Compass：房地产革命——[Business Breakdowns，EP.226]

All right, Geoff, we have you back to talk about a brokerage again. This time looks a little different than Goosehead. We have Compass, which is in the real estate space.

We can get to how different this is and all the nuances of real estate, but I thought a good place to start would just be the simple description of Compass that you would give to someone walking on the street. They understand what a real estate broker does, but what is Compass out to do differently? What was the ethos of what makes Compass a little bit different than the rest of the real estate brokers out there? And if you were to describe the value proposition to agents or for the business, how would you best capture that?

Yes, absolutely. At its core, Compass really has 4 key advantages that reinforce each other and are advantages for its agents: its proprietary, fully integrated software platform; its national scale; a dense network of top agents; and, lastly, exclusive listing inventory depth.

Just to quickly hit on these, starting with the platform: they're the only major brokerage that's built this end-to-end software stack. Everything from CRM to marketing to transaction management is integrated together in a mobile-first way that's designed specifically for agents who are very often on the go. They get more done in less time with less support staff, and the brokerage itself runs more efficiently because it ties into the software.

Importantly, this gives them a very unique edge when it comes to AI because it controls that platform across the different point solutions and the data. It can do things that others can't, like automate not just content creation but workflows, follow-up, and client engagement. They have a major AI initiative that's in beta this summer and will go to full release by the end of the year. It has voice-activated assistant capabilities that could really bend the curve on the value proposition.

The company's invested nearly $2 billion since inception in technology, and it captured a point in time in raising capital to do this that likely won't present itself again for a competitor to do something similar.

The next thing is its national scale. It's got nearly 40,000 agents in virtually every major U.S. metro. This ties into the platform because it gives them a cost advantage. It allows them to amortize this R&D investment across an increasingly broad base of agents and continually reinvest in the technology, as well as programs and services that the agents are specifically asking them to build. So, the scale and tech platform really go hand in hand, strengthening each other.

And then there's the top-agent network. This is important. Compass has more top agents and teams than any other brokerage—about 18% of the top 10,000, and that's 50% more than the next-closest competitor. Why this matters is because top producers drive the business. The top 20 agents do roughly 85% of transactions in the industry. They like to work with one another, and that creates a powerful referral engine.

On average, Compass agents generate 18% of their business from referrals within the Compass network. That boosts revenue per agent, retention, and recruiting. I believe that's at the high end of the market in terms of referrals.

And then, lastly, is the exclusive listing inventory depth. Compass has leaned into an inventory strategy and a phased marketing program that helps sellers test pricing and timing before going to MLS, giving them more control and also giving buyers early access. This avoids issues around days on market and price drops, and gives Compass agents an edge when competing for listings.

At the end of the day, what Compass is aiming to do is not compete on commission splits, but offer something that really enhances the agents' ability to grow their business more profitably and create better client outcomes.

It's the classic technology-disruption story in terms of how it was laid out, and it's still a relatively young history. I think there's been a lot of pivots. Can you just bring us back to maybe the earliest chapter and give us some overview of the founding story?

I think what you just mentioned there captures a lot of what they were out to do, but there's the idea of providing technology and all of this to agents, and then there's the execution of it. So, anything that you could touch on just in terms of the early days of Compass? One day we'll look back and still consider this the early days, but just the founding story and the origins here.

The original business model was focused on rentals in New York City. They quickly pivoted the business early on to focus on traditional home-sale brokerage. I think the vision has largely stayed the same.

What they needed to do was really effectively attract a lot of high-producing agents and build the technology that supports them alongside one another, without really having that foundation in place to begin with. And they did that with an immense amount of venture-capital funding and went to market in a manner that was hard for existing brokerage models to compete with, in terms of lucrative sign-on bonuses and multi-year contracts that would be very advantageous to the agent.

And that was likely necessary because they needed to build up a local market presence in order to attract more agents and then eventually transition the model to be more sustainable. And so, I think for a number of years there was a big open question as to the sustainability of the model, whether or not the technology was really going to prove out. I think that conceptual question mark remained with the company for a long time, until it really proved things out much later in its life cycle.

It's interesting when you consider capital-intensive businesses and you think about infrastructure. This might have been capital-intensive in the early days for talent. Something that we're seeing in some other markets right now, but at least it makes sense to me in terms of bringing people onto the platform. You can build it, but they won't necessarily just come here.

When do you think things started to shift a little bit around financial hygiene, transitioning away from just paying the most for agents? I'm oversimplifying, but to give you some context, were there any milestones or things in the history that really led to a change in that mindset?

