how-does-compass-make-money

How Does Compass Make Money? The Compass Business model In A Nutshell

Compass is a licensed American real-estate broker incorporating online real estate technology as a marketing medium. The company makes money via sales commissions (collected whenever a sale is facilitated or tenants are found for a rental property) and bridge loans (a service allowing the seller to purchase a home before the revenue from the sale of their previous home is available).

Origin Story

Compass is a licensed American real-estate broker incorporating online real estate technology as a marketing medium.

The company began as Urban Compass in 2012 and was founded by entrepreneurs Robert Reffkin and Ori Allon – a former engineer at Twitter. In the early days of Compass, users could schedule online appointments with salaried real estate brokers after searching listings on the company desktop or mobile app.

In 2014, the company pivoted from employing brokers full-time to collecting a commission from contracted (but independent) brokers.

Originally focused on the rental market, Compass now specializes in luxury, high-margin homes in affluent areas. After its IPO on the NYSE in 2021 the company passed the ten billion market capitalization.

Analyzing Compass strategy

As the company highlighted in its financial prospectus, “we envision a world where the experience of selling or buying a home is simple and pleasant for everyone. Our strategy is to replace today’s complex, paper-driven, antiquated workflow with a seamless, all-digital, end-to-end platform that empowers real estate agents to deliver an exceptional experience to every seller and buyer. Our agent-centric platform is at the heart of our mission to help everyone find their place in the world.”

The company executes that by providing an “end-to-end platform that empowers our residential real estate agents to deliver exceptional service to seller and buyer clients.”

LOGO
The Compass platform consists of three primary user journeys: advising sellers, attracting and retaining clients, advising buyers.
(Image Source: Compass Financial Prospectus).

Understanding the Compass value proposition

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An example of the workflows, tasks, and complexity that agents need to go through to perform well at their jobs as “CEOs.” The primary value proposition for Compass is to cut through that complexity to help them streamline most of its workflows
(Image Source: Compass Financial Prospectus).

Differently from other PropTech companies, Compass doesn’t try to remove the human from the loop. Instead, it tries to empower the agent to facilitate the transactions’ closing. In fact, Compass highlights how most buyers still want to deal with agents.

Understanding the Compass marketing flywheel

LOGO
The Compass marketing flywheel starts from a key stakeholder: the agent. As more agents are empowered through the platform, they attract, engage and delight buyers. This creates a reputation for the platform, and repeat purchases, that lead to revenue growth, invested back to the development of the technological platform to provide more and more empowering tools for agents. (Image Source: Compass Financial Prospectus).

Compass revenue generation

Like many real estate brokers, Compass makes money from commissions and referral fees. Following is a more detailed look at each revenue stream.

Sales commissions

The bulk of Compass revenue generation comes from sales commissions. These are collected whenever a sale is facilitated or tenants are found for a rental property.

These fees are split between Compass and the real estate agent. The exact nature of the split is unclear, but it might be assumed that more experienced agents can command a higher share of the commission.

The company also seeks to maximize commission fees by focusing exclusively on higher-end properties. Sellers can also opt to use the Compass concierge service which increases the fee the company can charge.

Through the Compass Private Exclusives facility, homes are privately listed before they hit the market. This creates hype and urgency among buyers which in turn increases the odds of a successful sale. It also allows property owners to get an idea of how much their home is worth using a host of marketing insights.

Lastly, the company endeavors to increase revenue by making its platform attractive to agents. To that end, Compass offers a range of curated learning resources to help real estate entrepreneurs grow their businesses. Topics offer assistance in marketing, financial planning, and comparative market analysis (CMA) reporting.

Bridge loans

In 2019, Compass began to offer a bride loan service in conjunction with mortgage partners Freedom Mortgage and Better Mortgage.

Essentially, the service allows the seller to purchase a home before the revenue from the sale of their previous home is available.

It should be noted that Compass cannot collect revenue on loan interest because it does not issue the loans. Having said that, it does receive a referral fee from the aforementioned partners for sending business their way.

In addition to referral fees, the company also charges for title and escrow-related services.

Key takeaways:

  • Compass is an American property technology company founded by Robert Reffkin and Ori Allon. The company has a focus on providing services for real estate buyers and sellers in lucrative, high-margin markets.
  • Compass collects a sales commission for each property sold and shares it with the agent. Since these professionals are independent contractors, Compass offers professional development resources around marketing and finance to name a couple.
  • Compass also earns money through bridging loan referral fees, which are underwritten by partnering lenders.

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Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"