Jeff Lowe, Chicago’s top-producing broker, was finishing a stationary bike workout when the emails started flying in on Thursday morning. News that the SoftBank Vision Fund had agreed to a $450 million investment into real estate brokerage Compass — claimed to be the largest real estate tech investment in U.S. history — was sending ripples throughout the industry.

Jeff Lowe, Chicago’s top-producing broker, was finishing a stationary bike workout when the emails started flying in on Thursday morning.

News that the SoftBank Vision Fund had agreed to a $450 million investment into real estate brokerage Compass — claimed to be the largest real estate tech investment in U.S. history — was sending ripples throughout the industry.

“When I heard about it, I was actually at the gym, and tons of people forwarded me information about it,” said Lowe, who just recently brought his team of 14 agents to Compass after a decade with Berkshire Hathaway HomeServices. “It was exciting — and the timing was great for us.”

Momentum was already strong with the November launch of Compass’s first-ever Chicago location. But the announcement that SoftBank Vision, a $100 billion tech fund backed by leading international financiers, had pledged a record-setting amount to Compass surely reinforced Lowe’s decision to entrust his longtime team at the five-year-old startup, a bold move for anyone — not least of all Chicago’s biggest agent.

“We were pretty happy at Berkshire Hathaway, but we were just ready for a change and there really weren’t any companies in Chicago that caught our eye,” said Lowe, who earlier this year closed a headline-making deal for the famed Theurer-Wrigley Mansion. “A lot of the bigger name brands are similar — whether it’s Coldwell Banker, Baird & Warner or Sotheby’s — they’re all similar and run on similar platforms, but Compass brought a different kind of opportunity.”

But just what is that opportunity for Lowe and agents like him? And does it justify Compass’s astronomical rise?

The road to a $2.2 billion valuation

Lowe isn’t alone. Since 2013, the rapidly ascendant real estate technology company, initially named “Urban Compass”, has grown from 144 agents to more than 2,100 in 10 metropolitan markets. Executives say Compass is on track to tally 16,000 transactions and more than $14 billion in sales by the end of 2017, with $350 million in revenue forecasted for the year.

During roughly the same period, investors have swooned, all but lining up to pour millions into the technology-forward real estate brokerage. Since an initial seed round of $8 million in late 2012, the company has received funding every year since, most notably with a Series E round of $100 million from Fidelity Investments last month and the Softbank injection this week. In total, the company has snagged $758 million from investors, upping its valuation to $2.2 billion.

Compass founders Ori Allon and Robert Reffkin

Compass founders Ori Allon and Robert Reffkin. Credit: Compass/Facebook

The allure for both brokers and investors, Compass executives insist, hinges on the company’s unyielding focus on the agents themselves and technology as a stepping stone to the future of real estate, with many of its benefactors characterizing the organization as a tech innovator first, and brokerage second.

In November, Compass CEO Robert Reffkin announced an ambitious strategy aimed at grabbing 20 percent of the market share in the 20 largest U.S. cities by 2020, while also developing a proprietary Customer Relationship Management (CRM) platform, high-tech, solar-powered signage and targeted digital advertising tools. The Softbank funding would provide the capital for the so-called “2020 by 2020” plan and then some.

“We’re obsessed with creating value for agents through technology and building a single integrated platform that allows them to grow their business,” said Compass Chief Revenue Officer Rob Lehman following the Softbank deal. “This funding allows us to make the largest investment in real estate technology development that’s ever been made. That’s the core of it, but the other exciting thing is that we’re going to be able to make some really opportunistic and strategic investments along the way to be able to accelerate our journey.”

Real estate ‘lowest hanging fruit for disruption’

Among venture capitalists, the Softbank funding–believed to be the biggest investment in real estate technology to date–was hardly surprising, but raised unanswered questions about where the round would be focused.

Indeed, with an annual burn rate of $45 million, the Softbank investment alone would provide runway for the next decade–far more capital, they believe, than necessary to simply expand into new markets and develop innovative technology.

“The brokerage community, in general, is the lowest hanging fruit for disruption within tech and that’s why you’re seeing these big investments,” said Roelof Opperman, a senior associate at Fifth Wall Ventures, a venture capital firm focused on the intersection of real estate technology that has invested in VTS, the asset management and leasing platform, and Opendoor, a high-tech real estate investor that buys and resells homes within days.

“Real estate agents not only have the least moat around them, they’re the most fragmented market, and there have been a number of innovations that have come out that have really disrupted them — including Opendoor.”

One venture capitalist, who was not involved in the Softbank investment but who has invested heavily in real estate companies and technology startups, cast doubt on Compass’s vow to invest entirely on new markets and technology. Much as Opendoor and OfferPad cut out agents in exchange for an automated experience, the investor believes Compass has its sights set on a similar iBuyer strategy, as well as international expansion.

