Let me tell you a story about Compass (It may shock you)
Updated Fall 2022
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Compass began as a start-up that raised $2 billion by portraying itself as a company with revolutionary tech. Critics have pointed out that the most disruptive thing about the company was the amount of money it had to spend.
And spend it Compass did, much of it on acquiring other brokerages and wooing agents with lavish incentives (stock options, signing and referral bonuses, and expense accounts, to name a few), allowing it to build formidable operations in those high-end districts. But all that growth was in other ways a problem. Early on, Compass focused on recruiting elite agents, but over time, they started throwing money at any and everyone, according to a former Compass agent.
“The earlier agents were told, ‘You’re so great and special to be here,’ but a few years later it was ‘Everyone who’s in line gets in.’ ” Agents trying to build out their teams found out that junior agents they’d been recruiting were having side meetings with Compass, which was giving them better offers. Not only did that kind of manic recruitment waste money and lead to morale issues, it also meant that there was never enough support staff to go around. There was little to no onboarding, said one former agent, the number of PR and tech support people never increased proportionally to the number of agents the company was bringing on, and marketing meetings were 25 to 30 minutes, tops — so short that she stopped bothering to make them. And while she’d initially been impressed by Compass’s marketing templates, she quickly realized sophisticated designs were useless if half the brokers in the city were using the same ones. “My first week, I thought, This stuff is great. But then they started growing by leaps and bounds, and I was like, Isn’t everyone going to have the same shit?”
It appears, in any event, that the spree may be over. The company saw its stock price drop to $3.53 last Wednesday, down from its initial public offering price of $18 in 2021 (and even that was significantly less than the $23 to $26 price it had been planning for). It’s not crashing and burning — more coming back to Earth, settling into the reality of being not the next big thing but just another brokerage, albeit one that still spends more money than it makes. Realogy, by comparison (now known as Anywhere Real Estate), which owns Corcoran, Sotheby’s, and Coldwell Banker, among others, reported $23 million in profits in the first quarter of 2022. Earlier this month, during its earnings call, Compass announced that it would lay off 10 percent of its workforce — about 450 employees. Its geographic-expansion plans and mergers and acquisitions would also be put on hold and, most likely, some offices consolidated. Even with those cost-cutting measures, claims that the company will be profitable in 2023 seem increasingly unlikely, with interest rates rising and the national sales market slowing down. “It has never been more clear that it’s a traditional brokerage — that’s how it makes money. It’s at the whim of home sellers and buyers, said Mike DelPrete, a scholar in residence at the University of Colorado Boulder who analyzes the financials of real-estate companies. “The difference between it and Realogy is that its cash burn is astronomically high.”
Compass has framed its cost-cutting as a prudent response to a cooling sales market. “Due to the clear signals of slowing economic growth, we’ve taken a number of measures to safeguard our business including the difficult decision to reduce the size of our employee team by approximately 10%,” a company spokesman wrote in an email. “These measures allow us to remain focused on our strategy of being the best company in the world for empowering real estate agents to grow their business while at the same time making continued, steady, progress toward our profitability and free cash flow goals.”
Certainly, it’s not the only company to pull back as interest rates rise and hints of a recession loom. Other brokerages, including Redfin, have also laid people off recently. But as DelPrete pointed out, Compass spends much more than its publicly traded peers, and will need to shed a lot more staff — something like half — to be profitable. “Their model has always been that they raised a lot and spent a lot, but then the market slowed down,” he said.
In the earnings call, Compass CEO Robert Reffkin said that while the company was pausing geographic expansion, it didn’t plan to stop adding agents. “It’s just much more profitable recruiting … where there’s still of course the demand to come to Compass as an opportunity,” he said. But the problem with laying off staff is that it’s likely to drive some of those independent-contractor real-estate agents away from rather than toward the company. If they bolt, revenue will drop, necessitating further cuts. A big part of the appeal of going to Compass wasn’t just the sleek branding; it was working with a company that has lots of resources.
