Monday, January 30, 2023

Jason Oppenheim: ‘There’s no fixing Compass. It’s unfixable’

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Welcome to the newest feature on Inman: Real Tea. If you love watching reality TV, mostly because real estate runs rampant on the screen, on the internet and in your heart, stay tuned to this column. We’ll get the scoop on the newest releases, go behind the scenes with your favorite stars, and spill the tea on the real estate porn you’re dying to know about.

Led by twin brothers Brett and Jason Oppenheim, The Oppenheim Group and its staff of high-fashion, high-heeled agents catapulted to fame in 2019 following the release of Netflix’s Selling Sunset.

Since then, fans have binged five seasons, with another season due this spring and yet another in the works. And then there’s the spinoff in Orange County, with the Oppenheim brothers back at the helm, this time at the brokerage’s Newport Beach office.

But when he’s not in the limelight, the Oppenheim brothers are among Southern California’s most prolific luxury real estate agents, and their opinions on the rapidly evolving real estate industry are coveted. In August, at Inman Connect Las Vegas, Jason Oppenheim was joined alongside Oppenheim Group Vice President Mary Fitzgerald, where the duo dished on reality TV, but also the state of the real estate brokerage, at which point he turned his eye to Compass, which earlier that summer initiated a round of layoffs and for months had been struggling with declining stock prices.

In a post-earnings discussion earlier this month following news Compass had continued to lift its agent count despite falling revenue and widening losses, Inman asked Oppenheim to expand on remarks he made this summer and share his views on the brokerage and where he believes its headed in 2023.

As Compass gobbled up market share and offered agents competitive splits, thanks in part to funding from investors including SoftBank, Oppenheim said he became convinced the brokerage would fail, and even went so far as pulling the trigger on a seven-figure short sale against the company. He’s since divested in the company and said he has no financial interest in Compass.

In an interview last week that has been edited for clarity and length, Oppenheim offered his opinions on Compass as it heads into the new year.

Compass did not immediately respond to a request for comment, or to confirm Oppenheim’s claims about the company’s commission splits. When Compass responded Monday, a spokesperson said:

“Compass doesn’t focus on other companies or reality TV, we focus on making our agents more successful. Compass did not respond to Jason’s inquiries because he would not have been a culture fit and therefore we did not want to waste his time. Lastly, on our last earnings call, Compass stated that we are planning our cost structure to be profitable in 2023 even with a 25 percent decline in the market with no change in our split policy. The market responded very favorably and the multiple Wall Street analysts project Compass will be profitable without any change to split policies.”

COMPASS TURNS 10: THE BROKERAGE’S MOST PIVOTAL MOMENTS

Inman: You have an incredible vantage point for noticing leadership in the industry. What do you see happening right now? 

Oppenheim: I don’t opine on the leaders of different brokerages … I don’t think there’s a leadership problem. I think it’s a systemic structural problem with real estate brokerages, but I don’t think there’s a leadership problem.

Do you want to say more about that?

Yeah, there’s been a race to the bottom in terms of brokerages focusing on revenue rather than profits.

I think that it became a very agent-centric real estate model — it was brokerage-centric, and it went toward real estate centric, largely, because of reality shows like Million Dollar Listing and Selling Sunset and so many others that really celebritized real estate. The real estate agent for the last five to 10 years has had a lot of leverage. 

And then it was compounded … brokerages were coming in again, notably Compass, at the same time you had so many brokerages trying to expand like Douglas Elliman and Compass … coming in and trying to impress investors with revenue and growth kind of in a way that a tech company — although Compass is simply not a tech company …. 

You’d think that investors would have learned their lesson because of [what I viewed as] such an obvious smoke-and-mirrors show of revenue growth, and then the promise of future profits. But for anybody who understood the brokerage model, we all knew that there were going to be [little] future profits because you’re now in a situation where you have overhead, unsustainable overhead, and your income is fixed at whatever percentage the commission split is with the agents, so there’s no fixing Compass. [In my view], it’s unfixable. 

I did a seven-figure short sale against Compass right when they went public and recently divested my interest. Obviously, it was the best stock investment I ever made. But it was just glaringly obvious to me, and I told everyone to do the same. 

I think for anyone who understood the brokerage model, you know, there was no other option than Compass imploding. There was no other scenario. Doesn’t matter whether the market stayed healthy, or when the market softened. That had nothing to do with Compass’ implosion. Compass would be in as terrible of a position, even if the market had stayed as strong as it was in 2021.

Compass earnings were last week. Compass added agents while revenue was falling. 

If you have a broken business model, it doesn’t matter how many agents you have. It’s irrelevant. If you are making televisions for $100 a piece, and you’re selling them for $99 a piece, it doesn’t matter that you’re making more televisions, it doesn’t fix your business model.

You’re still losing $1 for every television, so just because you’re making more TVs or selling more TVs, it’s actually a bad thing if you’re losing money on every agent, but having more agents is not an inherent positive.

In order for Compass to survive, they would not only need to cut costs, and they’re obviously already doing that. They would need to raise the splits of all of their agents, probably by about 10 percent. And I don’t think that’s possible for them to do that.

That’s the grim reality … I think it’s impossible for Compass to change the splits on all their agents including their top agents. But that’s the only way they survive, by a 10 percent increase in brokerage commission retention. 

