{"id":14043,"date":"2021-03-30T09:09:57","date_gmt":"2021-03-30T13:09:57","guid":{"rendered":"https:\/\/www.renthop.com\/content-manager\/?p=14043"},"modified":"2021-03-30T09:10:36","modified_gmt":"2021-03-30T13:10:36","slug":"how-compass-is-different-from-zillow-redfin-and-typical-brokerages","status":"publish","type":"post","link":"https:\/\/www.renthop.com\/blog\/how-compass-is-different-from-zillow-redfin-and-typical-brokerages\/","title":{"rendered":"How Compass is Different from Zillow, Redfin, and Typical Brokerages"},"content":{"rendered":"

Compass completed their IPO valuing the company at $7 billion dollars (really $9 billion after accounting for full dilution of all convertibles, warrants, employee stock options, and other derivatives). For all the early investors, it’s a huge win by any measure, reaching both liquidity and 10x unicorn status. Even most late-stage investors should be happy, especially after the prior year’s scares. The 2020 failed WeWork IPO followed by the Covid-19 lockdowns led to a rather large 15% layoff for Compass<\/a> staff. Founder and CEO Robert Reffkin predicted a 50% drop in revenues and further pain if nationwide real estate prices fall. Of course, a few months later the market stabilized and rebounded to all-time highs, helped in a large part by loose monetary policy and fiscal stimulus.\u00a0 Many people ask:\u00a0 what makes Compass different from other public traded real estate giants? Is Compass a brokerage firm valued at many multiples of Realogy and any other brokerage in history? Or is Compass a technology company, comparable to Tesla and Amazon?<\/p>\n

Compass vs Zillow – Brokerage versus Listing Portal<\/strong><\/h2>\n

We can get the easy comparison out of the way first.\u00a0 Ignoring Redfin for the moment, what is the difference between Zillow and Compass?\u00a0 Does Zillow own Compass as part of the Zillow Group?\u00a0 Absolutely not.\u00a0 The two are separate, publicly traded companies, each with multi-billion dollar market capitalizations.\u00a0 In July 2021, Compass happens to be at $5 billion and Zillow Group at $29 billion as Compass.<\/p>\n

\"matrix
Matrix of flight results shows inventor from dozens of firms, aggregating them all into one set of search results.<\/figcaption><\/figure>\n

As we discussed at length in our post on best sublet websites<\/a>, the main difference between Compass and Zillow is that Compass is a single brokerage firm with many agents and offices, but Zillow is a listings aggregation portal, showcasing inventory and offerings from thousands of different brokerage firms.\u00a0 The easiest comparison is to think of your favorite airline.\u00a0 Perhaps United, Jet Blue, Cathay Pacific, or Eva Airways?\u00a0 Even if you have great experiences with all four airlines, you usually won’t being a new flight search by going directly to a single airline’s website or app.\u00a0 You need some sort of portal that aggregates every airline, such as Google Flights, Kayak, Expedia, and the one-time pioneer Hipmunk<\/a>.<\/p>\n

To be fair, some loyal customers DO go directly to one airline’s website when booking, and that is usually because they are elite flyers who both know exactly which flights they want to check, or fly with a single airline frequently enough that they choose their preferred airline even if a competing company has a slightly better option.<\/p>\n

Neither of these loyalty cases really apply to real estate purchases in assessing Zillow vs Compass.\u00a0 \u00a0In real estate, the vast majority of people simply don’t buy often enough to form any real loyalties.\u00a0 Even if there is any bond or loyalty formed, the relationship is between the client and particular agent, not the brokerage firm.\u00a0 In fact, when a star agents moves from one brokerage firm to another, they usually expect to keep many of their former key clients (an important topic for another post).<\/p>\n

All else being equal, we would normally value a listings portal site based entirely on their traffic and market dominance, and Zillow certainly has a critical mass of leads they can send agents nationwide.\u00a0 When valuing a brokerage firm, you simply look at the amount of deals they close and commissions earned each year, plus any special market advantages they might have in brand recognition, recruiting capability, and internal technology.\u00a0 Compass has worked very hard to differentiate themselves as a brokerage with tons of these special advantage.\u00a0 Let’s take a look at whether there is anything there.<\/p>\n

