REAL Trending Episode 46
Compass & The Issue Of Money In The Age Of Data
From REAL Trends, the trusted source for real estate industry news, this is REAL Trending, episode 46. We’re breaking down the trends of the week, and showing how they impact brokers and agents. I’m Steve Murray, president of REAL Trends. Today, we’re discussing Compass and the issue of money in the age of data. What does it mean?
Compass
Compass has been in the news a lot recently. There’s been commentary from other bloggers, including our friend, Rob Hahn. There’s been commentary by Mike DelPrete, Boulder, Colorado-based strategist and member of the University of Colorado School of Business faculty. All looking at Compass and asking about the money factors and the return factors, and so on and so forth. REAL Trends has been in a unique position to understand some things about Compass others may not. But certainly, we don’t have exclusive access to any information about them beyond the fact that we’ve represented three brokers that they’ve bought, met with them, obviously, numerous times about those and other issues, and had the chance to visit with them personally for an entire day several months ago in their New York City headquarters.
Here’s the fact. Everybody needs to understand there is no such thing as a free lunch in the world. You may have a free lunch for a while, but you won’t have it forever. Or on the alternative side of that, you may have no free lunch ever. Right now, [Compass CEO and founder] Robert Reffkin and his partners, and the team at Compass have been given a vote of confidence by many large investors to the tune of approximately $1.2 billion. Now Robert and his team obviously have to perform to keep getting access to that kind of money. It’s not like investors these days just hand over the money and don’t sit in oversight positions to wonder how it’s being spent, where it’s being spent, when it’s being spent, and for what purposes.
In that regard, Robert Reffkin and his team run a business like anybody else runs a team. The difference being, given their formation, their structure, and their focus, they don’t have to produce earnings this year. Probably didn’t produce earnings last year. More likely than not, they will not have any reasonable earnings in 2020, perhaps even 2021. The goal really is to buy landscape, market share if you will, in the industry and to succeed in growing at double-digit rates quarter after quarter, whether it’s through the acquisition of individual agents or teams, whether it’s through the acquisition of large brokerage companies like Pacific Union, Stribling, or Alain Pinel, or Paragon. They’ve done about 20 total acquisitions. It’s likely they will do more acquisitions as they strive to achieve their goal of 20% market share in 20 key markets by the end of 2020.
Let’s face facts. They rose from nowhere five years ago to become the third or fourth largest firm in the country, depending how you measure things, whether it’s transactions or sales volume. Certainly as a national company, they have the highest average sales price per transaction of any company we’re aware of. So they have been effective at growing in such markets as Chicago, New York, Boston, San Francisco, Seattle, Austin, Houston, Atlanta. Nashville, Washington DC, South Florida, Los Angeles and San Diego. It may be that they don’t have to make money this year. It may be they don’t have to make money for several years.
Yes, at some point, investors will expect the possibility of a stable, growing, profitable business. But that is probably not the case now, and might not be the case for several years to come. You could look back at just recently, the public offerings of Lyft and Uber. We live in a time where a company like Lyft, who has revenues slightly over $2 billion and a reported loss of almost $900 million, went public at nearly $23 billion. There is no EBITDA multiple you can use to get to that number off of a $900 million loss. Following up on that, expectations for Uber, which if I’m coding this correctly, $11 billion in revenues, and a couple of billion dollars in losses, is talking about a market valuation of $60 billion to $80 billion.
This is somewhat predicated on experiences of other companies like Amazon, who for years made no money at all, but was building infrastructure and market share and growing their business, so a bet on someone like Compass is no different in many regards than a bet on Amazon that somebody may have made 15 years ago. Enough said about Compass. We think they will bear watching. They’re certainly an exciting company. They certainly have changed competition in the markets they’ve entered. Be interesting to see how it turns out. More on that, in later Real Trending episodes.
Money In The Age Of Data
Secondly, it’s clear that we’re living in an age of big data. And everybody’s heard about it. Everybody’s read about it. And big data acted upon by artificial intelligence. We actually employ it, each one of us do, almost every day when we interact with Siri, or Alexa, or Amazon, or many of the finer online retail establishments. They know what you bought. They know what you looked at. And if they’re a well-built system with AI, the system knows what you looked at, knows what you flagged, and in a simple fashion, pops up ads to say, “Hey, you liked that book by John Sanford. People like you, who bought that book, also bought other books. And here they are.” That’s a simplistic form of artificial intelligence.
But as we’ve reported on the arms race among big firms in our business, whether it’s Compass, Redfin, Realogy, Keller Williams, RE/MAX, and Berkshire Hathaway, among others, Zillow and realtor.com included, it’s clear that underneath the hood is not just providing a better CRM for their agents and brokers in their networks, or the consumers who visit them on their websites, or if you use their agents to buy and sell homes. For the same point, we expect the iBuyer companies, whether it’s Opendoor, Offerpad, Knock, or others, they’re going to be gathering enormous amounts of information about buyers and sellers of houses, as are the established incumbent national real estate organizations in the attempt to be the first to have a system that can predict much more reliably than systems of today, who’s going to be moving, when they’re thinking about it. What actions are they taking to think about it?
I think about a long, long time ago, early 1990s, a company founded by Steve Cropper and his partners in Cambridge, Massachusetts, he accessed sold information from a variety of sources and used push button phone decision trees, so you could access sold prices on homes. This is obviously pre internet days. We had the pleasure of working with him. This is now 27 years ago. And even that rudimentary of system, you could tell by where people were looking for sold data versus where they lived, as to what they were thinking about. If they’re looking at homes around their own neighborhood and what those sold comps were, they’re thinking about their own value. If they’re looking five, eight, or 10 miles away, or across the state, or across the country, they might be thinking of moving.
Well, in a modern day era, the systems of all the companies I’ve mentioned, they’re going to build big data with artificial intelligence interacting with their agents and with consumers to come up with real information to alert agents when their customers, or potential customers, are thinking about moving. We know that Zillow and realtor.com already have major artificial intelligence built in helping them decide when, where and how to apply different customer service solutions to buyers and sellers of homes, so they can improve the possibility of filtering good prospects from those who are not as good.
This age of data goes beyond just software, well beyond just the software. Maybe the battle in the past has been: Who’s got the best website? Who’s got the best CRM? Who’s got the best transaction management? That will no longer be the battleground. It will be assumed that you have to have well-functioning and integrated platforms for that. The battleground now shifts. Who can integrate and analyze customer data and agent data to affect a better outcome?
Learn more about industry trends, marketing and technology strategies, as well as listen to past REAL Trending episodes on our website at www.realtrends.com/blog. This has been Steve Murray. Thanks for joining us.
