The DelPrete Probability Paradox

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There is an inverse correlation between how likely something is to occur and how much attention it gets – a phenomenon a friend has dubbed the DelPrete Probability Paradox.

Why it matters: This leads to attention being focused on the highly exciting, yet least likely scenarios, which dilutes focus and clarity while creating noise and distraction. 

  • Getting informed and being entertained are two separate things; boring headlines don’t sell papers.

 
 

Real estate is rife with possibility – news headlines and conference agendas are packed with topics that exist in the realm of the possible and plausible, but not necessarily probable.

  • Will AI replace agents? What will happen to interest rates? How will the commission lawsuits change the industry?
     

  • The reality is that no one knows, and the most probable outcomes are slow, incremental deviations from the current state, not radical changes.

 
 

Probability revolves around the existence of data, facts, and evidence – the more we know, the more certain the predictions.

  • The least likely events – the possible – generally exist in a reality light on facts and flush with speculation. 
     

  • Facts are important; they form a trajectory of likeliness – plotting them over time and triangulating data points can identify likely outcomes.

 
 

For example: Opendoor’s IPO prospectus presented a very plausible argument supporting its ability to attach adjacent services to a real estate transaction.

  • The company asserted that because it had success attaching title & escrow services to its sales, it would be able to attach other adjacent services like home loans.
     

  • The story made sense – to those outside of the industry – but in the end it didn’t work and Opendoor shut down Home Loans. Plausible, yes, but not probable.

 
 

Inertia rules: Newton’s First Law states that an object in motion will stay in motion unless acted upon by an outside force – in other words, systems tend to remain constant.

  • Consider the percentage of homeowners that use a real estate agent to sell their home: even after the introduction of Zillow, Opendoor, and billions of dollars in venture capital pushing alternative models, it remains at a 40 year high.

 
 

Speculation is running high with the recent NAR settlement; my thoughts were summed up in this Bloomberg article.

  • "Right now, everyone is turning this ruling into what they want it to be,” said Mike DelPrete, who teaches courses on real estate technology at the University of Colorado Boulder. 
     

  • “Some people are saying not much is going to change. Others want the story to be that it’s a seismic shift for the industry.  The whole thing is being driven by fear and uncertainty.”

The bottom line: Don’t confuse news with entertainment – news is meant to inform, entertainment is meant to distract. 

  • Making smart decisions requires cutting through the noise and gathering evidence, pattern matching, and distilling insights.
     

  • But it's easy to get distracted, which is the crux of the DelPrete Probability Paradox: the less likely something is to occur, the more attention it gets.

Profitability as Proxy for a Healthy Business Model

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In 2023, the largest, publicly-listed real estate companies had another unprofitable year with over $1.1 billion in losses.

Why it matters: Profitability is an important metric – it’s a proxy for a healthy business model that has product market fit, is financially viable, and can generate returns for shareholders.

Dig deeper: Net Income (or Loss) is the standard, GAAP-friendly, apples-to-apples method to report a company’s overall financial profitability (or lack thereof).

  • Of all the public companies in the real estate ecosystem, eXp Realty was closest to profitability in 2023, while Compass and Opendoor had the largest losses.

 
 

Net Margin is a company’s net loss proportional to its revenue – losing $100 million is different for a company with $1 billion in revenue compared to a company with $100 million in revenue.

  • Net margin is an illuminating measure of a company’s business model; how effective is it at generating profits for shareholders? Is the company a cash generator or a cash incinerator?
     

  • eXp once again comes out on top, but the outlier is Redfin, which, proportional to revenue, was significantly less profitable and less capital efficient than its peers.

 
 

The Net Income of the “biggest losers” is being dragged down by large stock-based compensation expenses (compensating staff with stock options and grants).

  • In 2023, Zillow had $451 million in stock-based compensation expense, Compass $158 million, and Opendoor $126 million. 
     

  • These equity awards are a non-cash expense, but they do have a cost: diluting shareholders.

 
 

With exponentially higher stock-based compensation expense than any other company, Zillow is the noteworthy outlier in the chart above.

  • Without it, the company would be materially profitable (along with eXp Realty and Real).

Net loss per transaction is another method to highlight business model efficiency, similar to OpEx per transaction.

  • The low-fee brokerages, with lower operating expenses, and Anywhere with its large franchise network, have the smallest net loss per transaction.
     

  • Note: for Zillow, I’ve assumed 3 percent of 4 million transactions.

 
 

Throwing Opendoor into the mix highlights the inherent challenges of iBuying: comparatively, and in the current market, it’s a much less profitable business.

 
 

The bottom line: Profitability is not the same as cash flow; unprofitable businesses are not necessarily losing money or at risk of going bankrupt.

  • But it is a valid measure to consider when evaluating the merits of a particular business model – eventually, a business needs to make money.
     