Yes, absolutely. I think that the housing-market downturn that began in the early to middle part of 2022 was the true test for the company and its approach. Just for context, mortgage rates quickly spiked from under 3% to over 7%, and home sales precipitously dropped from about 6 million to around 4 million, a level that it's been at for a few years and really the lowest level in 30 years.

And so, Compass needed to react quickly, and it did. By the middle of 2022, it had paused market expansion, stopped M&A, executed 3 rounds of layoffs within a year, and eliminated all agent incentives. As part of this, it brought on a CFO, Kalani Reelitz, who played an instrumental role in decreasing the level of opex that the company had from a $1.5 billion run rate to around $850 million—so, nearly cut in half.

But the company actually didn't have to stop investing in its platform. Around the same time, the full capabilities for an agent to be able to do their entire workflow on the platform actually coincided with this time frame. By late 2022, that had been rolled out, and both the company and the market could see the validity of the model.

And perhaps surprising to some, without those incentives—not just incentives to have agents join, but also those multi-year incentives rolling off—they were able to maintain organic agent growth and very high levels of retention, around 90% for principal agents.

The technology-oriented value proposition was able to stand on its own by early 2023. The company had been proving out this new ability and had started to get to a point where it was operating around free cash flow breakeven. It was really positioning itself to go back on the offense after being focused on cost-cutting and stabilizing the business in this new environment.

Yeah, it’s a really interesting time period. I think we’re going to look back on 2022 and 2023 and reflect on companies that swallowed the pill, got operating hygiene, and reoriented themselves to an environment that wasn’t just pure capital influx and spending on whatever you wanted to spend. Even though we’ve seen some of that come back, it’s very interesting to see who’s emerged with more operating efficiency.

If you were to take a snapshot of Compass today, I think of it as a very successful platform in terms of the properties it gets, particularly in specific regions. Do you have any headline numbers around its market share or anything else that could give us a sense of its size and scale in the market today?

Compass operates the largest real estate brokerage in the US by sales volume. It has about 6% market share on a gross transaction value basis, around 21,000 principal agents, and nearly 40,000 total agents across about 38 states and Washington, DC. In 2025, it’s expected to generate close to $7 billion in revenue and around $200 million in free cash flow.

Beyond its core-owned brokerage, it recently expanded its capabilities by acquiring Christie’s International Real Estate in January of this year. That’s a high-margin global franchise business that gives independent brokerages a way to join Compass without selling outright to it. Compass has also built title and escrow operations in a majority of its markets.

It has a mortgage joint venture that’s still in the very early stages and isn’t financially meaningful, but over time it could be very impactful to the financial profile of the business.

You certainly confirmed what I thought in terms of market share. If they’re the largest, that speaks for itself. Then, just some numbers, because I know it’s important—we’ll get into more detail. The targets they have seem pretty grand and ambitious. Can you lay those out? We’ll talk more about them as we go on, just to set the ground.

One of the unique characteristics that I didn’t highlight is that it’s a national brokerage with a high level of concentration within major markets. It’s not everywhere, but it has a very strong presence in almost all the major cities in the United States.

In the middle of 2024, the company set a strategy called 30 by 30, whereby it wanted to grow its average market share in its top 30 markets to 30% on average by the end of 2026. At the time it made that announcement, it was probably about halfway there. With the growth and the M&A it’s done since then, it’s just over 20%, I believe.

Real estate is a local business, and on this basis, the average number-two competitor tends to be in the single-digit range. With the capabilities Compass has been building, its local market scale, and its national presence, there likely become certain tipping points where it becomes easier to attract more productive agents on a local-market basis as it becomes a bigger and bigger presence within those markets.

It’s interesting, especially on a relative basis to a number two or number three, to see what they’re doing. I associate Compass with luxury listings, or at least expensive listings. It might be related to just the markets they operate in, but do you think that’s a fair categorization of Compass, or am I oversimplifying based on the markets they’re operating in?

I think that’s generally fair. I would categorize it more as premium. The average price for a transaction for them is around $1 million.

Over time, their strategy, as we briefly touched on earlier, had been to launch in markets and attract the highest-producing agents who were most influential. That enabled the company to attract agents at lower levels of productivity who have better commission-split dynamics. That can cascade as the business and its presence grow.

In certain markets, it has a higher-end positioning, but over time it’s become more premium, if that makes sense.

Yeah, it definitely does. It feels like semantics in some way, but it actually means a lot, especially as they expand into other markets. There’s a natural question about where the share opportunity is in the industry as a whole.

