in beta this summer that will go full release by the end of the year. that has voice activated assistant capabilities that could really bend the curve on the value proposition.
The company's invested nearly $2 billion inception to date on tech technology and they capture at a point in time in raising capital. to do this that likely won't present itself again for a competitor to do something similar.
The next thing is its national scale. It's got nearly 40,000 agents in virtually every major US metro.
This ties into the platform because it gives them a cost advantage.
It allows them to amortize this R&D investment across a increasingly broad base of agents and continually reinvest in the technology as well as programs and services that that the agents are specifically asking for them to build.
So the scale and tech platform really go hand in hand, strengthening each other.
And then there's the top agent network. This is important.
Compass has more top agents and teams than any other brokerage.
About 18% of the top 1,000 And that's 50% more than the next closest competitor.
Why this matters is because top producers drive the business.
The top 20 agents do roughly 85% of transactions in the industry.
They like to work with one another. and that creates a powerful referral engine.
On average, Compass agents generate 18% of their business from referrals within the compass network. that boosts revenue per agent, retention, and recruiting.
I believe that's at the high end of the market in terms of referrals.
And then lastly is the exclusive listing inventory deck.
So Compass has leaned into an inventory strategy and a phased marketing program. that helps sellers test pricing and timing before going to MLS, giving them more control. and also giving buyers early access.
This avoids issues around days on market, price drops, and gives Compass agents an edge when competing for listings.
At the end of the day, what Compass is aiming to do is not compete on commission splits and but an offering that really enhances the agent's ability to grow their business more profitably and create better client outcomes.
And so I think that that is not always well understood.
It's the classic technology disruption story in terms of how it was laid out.
And It's still a relatively young history.
I think there's been a lot of pivots. Can you just bring us back to maybe the earliest chapter Some overview of the founding story.
I think what you just mentioned there captures a lot of what they were out to do.
But there's the idea of providing technology and all this to agents, and then there's the execution of it.
So anything that you could touch on just in terms of the early days of Compass, one day we'll look back and still consider this the early days. but just the founding story and the origins here.
The original... business model was focused on rentals in New York City.
They quickly pivoted the business early on to focus on traditional home sale brokerage.
I think the vision has largely stayed the same what they needed to do was really effectively attract a lot of high producing agents and build the technology that supports them alongside one another. without really having that foundation in place to begin with.
And they did that with an immense amount of venture capital funding. and went to market in a manner that was hard for existing brokerage models to compete with in terms of lucrative sign-on bonuses, multi-year contracts that would be very advantageous to the agent.
And that was likely necessary because they needed to build up a local market presence. in order to attract more agents.
And then eventually, transition the model to be more sustainable and so i think for a number of years there was a big open question as to the sustainability of the model, whether or not the technology was really going to prove out.
And I think that that conceptual question mark remained with the company for a long time until it really proved things out much later in its life cycle.
Yeah, it's interesting when you consider capital intensive businesses and you think about infrastructure.
This might have been capital intensive. in the early days for talent, something that we're seeing in some other markets right now.
But at least it makes sense to me in terms of bringing people onto the platform, like You can build it, but they won't necessarily just come here.
When do you think... things started to shift a little bit just around financial hygiene, transitioning a little bit away from just paying the most for agents.
I'm oversimplifying, but to give you some context...
Were there any milestones or things in the history that really led to a change with that mindset?
Yes, absolutely. So I think that the housing market downturn that began in the early to middle part of 2022 was the true test for the company. and its approach.
Just for context, mortgage rates quickly spiked from under 3% to over 7%.
And home sales precipitously dropped from about 6 million to... around 4 million, a level that it's been at for a few years and really the lowest level in 30 years.
And so compass needed to react quickly and it did.
By the middle of 2022, it had paused market expansion.
It stopped M&A. It had to execute three rounds of layoffs within a year.
It eliminated all agent incentives. And as part of this brought on a CFO, Kalani Rielitz, who played an instrumental role in decreasing the level of OPEX that the company had from a level of 1.5 billion run rate to around 850 million, so nearly cut in half.
But the company actually didn't have to stop investing in its platform. around the same time, actually, the full capabilities for an agent to be able to do their entire workflow on the platform actually coincided with this timeframe.
By late 2022, that had been rolled out. Both the company and the market could see the validity of the model.
And perhaps surprising to some, without those incentives, And not just incentives to have agents join, but they were having these multi-year incentives roll off.