Redfin vs Zillow<\/strong><\/h2>\n

What about Redfin versus Zillow?\u00a0 Are they both listing portals?\u00a0 Does one own the other?<\/p>\n

With some similarities to the Compass vs Zillow analysis, Zillow and Redfin are also separate companies, both publicly traded.\u00a0 Redfin’s recent market cap is $6.5 billion, making it more valuable than Compass.\u00a0 However, Zillow is still at least 4x as valuable.<\/p>\n

At first glance, the same brokerage firm versus listing portal analysis seems to apply.\u00a0 Redfin is a licensed brokerage firm that closes many deals and collects many commissions, no question about it.\u00a0 But do they behave and operate like one?<\/p>\n

Once upon a time, Redfin was a startup, and like most amazing startups, they tried many experiments and executed several minor pivots.\u00a0 One of the most incredible things they did was to focus on the customer service experience, above and beyond revenues, commissions, and deal closing.\u00a0 The incredible innovation was to compensate agents primarily based on customer satisfaction, regardless of whether or not the deal closed!\u00a0 Industry experts originally felt this was a downright blunder.<\/p>\n

As a brokerage firm, paying agents a commission after each closed deal properly aligns the incentives between company and agent.\u00a0 Commissions account for almost all of the brokerage firm revenue, and the prevailing wisdom has always been to recruit agents who can close a high dollar volume of deals.\u00a0 Why might compensation based on customer happiness misalign incentives?<\/p>\n

Most clients have doubts about making a purchase as large as a home.\u00a0 During the heat of negotiation during any stressful deal, emphasizing any small concern can easily sink the deal.\u00a0 Therefore, almost all real estate agents spend most of their energy focusing their client on the positives of the deal, praying all the way through closing that the seeds of doubt never bear fruit.\u00a0 The truth is, even with lots of prequalifying and vetting, most clients that an agent meets will ultimately not close.\u00a0 The actual conversion rate likely hovers between 5%-15%, with the higher end of the range only achieved under the best conditions (and lots of pre-qualifying).\u00a0 Said differently, 85% to 95% of clients are, to put it bluntly, a waste of time.\u00a0 The agent and brokerage firm will not make a penny on the deal, and actually loses money on travel, grooming costs, and mental energy.<\/p>\n

Now imagine the brokerage offers you a way to make money on 100% of clients.\u00a0 You just need to make them happy.\u00a0 Real estate agents play multiple roles, including salesperson, mentor, educator, and personal assistant (the later coming up way too often).\u00a0 \u00a0That means being friendly and professional, meeting them and earning their trust, and ultimately make the customer feel you’ve got their back.\u00a0 In most cases, the easiest way is often to talk them out of the deal, or at least talk them out of over-paying and over-competing to close a deal.\u00a0 When Redfin first announced this unique model, many industry experts laughed that they would attract exactly the wrong agents – people who were overly diligent, too honest, and unable to close.\u00a0 Fast forward two decades later, and I don’t think anyone is laughing at them.<\/p>\n

\"Redfin<\/p>\n

With both an amazing brand name and a top-tier consumer-facing website attracting many direct leads, it is easy to see that Redfin is more than an ordinary brokerage.\u00a0 Their search technology is arguably the best in the industry.\u00a0 They have comprehensive data coverage for most of the nation, excluding perhaps condo and co-op data in the NYC metro area<\/a>.\u00a0 Their depth of MLS coverage allows them to break past the usual Delta Airlines versus Kayak comparison.\u00a0 Years of success has given them a source of organic traffic that other brokerages could only dream of having.\u00a0 The key question is, can Compass grow into a Redfin?\u00a0 Is there room for both?<\/p>\n

