Philly’s real estate agents are buzzing about it. Competitors are suing it. What is Compass?
The national, multi-billion dollar real estate brokerage is a fast-growing disruptor that hopes to become a one-stop shop for buying and selling homes. It's convinced high-profile investors. Now can it convince its critics?
Standing in a sun-soaked Center City office last month, Lance Pendleton posed an unusual question to the real estate agents before him:
What kind of fruit do you cut up to put in your cereal?
Behind him, a yellow Post-it note was centered on a PowerPoint. He gestured in a very specific way. And then he asked the group which fruit they had in mind.
Almost 90% agreed: a banana.
On the surface, the exercise seemed odd for the several dozen agents who had gathered at Compass’ temporary Philadelphia headquarters. But, Pendleton explained, the lesson was about priming — a technique in which tiny cues are used to subconsciously affect thoughts and behavior. So, when Pendleton flashed the Post-it, gestured in the shape of a banana, and carefully used the words “cut up," he was priming them, he explained, to think of the yellow fruit.
“When you prime someone for something, it is a great way for them to come to a conclusion without you ever having to be verbally involved in the process,” said Pendleton, the head of agent development at Compass, a real estate start-up that is rapidly expanding in Philadelphia. “This is what we’re going to talk about when you help people understand pricing their home today.”
For the next half-hour, Pendleton provided tips on how agents can manage client expectations. Buying and selling a house is now considered one of the most stressful experiences in a person’s life. Compass’ agents, Pendleton explained, need to subtly prime their clients to make the transaction easier — and to convince them to follow their agent’s advice.
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Psychological tactics such as priming have long been deployed by real estate agents — and Pendleton’s lesson didn’t necessarily offer a new idea. Which, to be sure, is why many observers remain skeptical of Compass. The New York start-up — which defines itself as a modern, “technology-driven” brokerage — has captured the industry’s attention with its flashy marketing and speeches that assert it could be a “once-in-a-generation” company with the potential to “transform how part of [the] world works.”
Critics say Compass has failed to show how it is different from long-established brokerages — at the end of the day, the company’s clients are still buying and selling homes nearly the same way they always have.
In interviews, the company’s leadership has said it wants to become a “one-stop-shop,” a platform that not only helps consumers buy and sell homes, but also provides mortgage, title, insurance, inspection, move-in services, and more. As of today, however, the bulk of the business is focused on improving real estate agents’ jobs through technology — leaving many observers wondering: How is Compass different for the consumer?
Despite that, Compass has become one of the industry’s most formidable disruptors. Since launching in 2012 — and then reinventing itself two years later — Compass has raised more than $1.5 billion from high-profile investors, including the Tokyo-based SoftBank Vision Fund, catapulting its valuation to $6.4 billion. That makes Compass more valuable than other big-name start-ups, including Peloton, the soon-to-go-public company that sells stationary bikes for more than $2,200 each, plus subscription fees. For comparison, Slack, the messaging platform, was valued at roughly $7 billion in 2018 — one year before it went public on the stock exchange.
The capital that Compass has raised — including $370 million in a funding round announced July 30 — has renewed speculation that the company could be approaching an initial public offering, a move that would put it on par with other public companies, including Zillow and Realogy Holdings Corp., which owns brokerages including Coldwell Banker and Sotheby’s. A Compass spokesperson said that while going public is “one potential option for the future,” the company is currently focused on “growing the business.”
In the meantime, Compass has deployed millions of dollars scooping up some of the nation’s best agents to try to achieve the company’s “20/20 by 2020” plan — 20% market share in the top 20 markets by 2020. In April, Compass CEO Robert Reffkin said that Compass had reached 20% in San Francisco and Washington.
So far, Compass has recruited more than 12,000 agents nationally, plus 2,200 support staff — including marketing and technology experts. The start-up is active in more than 100 cities within 20 major U.S. markets. In the Philadelphia region, 336 agents and 40 staff have joined since its 2018 local launch.
In early July, the company had $355.8 million in active listings in the region, which includes Delaware, Pennsylvania, and parts of South Jersey. In June, local Compass agents completed 311 transactions.
In an interview at Compass’ temporary Philadelphia headquarters — a large swath of WeWork — multiple agents declined to disclose how Compass structured compensation. Rumors have swirled that Compass offers some of the industry’s most generous signing bonuses, stock options, and splits — meaning how money is divided between agents and brokerages. The Wall Street Journal reported in April that some Compass agents received all sales commissions, with Compass taking nothing, on as many as eight of their first deals.
Still, most agents interviewed said they jumped to Compass because of the company’s vision and technology, not money. Many described a company that streamlines everything, from marketing to technology to software. Margaux Pelegrin, who leads the “On the Square Real Estate” team out of Compass with her mother, said she canceled the real estate coach she had used for years after joining Compass because the “managers are so hands-on with us.”
Traditionally, to be able to focus on sales, agents have had to outsource tasks such as marketing, design, and photography. Compass offers those services in-house. It also seeks to consolidate the software that agents use — Reffkin has said a typical agent logs into 11 platforms daily. Reffkin told Bloomberg he hopes to have 400 engineers on staff by the end of 2019 to work on technology, including Compass’ “makeover” of for-sale signs.
“There are a few programs that Compass has developed, which are really revolutionary,” said Jeff “City” Block, who joined Compass in September. Among those that he described: Compass Concierge, a program that pays for improvements and staging upfront for sellers. The improvements are deducted from the sale price.
Reffkin, who did not speak to The Inquirer, has said in other interviews that the services Compass provides ultimately help agents focus on clients.
Real estate has not been immune to disruption within the last decade. Zillow, Trulia, and Redfin revolutionized how people search for homes. iBuyers — including Opendoor and Offerpad — introduced a model that uses technology to make instant offers on properties. And start-ups such as Houwzer have tried to move the industry away from commissions.
But few real estate disruptors have received as much scrutiny as Compass. Earlier this year, Zillow sued Compass, alleging that the company had poached its agents in an effort to steal intellectual property — violating Zillow’s noncompete agreements. The two companies recently reached a settlement.
In addition, Realogy sued Compass in July, similarly alleging that Compass lured its agents, despite noncompete agreements, and then promised “to indemnify these employees for these breaches if and when they are sued.” In response, a Compass spokesperson pointed The Inquirer to an article on real estate site Inman, in which Reffkin said declining margins and departing agents have put “a lot of pressure on people.”
Many observers, in interviews, chalked up Compass’ success to its fast spending — which, many said, has raised questions about long-term viability. Others questioned how innovative Compass’ end product will be. Still, nearly all conceded that Compass had hired some of the region’s best agents.
“At the end of the day, [Compass hasn’t] upended the way a real estate brokerage works," said Sean Kaplan, a Compass agent associated with the My Philly Nest team. “It’s a real estate brokerage, but with some amazing technology that changes the way it can function."
Asked whether he thinks Compass can one day rise to the scale of companies including Uber and Amazon, Kaplan chuckled: “I hope so.”