And they were able to maintain organic agent growth. and very high levels of retention, around 90%. for principal agents and really the technology-oriented value prop. was able to kind of stand on its own by early 2023, the company had sort of been proving out this new ability. and had started to get to a point where it was operating around free cashflow breakeven. and was really positioning itself to go back on the offense after being really focused on the cost cutting. and stabilizing the business in this new environment.
Yeah, it's a really interesting time period.
I think we're going to look back on 22 and 23 and reflect on companies that swallowed the pill, got operating hygiene and kind of reoriented themselves to an environment that wasn't just pure capital influx and spend on whatever you want to spend.
And even though we've seen some of that come back, it's just very interesting to see who's emerged with some more operating efficiency.
If you were to just take a snapshot of Compass today...
I think of them as certainly a very successful platform just in terms of the properties they get.
And this is in very particular regions specific to me.
But do you have any headline numbers just around their market share or anything else that could give a sense of the size and scale today in the market?
Compass operates the largest real estate brokerage in the US by sales volume.
It has about 6% market share on a gross transaction volume basis.
It has around 21,000 principal agents and nearly 40,000 total agents. across about 38 states and Washington, DC.
In 2025, it's expected to generate close to $7 billion in revenue and around $200 million in free cash flow.
Beyond its core owned brokerage, it recently expanded. its capabilities by acquiring Christie's International Real Estate in January of this year.
That's a high margin global franchise business that gives independent brokerages a way to join Compass without selling outright to them.
It's also built title and escrow operations in a majority of its markets.
And it has a mortgage joint venture that's still very early stages and not financially meaningful, but over time it could be very impactful to the financial profile of the business.
You certainly confirmed what I thought just in terms of market share.
They're the largest. That speaks for itself.
And then just some numbers because I know it is important.
We'll get into more detail. The targets that they have... seem pretty grand and ambitious.
Can you lay those out? And we'll talk more about them as we go on just to set the ground.
I think one of the unique characteristics that I didn't highlight was really that it's a national brokerage that actually has a high level of concentration within major markets.
So it's not everywhere, but it has a very strong presence in almost all the major cities within the United States.
In the middle of 2024, the company set a strategy 30 for 30 whereby they wanted to grow its average market share and its top 30 markets to 30% on average, by the end of 2026.
At the time that they made that announcement, They were probably about halfway there with the growth and the M&A that they've done since then.
They're just over 20%, I believe. And so I think that the real estate is a local business.
And for them, on this basis, The average number two competitor tends to be in the single digit range.
And so with the capabilities that they've been building and the local market scale plus its national presence, there likely become certain elements of tipping points where it becomes more easy to attract more productive agents on a local market basis as they become a bigger and bigger market share presence within those markets.
It's interesting, especially on a relative basis to a number two or number three to see what they're doing.
I have this association with Compass for... luxury listings or at least expensive listings.
It might be related to just the markets that they operate in.
But do you think that's a fair categorization of Compass or am I oversimplifying based on the markets that they're operating in?
I think that that's generally fair. I would sort of categorize it more as premium.
I think the average... price for a transaction for them is around a million dollars.
And over time, Their strategy, as we kind of hit on briefly earlier, had been to launch and markets attract the highest producing agents that were most influential to enable the company to attract agents at lower levels of productivity that have better commission split dynamics.
And that can kind of cascade as the business and its presence grows.
And so I think that In certain markets, it has a higher-end positioning, but over time, it's become more... premium if that makes sense yeah it definitely does yeah feels like semantics in some way, but it actually means a lot, especially as they expand into other markets and You're going to have this natural thing about where the share opportunity is.
On the industry as a whole, we were talking prior to the episode just about All of the nuances that make the real estate industry, real estate industry and the brokerage model who they're impacted by.
Can you give your best breakdown in terms of...
The major players, particularly as I think about the association's and the organizations that tend to run real estate behind the scenes.
I know they exist, but however you would best categorize and place them within the industry just to give some background on the market that they're operating in.
There are a few major players to understand that dictate the structure of the industry and play an influential role on how business is conducted.
So you've got the National Association of Realtors. or NAR, which is the largest trade group in the entire country.
It's got about 1.5 million members. To access MLS, the multiple listing service, the essential database. that agents rely on to share listings and work together, you must be a member of local state and national realtor associations.
That mandatory membership, effectively ties agents into rules that actually make the trade group more of a regulator for the industry than many other industries. that's really critical to understand.
And just a couple other sort of relevant data points The MLS is not a national system.
It's a patchwork of over 500 local databases.
About 80% of them are controlled by realtor associations.
For a long time, there was actually a built-in compensation offer where a listing agent would actually show the offer to the buyer's agent on the commission that they would receive as part of a transaction.
