The Compass Business Model – How Does Compass Make Money?

Executive Summary:

Compass is an online real estate brokerage that connects facilitates home purchases, sales, and rentals on its platform. The company’s agents are equipped with best-in-class technology (such as a dedicated app) to best serve their customers.

Compass makes money via sales commissions, fees from additional services, as well as referral fees from loans.

Founded in 2012 and headquartered in New York, Compass has risen to become America’s third-largest real estate brokerage (by sales volume). The company went public in April 2021.

What Is Compass?

Compass (formerly Urban Compass) is an online real estate marketplace that connects buyers, renters, and sellers with real estate agents.

As opposed to other online platforms, which try to cut out the middleman, Compass hires its own agents to offer the best possible experience.

To that extent, Compass provides both users and agents with a plethora of tools and products that aid them during the home buying, renting, or selling process.

The company is primarily focused on facilitating listings in the higher price range. To ensure users have a high-quality experience, Compass’ agents are hired and trained by the company itself. It once even had over 140,000 applicants, of which it only hired the best one percent.

To that extent, Compass has even developed its own online academy, which acts as a go-to resource for agents to improve their services.

That same mantra has carried over from the hiring process into the sales experience. When selling a home via Compass, sellers can opt into their exclusive concierge service. It includes things such as staging, roofing repair, kitchen and bathroom improvements, decluttering, and much more.

Agents are then aided by various software tools that provide them with insights (such as the average sale price in that area), lists all outstanding tasks, and helps them manage all interested buyers.

Conveniently enough, Compass provides an online platform that lists all the properties for rent and sale, which in turn can accelerate the sales process.

For its wealthier and more popular clients, Compass also offers Private Exclusives, a service where sellers can control the information that is provided during the process. This minimizes exposure to the public, which may come in handy for groups like celebrities or athletes.

Users can, furthermore, choose to list their homes under Compass’ Coming Soon section, which allows them to list their homes before they hit the market. This can generate an early buzz, increase the listing’s exposure, and give sellers early market insights.

Compass, furthermore, works together with professional real estate developers to advertise their listings. These listings are new developments in high-cost areas such as Manhattan.

Lastly, Compass provides a bridge loan service (in cooperation with Freedom Mortgage and Better Mortgage) for the sellers that use the proceeds of their home sale to buy a new property.

The Compass platform can be accessed via the company’s website as well as using its Android and iOS app, respectively.

A Short History Of Compass

Compass, headquartered in New York, was founded in 2012 by Robert Reffkin (CEO) as well as Ori Allon. Before starting Compass, both Reffkin and Ollin experienced major successes in the business world.

Reffkin began his entrepreneurial journey at 15 years when he started Rude Boy Productions in 1994. The young Reffkin used to DJ at various events. By the time he graduated high school, Reffkin’s DJ business had earned him over $100,000.

And because DJ’ing is not exhausting enough, Reffkin invested the remainder of his time starting a non-profit together with his mother. That nonprofit, called A Better Chance, connected talented students of color from underserved neighborhoods with the best public schools around.

After high school, Reffkin went on to study at Columbia University. He held positions at McKinsey, went back to do his MBA (at Columbia, again), and for the investment bank Lazard as well as The White House.

After his one-year stint at The White House, he went back to New York and accelerated the corporate ladder at Goldman Sachs. He eventually became the company’s COO and Chief Of Staff.

While at Goldman, Reffkin continued on his path of philanthropy. In 2007, he started the nonprofit New York Needs You (now called America Needs You). His goal: to raise $1 million by running a marathon in each of the 52 states. In 2013, he finally topped $1 million when he ran the New York Marathon.

It was around that time he met Allon who eventually became his co-founder. And Allon’s entrepreneurial resume is certainly nothing to scoff at either.

He was a 26-year-old Ph.D. student at the University of New South Wales when he created the algorithm behind the Orion search engine. After a bidding war between Microsoft, Yahoo, and Google, he sold his business to the latter, where he remained for four years.

After life at Google, he went on to start Julpan, an algorithm that analyzed the means of how people shared information across social networks. One year later, that business was acquired by Twitter, where Allon ended up becoming the Director of its NYC engineering office.

Both of his creations had a major influence on how the businesses that acquired it. His star quickly accelerated, and investors began knocking on his door, literally begging him to take their money should he ever come up with another idea again.

That idea came in the form of Urban Compass, the alias it initially launched at. The platform started as a hyperlocal social network. To get enough data on the network, the company hired data collectors that went around neighborhoods and reported on the best characteristics that it had to offer.

Luckily, Reffkin and Allon had themselves a sweet head start by receiving $8 million from investors such as Founders Fund, Goldman Sachs, Thrive Capital, and the former CEO of American Express Kenneth Chenault.

Urban Compass finally launched its beta version in May 2013, half a year after announcing its initial round of funding. And to show you just how much influence its founders had already amassed, Compass was officially unveiled by former New York mayor (and 2020 presidential candidate) Michael Bloomberg.

Wayback Machine

The first source of income originated from relocation services Compass provided to businesses and their employees. Within the first few months of operation, the company was supposedly operating at a profit. This allowed them to raise another $20 million in funding (announced in September 2020).

But despite its supposed profitability, the company underwent a major pivot in 2014 (alongside renaming itself to Compass only). Instead of serving other businesses, it ventured into becoming a licensed real-estate brokerage.

The company would list properties on its own platform while helping people to buy or sell homes through their agents – a model with higher margins and a much bigger upside. Compass took a page out of Apple’s playbook by controlling the whole value chain from lead generation to closing of the deal.