We were talking before the episode about all the nuances that make the real estate industry what it is, and about the brokerage model and who influences it. Can you give your best breakdown of the major players, particularly as I think about the associations and organizations that tend to run real estate behind the scenes? I know they exist, but however you would best categorize and place them within the industry would be helpful, just to give some background on the market they’re operating in.

There are a few major players to understand that dictate the structure of the industry and play an influential role in how business is conducted. You’ve got the National Association of Realtors, or NAR, which is the largest trade group in the entire country. It has about 1.5 million members.

To access MLS, the multiple listing service—the essential database that agents rely on to share listings and work together—you must be a member of local, state, and national Realtor associations. That mandatory membership effectively ties agents into rules that make the trade group more of a regulator for the industry than a trade group in many other industries. That’s really critical to understand.

A couple of other relevant data points: MLS is not a national system. It’s a patchwork of more than 500 local databases, and about 80% of them are controlled by Realtor associations.

For a long time, there was a built-in compensation offer where a listing agent would show the buyer’s agent the commission they would receive as part of a transaction. That was just how the industry worked, so a buyer wasn’t actually paying their agent outright.

The last players to understand are the consumer-facing portals, such as Zillow and Realtor.com. They get their listings data from MLS and turn that into customer-facing experiences. They generally monetize leads to buyers’ agents.

The key thing to understand about all of this is that the system basically supported tens of thousands of independent brokerages to compete and created a dynamic where there’s been very limited consolidation. The top 22 brokerages in the country control about 25% of the volume. Around 60% is done by firms with under $1 billion in gross transaction value.

As another frame of reference, commercial real estate is very different. It doesn’t operate under this structure. There, you see a handful of large firms that are much more dominant.

Yeah, it’s interesting with the 6% commission fee—or maybe that’s the cap of the commission rate that could be paid on a residential purchase. Is the governing body NAR in that case? Where does that originate from? We can get into a little bit more of the nuances.

I think there’s a bit of a misnomer around the 6%. The average commission in the US hasn’t been at that level for quite some time. I think from through 2020ish it gradually came down from around 5.3% to closer to 5%. Interestingly, it ticked up a little bit in 2023.

The listing side has remained around 3%. That’s standard in most markets, whereas the buy side has really been the area of pressure.

There were changes that occurred in 2024 that grabbed headlines and really impacted the way commissions are set. They’re always set by the agents, but there was essentially a landmark case, the Burnett case, that challenged the system I described earlier in terms of that offer of compensation within MLS.

There was a settlement that created changes starting in August 2024, when that offer of compensation stopped existing in MLS. Importantly, written agreements now need to be entered into between the buyer and the buyer’s agent. Those changes have created some dynamics that are influencing the market-share dynamics I mentioned earlier.

What we’re seeing as an output of this isn’t necessarily what people expected. I think commission rates have remained very stable, as has buyer representation. What’s occurring is a shift toward more professionalism.

It’s hard to tease this apart exactly because the industry has been in this trough period, but buyers’ agents are really having to articulate their value to their clients in a way they didn’t have to before and compete to win business.

Generally speaking, if you’re representing a seller, you’re providing them with a listing presentation. You’re competing with other people who are articulating their value in a way that historically wasn’t done on the buy side. Now that’s much more relevant.

Accordingly, if there are brokerages that can convey value to the agent and the client in this new setting, that’s also a powerful dynamic creating more market-share shift toward the most professional agents.

A couple of interesting tidbits to end on: It’s remarkable that 70% of agents who paid MLS dues and were affiliated with a brokerage in 2024 did zero transactions. It’s really been a market that’s shifting in certain ways.

I think firms like Compass are in a position to potentially absorb market share along the dynamics I described, but it’s also more obvious to brokerages that companies like Compass can actually enhance their value proposition, and the combination of them can be compelling. Matt Reustle

It’s very interesting on the agent side to hear that 70% data point because I think it tells the story of what many people think: a great agent is worth their money multiple times over, but the large majority, I think, are viewed as commodities. I don’t know that it’s that hard to argue against that on the buying side specifically.

One point of clarification: under the previous model, if I’m the buyer of the house, I buy the house and I don’t think about commissions. It was the seller who entered an agreement with the listing agent, and then that listing agent negotiated with the buying agent to split or decide on that commission. Under the new model, if I’m buying the home, I’m entering an agreement upfront about what commission I will pay, and then the seller is doing essentially the same thing on their side.

The cooperation dynamics that still enable the seller and the payment of the commission to not be a burdensome factor for the buyer actually still exist in the vast majority of situations. That was kind of an open question. That dynamic is still very cooperative in that way. It’s really just that there was the potential for steering around whether or not you’re going to pay the buyer’s agent a certain amount.