That was just how the industry worked. So a buyer wasn't actually paying their agent outright.
And then the last players to understand are... the consumer facing portals such as Zillow, realtor.com, They get their listings data from MLS and then turn that into customer-facing experiences.
They're generally monetizing leads to buyer's agents.
And the key thing to kind of understand about all of this is this system basically supported tens of thousands of independent brokerages to compete and created a dynamic where there's been very limited consolidation.
The top 22 brokerages in the country control about 25 of the volume around 60 is done by firms with under one billion dollars in gross transaction value.
And just as another frame of reference commercial real estate is very different.
It doesn't operate under this structure.
And there you see a handful of large firms that are much more dominant.
Yeah, it's interesting. With the 6% commission fear, maybe that's the cap of the commission rate that could be paid on a residential purchase.
Is the governing body NAR in that case? Where does that originate from and we can get into a little bit more of the nuances to it.
I think there's a little bit of a misnomer around the 6%.
The average commission in the US hasn't been at that level for quite some time, I think from 2011 through 2020 ish.
It gradually came down from around 5.3% to closer to 5%.
Interestingly, it kind of ticked up a little bit. in 2023, the listing side has kind of remained 3%.
That's standard in most markets. Whereas the buy side has been really more of the area pressure.
And so there's been changes that have occurred that were headline-grabbing in 2024 that really impacted the way commissions are set they're always set by the agents, but there was essentially a landmark Sitzer Burnett that challenged the system that I described earlier. in terms of that offer compensation within MLS.
And basically, there was a settlement that occurred that created changes that happened starting in August of 2024, now where that offer of compensation doesn't exist in MLS.
And sort of importantly, there are written agreements that need to be entered into between the buyer and the buyer's agent. that have sort of created some dynamics that are influencing some of the market share dynamics.
I hit on earlier, but really what we're seeing as an output of this is not necessarily what people expected.
I think the commission rates have remained very stable, as have the buyer representation What's occurring is a shift towards more professionalism.
It's hard to exactly tease this apart because the industry's been in this trough period. but buyer's agents are really having to articulate their value to their client in a way that they really didn't have to before. and compete to win on business.
Generally speaking, If you're representing a seller, you're providing them with a listing presentation.
You're competing with other folks who are articulating their value in a way that wasn't historically done on the buy side.
Now that is much more relevant. And sort of accordingly, if there are brokerages that can convey value to the agent and to the client, in this new setting, then that is also a powerful dynamic that's creating more market share shift to the most professional agents.
And just a couple interesting tidbits to end on here is, It's kind of remarkable that 70% of agents who pay MLS dues and were affiliated with a brokerage in 2024 did zero transactions.
So it's really been a market that is shifting in certain ways.
And I think firms like Compass are in a position to potentially absorb market share along the dynamics I described, but also it's more obvious to brokerages that companies like Compass can actually enhance their value proposition and the combination of them can be compelling.
It's very interesting on the agent side to hear that 70% data point because...
I think it tells the story of what many people think of, which is...
A great agent is worth their money multiple times over.
But the large majority, I think, are viewed as commodities.
And I don't know that it's that hard to argue against that on the buying side specifically.
One point of clarification, the previous model, if I'm the buyer... of the house, you know, I buy the house, I don't think about commissions, it was the seller who entered an agreement with the listing agent, and then that listing agent negotiates with the buying agent to split or decide on that commission.
Under the new model, if I'm buying the home, I'm entering an agreement upfront about what commission I will pay on that.
And then the seller's doing essentially the same thing on their side.
The cooperation dynamics that still enable the seller and the payment of the commission to not be a burdensome factor for the buyer actually still exists in the vast majority of situations.
That was kind of an open question. That dynamic, it's still very cooperative in that way.
It's really just that There was the potential for like steering around whether or not you're going to pay the buyer's agent a certain amount.
And so I think at the end of the day, the buyer's commission could potentially be more around 2%. than 3%, and there are dynamics where there's There's just more negotiation that's happening versus things not even being front of mind on the buy side.
Yeah, I think you've teased this out and it's something we were discussing before. which I did not quite appreciate is the importance of listings is kind of a core asset or core differentiator. within this space.
Can you riff on that a little bit more about the importance of that within the Compass model? and how they just operate differently when it comes to not only getting listings, but marketing those listings and everything that goes into their approach, which might look different than other brokers.
This is an area that has gotten increased focus more recently.
Ultimately, inventory's power in residential real estate.