  • For the time being, the most profitable – or least unprofitable – companies are traditional brokerages, especially cloud-based ones, while the disruptors and tech companies continue to struggle with sustained profitability.

Agent Migration and the Power of New

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I recently wrote about Learning From A New Generation of Brokerages, which includes the migration patterns of tens of thousands of agents across the industry. 

Why it matters: Agents change brokerages for a variety of reasons – technology, compensation, support, brand – but it turns out one of the biggest factors may simply be that agents are attracted to new things.

  • During 2023, agents continued to stream out of the big legacy brands for the lure of low-fee brokerage models, where agents can keep more of their commission.

 
 

Dig deeper: Aside from compensation structures, another factor appears to be at play: the average age of the brokerage.

  • Real, Fathom, United, RealtyOne, Compass, and eXp Realty, with an average brokerage age of 14 years, are all attracting agents.
     

  • While HomeServices of America, Keller Williams, RE/MAX, and Anywhere – the legacy brands with an average age of 43 years – are all losing agents.

 
 

Which raises an interesting question: why?

  • Real estate agents are entrepreneurs, and like the hard-working hustlers they are, appear to always be looking for something new: new ideas, new models, and new opportunities to grow their businesses.
     

  • New brokerages are brimming with actual and perceived potential – the potential to be more and do more for agents.

The bottom line: The industry is shifting, and one powerful trend is the migration of agents between brokerages. 

  • A number of factors are driving that movement, but a major determinant appears to be the relative age of the brokerage.
     

  • Which is a timely reminder of the entrepreneurial spirit of agents and the alluring power, and potential, of something new.

Learning From A New Generation of Brokerages

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Behind the hype of year-end press releases and the incomprehensible density of financial metrics, clarity is emerging on the shifting brokerage landscape.

Why it matters: The industry is changing – a new generation of brokerage businesses is rising, attracting more agents and operating more efficiently than their legacy peers.

Context: Overall transactions were down 19 percent in 2023 compared to the previous year – a significant market slowdown.

  • eXp Realty, Compass, and Keller Williams outperformed the market, with smaller transaction declines, while the big legacy firms HomeServices of America (HSoA) and Anywhere were on par with the overall market.
     

  • The notable outliers are Redfin, which underperformed the market by a wider margin, and the Real Brokerage, which grew its transaction volumes a whopping 78 percent.

 
 

Transaction volumes over the past seven years paint a fascinating picture of disruption.

  • During that time we’ve seen the exponential growth of eXp Realty and Compass, moving from effectively zero to top spots in transaction and sales volume.
     

  • At the same time, the two incumbent leaders (Anywhere and HSoA) went from total dominance to being usurped by these two disruptive start-ups.

 
 

Agent migratory patterns continued at pace with agents streaming out of the big legacy brands for lower-fee models (and Compass).

  • In the current downturn, the lure of the low-fee brokerage is simple: agents can keep more of their commission.
     

  • Which comes at the expense of the large, legacy brands including RE/MAX, HomeServices of America, Anywhere, and Keller Williams, who collectively lost over 19,000 agents in 2023.

 
 


Here’s another way to look at the same data that helps show perspective relative to each firm's size.
 

 
 

Zooming in to agent movement between Keller Williams, RE/MAX and eXp Realty highlights this continuing flow of agents.

  • According to 3rd party data from hundreds (but not all) MLSs, 1,627 agents moved from eXp to KW during 2023, while 3,099 agents moved in the opposite direction -- for a net gain of 1,472 agents in eXp's favor. 
     

  • Similarly, 388 agents moved from eXp to RE/MAX during the year, while 897 moved in the opposite direction – for a net gain of 509 agents in eXp’s favor.

 
 

Alongside the shifts in transaction and agent count, there is an underlying shift in brokerage business model efficiency.

  • Keeping in mind that eXp is the largest brokerage based on transaction volume, its operating expenses (OpEx) per transaction is one-fifth its brokerage peers.
     

  • Even Redfin, which has exemplified an efficient, tech-driven brokerage model, has a cost structure closer to an incumbent than a disruptor.

 
 

What to watch: The results bring to mind an out-of-context but still relevant Gary Keller quote: “We’re losing so slowly we think we’re winning.”

  • But it’s not as simple as winners and losers, and each number tells a part of, but not the entire, story.
     

  • For example, although Keller Williams lost the most agents in 2023, it still outperformed the market -- so context is key.

The bottom line: In a recent Inman presentation, I unpacked what a Netflix vs. Blockbuster moment in real estate would look like, and how a receding tide reveals business model resiliency and clues about future growth.

  • The key message here is less about winners and losers, and more about learning.
     

  • It’s a transformative time in the industry, and now is an opportunity to pause, step back, critically evaluate, and use the moment to get smarter – what can you learn?