Or had them. It hasn’t really felt that way for a while, according to a current Compass agent, who said that before the company went public it started charging agents for things like Docusign, Adobe, and Property Shark. “The nickel-and-diming of the support services is really annoying when you’re an agent who’s bringing in all this money and they have to pay for basic stuff like that,” he said. Although it was hardly the most frustrating thing since the IPO — that would be the stock price. Before the IPO, a lot of agents bought stock through Compass’s agent equity program, applying part of their commissions toward future stock options. “The stock is crushed,” the agent said. “It’s now worth significantly less than it was when they bought it. The ones who went heavy got smoked. They would have done better buying it now than at the ‘discounted’ price.”
In the first three months of 2022, the company spent $142 million, and on its most recent earnings call it confirmed that it has $476 million left in cash and access to $350 million in credit. This isn’t a terrible position to be in. “Running out of money is a relative term,” DelPrete said. “They definitely have, like, a year of runway left.” But that year isn’t going to be as lucrative as the previous one, even in the New York market. The Olshan Report, which tracks Manhattan sales of $4 million and above, recorded 20 contracts signed last week, as opposed to the 30-plus average between the beginning of 2021 and early May of this year.
The promise was that Compass’s tech would close that gap: boosting productivity and efficiency, eventually allowing the company to turn a profit. But even if the tech is helpful, it’s increasingly clear that it’s not a magic bullet: Real estate is still a time-consuming, personal business in which the biggest factor affecting “efficiency” is often the market itself. It’s unclear if AI-powered tools like the company’s “likely to sell” feature — which offers agents the names of people who may be inclined to list their properties — is a significant improvement on older technologies like sending out postcards and holiday greetings. Acquiring other brokerages and poaching agents, on the other hand, is clearly effective — Compass has grown into the largest brokerage by sales volume in the country — but also expensive. And it doesn’t work as well when you’re laying out to bring in not only the rainmakers but junior brokers who may founder working independently (instead of with an experienced team). For all that, the company is also still just one player among many: Its national market share grew to 6.1 percent in the first quarter of 2022.
Compass was always aspirational. Of course it was: It’s a real-estate brokerage and a start-up, both of which feed off and generate dreams of more comfortable, moneyed futures. It embodies both the sensible appeal and the hucksterism of the industry: Somehow, real estate is supposed to be both a solid, responsible investment and a get-rich-quick scheme, all rolled into one. In reality, the returns are often less than stunning, and people do get burned. Disruption itself sometimes gets disrupted when it encounters the physical world. WeWork put a sexy spin on subleasing office space — a potentially lucrative business, but hardly a novel one, and one in which the fundamentals still apply. Zillow’s ibuying spree, on the other hand, was quite innovative, but it was also a fiasco, one the company shut down after it suffered huge losses thanks to an overly optimistic algorithm, leading the chief executive to conclude that the practice had “a high likelihood, at some point, of putting the whole company at risk.”
“At the best of times, our business was a narrow-margin business, but I think their strategy of building market share without regard to the cost of the market share is a very dangerous strategy,” said Frederick Warburg Peters, president of Coldwell Banker Warburg — admittedly a competitor, but a pretty clear-eyed one. “A series of very complex things have to go right in order for it to work.” And now is not the time when things are going right. “We’re going into what is going to be a tough period for at least the next eight months. More interest-rate increases, and most economists believe we’ll go into a mild recession to tame inflation,” Peters said. “In 2021 Compass wasn’t profitable, and that was under the best circumstances. Two thousand twenty-three — that’s not going to be their year.”
Updated: Boston Real Estate Blog 2022
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I have to call you out on your boastful approach to an industry that we all know and love. While we agree that there’s a great opportunity to employ technology in ways to make both the consumer and agent experience better, we don’t think you need to resort to the trash-talking and grandstanding that we’ve heard from you – you’re better than that, and frankly we don’t want you to tarnish an industry that has funded the creation of the very technologies you now claim credit for.
