Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:04:49} We're investors in public markets and have been researching eXp and other brokers in the real estate industry. We want to better understand how the different models in real estate are currently competing, what their value propositions are, especially eXp which is showing the most growth in the industry. That's the framework of the conversation but could you tell us about your background in the industry?

{audio:0:06:12} I have a long history in the real estate industry. I got my real estate license and jumped in the industry straight out of college, where I joined a team to get coaching, training and leads guidance. I worked my way up to become a team trainer and had success with RE/MAX in my 16 years in the industry. For several years, I co-owned a RE/MAX brokerage with two partners in Phoenix, then joined RE/MAX international headquarters in Denver. I started as a franchise consultant, working with our independent franchise brokerage operators and owners on operations, recruiting, retention, agent development, technology and ancillary services. We were helping them run their brokerage businesses better, and I worked my way up through RE/MAX, culminating in the area vice president for 15 states across Western US. I spent 16 years with RE/MAX, in different functions, for a 360 approach to my background.

{audio:0:07:43} You've been an agent in that sense as well? Were you closing deals?

{audio:0:07:57} I still have my real estate license but I'm not actively selling or doing deals. 

{audio:0:08:17} You said you've been very involved in training, recruiting and retention of agents within the RE/MAX ecosystem?

{audio:0:08:28} Why would an agent decide to go to RE/MAX, Berkshire or any brokerage?

{audio:0:08:45} It depends on which phase of the journey of a professional real estate agent.  Newer agents are looking for a different set of values and criteria more relevant to them versus a tenured agent. There are three categories; new agents, tenured agents and team leaders, which I would classify more as business owners/operators. These team leaders are running small companies within a brokerage. New agents are looking for training to learn the ropes of the business, get out there, get their feet wet and develop some confidence.  Different companies within the real estate landscape have value propositions for new agents. 

{audio:0:10:05} RE/MAX was never known as a place for new agents, whereas Century 21 or Coldwell Banker are more designed, historically and even today, as better places for supporting, coaching and training newer agents. Tenured agents are independent agents who are not team leaders but are still solo, have a book of business and are looking for value. Sometimes it will be broker support or connection to their community in a connection they know at the office. They are looking for more business specific items in terms of technology, platforms and services, more what they are getting for their investment within that brokerage. They have the business fundamentals down and are bringing value to the brokerage so they are looking for things that can make them more efficient, do more transactions in less time, such as support with their transactions including professional photography and staging. 

{audio:0:11:52} Team leaders and business owners are looking for the lowest cost situation in terms of a brokerage, which is why eXp are having such tremendous success. They attract strong team leaders and business operators who run small businesses within brokerages, where they are provided the autonomy and the ability to run this business, while capitalizing on an attractive commission structure and financial model with revenue share, stock participation and equity grants, based on their sales volume and growth they can achieve through building out their team. They are more attracted to a model that can build wealth because they look at it as a business owner.

{audio:0:13:03} That makes a lot of sense as a good framework to understand the industry. Both RE/MAX and Keller Williams have been particularly successful at attracting agents and are leading the industry in terms of the number of US transactions closed per year. How did they do that versus other solo agents? What is their main value proposition?

{audio:0:14:10} RE/MAX was born out of a model similar to a doctor's practice or law firm where, essentially, agents come together. It was the first disruption to traditional real estate brokerage where the concept was, agents manage their own business and drive transactions and so forth. The idea was to join a brokerage and get a higher commission split and earn more money using a shared resource model, similar to doctors coming together to start a practice. That was the start of RE/MAX and it was a high commission concept where you could earn 100% of your commissions and pay a desk fee or monthly fee because these were the more experienced tenured highly productive agents in the industry. 

{audio:0:15:30} The mantra of RE/MAX has always been that it's the home of the more productive tenured experienced agent who have a strong business, so their growth has been largely in that sector. Their value proposition to agents within the space is that they are joining a more productive company, with higher average transactions per agent, and brand awareness. RE/MAX is, in many categories, the most recognized brand in real estate which brings them a connection to consumers. That has led to their success over the years in terms of their strong position with close to 140,000 agents worldwide. They are expressing some pressures in the US and some slow growth from an agent count perspective, but their international growth continues to be very strong. 

{audio:0:16:34} Keller Williams' success has come from heavily embracing the team model. They were first in terms of a revenue share and down line type perspective in terms of, if you build out a team and recruit to the brokerage you will get compensated because you get paid for all the agents you introduce. That took off and they have had tremendous success with that. Their average transactions per agent is six or seven which is not as high as RE/MAX which is 16, so they have more unproductive agents. Nevertheless, they have achieved the highest number of transactions in the US market, which is 1.1 million and ahead of RE/MAX. They also have the expansion team model where you may have a team in Denver, Colorado but you expand to Austin, Texas. They pioneered expansion teams which have also been very successful.

