App-Maker Unicorn Tries to “Disrupt” Residential 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. By Melissa Terzis,Realtor, City Chic Real Estate.

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

  1. nhz says:

    Nothing new IMHO, looks like the basic idea is to corner the market with a huge amount of investor money; and hope the investor money is enough to absorb huge losses for the first few (or many) years, until most of the competition has been removed.

    Many companies tried it over the last 20 years or so, and most of them failed of course (a few succeeded wildly, e.g. Amazon). I remember one US company who were trying to corner the digital photography gear market by selling many products way below cost, which generated a huge amount of publicity and probably strong sales numbers as well. Initially no one understood what they were doing until after 1-2 years it became clear that they were getting huge amounts of money from Wall Street (from some very stupid investors – because giving away stuff at huge discounts is not a solid business model).

    I think there is a lot of ‘disruptive potential’ in the RE market, but not with this kind of tricks that don’t seem to bring anything new to the table.

    • Dave says:

      Its better to do the disruptive tech companies early in the business cycle because lots of dumb money is available and you have time to ramp up sales before the economy and market peak and too many investors get burned !

      • nhz says:

        agree, and I guess there is lots of dumb money (home equity) available in RE at the end of the cycle ;-)

  2. Petunia says:

    Most of Silicon Valley is founded on making money on selling a startup for more than its initial funding level. It doesn’t matter if the company makes money or not, or survives or not. It only matters that the investors make a profit selling it to another firm or taking it public. The VCs also invest in many ventures at a time, knowing that most will die. They only need one good one to make the effort worthwhile.

    The split of 15% for the broker you mention seems really low. I never knew one that didn’t take at least 50%

    • nick kelly says:

      I worked as realtor up until late 90’s. Even then here in late to the party Canada, high earners would never put up with 50%.
      Even the base beginner rate where I worked was 40 % to broker.
      This ended up with a lot of the brokers offering a fairly low desk fee, where the realtor paid a fixed monthly fee and kept 100 % of his end.
      As the piece points out, competition for high earners is intense.
      Around here, a new outfit appears every year or so, as disgruntled realtors form their own co.

    • OutLookingIn says:

      To put it simply Petunia –

      Form an empty shell from an idea
      Sell the package to investors
      Pump the price as high as you can
      Dump your shares and cash out

      Commonly known as a “Pump & Dump”

      • Petunia says:

        Not exactly a pump & dump, at least not a first, because the players have an inside view into the deal. The developers know the code and they have professional reputations as well. The VCs chose to invest based on the developers and product demos. They really are sophisticated investors. When startups are bought by other tech firms they basically know what and who they are buying. When a firm goes public, the outside investors are the ones in the dark.

        • joel says:

          Petunia,

          Still a lot of guys need to google “mansplaining” and read down the page a bit.

          Also, since what some call the debate, we have “manterrupting” rising in awareness, we hope.

          Joel

        • Marty says:

          I worked at a tech company–not software–that was funded by vcs, and within a couple of months, I could tell that baby was going nowhere. One of the vcs was a friend of a friend, and I offered to tell him what was really going on, and what the company’s prospects were, but he never followed through with me. This company and it’s market niche did exactly what I thought it would–meandered around, making ok profits but never busting out to the IPO level as projected every year.

          As far as these geniuses knowing what they’re doing, maybe that depends more on the business cycle than anything else.

    • Markar says:

      No agent worth their weight in salt would work on a 50%, even 75% split unless the broker was providing free bona fide leads and/or paying a lot of their operating expenses. Zip Realty tried this years ago in many markets nationally and aren’t around any longer as a brokerage.

    • Sorry Petunia if the split part wasn’t clear. Most agents at the sales volume the agents Compass is hiring would be keeping 85-90% of the commission. Leaves the brokerage with 10-15%.