You claim to have started the tech talk in real estate. In your recent LinkedIn post titled Before Compass, Technology Was Barely Mentioned in Real Estate you said: “As it relates to technology, Compass truly revolutionized an industry that had become complacent and had fallen behind terribly.” In just a few words, you risk losing your credibility. The first wave of brokerage tech took place in the 1990’s. For instance, Windermere Real Estate, just one example of many, launched Windermere.com in 1995, creating the first known brokerage website, and added a complete suite of agent tools by 2000.
Since then, Windermere, Long & Foster and Howard Hanna have funded MoxiWorks, whose platform and tools now help make 60 brokerages and 110,000 agents better at what they do. Other obvious examples of innovative technology use in real estate include Zillow (founded in 2006), Redfin (2004), and the long list of startups that have been hard at work for decades, funded by hundreds of millions in capital that was invested prior to your founding.
And stated by your head of product Eytan Seidman in his recent Built In Chicago interview, Compass claims to be “the first and only company to bring engineers together with agents under one roof.” Yet Windermere, Long & Foster, Howard Hanna and countless other leading brokerages have had software engineers and agents working side-by-side in their brokerages to evolve real estate technology since the mid-1990s, developing the technologies, data exchange mechanisms, and standards you now rely on.
You claim to create all your own technology. And speaking of untruths, your CEO Robert Reffkin has publicly stated, “We build everything in house, and all the tools and support is in house.” But anyone can look at the websites you run and see that they’re licensed from MoPro, that you’ve licensed MailChimp as your email marketing tool, and that you licensed Honey for your internal social network. These are all fine choices, but you don’t “build everything in house,” so why the distortion?
Your CEO Robert Reffkin recently claimed in a live interview on CNBC that Compass “just launched Seattle five weeks ago and we already have 5% market share.” We took it upon ourselves to do a deep dive into the data – the Moxi Cloud Open Platform now contains the data for 90% of the home sale footprint of the United States, so like everyone out there with access to MLS data, we can calculate your actual market share in any of your markets. For example, that data shows that for the Seattle metro area, the best you could claim is 0.7% of transactions where Compass was either the listing or selling agent. That’s a far cry from the 5% you claimed. Your CEO Reffkin also said Compass “is the only company empowering agents.” That’s not credible, so why say it other than to antagonize the industry you’re clearly a part of, and in business with on the other side of many of your transactions?
You say that your goal is to “improve the lives of agents.” You pay six figure signing bonuses “to less than 10% of your agents” and claim 98% retention, yet notable agents flee to their former brokerage as soon as the contract is up. We did a deep dive into that data too. For agents that joined Compass any time after January 1, 2016 and have left Compass since, the average tenure was only 245 days.
Bottom line. The tech stack you tout is something every other brokerage can quite literally replicate on the open market – many already have. Compass may not be a brokerage that is great at building technology (that has yet to be seen), but you are a brokerage that is great at integrating the technology you buy, and you happen to build some of your own tools too. That sounds like Windermere, Long & Foster and others before they recognized that choosing the best mix of tools from the vendors that use the $1B of capital invested annually into real estate technology was a better strategy.
Side note to all the brokerages out there: You are investing in tech. Keep your independence. If you haven’t already, choose a platform, whether that’s from MoxiWorks or from any one of our worthy competitors and mix the unique set of agent tools that match your brokerage value proposition and business style. That’s all that Compass has done, only their platform isn’t open, which means they don’t have the flexibility you’ll have.
Compass’ strength of integration is one MoxiWorks has already built and established – nothing new here. The Moxi Cloud has been available to our customers for exactly this purpose for three years and has over 40 partner companies whose products work with it, sharing and contributing to the broker and agent data in the platform for the benefit of all. And we’re not the only ones – many of our competitors have similar abilities, and brokerages are mixing their unique blend of technology to support their value propositions just like you are.
