Compass and Redfin: Twin Sons of Different Mothers

REAL Trends’ view of these two similar firms.

These two firms continue to make the news—Redfin with their public offering and continued growth, and Compass with a new fundraising round and large claims of growth ahead. In many ways they are similar, venture-backed realty firms, proposing to do things differently and both communicating high expectations for future growth. Here’s our take:

RedFin

Redfin is the more interesting to us. They are fundamentally a residential real estate brokerage business. They have a well-regarded public web presence, and lesser-observed, tech-based operating system that runs their business. They offer discounts on their realty commissions (nothing particularly new here), and their agents are employees rather than independent contractors. Other realty firms, including Van Schaack in the distant past, and, more recently, ZipRealty, did the same thing. Some teams have mostly employees-agents as well.

But, they package it well. Better than most. Their investors price them more like a technology firm than a realty firm. At this time, they are worth more than RE/MAX International with its nearly 120,000 agents worldwide, without having any earnings. Wall Street believes they have a bright future and that their model will ultimately be a high-growth, high-margin realty business. Maybe they will, but they are little threat to the brokerage community at this time. What one must take into account is that both RE/MAX and Keller Williams began to affect the brokerage community when they had less than 2 percent market share nationally. Will the same thing happen with RedFin? Only the future will tell.

Compass

Compass raised another $100 million, which now values the firm at around $1.8 billion—roughly the same neighborhood as Redfin. Leaders of the company continue to tout that they are not a realty firm but a technology firm operating in the realty business. News reports cite that they have 2,000 agents today and expect to grow to 4,000 agents this next year. One of their leaders said his goal is to “have 20 percent market share in 20 large markets by 2020.” They indicated that they would generate about $190 million in revenue this year and expect to double that in the near future.

Leadership brushes off comments that they are really just a realty firm, that their technology is no better than what is available elsewhere and makes some claims that their technology helps their agents grow their business by 25 percent or more.

Regardless of your view, we do know markets and the brokerage firms that lead in those markets. If their claim of “20 percent share in 20 large markets” is not just a rallying cry but a realistic goal, they are likely to be sorely disappointed. In almost all of those markets, no one firm has ever had 20 percent or more market share. And, there are two or more strong, large competitors in each of them, most with well-built technology platforms and thousands of agents. Is it possible they could gain 20 percent market share in even one of those markets in the next three years? Only if they bring a far larger checkbook than the $100 plus million they have now.

As to whether they are a tech firm and not a realty firm, we will let their investors find out in their own time. We tend to agree with former agents and other observers that they are, in fact, a realty firm dressed up to look like a tech firm by their founders. One essential point we make here is that if their technology is so good, then why do they feel the need to offer signing bonuses at this late date in their development to get agents to join them? Just a thought.

It will be interesting to see where Redfin and Compass are in three to five years. We believe they will be larger and in more markets. And, we trust that, at some point, their owners will want to see earnings. But are they an existential threat to the incumbent brokerage market, particularly the leading brokerage firms of today? We don’t think so. They may have their investors believing they are technology firms who happen to be in the residential realty business, but everything we see tells us that they are just as much involved in the realty business as all the other brokerage firms.

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