      An agent sells $10M in real estate. Total commission dollars to brokerage is $250,000 – $300,000 depending on the commission paid on each deal. Let’s call it $275,000. Brokerage keeps $27,500 and agent gets the rest.

      You need a lot of agents hustling a lot of real estate to pay for engineers and plush offices with pool table and all the perks.

      • Petunia says:

        Maybe I wasn’t clear in my post as well. You are thinking of their business model as a regular brokerage business. I see a tech startup.

        All the perks in a startup come from the VCs not the revenue. Startups are not about making a revenue profit necessarily, although that helps. They are about making a killing in an IPO or M&A.

        Your article says they are in their 4th round of funding. If they raised 200M and the valuation is 1B, then they will be looking to go public or get acquired at a multiple of 1B. Whether they actually make any money for the final investors is irrelevant.

        • Aah. So you bring up the crux of the other piece of this. It would have made the article too long if I went into even more detail, but the situation with Compass specifically is they started as a “tech” company in NYC. They were going to create an app that would essentially be an MLS of sorts, since NYC functions in a different world than most of the rest of real estate. There is no multiple list, there is something like it, but it doesn’t include every single possible property. Thus, the idea for an app.

          Which would all be fine and a potential home run if they stayed in NYC and continued with that app. But they changed gears to become a regular brokerage. So they’re not really a tech startup any longer according to many. They’re really just a residential retail brokerage, masquerading as a tech startup.

          It makes me wonder if they didn’t realize prior to expanding to other markets that everywhere else has an MLS, and thus no need for an all-inclusive app.

          If what they’re looking for is to get rich through an IPO, how many people get rich when that happens, if the profits of the company never get in the black.

        • Petunia says:

          Melissa,

          I think you are trying to make sense of this under a traditional brokerage business model, but this is another beast.

          They are a tech startup because they are still getting VC money. They have gotten multiple rounds of funding from VCs as you mention in your article. VCs don’t invest to make average or above average returns, they are looking for large multiples.

          The people who get rich in a tech startup IPO are the investors, founders, and some employees. Once they cash out, the incentive to run a profitable company depends on whatever commitments the founders and management decide to make.

        • marty says:

          Petunia, think Theranos. This is a scam, not a business. In the end, IPOs have to make money. If enough of them don’t, like Theranos and Twitter, people will stop paying up for this stupid vaporware and the vcs will have to get real jobs.

        • Marty – exactly. And as mentioned in an earlier comment about the little guys getting hurt, it seems inevitable. I continue to be amazed at all the people who were hired and likely given stock options under the premise of “if/when we go public we’ll all be filthy rich!” and yet, when you look at the actual business, it just doesn’t make sense at all.

          Petunia, interesting points made about the VC’s wanting to cash in and then jet out. But this entire idea rests on the…I don’t want to say stupidity, but how about “not well thought out” decision by many agents to join a brokerage based on all the perks offered, signing bonuses and alleged stock options. They never once looked at the business to realize “wait, if I’m getting 90% of my commissions, stock options, a signing bonus, and other cushy perks in a beautiful high end office, it can’t last.”

          I mean – we’re people who help others buy and sell the biggest assets many of them will have in their lives, shouldn’t we know better to be able to see through a farce like this? When I point out to a Compass agent that the brokerage is doing all this with borrowed money, I get a blank stare.

        • Petunia says:

          Melissa,

          l think you now get it.

  3. walter map says:

    Real estate channels are pretty mature, so unless these guys have a really great marketing gimmick they’re very likely going nowhere. And it really doesn’t look like they have a great gimmick, so blimey, another tosser.

    You can always show up for the hors d’oeuvres, though.

  4. Ptb says:

    Can’t say as I see the part that “disrupts” anything except the flow of money into the greater fools pocket after buying into a scam like this.

    I’ve been in real estate as a developer, agent, flipper and a landlord since the late 1980s. And had a day job in software at the same time. The biggest change I’ve seen has been the access to information. But the transaction still has the usual steps and procedures. Not sure how to ‘disrupt’ that part. But, I do think that construction will probably have some major changes coming in the near future with the application of new technologies.