I think at the end of the day, the buyer’s commission could potentially be more around 2% or 3%, and there are dynamics where there’s just more negotiation happening versus commissions not even being front of mind on the buy side.

Yeah, I think you’ve teased this out, and it’s something we were discussing before that I did not quite appreciate: the importance of listings as a core asset or core differentiator within this space. Can you riff on that a little bit more—about the importance of that within the Compass model and how they operate differently when it comes to not only getting listings but marketing those listings and everything that goes into their approach, which might look different from other brokers?

This is an area that has gotten increased focus more recently. Ultimately, inventory is power in residential real estate. It’s what drives everything from agents to platforms like Zillow. Without inventory, there isn’t business to conduct.

What’s relevant to what you’re asking about is that Compass has taken a stance on pre-marketing. This fits back into the industry construct that we were talking about earlier in terms of NAR and MLS rules around listings. To level-set a little bit, there’s research that shows there’s real demand for off-MLS marketing. The Illinois MLS had, on average, 21% of its volume that eventually went to the full market go through its internal private listing network, which is available to all agents and brokerages.

There are reasons why consumers want to be able to do this. Their home may not be ready to be shown yet, or they may want to understand the price. In today’s market, around 40% of listings are dropping their price on MLS and the portals like Zillow. It’s tracking days on market, and it’s tracking price drops.

Compass is taking a position that it wants to be very homeowner-friendly and facilitate this in a manner that provides flexibility to customers. Even Zillow’s studies have found that 31% of sellers want to try pre-marketing efforts.

What Compass has done, starting last year, is create a program around this. It’s called the three-phase marketing strategy. It’s meant to give sellers control and buyers early access to homes, which can be relevant in a market where there’s been a dearth of inventory that has come up more recently.

The 3 phases are as follows. There’s the private exclusive phase. The aim is really to validate pricing and make adjustments before going to the public and MLS, without being exposed to those metrics I mentioned earlier. That’s accessible to Compass agents and their buyer-side clients, as well as other brokerages.

There have just been rules constructed in the industry that prevent a certain amount of marketing as it pertains to this phase of marketing. But Compass has a book that’s available at all of its offices, which makes it such that those listings are available to anyone who’s aware of them. When they have a high level of market share in a given market, it’s not a secret to folks participating in the industry that these listings are available, and the outcome for sellers can always benefit from co-brokering. So there’s no effort to not co-broker.

The second phase is coming soon. This is where they can potentially generate early demand on Compass.com, build buyer interest, and send all of those inquiries to the listing agent, who knows the property really well. That’s made searchable to consumers and agents across the country.

The third phase is launching on MLS and the public portals. At that point, ideally, you have a really strong sense of pricing and confidence in how you’re going to market the property so you can get the best possible outcome.

It’s worth noting that this process is meant to reflect what homebuilders do to create demand. Homebuilders are very sophisticated, repeat sellers of property who aren’t really putting all their inventory on MLS.

Just to quickly hit on this, it’s been a bit of a lightning rod for the industry, but there are a number of markets that facilitate this type of program really well. In Q1, about 50% of Compass listings went through this process. Ninety-four percent of them still hit MLS. The purpose is not to sell the property in the private market, but the seller can have varying degrees of what they want to do in terms of the effort they put into selling the house.

If you can get top dollar and you don’t want to put in extra effort, that should be the seller’s discretion. They’re actually getting better pricing outcomes for their customers. Listings using the strategy sold for about 3% more on average, and offers were accepted 20% faster—about 8 days quicker to close. There were only 13% of these listings with price drops, versus 40% more broadly.

To end on this topic, other people in the industry don’t appreciate this practice and have been voicing concerns that I think are often informed by their position in the industry. I would underline that there are markets like Chicago that have been operating with private listing networks as part of MLS for over a decade. There are other markets that offer similar things. Austin literally just this past week implemented something similar.

There’s a notion here that there’s a place in the market to serve this need that is not in violation of fair housing and is also not meant to be double-ending deals. It’s really to provide a better outcome for sellers, but it challenges some of the business models, like MLS and some of the portals. So there’s been a lot of outspoken chatter about it.

I can certainly understand why MLS would challenge it. For a portal, we’ll use Zillow because I think they have publicly gone against this. If Compass is making these available to other brokers, then other brokers would have access to these opportunities. Is Zillow’s challenge that they rely on the MLS listings for what goes up on Zillow?

Just to step back, I think as a portal, you want access to any and all listings that you can get. You want to be the one-stop shop to search for homes, so I think that’s somewhat obvious.

