App-Maker Unicorn Tries to “Disrupt” Residential Real Estate

Unicorn, Residential Real Estate, Compass Real Estate

The idea didn’t include anyone in real estate.

By Melissa Terzis, Realtor, City Chic Real Estate, Washington, DC:

Here we are, 15+ years post-dotcom bust, and 9 years post-housing bust. We should be smarter, having watched these two industries independently rise and fall, but something else happened: people decided to combine the two. Now software engineers are going to “disrupt” the real estate industry.

Everyone loves that word: disrupt. They all say it. It’s like their own adopted mascot buzzword.

Then they push out their software and ask a couple real estate types what to include, what not to, and they start selling it. Several times a day, I’m on the receiving end of their sales calls. Of the ones I’ve tried, most of them were junk. They have more glitches and issues, and I spend so much time on the horn with their help desk that they should call it a beta version and give it to me for free for all the advice I’m giving them by way of corrections. Sigh.

So a couple years ago a brokerage entered the Washington DC market. They were going to “disrupt” the industry. They had an app. They had tech. They launched a website, and started getting agents on board. These well-respected agents left the heavy hitting, well-respected brokerages they were affiliated with and went to the new kid in town – Compass Real Estate.

It started in New York, where there is no Multiple List Service, so an app potentially made sense. But then they launched in other cities. And they came to mine, Washington, DC. According to the The Real Deal:

Compass, on paper at least, is the most valuable residential brokerage in New York City , and has raised about $210 million from investors. At the time of its Series D round in August, it had a presence in 11 markets.

It currently has a “valuation” of $1 billion. So a member of the startup unicorn club.

Among the many things that smelled odd: I noticed on their website that they would show an agent as being on their team, and then load a bunch of “houses sold by” links below the agent’s name on their individual profile. Those houses hadn’t been sold by that particular agent but by another agent on the team. It seemed misleading – as if they wanted to indicate their agents were doing a ton more business than they actually were.

From day one, their business plan didn’t make sense to me or many others I spoke with. Why would VCs part with $210 million to fund a residential real estate brokerage – an entire business that is based on one fact: The more successful the agent you hire, the higher a commission split you have to pay them.

Compass hung their hat on getting some well-respected, high dollar-volume-earning agents to join their firm. I and other real-estate locals I trust came to the same conclusions: If 90% of your revenue goes right back out the door with your agents, where is the money to be made? They would have to run bare bones to operate off 10% of the money coming in the door.

Several weeks ago, I attended an event in New York where I heard from Compass agents that the headquarters was amazing. Pool tables! Beanbag chairs! Food! I wondered: How can they make money when there’s so much overhead, so many perks, so much staff – and who is paying for this?

The VCs are paying for this.

Reminds me of the late 90s. But I didn’t have to stew in the Compass mystery for long. Because this happened, according to The Real Deal:

A 16-page presentation and YouTube video sent to a string of brokerage chiefs and agents across New York and Los Angeles last weekend took aim at Compass, saying the venture capital-backed brokerage poached agents, artificially inflated its valuation to north of $1 billion and stole data from other companies.

Someone actually got mad enough to put it all out there. The gossip. The facts. But most importantly – the numbers (their YouTube presentation).

This time it seems it was one software engineer and one Wall Street guy who formed this company to disrupt (there’s that word again) the industry. The idea didn’t include anyone in real estate.

But I know real estate. And I can say several things with authority:

Brokerages aren’t non-stop profit machines. They don’t own anything, they don’t sell anything; their agents do. They have to work hard to make agents (some with very high egos) happy, whether that be perks, supplies or commission splits. Make an agent mad, they’ll leave, and they’ll take all their business with them. If you assume that you keep 15% of every dollar that comes into your door, averaging an 85% commission split with your agents, how much money does that leave you for pool tables and all those engineers and assistants? Lots of assistants.

I’ll leave the math to the sources who did it much better than I ever could. I just hope Wall Street is listening. There are going to be more of these companies founded on an idea, and charging full steam ahead at something – anything – in the hope of the real estate/tech industry disrupting IPO.

But they better hurry up with their IPO. Real estate market dynamics are changing under an onslaught of new supply. The impact is already visible in the largest rental markets. Read… Rents Plunge in San Francisco, New York. “Mixed” Nationally

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