  5. LG says:

    I’ve heard there’s a dude name Tesla who sells dreams and gets billions from government and stupid investors!

  6. michael says:

    That is brilliant LG

  7. Thomas Malthus says:

    I remember a meeting with Lycos Asia late 90’s

    We arrived to be greeted by a 30ish guy in sweatpants and an NBA tshirt who spoke so fast we were thinking he had just shoved half a gram of blow up his nose.

    He then proceeded to show us the full floor entertainment room – foosball, basketball net and so on….

    Strange how after seeing all these sorts of companies fail a VC would not walk out the door the minute he saw a company with a pinball machine in the lunch room…..

    I actually think I enjoy when people who run businesses like this fail.

    • Mike Earussi says:

      Trouble is, if they’re investment houses they usually fail using other people’s money (like pension funds) which hurts a lot of little people.

  8. Mike Earussi says:

    Your article reminds me of a lot of old (but true) sayings like:

    “A fool and his money are soon parted”

    “There’s sucked born every minute”

    and

    “If it seems to good to be true it probably is.”

    How many times has this happened over the last 300 years, and yet people still don’t seem to learn. Maybe the investors, once they lose their money will learn, at least until the next “deal” comes along.

    Also perhaps some of us here are just jealous we haven’t thought up some scam like this to make us rich. :)

  9. wkevinw says:

    Yep, DISRUPTION! Like Theranos?

    You have to get in there and show leadership, determination, etc., etc., etc.

    Many (most?) of these are a joke. I think a lot of the sharing/App-based businesses might fit into this category. If they don’t change existing laws in Real Estate, Transportation, Medical/Labs, etc., they don’t have a sustainable business. (Note that maybe some of these laws should be changed, however, the App is probably a necessary condition for this “disruption”, but not sufficient).

    • nhz says:

      agree, apps or other software do not disrupt; you need a good new idea or new laws for that.

      IMHO the ordinary home buyer (I’m not talking about investors or big companies who are frequently buying RE) is in a severely disadvantaged position regarding information. It’s very easy for a few RE agents to conspire and manipulate prices, at the disadvantage for the buyer (or the taxpayers that often guarantee the loan in the end). The web has made some small changes, but we still have a long way to go before the buyer is in an equal position. Obviously opposition to any changes would be fierce because of all the easy money at risk.

      BTW, although Theranos is an obvious fail now, I think the basic idea that they started on (offering a more convenient alternative for conventional blood test) is sound, and could have disrupted the business. However, until now it’s more hype than substance, and apart from the technical issues it’s really difficult to disrupt an industry that is protected from all sides by the FDA, CDC, NIH etc. etc. (apparently even if you have half the former State Department and Military on your board …).

  10. chris Hauser says:

    if they get enough good producing agents, who are enamored of being part of the future cash-out, and they produce said cash-out, they win, right?

    real estate offices are like banks. more sites than needed.

  11. roddy6667 says:

    Any time I hear the word “disruptive” I know I am dealing with a hipster who is clueless about the field he intends to disrupt.

  12. Shawn says:

    In SF, I was asked to interview for a job by three fresh out of college Cal graduates. Their idea. A korean dating site. Wow, now that is novel, never saw that one coming. A VC I haven’t heard about dumped 11 million into their collective laps. Money is cheap, it’s so easy to get, even if you have no name and a stupid idea.

  13. ML says:

    I am blessed with a steady flow of good commercial ideas. Mostly i give them away to others. Occasionally i keep them and either do nothing until i am sure no one else is going to come up with rhe same idea or launch immediately. Currently I have 2 ideas that i have been working on developing for a few years. One was very successful years ago pre-internet (website) so again I am hoping for great things.

    I do not want your investment in my idea, thank you. I do not want you breathing down my neck.

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