If you dial back the clock on the industry, MLSs didn’t really invest in the same way that Zillow did to be that source for searching and support the customer in the way that they wanted to. What’s ended up happening is that the listings are going to Zillow, and the listing agents aren’t necessarily benefiting all that much because, instead of getting direct leads to them—which can help them grow their business over time—those leads are being diverted to buyers’ agents.

Basically, the background here, and why it’s so important to Zillow, is that there was a rule that came into play in 2019 called Clear Cooperation. It basically forced listings into MLS within 24 hours of any public marketing. There was activity happening leading up to that. It was even coined by some as the “Compass rule” because, in areas like San Francisco, Compass had coming-soon listings. In a market where they have a very high level of market share, they end up being a place to search, and it can compromise some of these structural dynamics that we’ve already talked about.

In March of 2025, after these settlements occurred in 2024 and after increasing levels of pressure, they made some changes around Clear Cooperation that created some flexibility around pre-marketing. Keep in mind that there are local-level MLSs that make it possible to approach things in different ways. As I mentioned, Chicago has had different ways to do this in a compliant manner.

But basically, it came to a head in March when they made changes around Clear Cooperation. In response to that, Zillow created its own listing rules that went above and beyond what had been the Clear Cooperation rules. It basically said that if you list your property publicly and don’t put it into MLS within 24 hours, your listing will be banned from Zillow.

That phase 2 of the three-phase process really comes under pressure because you’re basically needing to tell a client—or the client needs to be aware—that if you’re going to market that property and you want it to be on Zillow, you can’t do so for more than 24 hours. So the ability for a brokerage to create a source of search is impacted by this somewhat.

But I think the key thing to understand about this, in part, is that for Zillow, it’s a fight over the top of the funnel.

Compass is suing Zillow in an antitrust lawsuit, and there are aspects of that we can get into. The stakes are pretty big, but I would say the three-phase marketing process can continue unabated. It's just phase 2 that's necessarily impacted.

To the extent that consumers choose to market their property and not comply with that, compliance and enforcement from Zillow's perspective might be kind of tricky. It could bifurcate the market, particularly with higher-end homes where people don't want their listings on Zillow for privacy reasons or otherwise. And then you've also got dynamics like a newer portal, Homes.com, that's owned by CoStar Group, which has a very different business model: it's not buyer leads, it's advertising for a listing agent. They're basically providing free advertising boosts for listings that get banned from Zillow.

So it's a very interesting dynamic here that ultimately, I think, if Compass wins out, or there's just increasing levels of flexibility in terms of pre-marketing, that likely accrues to Compass's benefit. If the status quo persists, nothing really changes. That's kind of how I see it right now.

Yeah, it's certainly an interesting dynamic, and it's hard to separate fairness for the consumer from companies and what benefits them. Certainly, you can understand it from all sides of the equation. I guess, just with Compass, do they ever split out how much of their sales are done where outside brokers are the purchasing agents on their listings? Is that anything they ever disclose? I do think it's one of those hot topics where it's very easy to pin that as the thing you want. You want to get both sides of the commission. If you're an agent, that's an ideal spot to be in. Do they give you any sense of what that looks like within their own business?

There's not direct line of sight into that. I just go back to the three-phase marketing strategy. It's not the one-phase marketing strategy, and 94% make it to MLS. Even those that don't, I believe Compass has disclosed that the majority of those that don't make it to MLS are co-brokered. You're talking about a low single-digit percentage of the overall transactions that are done privately and double-ended.

I think that talking point that you raise has been a key issue that folks have taken. I would just reiterate, though, that as a home seller, you're looking to execute on your objectives, and it's not the case that Compass is withholding the listings from other brokerages. There are just certain rules around that public-marketing dynamic, whether it's one-to-one with other brokerages or that book that exists in Compass's offices.

There are regions like Illinois that have that private listing network, where it makes listings available to everybody, and Compass is very supportive of that being the construct that works everywhere. It's just a matter of these local geographies choosing what's best. I think it's not always clear to just say we represent what's best for the consumer if you're Zillow or if you're another constituent in the market, because there are different needs and desires for different constituents that are selling their homes.

And so I think it's probably likely that there needs to be some level of flexibility that's created in the industry. Places like Illinois, with MRED, create a positive construct. I think the other dynamic that flows from what you're asking about is just this idea that, oh, man, we'll have this market where listings aren't available in a centralized place, and all of a sudden this great market that was really transparent ends up going into a much more difficult buyer experience.