It's what drives everything. from agents to platforms like Zillow without inventory, there isn't business to conduct.
What's relevant to what you're asking about is Compass has taken a stance on... pre-marketing.
This sort of fits back into the industry construct that we were talking about earlier in terms of NAR, MLS rules around listings.
And to level set a little bit, There's research that shows that there's real demand for off MLS marketing. the Illinois MLS had on average 21% of its volume that eventually went to the full market go through its internal private listing network. that's available to all agents and brokerages.
And there's reasons why consumers want to be able to do this. their home may not be ready to be shown yet.
They want to understand price. In today's market, around 40% or so of listings are dropping their price. on MLS and the portals like Zillow, it's tracking days on market.
It's tracking price drops. Compass is taking a position that it wants to be very homeowner-friendly. and facilitate this in a manner that provides flexibility to customers.
Even Zillow's studies have found that 31% of sellers want to try pre-marketing efforts.
And so What Compass has done starting last year is create a program around this.
It's called the three phase marketing strategy.
It's meant to give sellers control. and also buyers to have some early access to homes.
And that can be relevant in a market where there's then a dearth of inventory that's come up more recently.
But the three phases are as follows. There's the private exclusive phase, The aim is really to validate pricing and make adjustments before going to the public and MLS. without being exposed to those metrics I mentioned earlier.
That's accessible to Compass agents, as well as their buy-side clients, as well as other brokerages.
There's just been rules that have constructed in the industry that prevent a certain amount of marketing as it pertains to this phase of marketing.
But Compass has a book that's available at all of its offices that make it such that Those listings are available to anyone that's aware of them.
And when they have a high level of market share in a given market, it's not a secret to folks that are participating in the industry that these listings are available.
And the outcome for sellers... can always benefit from cobroking.
So there's no effort to not cobroke. The second phase is coming soon.
This is where they can potentially generate early demand on compass.com. build buyer interest, and all of those inquiries are going to the listing agent who knows the property really well.
That's made searchable to consumers and agents across the country.
And then the third phase is launching on MLS and the public portals.
And at that point, ideally you have a really strong sense for pricing and confidence in kind of how you're going to market. so you can get the best possible outcome.
And it's just worth noting that home builders This process is meant to sort of reflect what home builders do to create demand.
And they're very sophisticated repeat sellers of property who aren't really putting all their inventory on MLS.
Just to quickly hit on this, it's been a little bit of a lightning rod for the industry, but there are a number of markets that facilitate this type of program really well.
And in Q1, about 50% of Compass listings went through this process.
94% of them still hit MLS. Like the purpose is not to sell the property in the private market.
But the seller can have varying degrees of what they want to do. in terms of the effort that they put in to sell the house.
And if you can get top dollar and you don't want to put in extra effort, That should be the seller's discretion.
They're actually getting better pricing outcomes.
For their customers, listings using the strategy sold for about 3% more on average. and offers were accepted 20% faster, about eight days quicker. to close.
And there were only 13% of these listings with price drops versus 40% more broadly.
But just to sort of end on this topic, other people in the industry don't appreciate this practice. and have been voicing concerns that I think are are oftentimes informed by their position in the industry.
And I just kind of underline that there are markets like Chicago that had been operating with private listening networks as part of MLS for over a decade.
There are other markets that offer similar things.
Austin literally just this past week implemented something similar.
There's a notion here basically that there's a place in the market to serve this need that is not in violation of fair housing and is also not meant to be double-ending deals.
It's really to provide a better outcome for sellers, but it challenges some of the business models like MLS and some of the portals.
And so there's been a lot of outspoken chatter about it.
I can certainly understand why MLS would challenge it for a portal.
We'll use Zillow because I think they have publicly. gone against this.
If Compass is making these available to other brokers... then other brokers would have access to these opportunities.
Is... Zillow's challenge that they rely on the MLS listings for what goes up on Zillow.
Just to step back, I think as a portal, you want access to any and all listings that you can get.
You want to be the one-stop shop to search for homes.
So I think that's... somewhat obvious. If you just dial back the clock on the industry, MLSs didn't really invest in in the same way that Zillow did to be able to really be that source for searching and support the customer in the way that They wanted to, and really what's ended up happening is the listings are going to Zillow and the listing agents aren't really... necessarily benefiting all that much because instead of getting direct leads to them, which can help them grow their business over time,
Those leads are being diverted to buyer's agents.
But basically the background here And why it's so important to Zillow is there was a rule that came into play in 2019 called clear cooperation.
And it basically forced listings into MLS within 24 hours of any public marketing.