“Basically, I think Compass has done a really great job of catering to the real estate community, providing sleek tools to a fragmented market by consolidating and prioritizing the best of what’s out there,” said the investor, who asked not to be named. “But, I think, the issue there is that it’s a bit of a Band-Aid over a gunshot wound.

“At the lower end of the market, and even the middle of the market, people are just not going to use real estate agents long term. If you’re buying on the lower end, I don’t think you need it. And I think Compass knows that they can’t just have a service model and expect to survive.”

Compass’s Lehman denied any plans involving investment in existing iBuyer companies or intentions to develop a competing platform. However, he said brokerage acquisition may be in the cards.

“We have no designs for disintermediating the real estate agent because we think they are core to the buying and selling process, and we think that we can craft the future of this profession by elevating real estate agents from being individual contributors to being the CEOs of their business,” said Lehman. “We think that that’s what the future of this industry looks like and that’s what we’re 100 percent focused on.”

Agents say marketing, sales resources and bonuses key to recruitment

Interviews with current and former Compass real estate agents, meanwhile, indicate that hefty signing bonuses and generous resources such as in-house marketing and sales operations teams play nearly as big of a role as the heavily-touted technology.

Some remarked that, unlike Coldwell Banker, Keller Williams and Prudential, Compass does not operate as a franchisor, which critics argue can be limiting and restrictive with regards to branding, marketing and experimentation.

“When I go to the office in Aspen, or if I’m in Beverly Hills, or if I’m in Pasadena, I know when I come in the door we’re part of the same culture, and that’s important,” said Brian Lewis, a New York-based agent who joined Compass in October following 18 years at Halstead Property.

“With branding you don’t want to brand for the sake of branding,” Lewis continued. “We’re not McDonald’s. We’re jazzed about the best technology in real estate on Earth — and I don’t say that with cockiness, I say it with assurance — but we don’t forget that this is first and foremost a people business.”

Alex Venditti, a former agent with Compass based in Washington, D.C., who left for Coldwell Banker in 2016 (Compass told Inman he was let go), said that, rather than technology, among the huge draws for incoming agents are signing bonuses that best competing real estate companies, and marketing and sales resources.

Conference Room at Compass's Chicago office

Conference Room at Compass’s Chicago office

“Every one of them gets a huge signing bonus,” Venditti said. “Every single person coming in on a higher level–and that’s most people–are getting a signing bonus as well as a marketing budget. Not to mention: parking, office space and I could go on and on and on.”

Venditti, however, raised issues with Compass’ business model, which he described as unsustainable and an anomaly among real estate companies nationwide. Under a typical commission split, a listing agent at Compass who sells a $1 million property would earn around $30,000 while the brokerage takes in a paltry $3,000 cut, presuming it’s a 90-10 split (Compass said the industry standard is 70-30, but numbers vary widely depending on the brokerage, market, and seniority of the broker or agent).

“If they lure me over with a $100,000 signing bonus and a $50,000 marketing budget, now how many $1 million deals am I going to have to sell just to pay back that one $150,000 bonus they gave me up front — not to mention the cost of the electricity, water, the space, rent, the paper, the office equipment, everything else they have to pay for? How does that even make sense?” Venditti said.

Compass pushed back on this description of its bonuses, saying in a follow-up email after this article was originally published that “an agent with a Gross Commission Income of $1 million will get a $13,000 signing bonus on average. Reports of lavish signing bonuses are inaccurate.”

Sam DeBord, a managing broker for Seattle Homes Group, wondered, too, if Compass’s numbers add up, or if, instead, many investors are banking on the company’s work culture, which brokers have described as more akin to the vibrant environs of Google or Twitter than, say, the corridors of power at Prudential.

“Many of the smartest people I know are scratching their heads,” DeBord told Inman on Friday. “A Redfin investor is betting on commission compression. Compass investors must believe the opposite to support a $2 billion valuation. The disruptiveness is hard to pin down. CRM isn’t defensible. The value is in the network, which agents largely own and can take with them at any point. So maybe investors are buying into the staying power of ‘culture.’”

Lewis, the former Halstead Property agent, dismissed criticism from real estate competitors, describing Compass’ vision for the next decade as light years ahead of traditional brokerages.

“I didn’t impulsively go to Compass,” Lewis added. “I was slowly but surely, on my own, convinced it was the right move for my clients and also for my future. I literally felt like I was shoveling coal in a steam engine for a long time and doing very well with it and enjoying the ride and suddenly a bullet train running on magnets zips by, and I said, ‘That’s the future.’ That literally is going to carry me forward for the next 20 years and my clients will benefit greatly.”

This article was updated following publication to correct the spelling of DeBord’s last name (incorrectly spelled as “DeBoard” in an earlier version”), and to include more information supplied by Compass. 

Email Jotham Sederstrom

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