I just point to areas like Illinois and even other markets that are more flexible on this. There aren't huge issues in places like that in terms of accessing the inventory. So I think a lot of this is overblown, to be quite honest.

Yeah.

Yeah. It'll just be interesting to see what flows from all this. I think one of the things that's probably worth pointing out here is that Compass and Robert Reffkin, its founder and CEO, believe that they work for their agents. Their efforts to create what they believe to be common-sense frameworks that enable their clients and agents to have successful outcomes are a little bit of a rallying cry for anyone in the industry who has similar beliefs.

There are definitely people who don't agree with their approach, and I think there's room for different models to operate in different ways. But what Compass has seen is its agents, in listing presentations, go to the client and say, "We're going to offer you this capability that's built into our model and makes it easy for you to go about this in a flexible way."

A lot of other agents, particularly ones at brokerages that are saying, "Don't do this," are, to your point earlier, kind of viewed as commoditized. It helps Compass stand out a little bit and win listings in a manner that I think is important, because agents are competing with each other at a local level on an everyday basis.

Yeah, it feels like a premium experience, without a doubt, and I certainly see it out there in the market. I found myself in some of these distribution lists, and it's noteworthy to see how different it looks. I want to transition a bit just into the model itself. I think it's fairly straightforward: they generate fees based on commissions. I would imagine that's going to be tied to the housing market.

Just thinking about revenue and sales, and putting aside the market-share changes, is that the right way to think about a real estate brokerage business? Is its correlation to the housing market the right framework?

Yeah. Compass's core business is an owned brokerage versus a franchise model, which they now do have through Christie's. But the owned brokerage is really driven by the following: agents times their productivity equals the number of transactions that they're doing.

Compass has actually taken organic market share in all 17 quarters it's been a public company. M&A is an additional lever for them. Those transactions times the average home transaction price, times the agent commission rate, and then the commission split between the agent and the brokerage, is really the gross-profit stream that's so critically important to understanding Compass's business model.

On the commission rate and the brokerage split, is there just a right way to frame what that looks like in the industry and how Compass may differ? I know it's going to be nuanced based on the agent and all of that, but just some ballpark in terms of the gross-profit percentage that Compass would take home net of those commissions.

Yeah. On average for Compass, it's roughly 82% going to the agent and 18% going to Compass. To your point, though, there's a range around that on an agent-by-agent basis. I believe there's around a 9-percentage-point difference in splits for certain production levels.

It's important to understand the mix dynamics here. As Compass's agent base grows, it's likely that the mix shifts away from the top 10% of agents toward the top 50%, improving overall margins without actually changing commission splits between the constituents. Industrywide, agent splits had been trending in favor of the agent for quite some time, but they've actually reached a level of stability, I believe, for a few years now, since the housing downturn pulled out some of the dynamics around the ability to do that, particularly in the area of the market where Compass plays.

I would also just say that there are other business-model types in the space that offer even more generous splits and/or caps. Those often come with less support and more out-of-pocket costs for tools, marketing, and training. Those models will likely appeal to a certain segment of agents, but clearly not all of them.

What Compass is really aiming to do is transcend the value proposition away from just that economic split to capabilities that drive performance for the agent to grow more profitably. And so that would sum that up.

I think it sells the point on the marketing plan and everything that goes into that as well. If you can say, if you're a Compass agent, everything's going to feel premium for your customers, it does change the dynamics and doesn't make each brokerage house feel like a commodity.

On the 82%, do you have any context for what the earliest agents were looking at in terms of commissions, just to get a sense of how much maybe that's come down over time?

I would probably just frame it as: it could be extremely lucrative for founding agents in a market, and there were often multi-year financial incentives that were part of the conversation in the early days of Compass being a public company that needed to expire, effectively. The concerns around what that would mean to the model were very front and center from an investor's perspective in 2021 and 2022 for Compass, because no one knew the level of retention or really what the stable level of commissions would be that would enable the company to continue to attract agents.

And so I think that resolved in that downturn environment that we spoke of earlier and has remained in a healthy place. Just to reiterate something, I think ultimately what they can do is go to market with competitive splits against traditional brokerages that offer support, but provide extra value that others have difficulty replicating.

Yeah. Rather than just compete on price, in theory, for your talent, it makes a lot of sense on the mechanics of commissions. I know it differs from one brokerage to the next, but are there tiers? Your first $1 million in commissions are at this rate, and above that they're at this rate. Is there any change just in terms of how the commission structure works in one direction or the other?

There certainly are tiers at certain players in the industry.

I think it can actually be pretty bespoke by agent and by the level of volume that they do. The frame of reference for Compass is that they publicly stated there's a 9-percentage-point differential between certain bands. That's really the way to think about the mix shift over time.