So for those on a 90-10 split, they’d all need to be on an 80-20 split. Anybody on an 80-20 split, they’d have to be 70-30. Basically like that. Compass would have to have every single agent renegotiate and give Compass 10 percent more of their income. 

What happens next for Compass? What’s your 2023 prediction?

Oh, misery. Misery. [In my opinion] they don’t have a viable business model. Unless they do what I just said, and I don’t see that happening. 

And what Compass did, by essentially dumping, will affect every other brokerage because they were unable to compete because Compass was dumping. So they damaged the entire brokerage system with what they did. 

I think that other brokerages will hopefully be able to sustain throughout the next few years, but if they do, they’ll do it barely. They’ll have to cut costs and probably increase commission splits, which is just a grim reality for the entire model. I mean Compass basically destroyed the brokerage model for the entire industry — not the model, the industry — with what they did. 

Because they made it impossible for viable companies. Profitable companies were unable to compete. It’s the same way that again, television manufacturers weren’t able to compete when other television manufacturers were selling products below the cost to produce. It destroys the entire industry. It was legal, but, you know, it was shameful.

So you’ve said Compass destroyed the industry model. What comes out of that?

Well, what will come out of it is that the model will have to become more brokerage centered. Brokerages will have to spend, unfortunately, less money to provide less services and then have to charge their agents more of a commission. 

Now there’s a lot of kinds of secondary options for agents, but I think it’s unfortunate for the industry in general. I mean you have a lot of, what you’d call budget brokerages, whether you’re like a Keller Williams or like an eXp where you’re not getting that much in the way of services.

The goal of the brokerage industry, the real estate industry, should be to provide excellent service to buyers and sellers. 

In that regard, we want brokerages to exist that provide service, training, staffing, marketing to offices, to their agents. And those brokerages are going to have to start charging — basically it’s the New York model. 

New York real estate brokerages charge far more money, take far more money from their agents than almost any other city. So the New York brokerage model is OK. I just think that’s the model that needs to be duplicated around the country for brokerages to survive. And obviously, it’s sustainable because it works in New York.  

Probably Compass in New York could survive because you can take 40 percent from the agent. But when you expand to all these cities, and you start having to compete and beat out everyone else in here, you start taking 10 percent brokerage. You know how many brokerages are at 90-10? That is an unprofitable model. 

I don’t care how successful the agent is, unless you’re like a top 20 agent in the country. If [the brokerage is] taking 10 percent, you’re not profitable. The only brokerage that runs a profitable model is probably The Agency off the top of my head. They’ve been pretty good at standing firm, and I think that’s why they’ll probably survive and probably thrive. 

Are there any other points you’d like to make?

But I think what’s unfortunate is it took down an entire industry in many ways. What they did, you know, investors who didn’t have anything to do with Compass got hurt. Real estate agents, in the long run, get hurt. Buyers and sellers, in the long run, get hurt. You know, I mean, a real estate industry that’s sick doesn’t help anyone involved. Right now the industry is sick. Compass has a responsibility in that regard.

[This has] nothing to do with Compass agents. I have a lot of people that I respect at their company, and, quite honestly, who wouldn’t want to work with Compass when it’s throwing out, you know, unsustainable splits, and signing bonuses and marketing budgets? I mean, quite honestly, I probably would have gone to Compass, you know, if I wasn’t at The Oppenheim Group, so I don’t blame the agents at all.

What about the brokerages? There were a lot of brokerages that got snapped up.

I don’t blame them either. See I was hoping they were going to come buy The Oppenheim group. Seriously, or I even inquired. I’m not kidding. I actually inquired I mean, why wouldn’t I want Compass to come buy me up? Yeah, I mean, those are the smart people in the game with the brokerages that got bought out by Compass. I don’t blame them at all.

What did that look like, the inquiry? Did they ever get back to you?

No, I never got any feedback. I can’t remember who I reached out to, but I definitely would have engaged with Compass as it relates to them offering to buy me out. Obviously, it would have had to make sense. 

But I mean Compass at one point — this is probably the most conspicuously manipulative things about Compass — would go buy a brokerage. Let’s say the brokerage has 300 real estate agents, they would actually value the agents based on the purchase price, right? So they’re paying let’s say, $50,000 an agent or whatever it is.

Immediately, once those agents are Compass agents, they were being valued [by the market] like three to five times …what they paid for them. Is that agent all of a sudden worth five times more money? No, it’s the same agent. 

Is every agent that goes to Compass five times more successful? It’s obnoxiously stupid on its face. I mean, there were so many red flags in what was going on, that, to me, it was actually laughable. 

Like, I literally laughed out loud, reading, you know, so much of this and following so much of this many times. I was telling everyone at my brokerage. I had a long record last year and a half, two years even. I’ve pretty much told anybody anyone who would listen in the last few years that Compass was going to implode. 

There are probably 1,000 people whom I’ve spoken to … I mean when people read that article, they’re all gonna be like, yeah, Jason told me about that a year ago or two years ago. I probably said what I told you 500 times to anyone who listened — especially anyone who was considering investing. Clearly, I didn’t make a difference. 

Editor’s note: This story has been updated from its original version with comments from Compass.

Email Dani Vanderboegh

New markets require new approaches and tactics. More than 250 experts and industry leaders will take the stage at Inman Connect New York in January to help you navigate the market shift — and prepare for success in 2023. Register today and get a special offer $1099 ticket price.

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