And so there was activity that was happening leading up to that.
It was even coined by some as the compass rule because in areas like San Francisco, Compass had coming soons where in a market where they have a very high level of market share, they end up being a place to be searching and it can compromise some of these structural dynamics that we've talked about already.
So basically, in March of this year, in 25, after these settlements occurred in 24, after increasing levels of pressure.
But just keep in mind that there's local level MLS that makes it such that I referenced Chicago.
There's been different ways to go about things in a compliant manner, but basically It came to a head in March when they made some changes around clear cooperation that created some flexibility. around pre-marketing in response to that Zillow created its own listings rules that basically went above and beyond what had been the clear cooperation rules and basically said, if you list your property publicly and don't put it into MLS within 24 hours, your listing will be banned from Zillow. that phase two encompasses three-phase process, really comes under pressure because you're basically needing to tell a client or the client needs to be aware, if you're going to market that property and you want it to be on Zillow, you can't do so for more than 24 hours.
So basically... the ability for a brokerage to create an ability to be a source of search is impacted by this somewhat.
But I think the key thing to understand partially about this is Zillow, it's a fight over the top of funnel. encompasses suing Zillow in an antitrust lawsuit.
And so there's aspects that we can get into that.
The stakes are pretty big. But I would say the three-phase marketing process can continue unabated.
It's just that phase two. that's necessarily impacted.
And to the extent that consumers choose to market their property and not comply with that.
And compliance and enforcement of that from Zillow's perspective might be kind of tricky.
It could bifurcate the market, particularly with higher-end homes where people don't want their listings on Zillow for privacy reasons. or otherwise and then you've also got dynamics like a newer portal homes.com that's owned by costar group that has a very different business model, where it's not buyer's leads,
It's advertising for a listing agent, and they're basically providing feedback free advertising boosts for listings that get banned from Zillow.
So it's a very interesting dynamic here that ultimately I think if Compass wins out or there's just increasing levels of flexibility in terms of pre-marketing, That likely accrues to Compass's benefit if the status quo persists. nothing really changes.
And so that's kind of how I see it right now.
Yeah, it's certainly an interesting dynamic.
And it's hard to separate fairness for the consumer from companies and what benefits them.
Certainly, you can understand it from all sides of the equation.
I guess just with Compass, do they ever split out how much of their sales are done? where it's outside brokers are the purchasing agents. on their listings.
Like, is that anything they ever disclose?
Because I do think... It's one of those hot topics where it's very easy to pin that as the thing you want.
You want to get both sides of the commission, you know, if you're an agent and that's an ideal spot to be in.
Do they give you any sense of what that looks like within their own business?
There's not direct line of sight into that.
I just go back to... It's a three phase marketing strategy.
It's not the one phase marketing strategy.
And 94% make it to MLS. Even those that don't, I believe Compass has disclosed that the majority of those that don't make it to MLS are co-broked.
You're talking about a low single digit percentage of the overall transactions that are done privately and double-sided.
And so I think that that talking point that you raise has been a key issue that folks have taken.
I would just... Reiterate that as a home seller, you're looking to execute on your objectives and It's not the case that Compass is withholding the listings from other brokerages.
There's just certain rules that actually make it around that public marketing dynamic that it's one to one. to other brokerages or that book that exists encompasses offices.
So There are regions like Illinois that have that private listing network where it makes it available to everybody.
And Compass is very supportive of that being the construct. that works everywhere.
It's just a matter of these local geographies choosing what's best.
And I think it's not always clear to just say, we represent what's best for the consumer. if you're Zillow or if you're another constituent in the market, because there are different needs and desires for different constituents that are selling their homes.
And so I think it's probably likely that there needs to be some level of flexibility flexibility that's created in the industry.
And I think places like Illinois with MRED create a positive construct where I think the other dynamic that flows from what you're asking about is just this idea that oh man, we'll have this market where listings aren't available in a centralized place.
And all of a sudden, this great market that was really transparent ends up going into this really much more difficult market. buyer's experience and I just point to the areas like Illinois and even other markets that are more flexible to this There aren't huge issues in places like that in terms of accessing the inventory.
So I think a lot of this is overblown, to be quite honest.
Yeah. Yeah. It'll just be interesting to see what flows from all this.
And I think One of the things that's probably worth pointing out here is that Compass and Robert Ruffin's founder-CEO...
They believe that they work for their agents.
And their efforts to... create what they believe to be common sense frameworks that enable their clients and agents to to have successful outcomes is a little bit of a rallying cry for anyone in the industry that has similar beliefs.