Makes sense. You mentioned free cash flow generation in recent quarters or years. What does the operating leverage look like for this business? I think it had the connotation of taking in a lot of capital, spending that capital, and then it seems like there's been some inflection. Is there inherent operating leverage in the business? How do you frame that or think about that as an investor? If you want to put some numbers to help explain or contextualize it, that's helpful.

For 2025, the free cash flow margin as a percentage of revenue will be roughly 3% for the business. There's roughly $1.2 billion in gross profit this year, at a high-teens margin, and there's roughly $1 billion in OPEX, which includes almost $200 million of annual technology spend.

I think it's actually somewhat easy to contextualize the operating leverage and the trajectory of the company based on the discipline and framework that they've put around it. They've committed now, for several years at this point and into the future, to keep OPEX growth at 3% to 4% annual increases. There are just inflationary dynamics that feed into that. This quarter, they actually announced some cost savings that, while somewhat moderate, flow directly to the bottom line and can be meaningful to profit dollars.

I think they've really found religion around cost discipline in 2022, and there's actually more potential for this over time. Just think about the use cases around document processing of transactions. There's a good amount of human intensity as it relates to this that could come out of the system over time with the advent of new technology.

It's also worth noting that they've acquired a company called @properties that came with the Christie's business. They generate a high-single-digit EBITDA margin, and they're really great operators. I think the idea really is that Compass can be the low-cost operator for a brokerage, and I don't think that investors really think of Compass in this way.

Depending on the rate of growth, with production basically at that high-teens margin—which can grow with the mix shift in agents, as well as the attachment of title and escrow and potentially mortgage over time—the incremental free cash flow margins can be in the double digits. That can make it such that not-too-high levels of growth can result in very rapid free cash flow growth.

Yeah, it's very interesting when you find these inflections or trajectories that are clearly moving in a different direction than they once were. On that 2% to 3% OPEX growth, and looking more at the technology spend, does that encompass what you were mentioning at the very beginning in terms of investing in the technology for the platform? I don't know where this would fit—whether it would be in an OPEX line, a CAPEX line, or wherever it might be—but how do you frame that and the capital that still needs to go toward that technology investment effort?

It's that close-to-$190 million line, which is inclusive of investment in new capabilities. I think what's important to understand about that is that the industry is at a trough level, and there's been this trend in commission splits. Just the level of scale necessary to invest makes it such that they stand alone in their ability and their stance on investing. Others are really starved of an ability to do that and really don't have a structure to do it. It's really a hodgepodge of third-party software tools.

I think where this is going for Compass is actually potentially really exciting because they own all the software, it's all interconnected, and they own all of the data. They've announced some AI capabilities that are in the beta stage that can actually end up taking on a lot of the manual tasks that an agent would do, and even proactively suggest next-best actions that can transform an agent's day-to-day life in a manner that could be very differentiated and hard to replicate by others in the industry.

Yeah, very interesting. I should have looked this up beforehand, but I have to ask: with this particular cohort of businesses, stock-based compensation is always a focus. What does that look like here? Is it a point of contention from the market? Where does that stand?

Where it stands is that it's basically a fixed cost now in the business, and their approach to it is very similar to overall OPEX, such that it shouldn't grow that materially from here on out. What that means is free cash flow per share should be very attractive.

The name of the game for them is really bringing on productive capacity. They've designed their business now in a way where they can bring on agents, teams, brokerages, and the franchise-affiliate model. They welcome folks joining their platform in any way that best fits them. It's that pace of gross profit growth over the relatively fixed cost base, including the SBC.

That's the framework here in terms of the growth and achieving some of those numbers that you laid out before about 30% in the 30 markets.

You have organic growth—your agents continue to chop more wood and capture some of it—but it sounds like M&A has been a part of the DNA here for a while. How much of the growth story do you expect to come from acquisitions of brokerages, brokerage houses, or whatever it might be in terms of how they target them?

I think it could be very material. Just to reiterate, the industry is very fragmented. There have been changes, and we're in a trough environment that makes it difficult and makes the propensity for folks to want to enhance their value proposition in order to grow very real. You'll see announcements somewhat often of smaller brokerages joining. Really, getting from here to 30% market share will require meaningful M&A.

They've acquired meaningfully sized brokerages in Tennessee and Louisiana. The @properties–Christie’s deal was very sizable and came with title and mortgage joint ventures. That multiple was 9 times EBITDA. With synergies running ahead of plan, that should bring it down to 5 to 6 times. In general, they're targeting 4 to 6 times EBITDA. That could fall to 2 to 3 times post-synergy, all while keeping OPEX flat.

