Behind the scenes in real estate? A constant frenzy—brokerages are continually implementing innovative strategies in order to recruit profitable agents before they’ve aligned with a competitor. Has Compass taken this to a new level? For Compass, which raised $400 million last month in its most recent funding round, an IPO could be in the near future, along with stock options as a new recruitment tool. According to an L.A. real estate news website, The Real Deal, Compass is now offering agents stock options through an Agent Equity Program. Rory Golod, chief of staff at Compass, declined to comment.
The program details were outlined in a document reportedly sent to agents at Pacific Union International, a San Francisco firm acquired by Compass this summer. The opportunity would allow agents to invest a share of their commissions into options. For every dollar invested, Compass would add a 30-cent bonus. For example, an agent investing a $20,000 portion of $100,000 in commissions would receive $26,000 in stock options (including the bonus).
The biggest concern? Risk vs. reward. From Compass’ perspective, this opportunity provides agents with “a sense of ownership in the company,” as phrased in the alleged document. While this could prove a significant advantage for Compass, helping to grow their stocks before they go public and giving them financial padding from which they can borrow, multiple sources have expressed it could be a highly risky venture for agents.
Regarding stock options as a company benefit, industry veteran York Baur, CEO of MoxiWorks, says they may not be as profitable as employees believe them to be.
“Having spent my entire career in the tech industry where stock options are common and are considered part of a competitive comp package, my experience is that employees rarely fully understand them and what they might be worth. And further, it’s rare that they produce ‘I can retire’ wealth if you’re not very early in a company,” Baur tells RISMedia.
Could the opportunity to own company stocks and, on top of that, receive investment bonuses, incentivize more agents to sign with Compass? And could these efforts promote company loyalty, strengthening retention efforts? Perhaps, if Compass can achieve its hypothetical scenario, in which the valuation of the company is five times its current amount of $4.4 billion, giving way to $99,000 profits for agents who invest $20,000.
“To invest in stocks like this the SEC want you to be an ‘accredited investor’ which means you must have a track record of sufficient income, net worth and financial experience to invest in risky stock offerings without all the traditional protections the SEC offers,” Jon Coile, president and CEO of Champion Realty, Inc. and chairman of Bright MLS, tells RISMedia. “This stock is a huge gamble and only experienced investors who can judge value of aspirational start-ups should invest as it is highly speculative.”
In Compass’ scenario lies the concern. Could the real estate company truly achieve a market cap of $22 billion or is the expectation set too high? Looking at the current stock market environment, Compass is aiming toward record breaking numbers as residential brokerage stocks are currently trading at much lower valuations.
“The huge fundamental problem is how Compass can shift from a venture capital-funded growth model to a sustainable profitable business. The Compass current valuation of $4.5 billion and projected future valuation of $22 billion, for an unprofitable start-up company, is frankly laughable,” says Coile. “Real estate brokerage is an established industry with more than a century of experience proving that the profit projections required to justify those values are not attainable in a climate where agents universally get more than 75 percent of the gross commission income. Even new models like Redfin with agent splits below 50 percent are unable to generate profits that Compass believes they can somehow miraculously achieve.”
“Any agent considering investing in this offering should look hard at their own commission split. Have they already hampered Compass’ long-term profitability by accepting a split over 50 percent? If so, they should ask the tough questions,” adds Coile. “How can Compass make money if they start off by giving most of it away to their agents? As an accredited investor myself, I already know the answer.”
And while agents would not be restricted in the amount of stock options they can purchase, the investment minimum would be set to $10,000 to participate in the program. If participating agents leave the brokerage by the end of 2020, they would forfeit their contributions. Would agents see this as a forced brokerage relationship or as a potential windfall if they remain?
“Many brokerages have utilized lucrative cash bonuses as a strategy to entice profitable agents and increase retention efforts,” says RISMedia CEO John Featherston. “However, to our knowledge, having serviced the industry for decades, we haven’t seen a company offer comprehensive stock options as a recruitment tool. This opens questions and opportunities for recruitment practices and where they will go in the future. As for Compass’ success, that will be determined over time.”
Any information relating to the Compass document outlining their stock option program was obtained from a Real Deal article published on Oct. 16.