There are definitely people that don't agree with their approach.
And I think that there's room for different models to operate in different ways, but...
What Compass has seen is their agents in listings presentations to go to the client and say, we're going to offer you this capability that It's built into our model and makes it easy for you to go about this in a flexible way.
A lot of other agents, particularly ones at brokerages that are saying, don't do this, To your point earlier, you kind of use this commoditized.
It helps Compass stand out a little bit and win listings. in a manner that I think is important because agents are competing with each other at a local level on an everyday basis.
Yeah, it feels like a premium experience without a doubt.
And I certainly see it out there in the market.
I found myself in some of these distribution lists and it's noteworthy to see how different it looks.
I want to transition a bit just into the model itself.
I think it's fairly straightforward to, They generate fees based on commissions.
I would imagine that's going to be tied to the housing market. just thinking about revenue and sales and putting aside the market share changes.
Is that the right way to think about a real estate brokerage business is correlation to the housing market?
Yeah. Compass's core business is an owned brokerage versus a franchise brokerage. model, which they now do have through Christie's, but the own brokerage is really The following drivers, agents times their productivity equals the number of transactions that they're doing.
Compass has actually taken organic market share in all 17 quarters.
It's been a public company. M&A is an additional lever for them.
And then those transactions times the average home transaction price times the agent commission rate, and then the commission split between the agent And the brokerage is really the gross profit stream that is... so critically important to understanding Compass's business model.
On the commission rate, the brokerage split, is there just a right way to frame what that looks like in the industry, how compass may differ.
I know it's going to be nuanced based on agent and all of that, but just, some ballpark in terms of the gross profit percentage that Compass would take home net of those commissions.
Yeah, so on average for Compass, it's roughly 82% going to the agent, 18% going to Compass.
To your point though, there's a range around that on an agent by agent basis.
I believe there's around a nine percentage point difference in splits for certain production levels.
It's important to understand the mix dynamics here in terms of as Compass's agent grows, it's likely mix shifting away from the top 10%. of agents towards the top 50, improving overall margins. without actually changing commission splits between the constituents. industry-wide agent splits had been trending in the favor of the agent for quite some time.
But they've actually reached a level of stability, I believe, for a few years now since really the housing downturn pulled out.
Some of the dynamics around the ability to do that. particularly in the area of the market where Compass plays.
And I would also just say that there's other business model types in the space. that offer even more generous splits and or caps.
Those often come with less support, more out of pocket costs for tools, marketing, training.
Those models will likely appeal to a certain segment of agents, but clearly not all of them.
And what Compass is really aiming to do is transcend the value proposition away from just that economic split to be around capabilities that drive performance for the agent. to grow more profitably.
And so that would sum that up. I think it sells the point on the marketing plan and everything that goes into that as well.
If you can say, if you're a compass agent, everything's going to feel premium for your customers.
It does change the dynamics and doesn't make each brokerage house feel like a commodity.
On the 82, do you have any context for what the earliest agents were looking at in terms of commissions just to get a sense of... how much maybe that's come down over time?
I would probably just frame it as... it could be extremely lucrative for founding agents in a market And there were often multi-year financial incentives that were part of the conversation. in the early days of Compass being a public company that needed to expire effectively.
And that was... The concerns around what that would mean to the model were very front and center.
From an investor's perspective, in 21, 22, for Compass because no one knew what the level of retention and really what the stable level of commissions that would enable the company to continue to attract agents would be.
And so I think that that resolved in that downturn environment that we spoke of earlier. and has remained in kind of a healthy place.
Just to reiterate something, I think Ultimately, I think what they can do is go to market with competitive splits against traditional brokerages. that offer support but provide extra value that others have a difficulty replicating.
Yeah. Rather than just compete on price in theory for your talent, it makes a lot of sense.
On the mechanics of commissions, I know it differs from one brokerage to the next.
But are there tiers like your first 1 million in commissions are at this rate, above that, they're at this rate?
Is there any... change just in terms of how the commission structure works in one direction or the other?
There certainly are tears at certain players in the industry.
I think it can actually be pretty bespoke. by agent and by the level of volume that they do.
The frame of reference for Compass is just, I think, they publicly stated there's a nine percentage point differential between certain bands that is really the way to think about the mix shift over time.
Makes sense. You mentioned before free cash flow generation in recent quarters or years.
What does the operating leverage look like for this business?
Because I think... It had the connotation of taking in a lot of capital. spending that capital.
And then some, it seems like there's been some inflection, but Is there inherent operating leverage in the business?