Positive Signals for Compass & The Market

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Compass’s for sale listings are up 15 percent compared to the same time last year – just one example of rising activity across the U.S. real estate market.

Why it matters: An increase in for sale listings is a welcome sign of more sellers coming to market, good news for businesses in the real estate ecosystem, and a promising start to the year after a depressed 2023.

  • Compass, the nation’s largest brokerage based on sales volume, currently has 2,000 more listings than the same time last year – and that number is increasing.

 
 

On a year-over-year basis, the number of Compass listings has gone from down 8 percent in July to up over 15 percent at the end of January – a significant change in fortunes.

  • Aside from being good for buyers, this is good news for Compass – more listings should lead to more sales and more commission revenue.

 
 

New listing volumes and revenue are indirectly correlated (because of the time lag between a listing and a sale). 

  • In Q3 2023, Compass’s listing volumes were down 5 percent and revenue was down 10 percent year-over-year (YoY).
     

  • But things are looking up: Compass listing volumes were up 3 percent in Q4 and are currently up 13 percent in Q1 – positive signs that won’t appear in Q4’s financials but will land in Q1 2024.

 
 


And Compass is not alone; according to Redfin’s national data, new listings are up significantly across a number of major U.S. markets.
 

 
 

The increase in activity appears to be driven by – wait for it – interest rates.

  • With the recent drop in rates, mortgage demand has spiked to the highest level in six months.

 
 

The bottom line: From a transaction volume standpoint, 2024 is off to a promising start.

  • From a business perspective, more transactions means more commission income – the $90+ billion that fuels so much of the industry, from agents to brokerages, from portals to tech vendors. 
     

  • It’s still very early, but these are signs that would signal a positive shift in the market and, therefore, good news for the ecosystem of businesses that surround the transaction.

The Great Disruptor Hibernation Continues

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When the market turned in mid-2022, many real estate disruptors began the long and painful process of reducing expenses, laying off staff, and reorienting their businesses to a new, challenging reality.

Why it matters: A year and a half later most disruptors are still around, but remain a shadow of their former selves and have yet to show signs of emerging from hibernation.

Dig deeper: The pre-2022 low interest rate environment was a breeding ground for real estate tech disruptors that relied on a financial component as the core of their product offering and business model – using cheap money to solve consumer pain points (iBuying, Power Buying).

  • Because of this, many disruptors operate in the mortgage space and hired mortgage loan originators (MLOs) to service their customers.
     

  • And as these companies rightsized to a high interest rate environment, they slashed their MLOs anywhere from 50 to 85 percent (and in Opendoor’s case, down to zero).

 
 

Zillow has been the outlier, accelerating the hiring of MLOs for Zillow Home Loans since February ‘23, at the same time its smaller peers have been shedding the same.

  • This is both a clear signal of intent around Zillow’s plans to build Zillow Home Loans, and a powerful demonstration of the benefits of having a strong balance sheet.
     

  • Read more: Zillow Still Crazy About Mortgages.

 
 

Arch-disruptor Opendoor, meanwhile, has embraced reality by significantly reducing the amount of homes it’s acquiring – all in an effort to streamline the business.

  • Opendoor’s purchases have stabilized at around 1k per month – orders of magnitude lower than the highs of ‘21 and ‘22 – but with a recent uptick as the company aims to double its monthly acquisitions. 
     

  • The goal appears to be refocusing the business on the core iBuyer proposition after years of adjacent distractions (like Opendoor Home Loans).

 
 

The bottom line: For many disruptors – private companies that don’t publish much data – MLO count remains the best leading indicator of demand for their services.

  • For the time being the disruptors are still in hibernation mode, but if and when the tide begins to turn, MLO count should begin to tick upwards.
     

  • And by that time, the surviving disruptors will be battle-hardened with more nimble and streamlined operations, better product-market fit, and on stronger financial footing with more rational business models.

Redfin: High Debt, Low Cash, and Unprofitable

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Redfin’s latest results reveal a worrying financial trend – and raise questions about the sustainability and viability of its business model.

Why it matters: A lot of debt, dwindling cash, and an unprofitable core business are a challenging collection of attributes for the business to deal with, which may force a larger strategic change.

  • It all started with Redfin taking on a substantial amount of debt in 2020, eventually rising to $1.2 billion by 2021.

 
 

Redfin then made a pair of expensive acquisitions: In 2021, it bought Rentpath for $608 million, and then acquired Bay Equity Home Loans for $138 million in 2022.

  • Since 2020, Redfin’s available cash balance (cash and liquid investments) declined sharply, from over $1 billion in 2020 to just $173 million at the end of Q3 2023.

 
 

Redfin is using its cash to gradually repay its debt, but the challenge is that the business itself is unprofitable (as measured by Net Income/Loss).

  • Redfin has incurred a net loss since at least 2018 – it doesn’t appear that the business has ever been profitable.