Another aspect was the company’s extreme focus on quality. With millions in funding, it started poaching agents from established brokerages. One of these brokerages, New York based The Corcoran Group, even sued Compass because its new hires took confidential information with them.

In 2015, the company decided to expand into Washington D.C., its second city. That same year, Compass supposedly mediated the (at the time) fifth largest residential sale in U.S. history, helping to sell hedge fund manager Scott Bommer’s Lily Pond Lane properties for $110 million.

Compass took a major leap when Softbank, in December 2017, led the company’s Series E round, which netted it another $450 million in funding. It made sure to put that money to good use.

Compass went on a shopping spree and started buying up major real estate brokerages across the country. It also went on a major hiring spree and started recruiting the industry’s best real estate agents, offering some very lucrative bonus packages. By 2018, the company had hired over 7,000 agents nationwide.

The funding furthermore allowed Compass to differentiate on technology. It established an engineering hub out of Seattle, ran by Joseph Sirosh, former CTO of AI for Microsoft. It invested heavily in building out its machine learning capabilities to improve the decision making of its agents.

It helps them figure out pricing, the best time for a sale, and even how to stage homes (via its concierge service). Compass even acquired Contactually, a startup that developed a CRM software for real estate agents, which is integrated into its ecosystem of tools.

But its success came at a cost. Major competitors, such as Zillow or Realology, sued them for poaching its employees and allegedly prompting them to bring technological secrets along with them.

Nevertheless, these hiccups haven’t stopped the company’s rise to the top. In April 2021, Compass went public (after pricing its IPO on the lower end). Throughout the year, Compass was riding the hot real estate market, which enabled the company to almost double its revenue.

Compass, furthermore, continued to double down on its insurance business by acquiring multiple firms in the space. In March 2022, the company claimed that it had just become the leading real estate brokerage by volume.

Worsening economic conditions forced Compass to lay of 10 percent of its workforce in June, equal to about 450 employees.

Today, Compass works together with more than 26,000 agents across 100 offices in the United States.

How Does Compass Make Money?

Compass makes money from the commission it receives for every sale made on its platform, referral fees from loans, as well as other associated fees from services it provides.

Let’s take a closer look at each of these monetization streams below.

Sales Commission

Most of the revenue that Compass generates comes from sales commission. These fees are paid whenever its agent successfully facilitate a sale (or successfully rent out an apartment).

Commissions normally range anywhere between two to three percent of a home’s sale price. However, commissions can vary depending on the agreement Compass signed with the client.

Additionally, Compass receives a commission from rentals as well as new development projects.

The sales commission is then split between Compass and the real estate agent. Handing parts of the commission to the agent puts in place the proper incentive structure for them to be willing to increase sales.

According to current and former employees, the split between Compass and the agent is dependent on what’s negotiated in the contract. More experienced and touted agents often can demand a higher revenue split.

The main differentiator in Compass’ model stems from its technological prowess. Its tools allow real estate agents to better serve clients and manage their time. On average, Compass agents close 7.4 deals per year.

Furthermore, by focusing on high-end properties and clients, Compass simply makes more money on every transaction. If sellers opt in to the company’s concierge service, an even higher commission can be charged.

Lastly, its buyer and seller platform, which allows users to browse listings in their proximity, exponentially increases the number of potential buyers and tenants that it can attract.

Compass’ Exclusives section, where it advertises listings before they hit the market, allows them to hype up listings, which can further increase the likelihood of a sale.

A similar model is employed by Redfin, one of its major rivals. The company was among the first ones to equip its own agents with various technological tools to aid in the sales process.

Apart from sales commissions, Compass also generates revenue from adjacent services it provides. For example, it provides various different services in its commercial development business line for which it charges customers.

Bridge Loan Service

In October 2019, Compass launched a bridge loan service in cooperation with Better Mortgage and Freedom Mortgage.

The bridge loans allow sellers to get the money they need (before revenue from the sale comes in) to purchase their next home.

Interested borrowers will use the value of their home as the down payment for the loan. Loans can be accessed within a matter of days to allow for the required flexibility.

Since the loans are not issued by Compass directly, it does not make money based on the interest it charges for that loan.

Instead, it receives a referral fee from its partners (in this case Better Mortgage and Freedom Mortgage) for every lead it facilitates. The exact amount is dependent on the agreement between the parties.  

Additionally, Compass provides other adjacent services such as title and escrow, which it further monetizes.

Compass Funding, Valuation & Revenue

According to Crunchbase, Compass has raised a total of $1.5 billion across 10 rounds of venture capital funding.

Notable investors into the company include SoftBank (which has also invested in its rival Opendoor), Institutional Venture Partners, Dragoneer Investment Group, Founders Fund, Fidelity Investments, and many more.

The company raised another $450 million during its IPO. At the time of going public, Compass was valued at a little over $8 billion.

For the fiscal year 2021, Compass recorded revenues of $6.42 billion, up 73 percent from the previous year. The firm still loses money though, namely $494 million in 2021 (vs. $270 million in 2020).

Who Owns Compass Real Estate?

Compass revealed its ownership structure when the company filed to go public back in April 2021.

SoftBank, at the time of going public, remained the largest shareholder of Compass with a combined ownership stake of close to 35 percent.

The second largest institutional shareholder of Compass is DG Urban, owning 3.3 million Class A shares (equal to 9.2 percent).

Co-founder and CEO Robert Reffkin’s stake is equal to 2.4 percent. However, he also owns 1.5 million Class C shares (100 percent of all Class C shares), which grant him 20:1 voting rights.

Hi folks, Viktor checking in! Years of experience in various tech-related roles have led me to start this blog, which I hope provides you with as much enjoyment to read as I have writing the content.