Noteworthy Compass Accomplishments<\/strong><\/h2>\n

Compass gained a tremendous amount of market share in about 8 years of operations. They started solely in New York as Urban Compass, initially hoping to revolutionize the rental market before realizing sales were far more lucrative. In the process, they navigated through multiple game-changing shifts in the industry: a shift to No Fee Brokers<\/a> and OPs, the rise of the 100% firms, and the mid-sized brokerage squeeze.<\/p>\n

Compass Reversed the Trend Toward Light Brokerages<\/strong><\/h2>\n

For at least a decade prior to the Compass ascent, almost everyone in real estate was talking about the death of the traditional brokerage model. In a world where most leads come from the internet, who needs a fancy office, let alone expensive store frontage?<\/p>\n

The New York City market changed drastically, and along the way Compass found itself steering exactly against the tide. Although we focus primarily on NYC firms, similar disruptions happened in many cities and metro areas across the United States.<\/p>\n

The 100% Firm and other High Split Models<\/strong><\/h2>\n

For a time, a new, light brokerage model seemed inevitable. Light brokerages can offer extremely high commission splits in favor of the agent, relative to the traditional 50% (half to the agent, half to the brokerage). Although sometimes called a 100% firm or high commission split model, in practice the firms offer about 80%, while taking only 20% or less (the ones that say 100% have higher monthly desk fees). The firm fulfills the legal requirement of a brokerage and often provides some technology infrastructure and sometimes shared office space (although it is unlikely. However, the three most fundamental characteristics of a light brokerage are:<\/p>\n

    \n
  • Agents must pay a small monthly fee to continue parking their license, often called a desk fee, even though you never get a desk<\/li>\n
  • Agents are not required to work full-time and can go for periods without any closed deals. A traditional firm would quickly let you go.<\/li>\n
  • Agents are largely responsible for procuring a source of leads. You generally pay for your own advertising, although you might be able to take advantage of bulk rates from your firm.<\/li>\n<\/ul>\n

    To some, the shift seemed inevitable. Remax and Keller Williams were rapidly growing their agents nationwide. In New York City, Charles Rutenberg and Level Group, Pari Passu <\/a>at the time, were among the first high-split firms. Not long after came Oxford Property Group and Spire Group. All of these firms grew their agent counts to well over 100 in short order.<\/p>\n

    Compass vs Redfin vs Discount Firms<\/strong><\/h2>\n

    Note that Compass is absolutely not a high split firm or light brokerage model. They infamously recruited many of their top agents with a high commission split lure<\/a>, but those deals are designed to be temporary. For example, they promised some agents a 90% commission split for the first year, plus a signing bonus and marketing subsidy<\/a> that totals 6 figures. However, all of those perks are charged as recruiting and agent costs. Their reported $3.7Bn of revenues includes the commission they would have received on an industry-standard 40% split.<\/p>\n

    Separately, neither Compass or 100% firms are discount brokerages.\u00a0 Discount brokerages are a somewhat failed model from the 1990s (Redfin started out this way, but transitioned into something quite different, discussed later). In a discount brokerage, the discount goes to the consumers in terms of a commission rebate. Instead of the usual 6% commission when selling a house, 1% goes back to the buyer or seller when using a discount brokerage. ZipRealty and Foxtons attempted the model in the US, along with many clones that ultimately failed. Quite simply, the firms self-select for lower-performing agents<\/a>, leading to a downward spiral into a zombie company.<\/p>\n

    The Mid-Sized Firm Squeeze<\/strong><\/h2>\n

    The big losers over the past decade have been mid-sized brokerage firms. These firms are often owned and operated by the founders on a daily basis, boasting high-touch management and about 50 to 200 agents. Their strength lies in specializing in a particular niche, either a few neighborhoods or a specific style of apartment consumer.
    \nThe migration from traditional to light brokerages sent shockwaves through the industry. Traditional brokerage competitors took notice, especially in the mid-sized segment. Even some of the most high-touch, centrally managed firms dabbled into high-split experiments. Ardor NY, once a Midtown powerhouse run by Chris Shiamilli and COO Stephen Love, began     offering 3 different agent tracks<\/a>.<\/p>\n