 
 

Over the years, Redfin has assembled a collection of unprofitable business lines.

  • Redfin’s real estate brokerage is unprofitable, its now-closed iBuying business, RedfinNow, was unprofitable, its rentals business is unprofitable, and its mortgage business is unprofitable.

 
 

To say Redfin’s problems are a direct result of the market would be incorrect – it’s not the market, it’s the business model.

 
 

This leads to a strategic dilemma: Redfin is significantly under-resourced in a challenging, competitive market.

The bottom line: A receding tide reveals, and the current market is highlighting Redfin’s various challenges.

  • Strategically, it appears that Redfin is overstretched with limited resources, and up against well-funded competitors with cost advantages, something it cannot compete with.
     

  • This is a galvanizing moment for the business; one way or another, something has to change.

Agent Migration and Brokerage Transformation Continues

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As 2023 grinds into the final months of the year, agents are continuing to migrate from legacy brands to low-fee, cloud-based brokerages.

Why it matters: A receding tide reveals, and the current market dynamics are revealing clear agent attraction trends – with implications that may affect the industry for years to come.

The data: Between the second and third quarter of the year, agents continue to flock to the low-fee / high-split brokerages where they are able to keep more of their commission dollar.

  • This is at least the third straight quarter of declining agent counts at the large legacy brands: Anywhere, RE/MAX, and Keller Williams.
     

  • The noteworthy outlier is Compass – which acquired Realty Austin and its 630 agents – which operates as a legacy brand but has the growth rate of a low-fee brokerage.

 
 

Since the beginning of the year, 10,500 agents have left the big legacy brands, while the exact same number of agents have joined the low-fee brokerages. 

  • Agents are voting with their feet, and moving from one brokerage paradigm to another.

 
 

Agent migration is shaping transaction volumes and brokerage market share.

  • Between Q2 and Q3 of this year, the number of U.S. existing home sale transactions was down five percent, with some brokerages over- and others under-performing the market.
     

  • Low-fee models Real, United, and eXp Realty continue to outperform the market and grow during a down market – a remarkable achievement.

 
 

Yes, but: While this metric shows momentum, it’s not perfect; one down quarter can result in a subsequent up quarter, which appears to be the case with Compass – it didn’t have a bad Q3, it just had a great Q2.

The bottom line: As measured by agent count, there is an undeniable shift occurring across the industry in this time of upheaval, uncertainty, and change.

  • It’s worth noting that the low-fee / cloud-based brokerage models have another important attribute: low operating expenses (no offices!).
     

  • That fact, coupled with growing agent numbers, is laying the groundwork for a transformational shift in the industry that may set the tone for years to come.

Note: Thank you to Keller Williams, United Real Estate, and RealtyOne for trusting me with their data. As private companies they don’t have to share. Certain data for RE/MAX and Berkshire Hathaway HomeServices is not publicly available, which is why it is not included. 

Visualizing Existing Home Sales

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A collaboration between Mike DelPrete and Aziz Sunderji

There is an abundance of data about the U.S. housing market – and for every metric, there are an infinite number of ways of slicing and dicing the data.

Why it matters: What’s needed is a way of simplifying the data – ultimately, data should tell a story and provide meaning.

  • This week I am teaming up with real estate data visualization specialist Aziz Sunderji of Home Economics to contextualize yesterday's existing home sales report.

 
 

401,000 homes were sold across the country in August, and we think the best way to contextualize the data is to compare these figures to the same month in prior years. By this measure, home sales last month were the lowest since August 2010.

 
 

Sales in the West have declined against the long-run average more than in other regions (though the Northeast is not far behind). Transactions are holding up better in the Midwest and in the South.

 
 

Momentum in home sales over the past six months has been sluggish, and well below historical averages.

 
 

And sales are consistently falling below the historical average, especially during the past five months -- although August was a slight improvement over July. 

 
 

The current downturn shows signs of similarity to past housing downturns, both in velocity and duration.

 
 

Our ask: Use these charts! Include them in your own research and use them to educate consumers, board members, and peers.

  • The more we collectively understand the data – and make meaning from it – the better decisions we’ll make to move forward with clarity.

Zillow Still Crazy About Mortgages

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In a down market with historically high interest rates, Zillow continues to invest in its mortgage business – Zillow Home Loans – and is the only company among its peers that is adding mortgage loan originators (MLOs) to its headcount.

Why it matters: While other real estate tech companies are shedding mortgage headcount, cutting expenses, and closing their mortgage operations, Zillow’s investment is a clear sign of strategic intent and a reflection of its ability to invest for the long-term.

Zillow’s real estate peers, including iBuyers, Power Buyers, digital brokerages, and mortgage start-ups, have all shed MLOs over the past 18 months.

  • Some companies, like Opendoor, have shut down their entire mortgage operations, while others have cut MLO headcount by half (or more).

