Business Breakdowns
· Geoff Collette
[00:00:00] S1: There's not direct line of sight into that. I just go back to the 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 talking point that you raise has been a key issue that folks have taken. I would just reiterate though, 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. 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 that's created in the industry. And I think places like Illinois with MLS 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 buyer's experience. And I just point to the areas Illinois and even other markets that are more flexible to this. There aren't huge issues in places in terms of accessing the inventory. So I think a lot of this is overblown, to be quite honest.
· Matt Reustle, Geoff Collette
[00:00:00] S0: Yeah. [00:00:00] S1: 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 Reffkin, the 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 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 is 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 are, to your point earlier, 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.
· Matt Reustle, Geoff Collette
[00:00:00] S0: Yeah. It feels 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. 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? [00:00:00] S1: Yeah. Compass's core business is an owned brokerage versus a franchise model, which they now do have through Christie's. But the owned 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.
· Geoff Collette, Matt Reustle
[00:00:00] S1: Yeah. Compass's core business is an owned brokerage versus a franchise model, which they now do have through Christie's. But the owned 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. [00:00:00] S0: On the commission rate, the brokerage split, is there just a right way to frame what that looks 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, not net of those commissions.
· Geoff Collette
[00:00:00] S1: 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 9 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.
· Matt Reustle, Geoff Collette
[00:00:00] S0: 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 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. [00:00:00] S1: 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 2021-22 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 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, what they can do is go to market with competitive splits against traditional brokerages that offer support but provide extra value that others have difficulty replicating.