As Compass prepares to go public, its agent and company economics are starting to come more into focus. The company is reporting huge top-line revenue growth but at the same time its reporting big losses.
But one thing that’s still not exactly clear is just how much the company’s aggressive attempts to lure agents are contributing to Compass’ bottom line. A real estate industry source with knowledge of the initial public offering process told Inman that they believe Compass’ agent splits are actually much higher than they appear if you examine the company’s S-1 filing with the U.S. Securities and Exchange Commission.
“This is supposed to be a disclosure document but they’ve done their best to disclose as little as possible,” the source said.
If you divide “commissions and other transaction-related expenses” by the company’s revenue — the filing says Compass’ generates “substantially all of our revenue from commissions paid for these transactions — it appears that, on average, 82 percent of that revenue went back to agents in 2020, up from 81 percent in 2010 and 78 percent in 2018.
How Compass’ revenue is calculated. Credit: Compass S-1 filing.
That doesn’t tell the whole story, though, the source explained. Even if a small portion of that total revenue is from adjacent service as the filing says, that actually drives the split percentage higher. And the range of commission splits is wide, especially at a company that’s growing so quickly.
The source also pointed to the section of Compass’ S-1 filing related to “sales and marketing expenses” to note that Compass includes “agent acquisition incentives,” in the sales and marketing section of its expenses and not in the “commissions and other transaction-related expenses,” section.
“They’re growing every year, they’re actually getting worse every year,” the source said. “That means probably, a year or two from now, when they flush out all of the financials, it’s going to be like 90 percent splits.”
Real estate tech advisor Mike DelPrete told Inman that the inclusion of “agent incentives” and “agent marketing” pushes splits close to 85 percent of the commission going to the agent, with 15 percent going to Compass. But with more than 19,000 agents, he doesn’t believe including those metrics in the commission cost will shift the split much more than that.
Paul Levine, a partner at Sapphire Ventures, also pointed out the company’s high sales and marketing costs related to agent acquisitions, in an illuminating thread on Compass’ financials on Twitter.
Compass’ S-1, published this week, provides tons of insights into the company’s size, growth, margins, agent productivity, and potential valuation.
Read on for a teardown: pic.twitter.com/9SNCslhkDJ
— Paul Levine (@plevine) March 5, 2021
Looking to Realogy, one of Compass’ top rivals, you can see that commission splits average roughly 76 percent, by taking the total gross commission dollars generated by the company and dividing the “commission and other agent-related costs” section by total commission dollars.
Realogy’s commission splits have steadily risen as the industry has gotten more and more competitive. The upward pressure from those rising splits is usually a frequent point of questioning from analysts that cover the company if you listen to any of their quarterly earnings calls.
Douglas Elliman, another top rival of Compass, reported an average agent split of 74 percent in 2020, which is revealed by dividing the amount paid in real estate agent commissions by “commission and other brokerage income,” disclosed in its yearly 10-K filing with the SEC.
Higher commission splits aren’t new for the industry, but usually companies seek to offset those splits in another way.
EXp Realty, for example, has incentives that allow agents to keep 100 percent of their commissions after hitting a certain cap. But the company keeps costs low with no brick-and-mortar brokerage offices and instead operates as a virtual cloud-based company.
Compass, meanwhile, has nearly 300 field offices, according to the industry source, and four major technology hubs, including one in India.
Other 100 percent commission companies charge agents various fees to make up for the commission dollar profit that’s lost.
“They’ve got Berkshire Hathaway’s cost structure and eXp’s revenue structure,” the industry source said.
The clearer picture of Compass’ agent costs — which is still not very clear — comes as the company prepares for its initial public offering. A number of industry experts have questioned the company’s path to profitability, including DelPrete
“Compass is losing less money per transaction as it scales, but it’s still losing a lot of money,” DelPrete wrote earlier this month. “The path to profitability is uncertain.”
“The fundamentals of the Compass business model, anchored by its low, brokerage-style gross margins, coupled with sky-high expenses, paint a particularly interesting challenge for the business — and the industry — going forward.”
Compass declined to comment on its agent commission splits.