How do you frame that or think about that as an investor?
And if you want to put some numbers to help explain or contextualize that's helpful.
For 2025, the free cash flow margin percent of revenue will be roughly 3% for the business. roughly $1.2 billion in gross profit this year.
That's at a high teens margin. And there's roughly a billion dollars in OpEx.
And that includes almost $200 million of annual technology spend.
I think it's actually somewhat easy to contextualize the operating leverage and the trajectory of the company based on the discipline and framework that they've put around it.
So they've committed now for, I believe, several years at this point and into the future to keep OPEX growth at three to 4% annual increases.
And there's just inflationary dynamics that feed into that.
This quarter, they actually announced some cost savings. that while somewhat moderate flow directly to the bottom line and can be meaningful to profit dollars.
I think that they really found religion around cost discipline. in 2022.
And there's actually more potential for this over time.
Just think about the use cases around document processing of transactions.
There's a good amount of human intensity as it relates to this that could come out of the system. over time with the advent of new technology.
And it's also worth noting that They've acquired a company called App Properties that came with that Christie's business.
They generate a high single digit EBITDA margin. and they're really great operators.
I think the idea really is Compass can be the low-cost operator for owned brokerage, And I don't think that investors really think of Compass in this way.
And then just depending on the rate of growth, with production, basically, at that high teens margin, which can grow with the mix shift in agents, as well as the attachment of title and escrow and potentially mortgage over time, the incremental free cash flow margins can be in the double digits.
And that can make it such that not too high levels of growth can result in very rapid free cash flow growth.
Yeah, it's very interesting when you find these inflections or... trajectories that are clearly moving in a different direction than they were once in the On that 2% to 3% OPEX growth and more looking at the technology spend,
Does that encompass what you were mentioning at the very beginning in terms of investing in The technology for the platform, I don't know where this would fit, whether it be in an OpEx line, a CapEx line, wherever it might be.
But how do you frame that and the capital that still needs to go towards that effort of technology investment?
So it's that close to $190 million line.
That's inclusive of investment in new capabilities.
I think what's important to understand about that is the industry is at a trough level. and there's been this trend in commission splits and just the level of scale necessary to invest that makes it such that they stand alone in their ability and their stance on investing.
And so... Others are really starved in an ability to do that and really don't have a structure to even do that.
It's really a hodgepodge of third party software tools.
I think where this is going for Compass is actually potentially really exciting because They own all the software that's all interconnected and all of the data. which makes it such that they've announced some capabilities around AI that are in beta stage that can actually end up taking on a lot of the manual tasks that an agent will do and and even proactively suggest next best actions that can transform the agent's day-to-day life in a manner that could be very differentiated and hard to replicate by others in the industry yeah very interesting i should have looked this up beforehand but I have to ask with this particular cohort of businesses, stock-based compensation is always a focus.
What does that look like here? Is it a point of contention from the market?
Where does that stand? Where it stands is it's basically a fixed cost now in the business.
And their approach to it is very similar as overall OpEx, such that It shouldn't grow that materially from here on out.
What that means is free cashflow per share. should be very attractive.
The name of the game for them is really bringing on players productive capacity.
They've designed their business now in a way where they can bring on agents, teams, brokerages, the franchise affiliate model, they kind of welcome folks joining their platform in any way that best fits them.
It's that pace of gross profit growth over the relatively fixed cost base, including the SBC.
That's the framework here. In terms of the growth and achieving some of those numbers that you laid out before about that 30% in the 30 markets, You have organic.
Your agents continue to chop more wood and capture some of it.
But it sounds like M&A has been... a part of the DNA here for a while, how much of the... growth story do you expect to come from acquisitions of brokerages, brokerages, houses, whatever it might be in terms of how I think it could be very material.
Just to kind of reiterate, the industry is very fragmented.
There have been changes and we're in a trough environment that make it difficult to and make it that the propensity for folks to want to enhance their value proposition to be able to grow is very real.
And so you'll see announcements somewhat often of smaller brokerages joining really getting from here to 30% market share will require meaningful M&A.
They've acquired meaningfully sized brokerages in Tennessee, in Louisiana, the app properties, Christie's deal. that was very sizable that came with title and mortgage joint ventures.
That multiple was nine times EBITDA with synergies that are running ahead of plan.
That should bring it down to five to six times.
In general, they're targeting four to six times EBITDA that could fall to two to three times post-synergy, all while keeping OpEx flat.
And there's also a dynamic where There are quote unquote walkover situations where a brokerage can shed its costs and join Compass.