{audio:0:18:24} Why would a top producing US estate agent not choose to go independent instead of working for a RE/MAX or Keller Williams franchise?

{audio:0:18:48} We will continue to see more of a movement to independent boutique specialized real estate brokerages. The value of brokerages have been threatened over time and it is getting tougher for traditional real estate brokerages to provide value to their agents. Years ago, the broker used to be the nucleus of the value and controlled everything for agents and provided them leads and training. But today, agents can get this value outside the brokerage. They can get a transaction management platform and use DocuSign and other technology platforms to help grow their business. There is an independent piece but there is also joining a low fee discount brokerage where they pay less, but get their own services and control that. 

{audio:0:20:44} A very interesting model is a company called Side, who have received tons of funding. They just hit unicorn status or a billion-dollar valuation six months ago. Their model is to partner with independent brokerages to bring them under the Side platform, and power and provide them with services. It's an interesting model and I see more going this way, but they offer a tremendous amount of value, not only providing all the tech stack for that brokerage but also providing services to help them recruit agents by posting jobs and interviewing agents. Those services have, traditionally, never been found in a brokerage model. I believe they partner with them and take a good portion of the revenue from that particular brokerage. I see that as another emerging model where you can go independent, but join an operating system or business entity to help you run your business so you can focus on doing more transactions, which is the revenue driver for any brokerage team or agent.

{audio:0:22:42} We didn't know about Side and that is very interesting. We can talk later about eXp but it reminds me about their business model in which they provide the best framework for independent broker agents to build a team or find services which help them close transactions instead of paying for a brand which is no longer relevant. Do you have a sense of the number of agents Side already has within their framework?

{audio:0:23:31} I don't know exactly how many agents they have but they are growing rapidly. They achieved the billion-dollar valuation quickly and their latest round was $100 million from several big-name investors. They will go public here soon if I had to speculate on it. Another model which is similar to Side is called Place. The founders are successful Keller Williams franchise owners and one of them, Ben Kenny, also owns several real estate companies including a CRM lead generation platform. They merged it all together to create Place, and they got a billion-dollar valuation six months ago and $100 million from Goldman Sachs. That doesn't necessarily lead to success but I'm simply sharing the information about their model. 

{audio:0:25:13} They partner with team leaders to provide them the services they need to run their business, and also help them recruit agents by advertising positions, interviewing and qualifying them. Agents and team leaders wear so many hats and are responsible for sales and agent retention, training, human resources, accounting and finance. Place and Side offer to take those things off their plate by managing those functions for them, which allows them to sell real estate which is what they do best and where they should be focused because it generates revenue. They partner with them in multi-year contracts which open up other opportunities in terms of mortgage, title and other areas, similar to Side. They get them involved in ancillary bolted on services and opportunities for revenue within the real estate area.

{audio:0:26:54} Do they need to have a brokerage license or do Side or Place partner with someone who has an independent boutique or brokerage?

{audio:0:27:12} Place are not brokers so the agent remains at their brokerage and becomes powered by Place. A team leader at Keller Williams will stay there and use the same templates. What's interesting about their model is they're not saying, you have to go independent or join our company. They say, stay where you are and we'll help power your entire business. Side, on the other hand, function as a brokerage by bringing on independent brokerages.

{audio:0:28:15} Place bundles all the tools to help you run your business better, whereas Side has more of an eXp approach, in which they offer the full framework so you can join them and bring your whole team together to start a business with their tools and license? Is that the correct understanding of how it works?

{audio:0:29:05} Yes, similar to what eXp does and where they've had tremendous success. They will bring on a large team and allow them to setup their own office and come onto the eXp platform. 

{audio:0:29:27} Now that you mentioned those other two business models, it seems to be clear that the industry is moving more towards providing agents with the tools and infrastructure to get that job done, versus trying to leverage on your brand. It has become way more focused on simply, give me whatever I need to close deals, which is actually what I'm focused on, and then I will pay for that. But most of the commission split is going to be to me because I'm the one making deals. In that sense, how do you see RE/MAX and Keller Williams in the next five to 10 years?

{audio:0:30:22} It pains me to say this because I have a long history with RE/MAX and a lot of fond friends there and love the organization, but unfortunately, I see a tough road ahead for them in the US. It will be a challenge for them to attract agents and grow their market share because they are franchises which are all independently owned and operated. Independent owners have their own way of operating their business and a splintered approach is hard. eXp is one brokerage so they can roll out their model, infrastructure and services across their agent base.