 
 

The number of Zillow’s MLOs has fluctuated over time, but there has been a sustained and noticeable increase throughout 2023. 

  • Zillow’s MLO headcount is up around 40 percent since February ‘23.

 
 

Better Mortgage, which recently went public via a SPAC, presents a very different story of MLO headcount. 

 
 

Zillow Home Loans is still relatively small compared to industry peers, including Redfin’s Bay Equity and Prosperity Home Mortgage (a subsidiary of mega-broker HomeServices of America).

 
 

Zoom out: And as I’ve written in the past, these companies are a drop in the bucket compared to mortgage industry behemoth Rocket Mortgage.

 
 

Remember: Zillow’s recent financial reporting changes have removed an informative layer of transparency from its business.

  • After six years of losses, it’s no longer possible to track the profitability and operating expenses of the mortgage business unit.

The bottom line: The number and growth of MLOs is an important leading indicator of a company's firepower and strategic intent.

  • With continued struggles around profitability and uncertainty around adoption, Zillow Home Loans is far from an unequivocal success story – but the company continues its heavy investment.

  • The depth of investment stands out by going against the grain of other mortgage companies, real estate tech disruptors, and the overall market – which highlights the importance of mortgage for Zillow.

Industry Evolution Continues During a Receding Tide

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At the close of the first half of 2023, key metrics – agent count, transaction volumes, and overall profitability – highlight a brokerage industry evolving along two paths.

Why it matters: In my recent Inman presentation, I unpacked what a Netflix vs. Blockbuster moment in real estate would look like, and how a receding tide reveals business model resiliency and clues about future growth.

Earlier this year, I suggested that “to identify the brokerage business models of the future, one simply needs to follow the agents.” (Read more: Agent Migratory Patterns.)

  • There is a clear split between the low-fee brokerage models that are attracting agents, and the legacy brokerages that are shedding agents – a trend that continues in Q2.

  • The notable change is Compass, which once again grew its agent count after shedding around 400 agents during Q1 – putting the company back on the growth side of the ledger.

 
 

The net change in agents is correlated to brokerage transaction volume; in general, more agents yield more transactions.

  • The overall market was up 37 percent in Q2 compared to the previous quarter, which can be attributed to seasonal growth.
     

  • The most notable outliers of the past quarter are Real and Compass, which both significantly outperformed the market.

 
 

And transaction volumes directly correlate to brokerage revenue.

  • Overall brokerage revenues are depressed in 2023, and continue to follow seasonal trends.
     

  • Compass has maintained its revenue leadership position, with eXp making significant gains over the past two years (while industry incumbent Anywhere has lost its top spot).

 
 

Overall brokerage profitability, a function of revenue and a company’s operating expenses, is clearly split into two camps.

  • The legacy brokerages had a much better Q2 (including Compass being cash flow positive), but are still unprofitable at a Net Income level for the first half of the year.
     

  • With significantly lower fixed costs and operational overhead, the low-fee brokerage models continue to have a structural advantage, and are operating much more profitably than legacy brokerages in the down market.

 
 

The bottom line: In my recent Inman presentation, I outlined what a Netflix vs. Blockbuster moment in residential real estate would look like.

  • Incumbents would have a stagnant market share with high fixed costs and a limited ability to evolve, while disruptors would be exponentially gaining market share with an easy to define unfair advantage.

  • The shifting market – the receding tide – is revealing these changes across the industry, leading to a bifurcation of business models with key differences in market share, growth, and profitability.

The Last Mile Problem

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Real estate has a last mile problem. Despite advances in online lead generation, tech platforms, emerging AI assistants, and disruptive new models -- an agent is still the necessary bridge to a consumer. Watch a clip of me outlining this phenomenon during my Inman Connect keynote below.

The last mile problem is a concept that comes from logistics and transportation.

  • Getting goods from a factory to a warehouse, and from a warehouse to a distribution center, is the easy part.
     

  • The difficulty comes with the final delivery -- the last mile -- where the experience is uncertain, complex, and expensive.

 
 

Real estate's last mile problem is similar -- you can buy thousands of online leads, invest millions into building a tech platform, and use predictive analytics to score how likely a lead is to transact.

  • But you still need an agent to pick up the phone, make a call, and build a relationship with a consumer.

 
 

And that's why the biggest players in real estate are working with agents, and not trying to disintermediate them.

  • Zillow's Premier Agent and Flex programs keep high-quality agents at the center of the transaction.
     

  • And now Opendoor is pivoting back to agents with a significant marketing and partnership campaign.

 
 

Online real estate companies probably wish agents weren't necessary and that they could go directly to consumers -- and agents probably wish the online disruptors would just go away.

  • But both forces operate in a tentative equilibrium, not necessarily liking each other, but able to work together to achieve a common outcome.
     