There's also a dynamic where there are, quote-unquote, walkover situations where a brokerage can shed its costs and join Compass. I think it's a very central part of the go-to-market strategy. If you step back and think about the advantages that the company brings, plugging in productive capacity actually has the ability to strengthen the overall value proposition and incentivize people to join.

Interesting. On the risk side, I guess you just have general macro risk. We talked before about the housing market, and to the extent that you had major downturns, it would obviously impact the business. But is there anything else that stands out?

It feels like what they're doing—I wouldn't expect a competitor to try to capture all this money, spend on technology, and spend on brokerages. Maybe they nip at the heels a little bit, but is there any other risk that really stands out to you besides some of the more obvious ones?

The foundational assumption is that the agent remains central to the home transaction. In years past, there were companies and investments made to disrupt that, and that has largely not panned out. Even in a largely digital world, close to 90% of home buyers used an agent in 2023. The listing agent is probably even more structurally sticky. That 89% reference is up from 83% in 2010.

The truth is that residential real estate transactions are an infrequent, high-stakes situation where consumers overwhelmingly prefer expert guidance. The risk to this is in a world with increasing levels of AI capability, but Compass is basically on the verge of arming its agents with AI-powered capabilities that should actually be both offensive and defensive. I think that risk is there, but it has not shown to be overly concerning.

Then there are execution risks around their ability to grow and retain productive agent capacity. They need to continue to deliver meaningful value with technology, training, and support, and differentiate themselves beyond commissions. The AI functionality here could be very impactful to the overall value proposition and the productivity of agents.

M&A, as you referenced before, is another area where execution matters. I wouldn't say that there's a huge amount of integration risk associated with this, but culturally and operationally, they want to bring on folks who stay and perform.

The other risks relate to this pre-marketing flexibility. I'd say that the trend has been in the direction of greater flexibility. To the extent that went in the other direction, that would not help them differentiate.

From a macro perspective, housing turnover and home prices are really key. At today's level—around 4 million existing annual home sales—that's a 30-year low. Mid-cycle is about 33% higher. I think there's a lot more upside than downside there. There could be temporary dislocations, but mortgage rates are important. A recession without inflation could actually help mortgage rates. Consumer sentiment and employment are also key, but I think we're at a trough cyclical level. There's a lot more upside than downside from that perspective.

A lot of points in there. I think agent retention and attracting the best agents—and even the dynamic of having 30% of a market means some agents are in the same territory—you can definitely get synergies from working together, but you can have some fierce battles as well over some of these things.

But it's an interesting thing to monitor, and I think you've teased out the importance of that in terms of their mission really well. This has been very interesting. It's a name I will admit I had a very specific view on, and as we've talked more and more, it's opened up my mind to the reality of the situation.

But we close out these conversations, as you know, with the key lessons that you can take away. What stands out the most to you from Compass in terms of a lesson or framework that you could potentially apply elsewhere?

A few thoughts for a lot of investors. I think residential real estate brokerage triggers an immediate hard pass: low margins, agent churn, regulatory uncertainty—all these factors are very understandable. But sometimes downturns reshape companies in ways that are easy to miss.

Today, Compass is not the Compass of a few years ago. The housing downturn forced it to find discipline financially and strategically, and the results are pretty consistent: outpacing the market, growing free cash flow, and increasing its margins. It's a clear strategy forward that's relatively unique for the industry.

The stock is up 4x from its lows. I would say that there are a few questions that come to mind that will dictate the future lessons learned. Has Compass already reached a tipping point where the strategy is already working, and it's really just the pace at which it's able to grow that's the major question mark? Was the downturn for housing the best thing that could have happened for them?

How much potential upside do these court cases that it's involved with have for the company, and what's the real downside risk? Has the trough transaction environment created an environment that allows them to stand out even more from its competition, incentivizing them to join at greater levels than they would otherwise? What other brokerages are really competing on the same terms, and how are their trends looking relative to Compass?

I'd say, long term, if they keep executing the way that they are and the market values it accordingly, does that open the door for larger M&A transactions? And longer term, if there's flexibility on pre-marketing and Compass is able to achieve its stated goals of market share, could it evolve into a home search destination, not just an agent platform? What would the economic situation look like then?

Those are the things that I'm watching, and I really appreciate the opportunity to have this conversation with you today. Matt, it's been a pleasure.

Thank you again for sharing the knowledge and maybe teasing out the fact and fiction about a name like Compass. So thank you again, Geoff.