{audio:0:32:03} Are you saying you will have to negotiate with all the independent agents?

{audio:0:32:09} Yes. Downward pressure on commissions will continue, so franchise companies, in general, will have to look at the entire real estate transaction to explore other ways of ancillary revenue. They can no longer rely on real estate commissions as a main source of revenue. They need to look to title, mortgage, escrow and areas related to the transaction. That is easier for eXp to do in terms of adoption and attach rates within mortgages because they are one company versus independent franchise owners and operators. Both RE/MAX and Keller Williams will be in the same boat in the next 10 years, so the quintessential question is, what value could they bring to the agent, especially when you have other emerging models such as the power buyers and iBuyers like Orchard, Knock, Homeward and Ribbon. 

{audio:0:34:15} These companies are a fintech play. It's a hassle to sell and buy a home because you have to deal with getting your home listed which is contingent on finding another home and sometimes you may have to move your temporary home or your home sells and buy the next home. They provide that buyer with cash to buy their next home and help them sell their home without any pressure. They have agents in their company who will help you do that which is a service. They will make traditional commission on the transaction but also have mortgage and title. My point in all that is, they provide a service which changes the experience of how a consumer buys and sells real estate. That is an emerging value for consumers which traditional brokerages have not been able to provide yet. Things like that put more pressure on the value they bring to both agents and consumers.

{audio:0:35:37} How do you compare the eXp model to RE/MAX and Keller Williams, who are at a clear disadvantage because they have franchises? What is their competitive position and how difficult will it be for new companies like Side to compete with them?

{audio:0:36:09} For US residential real estate, I see a couple of big trends happening, one of which is a continued downward pressure on commissions. There is so much more technology and information available to consumers in today's environment to navigate a transaction, and technology does this in any industry; it lowers the cost of whatever that good or service is, which is kind of the same with agents. Commission generated from real estate transactions will continue to decrease over the years, and we will see companies offer lower costs to consumers to transact real estate in mid to lower value properties. 

{audio:0:37:40} On the upper end, luxury higher socioeconomic status owners are willing to pay for service, so Sotheby's, Compass, Engel & Völkers and even Coldwell Banker will be okay because they're more luxury focused. They won't have an issue paying higher commissions for premiere experiences agents provide. On the lower to mid-range, if the commission income per transaction continues to decrease, you have to increase your number of transactions to make up that lost revenue, and/or get out to other areas of the transaction such as mortgage, title and escrow, to generate revenue from one transaction. 

{audio:0:39:03} Going back to your original question on how I see eXp, there are 1.5 million registered with the National Association of Realtors in the US and I see that number going down in future. eXp will be strong as there will be a big movement to teams, which already has been for the past 10 years, but I see that trend continuing where teams will continue to be the wave of the future in terms of real estate. The reason for that is newer agents are coming to the business and they provide them with training, services and support. Independent agents who are running their own business and wearing all the hats are not specialized, and a team environment allows agents to be specialized. Those agents who only focus on buyers, sellers or showing agents, can be more efficient and do more transactions to generate more revenue. That is why teams will continue to proliferate and models like Place and others are there. 

{audio:0:40:33} eXp are a team-focused model, and allow them to plug into their environment and provide a technology platform. They don't have traditional real estate offices so do not pay for huge leases or salaried employees. They bring in team leaders who have the ability to establish an office if they want to and run their business powered by eXp. I see that being more of the direction where agents will go. That was a long-winded answer to your question but to sum it all up, I see eXp being a very strong model because I believe teams are going to be a strong model and they are equipped to manage and handle teams very well.

{audio:0:41:42} You mentioned two trends; pressure on commissions and the move to teams. It seems eXp are very well-positioned in that second trend and are seeing many top agents moving to this model. Pressure on commissions is inevitable and has nothing to do with eXp. It is the trend that information advances are no longer on the side of brokers so they will have to get revenues from mortgage, title and escrow, but why would a brokerage have a right to get revenues from ancillary services and how is eXp positioned to get that revenue pool?

{audio:0:43:20} I don't know what eXp is doing from an ancillary platform perspective in terms of mortgage, title and escrow, but teams and team leaders have the ability to face the downward pressure on commissions by going out to get ancillary business. They can approach mortgage, title and escrow companies to form joint ventures themselves, irrespective of the brokerage. That is not revenue coming to the brokerage, it would go to the team leader.

{audio:0:44:31} If an independent brokerage within eXp closes a transaction, the commission split is clear, but they can generate extra revenue by partnering with a loan officer because they are the ones holding the transaction and know the timing. So they can create that lead for someone else, but would eXp demand a share of that income?