  • Which leaves real estate agents as the last mile solution -- the unavoidable, indisputable, and irreplaceable central part of the transaction.

Watch my enitre keynote, Pandemonium, to hear more about the industry's Netflix vs. Blockbuster moment and what a receding tide reveals about business models and true intentions. Enjoy!

Compass’ Cash Crisis Closes

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After 15 months of cost cutting, Compass is free cash flow positive, making more money than it spent in Q2 2023.

Why it matters: With a high cost base and dwindling cash reserves, Compass was forced to cut operating expenses as it pivoted to a profitable, sustainable operation – which it has done.

Dig deeper: I first wrote about Compass' cash burn problem in May 2022, and it's been a busy 15 months.

  • Over the past year, the company has cut expenses by about 35 percent – or $500 million – through three rounds of layoffs.
     

  • Compass’ annual operating expenses have dropped from $1.45 billion to $950 million, with a goal of getting down to $900 million by the end of the year.

 
 

A declining market is an especially challenging time to achieve profitability.

  • As of Q2 2023, Compass’ trailing 12 month revenue was $5 billion – down from $6.7 billion a year ago.
     

  • Which means cost control is the only realistic option available to get cash flow positive.

 
 

Compass’ cash balance has stabilized at $335 million – and, in fact, has increased for the first time in years.

  • Management clearly has confidence in the business: in July, it repaid the outstanding $150 million draw from its revolving credit facility.

 
 

What to watch: Compass isn’t entirely out of the woods yet, but it’s on a much more solid foundation.

  • This past quarter is the high-water mark for revenue; from here seasonality kicks in with progressively lower revenue for the next nine months.
     

  • It’s likely that cash flow will remain relatively flat for the rest of the year – the question is whether it will limit the company’s ability to invest for future growth (M&A and organic).

The bottom line: Compass’ turnaround has been an instructive case study in managing a business through a turbulent market. 

  • Like many businesses, the company was caught flat-footed last year when the market changed, but it executed a necessary turnaround to sustainability.
     

  • The broader lesson is around adaptability – it matters less how you got to where you are, and more how quickly you can adapt to a rapidly changing environment.

Brokerage Profitability

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A common response to my previous analysis, Agent Compensation at the Top U.S. Brokerages, is that the brokerages paying the most out to agents couldn’t be profitable or sustainable – but, perhaps counterintuitively, the evidence suggests otherwise.

Why it matters: In a shifting market, the low-fee brokerage models are structurally designed to thrive, and are operating much more profitably than legacy brokerages.

  • To recap, the low-fee models are paying out a significantly higher percentage of their revenue to agents than legacy brokerages. 

 
 

Those same low-fee brokerages are also profitable or closest to profitability: eXp Realty, United, Real, and Fathom (RealtyONE declined to share this information with me).

  • The only companies that were profitable in Q1 2023 were eXp Realty and United Real Estate, and the largest legacy brokerages were really unprofitable.
     

  • Note: This analysis uses Adjusted EBITDA (think of it as Adjusted Earnings) as the metric of profitability – it allows a company to portray its earnings in the best possible light by backing out expenses like stock-based compensation, one-off legal or restructuring charges, and other non-cash expenses.

 
 

To account for variations in brokerage scale, we can look at Adjusted EBITDA per transaction, which yields similarly revealing results.

  • It’s worth directly comparing the two fastest-growing models of the past five years, Compass and eXp: in Q1 2023, Compass lost $1,900 per transaction, while eXp generated a profit of $130 per transaction – quite the difference.
     

  • The outlier is Douglas Elliman, which has a much smaller transaction volume (4,600 in Q1 '23, compared to 36,000 at Compass), so its loss per transaction is much higher than its peers.

 
 

The next most common response to this analysis asserts that the low-fee models don’t provide as much support to their agents. 

  • Therefore, while agents are able to “make more money,” they’re on their own and, without brokerage support, are less productive.
     

  • Once again, the evidence suggests otherwise.

Across the nine brokerages in this analysis, the average production was one transaction per agent in Q1 2023.

  • The average for the legacy brokerages (Compass, Anywhere, Keller Williams, and Douglas Elliman) was 1.03 transactions per agent, while the average for the low-fee brokerages (eXp, Real, RealtyONE, United, and Fathom) was 0.98 transactions per agent – effectively the same.
     

  • In aggregate, agents at low-fee brokerages, with “less support,” were just as productive as agents at the legacy brokerages with “lots of support.”

 
 

Variability in the number of transactions per agent over time provides further evidence: between Q4 2022 and Q1 2023, the average number of transactions per agent dropped 10 percent across the same nine brokerages.

  • Four low-fee brokerages (eXp, Real, Fathom, and RealtyONE) were at or below that average – meaning that their agents saw less of a decline in transaction volume than agents at legacy brokerages.
     

  • Support or not, agents at low-fee brokerages were more resilient and saw less variability in production during a changing market.