And so I think that it's a very central part of the go-to market strategy.
And I think that if you step back and think about the advantages that the company brings, plugging in productive capacity actually has the ability to strengthen the overall value proposition and actually incent more people to join.
Interesting. And then on the risk side, I guess you just have general macro risks we talked about. before about housing market and to the extent that you had major downturns, it would obviously impact the business.
But is there anything else that stands out?
It feels like what they're doing, I wouldn't expect a competitor to... try to capture all this money, spend on tech, spend on brokerages. maybe nip at the heels a little bit.
But is there any other risk that really stands out to you besides maybe some of the more obvious?
The foundational assumption is that the agent remains central to the home transaction.
I think that in years past, there were... companies and investments made to disrupt that, and that has largely not panned out. even in a largely digital world, close to 90% of home buyers use an agent in 2023.
The listing agent is probably even more structurally sturdy.
That 89% reference is up from 83% in 2010.
The truth is, is that residential real estate transactions are an infrequent high stakes situation where consumers overwhelmingly prefer expert guidance.
I think where there's some risk to this is in a world that has increasing levels of AI capability, but Compass is basically... on the verge of arming its agents with AI-powered capabilities that should actually be both offensive and defensive. think that that risk is there, but has not shown to be overly concerning.
Then there's execution risks on just their ability to grow and retain productive agent capacity.
They need to continue to deliver meaningful value with technology, training, support, differentiate themselves beyond commissions, the AI functionality here could be very impactful to the overall value proposition and the productivity to agents.
M&A, as you referenced before, the execution there matters.
I wouldn't say that there's huge amounts of integration risk associated with this, but culturally, operationally, they want to... bring on folks that stay and perform and The other risks are relating to this pre-marketing flexibility.
I'd say that The trend has been in the direction of greater flexibility.
To the extent that that went the other direction, that would not help them differentiate the And then from a macro perspective, housing turnover and home prices are are really key at today's level, around 4 million existing annual home sales.
That's a 30-year low. mid cycles, about 33% higher, I think that There's a lot more upside than downside there.
There could be temporary dislocations. But mortgage rates are important.
A recession without inflation could actually help mortgage rates. consumer sentiment and employment are also key.
But I think that we're kind of at a trough cyclical level.
And so there's a lot more upside than downside from that perspective. a lot of points in there.
I think the agent retention and attracting the best agents and even the dynamic of having 30% of a market means some agents in the same territory.
You can definitely get synergies from working together, but you can have some fierce battles as well. over some of these things.
But it's an interesting thing to monitor.
And I think you've teased out the importance of that in terms of their mission really well.
This has been very interesting. It's a name, I will admit, I had a very... specific view on and as we've talked more and more, it's opened up my mind into the reality of the situation.
But we close out these conversations as you know, with the key lessons that you can take away What stands out the most to you from Compass in terms of a lesson or framework that you could potentially apply elsewhere?
A few thoughts. For a lot of investors, I think residential real estate brokerage triggers an immediate hard pass.
Low margins, agent churn, regulatory uncertainty, all these factors Doctors are very understandable.
But sometimes downturns reshape companies in ways that are easy to miss.
Today, Compass is not the Compass of a few years ago. the housing downturn forced it to find discipline, financially, strategically.
And the results are pretty consistent of them outpacing the market. growing free cash flow, increasing their margins. kind of a clear strategy forward that's relatively unique for the industry. the stock is up 4x from its lows.
I would say that there's a few questions that come to mind that will dictate the future lessons learned.
Has Compass already reached a tipping point where The strategy is already working, and it's really just the pace at which it's able to grow that's the major question mark.
Was the downturn for housing the best thing that could have happened for them?
How much potential upside do these court cases that it's involved with have for the company?
And what's the real downside risk? Has the trough transaction environment created an environment that allows them to stand out even more from its competition. incenting them to join at greater levels than they would otherwise.
What other brokerages are really competing on the same terms and how are their trends looking relative to Compass?
I'd say long-term, if they keep executing the way that they are, and the market values it accordingly, does that open the door for larger M&A transactions?
And longer term, if there's flexibility on pre-marketing And Compass is able to achieve its stated goals of market share Could it evolve into a home search destination, not just an agent platform?
And what would the economic impact situation looked like then.
Those are the things that I'm watching, and I really appreciate the opportunity to have this conversation with you today, that.
Been a pleasure. Thank you again for sharing the knowledge and maybe teasing out the fact and fiction about a name like Compass.
So Thank you again, Jeff. or to sign up for our weekly summary, check out joincolossus.com.
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