We set out to better the industry, not terrify it or antagonize it. Consider this open letter an invitation. Consider it an opportunity for you to set the record straight.
York Baur, CEO of MoxiWorks
I have Compass on my mind because of an article The Real Deal published this week (subscription required) about former and current Compass agents and small real estate companies struggling with the consequences of contracts they willingly signed with Compass.
Some of the top producing Boston real estate agents I know are affiliated with Compass. Some of them love it, some are ambivalent, some are itching to get out.
The story I’m going to share with you illuminates so much about what has troubled me about Compass all along: that it depends, ultimately, on a combination of brute financial Wall Street money and peoples’ willingness to buy into a story that too often has a happy ending only for Compass who’s telling the story.
Let me tell you a story about Compass
The nightmare began a year ago.
After rebuffing Compass for several years, a real estate agent finally gave into temptation.
But the agent found out 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.
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 only top producers.
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.”
In a statement, Compass said its “contracts are in line with industry standards and are reflective of market norms in use at other brokerages.”
But the agent accounts run counter to the story the firm tells about itself: that it’s changing the brokerage business and Compass has the best retention rate in the industry because it empowers agents above all else. However, having an enormous fine for leaving is one hell of an incentive not to leave.
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.
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, you can always leave, its just how much will it cost you?
Boston Real Estate and the Bottom Line
As stated, Compass biggest competitive advantage is Wall Street money, and an abundance of it.
It might appear that I’m coming across as jealous, lets face it – maybe I am.
But my biggest concern is not for me, or those poor agent who didn’t hire a lawyer before signing a contract, but for me its hoarding listings under “Coming Soon” on MLS and in the fragmentation that’s being caused with Boston real estate listings.
It appears that the newest trend, each Boston real estate company are breaking away from MLS and trying to keep listings in-house. The problem here is for the consumer – if this trend continues, a Boston condo buyer will need to go to multi-real estate websites (Coldwell Banker, ReMax, Zillow etc.) to see all the Boston condo listings for sale.
The disconnect between the Compass storyline and action is not just about technology as they want you to buy into. It lives openly in the company’s “Compass Private Exclusives” strategy. Here we see a Compass true real stated mission which is to literally “hiding the ball with Coming Soon inventory.”
Compass defrauded its real estate agents out of millions of dollars in sales commissions and broke pledges to give agents shares of stock, according to a lawsuit that seeks class-action status.
The complaint allege that the brokerage lured them in 2018 with the promise of a signing bonus, marketing budget, and office space. Additionally, the sales team would keep 90% of each sales commission, with 10% routed to Compass.
However, once they arrived at Compass, the brokerage allegedly deducted expenses, including marketing, from the Sheppards’ 90% commission on each sale.
When real estate agents complained about these deductions, Compass responded it has discretion to deduct expenses under its “term of engagement” with agents. The couple contend that they never saw these terms of engagement upon joining Compass, and instead were presented with a 1 ½ page contract that they electronically signed.
Also, the lawsuit claims, the brokerage deducted commission if the sales team got less than the standard 5% commission rate of each home sale, a rate usually divided 50/50 by buyer and sales-side agent.
“Compass’s refusal to shoulder the cost of the discounted commission is unique and unprecedented in the real estate profession,” the lawsuit reads.
Additionally contend that Compass deceived them in terms of stock shares once the company became public.
“Compass failed to disclose to plaintiffs and class members that they would receive an inferior level of stock, not the company’s shares of common stock,” the lawsuit reads.
A lawsuit filed in January by Greg Maffei, a former Los Angeles-area Compass agent, makes a similar claim about agent’s shares of stock.
Compass has a few agent-equity plans, which are premised around agents snaring shares now in exchange for past commission income deferral. One program has agents buying stock at the “preferred” price of $154 a share. The firm’s stock as of Monday was trading at $18 a share.
Compass has faced multiple lawsuits and pending litigation includes brokerages Realogy and Howard Hanna suing over unfair business practices, and theft of trade secrets.