 
 

Yes, but: These are averages, and as with all averages, there will be overs, unders, and outliers.

  • Not all low-fee brokerages and legacy brokerages perform similarly.
     

  • Furthermore, inside of each organization, there is significant variability in individual agent performance and compensation. 

The bottom line: The dual hypotheses that low-fee brokerages aren’t sustainable, and that their agents are less productive due to less support, are false.

  • Low-fee brokerages are in fact more profitable than the legacy brokerages, even after paying out a significantly higher proportion of their revenue out to agents.
     

  • This is classic Innovator’s Dilemma: while the legacy brokerages are racing to cut costs, the low-fee models – built from the ground up with a lower cost operating model – are taking market share and competing where they can win.

Agent Compensation at the Top U.S. Brokerages

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Agent compensation structures at U.S. real estate brokerages vary, with some firms paying out a significantly higher percentage of their revenue to agents than others. 

Why it matters: Commission and fee structure is foundational when it comes to agent loyalty and recruitment; as agents seek to maximize their earnings, they're naturally drawn to brokerages offering higher splits and lower fees.

Dig deeper: Brokerages generate revenue from the commission on the sale of a house. 

  • The brokerage and agent then effectively split the commission, through a varied combination of commission splits, fees, and revenue sharing.
     

  • Once added up, the result is a percentage of total brokerage revenue that is paid out to agents – ranging from 77 to 96 percent in this analysis.

 
 

The low-fee / high-split brokerages like eXp Realty, Real, RealtyONE, Fathom, and United end up paying significantly more of the commission out to agents.

  • Compass, which famously offered agents high commission splits as a recruitment incentive, is, on aggregate, closer to traditional industry stalwart Anywhere (home of Coldwell Banker and Sotheby's) than the others.

Compass is paying its agents less over time, through a combination of reducing existing agent splits, recruiting new agents with lower splits, and higher fees.

  • The one percent reduction in revenue paid out to agents over the last two years represents about $9.5 million retained by Compass and not paid out to agents in Q1 2023.

 
 

Compass highlights this achievement, which it is clearly proud of, in its quarterly earnings, declaring that its “commissions expense as a percentage of revenue” is “improving.” 

  • In fact, Compass is so pleased with this achievement that it is the first data point in its earnings press release and the second financial highlight, behind total revenue, in its investor presentation.
     

  • Enjoy it while you can; after this article, I doubt Compass will be highlighting these numbers so strongly in the future – and it certainly won’t kick off its agent gatherings with the same metrics.

 
 

Agents like to make money, so it’s unsurprising that as natural entrepreneurs they flock to brokerages where they can maximize their earning potential.

  • It’s no coincidence that the top 5 brokerages that grew agent count over the past quarter are the exact same brokerages that paid the most out to agents: eXp, Real, Fathom, RealtyONE, and United.

 
 

The bottom line: It’s a simple equation: More money attracts more agents, and more agents sell more houses.

  • Brokerages paying a smaller proportion of revenue to agents is an effective strategy to improve short-term financials, but the long-term implications around agent recruitment and retention are significant.
     

  • In a period of fewer transactions and overall belt-tightening, it's more important than ever for agents to carefully consider commission splits when deciding where to work.

Agent Migratory Patterns

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The first quarter of 2023 saw a variety of winners and losers in terms of brokerage agent count – the numerical manifestation of agent recruitment and retention.

Why it matters: As I’ve previously asserted, agents are central to the real estate transaction; growth in transaction volumes goes hand in hand with growth in agent count, because agents sell houses.

Dig deeper: Disruptive, low-fee brokerages like eXp Realty, Real Brokerage, United Real Estate, and RealtyOne all added agents during the first three months of the year.

  • Meanwhile, some of the largest incumbent brokerages and franchises – Keller Williams, RE/MAX, and Anywhere – all lost agents.

 
 

The five largest brokerages and franchises in this list – Anywhere, Keller Williams, RE/MAX, Compass, and eXp Realty – account for over 427,000 agents, down 1.1 percent from the previous quarter.

  • Among them, only eXp Realty grew its agent count from the last quarter.
     

  • Redfin, with less than 2,000 salaried principle agents, is the downside outlier after three rounds of layoffs.

 
 

Real Brokerage is the clear upside outlier, growing its agent count over 20 percent – to 10,000 agents – from the previous quarter.

  • 10,000 agents is considerably fewer than Anywhere’s 58,000 or RE/MAX’s 82,000, but Real is catching up to Compass’ 28,000 agents. 

 
 

Speaking of Compass, Q1 2023 was the first time that the brokerage’s agent count decreased.

  • Context is important: many brokerages lost agents!
     

  • But Compass is no longer in the ranks of “fast growing brokerages,” a category it dominated over the past three years – that mantle now passes to eXp Realty and Real (and several other low-fee brokerage models).