{audio:0:45:25} I don't know what their plan is but in that model, eXp would not be involved. The value for them is that they will continue to have a team operation weathering the storm of downward pressure on commissions and getting revenue from other places while continuing to churn out transactions and paying their splits. The revenue model for eXp is that each agent is capped at paying eXp $18,000 a year, after which they pay monthly fees for a tech package and insurance, so there are other areas of revenue even after they cap. I would not call that a low amount for an agent to be paying a broker, so it's not a discount for an agent to be at eXp. 

{audio:0:46:27} They are also getting revenue share, stock and investment schedules which is a slick way for an agent to be fully invested in the company. Compass has their own model where mortgage, title and escrow are in-house and they try to get agents to use their own services. Perhaps eXp is rolling out a company operated JV style thing where they help a team leader set it up and participate.

{audio:0:47:55} eXp in the US have already reached 70,000 agents and are growing very fast and will likely double in three years reaching 150,000 US agents. Is it advantageous for them to build an ancillary services platform at scale?

{audio:0:48:31} If they reach that level of agents, their purchasing power will allow for better negotiation so that would help them. It certainly opens up the play book for them to be able to introduce ancillary services from the eXp brokerage down to the agents as a way of other areas of revenue for the company for sure. They may already be doing that or plan to. I would draw on the distinction between the brokerage getting revenue from ancillary services versus the team leader doing it.

{audio:0:49:31} They said they are partnering with SUCCESS Lending which came from Kind Lending which was very successful. They are trying to get loan officers on board by incentivizing new agents onto the platform. If an agent introduces a loan officer, they are compensated for that, but I am not clear on how they will split income between loan officers, agents and eXp. What is the difference between Place, Side and eXp?

{audio:0:50:57} Side offer independent brokerages everything they need to run their business. That includes lead generation, marketing and post-sale client follow-up and they pay for it. Their model is to partner with that independent brokerage and share the expenses, profits and losses. It is a much stronger partnership because they will spend money to make money. It is almost like a partnership or a 50/50 joint venture deal. Place does the same but with team leaders who remain at their current brokerages.

{audio:0:53:14} Would it make sense for a team leader on eXp to partner with Place?

{audio:0:53:22} Absolutely, they can do that.

{audio:0:53:26} Is there anything about the industry we should consider looking at eXp?

{audio:0:53:50} The cloud brokerage type models from eXp, Fathom and the like are a strong play. The only other thing we didn't touch on which I've seen emerge in the industry are public companies offering equity to agents, which is a big deal in the industry. It is a way for agents to build wealth and is a big advantage for eXp and Fathom. Another model has emerged called Real which is based in Canada and also a public company. They have 5,000 agents but are growing quickly. It's very attractive for agents to have an exit strategy to build wealth, which they don't get through a traditional brokerage. I joined the company I'm at now because I got stock over four years and invest. That is a good retention tool and a way to build wealth. They have introduced that into the real estate landscape and it will continue to be a very attractive component for agents to be with brokerages.

{audio:0:56:11} Does it help align incentives and increase retention?

{audio:0:56:18} Real Brokerage are growing faster than Fathom; what are they doing different compared to eXp or why would an agent choose to go to Real versus eXp?

{audio:0:56:42} The Real model is very similar but they are currently trading at $2 per share. If I was an agent, I would join Real over eXp because it's a way to get in on the ground floor of a company who could follow the same path as eXp. Their share price could go up or they could split the stock and an agent would be compensated very well. Conversely, by joining eXp you're joining a more established well-run company who is financially stable with a more robust platform than Real. That is an area where participation through stock equities and residual revenue share is a way to bring the agency in, and Compass are doing the same model. Part of the sales pitch they make to agents is that they will be on an investing schedule and get stock for three years. Clearly, they're having success with it but Compass will have profitability issues so it will be interesting to see what happens in future.

{audio:0:58:46} If you were to bet on one public company, which one would you pick out of Dimension, Compass, eXp, Fathom or Real Brokerage, not as a stock recommendation but just to get a sense on which one you think will be more successful?

{audio:0:59:07} I don't see eXp slowing down any time soon and Fathom and Real are the same model which will continue to grow because they cater to the emerging trend of teams. Compass will figure things out but are slightly more challenged in that they are more of a traditional brokerage. They may be tech-enabled but they have huge expenses with leases of big offices and personnel. They have to get more revenue so I'm less bullish on Compass.

{audio:1:00:26} Many thanks for your time, it's been a pleasure and I've learned a lot.

eXp World, RE/MAX, & US Real Estate Brokerage

Former AVP at RE/MAX

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