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Is Compass just Redfin on Steroids?
NAR, Lawsuits, AI and Laws of Free Markets Shrink Commissions
Let's put the 'early retirement' of NAR CEO Goldberg aside. Let's put the Sitzer/Burnett verdict aside. Further, let's table the various other pending lawsuits for the moment and just focus on the impact of technology on the business of residential real estate.
To argue that artificial intelligence is not simplifying and streamlining numerous aspects of the production process is foolhardy. To argue that greater transparency and streamlining will not lead to the narrowing of spreads or reduction in fees and commissions is to long for the era of the buggy whip.
It's over. The game is changing, and this change will bring significant disruption, displacement of labor, and lower income to many industry participants as direct and indirect suppliers of services.
Compass is a classic, albeit well-funded roll-up.
"A roll-up (also "roll up") is a process used by investors (commonly private equity firms) where multiple small companies in the same market are acquired and merged.
The principal aim of a roll-up is to reduce costs through economies of scale.
Roll-ups may also have the effect of rationalizing competition in crowded and fragmented markets, where there are often many small participants but room for only a few to succeed.
The characteristics that can make a roll-up particularly attractive come into play, especially when there are many small players in a fragmented market or in fields where technology can play a role in revitalizing industries with small margins." From Wikipedia (edited).
Compass grew through the acquisition of rivals and by inducing agents to join the firm via the offering of temporarily enhanced compensation packages.
No surprises, as the firm was founded and driven by an engineer with experience at formidable technology companies and by an MBA with a background in politics, consulting, and investment banking. Unsurprisingly, the duo had an understanding of and entre to the world of venture capital.
Why the Comparison to Steroids?
Because they wear off - they stop working.
Steroids, specifically anabolic steroids, are synthetic versions of the hormone testosterone. They are primarily used to promote muscle growth and enhance athletic performance. However, they are often abused for non-medical purposes and risk long-term harm to the body.
Increased Muscle Mass and Enhanced Athletic Performance
Improved Recovery post-workout
Increased Red Blood Cell Production, improved oxygen delivery and stamina.
In the long run, the body (with luck) returns to its normal state without lasting negative consequences. Muscle strength and stamina revert to their original status, and the body moves forward in the then-current state of affairs.
Can steroids be harmful? Yes, anabolic steroids can be harmful. Just as injecting too much venture capital and cheap money into an industry where the talent walks out the door each night can be detrimental to the long-term profitability of a firm and to the health of an industry.
Therefore, this is a long introduction to get to the point: Compass is nothing more than Redfin on Steroids.
Residential Agent Commissions Will Approach Zero
The era of 5%-6% total commission is over. Whether or not most industry participants know it or will admit that massive structural change to compensation is upon us is another story.
I predict that in the not-too-distant future, the vast majority of purchase and sale transactions will be done for total commissions of 3% or less. Somewhere between 5% and 20% of transactions will garner a more substantial fee, but these will be the exception, not the rule.
If you don't buy off on my argument of structural change, take a peek at Aalto, where it is possible TODAY to buy a home online.
Compass sells on service; Redfin sells on price.
If one reviews the marketing offered by each firm, you will notice this clear as day. At first glance, the homepage for each company is virtually identical.
Each site leads with "Search" for a home as the entre to the firm's offerings. Submit your zip code, and it is likely that the results returned will be very similar. In fact, I suspect that the MLS data presented will have significant overlap.
Review this Redfin page and note the marketing slanted toward 'selling on price.' Scroll to the bottom of the page and look at the comparison chart.
Review this Compass page, and note the offering targets 'service.' This is the Compass Concierge service, which appears prominently across the website.
Interestingly, Redfin offers a similar service called Redfin Concierge Service, but one must dig a bit deeper to find the product.
Sure, the vast Compass network of independent contractors, agents, brokers, and staff are professional and intellectually capable, and the firm garners massive market share. But, the landscape is changing and morphing in ways that will lead to a reversion to the mean whereby, on average, the Redfin transactional experience and the Compass experience will become virtual substitutions for one another.
Technology, Transparency, and AI Win
It’s a foregone conclusion that creative destruction combined with chips and multi-layered matrices and a bevy of Department of Justice and private party lawsuits, enhanced regulation, and transparency will crush the existing compensation structure for generic real estate transactions and mortgage financings. Mark my words.
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