 
 

What to watch: Agent migration patterns are a significant leading indicator of future brokerage growth.

  • In a period of belt-tightening and fewer transactions, agents are moving away from traditional brands and flocking to relatively newer models where they're able to keep more of their commission.

The bottom line: Agents – and not AI, machine learning, a sophisticated CRM, a one-click transaction, nor any other tech buzzwords – sell houses.

  • This period of market scarcity reveals the brokerage business models able to thrive in a downturn, as well as those facing more fundamental challenges.
     

  • To identify the brokerage business models of the future, one simply needs to follow the agents.

Zillow 3.0: Is It Working?

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Zillow’s latest earnings reveal growth in its core Premier Agent business after nine months of decline – the longest in the company’s history – a promising result of Zillow’s new strategy.

Why it matters: The next iteration of Zillow revolves around a back to basics strategy of generating more leads and monetizing those leads through an integrated consumer experience (a super app).

  • But a change in financial reporting will make it more difficult to track the various components of the business on its journey to building that super app.

Zillow’s Premier Agent revenue increased during the first quarter of the year, breaking a nine-month losing streak – the longest consistent revenue decline in the company’s recent history.

  • Premier Agent revenue was up 8 percent from Q4 2022 (but still down 16 percent from the heady days of early 2022, when the market was at its peak).

 
 

Comparatively, Zillow had a strong quarter – its Premier Agent business outperformed the market year-over-year and quarter-over-quarter.

  • Compared to the same period last year, overall transactions in the market were down 26 percent, compared to a 16 percent decline in Premier Agent revenue.
     

  • And compared to last quarter, market transactions were down 14 percent while Zillow managed to grow its Premier Agent revenue 8 percent – a noteworthy achievement!

 
 

Zillow’s ability to outperform the market comes down to two activities: capturing a higher percentage of leads in the market, and generating more revenue per lead.

  • Zillow’s stated goal is to double its share of customer transactions from 3 to 6 percent by the end of 2025.
     

  • ShowingTime and Flex are both designed to engage more consumers and increase conversion rates, resulting in more leads and more revenue per lead.

Zillow Home Loans is another source of revenue growth, and the company continues to invest in it.

  • The segment saw an increase in revenue during the latest quarter, but the change in financial reporting means we’ll no longer be able to see profitability for the segment – after six years of losses and two years of me writing about those losses.

 
 

Losses aside, Zillow continues to invest in its mortgage business and is hiring more mortgage loan officers (MLOs) to handle an increase in volume.

 
 

The bottom line: Zillow’s path forward is dependent on its ability to capture more leads, further monetize those leads, and attach ancillary services like mortgage – a super app leading to super revenue.

  • But Zillow’s change in financial reporting will make it more difficult to track, with any degree of granularity, which pieces of the puzzle are working well and which are struggling.
     

  • Still, the numbers (while they last) don’t lie – the company’s recent performance relative to the market underscores the powerful position Zillow occupies at the top of the consumer funnel and its ability to affect change for consumers, agents, and the entire industry.

The Rise of Real

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A relative newcomer to the industry, the Real Brokerage is growing fast and is one of the few brokerages to materially grow its transaction count in 2022.

Why it matters: In a notoriously slow moving industry, it’s worth tracking the fast movers.

Dig deeper: Real was a big winner in 2022, with its transaction count increasing by 181 percent – 24,000 units – compared to an overall industry decline of 18 percent.

  • On a unit basis, Real was second only to eXp Realty in terms of its growth.

 
 

Like other growing brokerages, the surge was fueled by agent recruitment: Real’s agent count increased 113 percent to 8,200 agents in 2022 (and has since exceeded 10k).

  • Agent count is the most reliable indicator that correlates to transaction count growth.

 
 

Cash flow: There is chatter about Real’s profitability and ability to sustain itself.

  • During 2022, Real’s cash balance fell from $29 million to $18 million – but that drop includes $10 million in acquisition-related expenses.
     

  • Outside of acquisitions, the company appears to be close to cash-flow positive.

 
 

What to watch: As we’ve seen with other brokerages, the momentum of Real’s agent recruitment will likely propel the business to continued growth in 2023.

The bottom line: It’s difficult to look at Real and not think of eXp Realty – both companies have similarly favorable agent commission splits and multi-level revenue share schemes.

  • And while future performance is uncertain, Real appears to be in the early stages of an exponential growth phase, driven by strong agent recruitment.
     

  • A receding tide reveals winners and losers in the brokerage space: The Real Brokerage is on the winning side of the ledger, growing quickly and at an increasingly meaningful scale.

Note: I’ve had coffee with Real’s CTO, but I have no financial stake nor association with Real Brokerage. I’m just looking at the data – and it’s difficult to ignore a fast-moving business in a slow-moving industry.