Compass Business Model | How Does Compass Make Money?

Compass is a registered real estate broker in the United States that uses online real estate technology as a marketing tool. 

Compass earns commissions through facilitating sales, finding tenants for rental properties, and providing bridge loans to allow clients to purchase a home before the proceeds from their prior home are available.

Compass Business Model is based on Sales commission and Bridge Loan Service from which it generates revenue. However, the company is still at a loss as of August 2021. 

One of these businesses is Compass Real Estate. And if you’re searching for a Realtor who makes the most of technology, you might want to try one of their representatives. 

We will look at the Compass business model to understand how the company is making money.

Compass Real Estate, formerly known as Urban Compass, was founded in 2012. Ori Allon and Robert Reffkin founded the company in 2012, intending to revolutionize real estate.

What is Compass Real estate?

Compass is an online real estate company that links buyers, sellers, and renters through its platform. The company’s agents are outfitted with best-in-class technology (such as a dedicated app) to serve its consumers better.

Compass Business Model

Compass earns money by receiving a commission on each property deal it mediates. Compass and the real estate agent then share the proceeds. Furthermore, it earns money from referral fees for proposing bridge loans.

Compass was founded in 2012 and is headquartered in New York. Compass is the third-largest real estate business in the country (by sales volume). The company went public in April 2021.

Company NameCompass Inc.
Company TypePublic
FoundersOri AllonRobert Reffkin
ProductCompass Real Estate Marketplace
Founded Date2012
HeadquarterNew York, New York, United States
Area ServedUnited States

How Does Compass Work?

Compass, formerly known as Urban Compass, is a real estate internet platform that links buyers, renters, and sellers with real estate brokers.

Compass employs its agents to give users the best possible experience, unlike other online platforms that strive to eliminate the middlemen.

Compass offers both consumers and brokers a myriad of tools and solutions to assist them in purchasing, renting, or selling a property.

The company’s primary focus is on supporting higher-priced listings. Compass hires and trains its agents to guarantee that users have a positive experience. The company has received over 140 thousand applications this year, of which just 1% were hired.

The same mantra applies to the hiring process as well as the sales experience. Sellers who sell a house through Compass might choose to use their special concierge service. 

It covers staging, roofing repair, kitchen and bathroom upgrades, decluttering, and much more.

Various software tools offer agents insights (for example, the average sale price in a certain area), a list of all outstanding duties, and help them manage all interested buyers.

Conveniently, Compass offers an online platform that includes all available properties for rent and sale, which can help to speed up the sales process.

Compass offers Private Exclusives, allowing sellers to manage the information disclosed during the transaction to its wealthier and more popular clients. This reduces public exposure, which may be useful for groups such as celebrities or athletes.

Alternatively, users can participate in Compass’ Coming Soon program, where they can list their homes before they hit the market. 

This can generate early buzz, enhance exposure for the listing, and provide sellers with early market insights.

Compass also collaborates with professional real estate developers to advertise their listings. These are new listings in high-priced areas like Manhattan.

Finally, Compass offers a bridge loan service (in collaboration with Freedom Mortgage and Better Mortgage) to sellers who use the proceeds of their house sale to purchase a new home.

The Compass platform is accessible via the company’s website as well as its Android and iOS apps.

How Does Compass Make Money?

Compass earns money by receiving a commission on every sale made on its marketplace. Furthermore, a referral fee is given for each lead provided by the organization to its loan partners.

In this section, we will explore each of these revenue channels in detail.

Sales Commission

The majority of Compass’s revenue comes from sales commissions. These fees are paid if the company’s agent successfully completes a sale (or successfully rents out an apartment).

Compass and the real estate agent then share the sales commission. Giving the agent a portion of the commission creates the right incentive structure for them to grow sales.

Compass and its agents divide revenues based on the contract, say current and past employees. It is common for more experienced and well-known agents to demand a higher revenue split.

Compass Business Model

The key point of differentiation in Compass’ model is its technological prowess. Its technologies enable real estate brokers to provide better service to their clients while also managing their time. Compass agents close 7.4 deals per year on average.

Furthermore, by concentrating on high-end properties and consumers, Compass makes more money on every transaction. A greater commission can be paid if sellers use the company’s concierge service.

Finally, its buyer and seller platform, which allows users to view listings in their area, boosts the number of potential purchasers and tenants that it can attract tremendously.

Compass’ Exclusives area, where it advertises properties before they hit the market, enables them to excite listings, increasing the possibility of a sale.

Redfin, one of its main competitors, uses a similar model. The organization was e first to provide its agents with various technical tools to help with the sales process.

Service for Bridge Loans

Compass introduced a bridge loan service in collaboration with Better Mortgage and Freedom Mortgage in October 2019.

Bridge loans enable sellers to obtain the funds they require (before receiving proceeds from the sale) to acquire their next house.

Interested borrowers will utilize the value of their house as the down payment for the loan. Loans can be obtained in a matter of days, providing the necessary flexibility.

Compass does not profit from the interest it charges on loans because they are not offered directly.

Instead, it is paid a referral fee by its partners (in this example, Better Mortgage, and Freedom Mortgage) for each lead it enables. The precise sum is determined by the parties’ agreement.

Compass also offers complementary services such as title and escrow, which it monetizes.

What is the Funding and Valuation of Compass Real eState?

Crunchbase reports that Compass has raised $1.6 billion in venture capital funding over ten rounds.

The company has received funding from a range of notable investors, including SoftBank, Institutional Venture Partners, Dragoneer Investment Group, Founders Fund, and Fidelity Investments.

An additional $450 million was raised in the company’s IPO. Compass was worth slightly more than $8 billion when it went public.

What is the Revenue of Compass?

Compass has reported revenue growth of 56 percent since the previous year, totaling $3.72 billion. Although the company still loses money, this year’s loss is $270.22 million (instead of $388.2 million in 2019).

Compass Business Model

Success Story of Compass

Compass, based in New York, was formed in 2012 by CEO Robert Reffkin and Ori Allon. Both Reffkin and Ollin had significant commercial accomplishments before founding Compass.

Reffkin’s entrepreneurial path began in 1994 when he was 15 years old and founded Rude Boy Productions. Reffkin used to DJ on numerous occasions when he was younger. 

When he graduated from high school, Reffkin had earned more than $100,000 in his DJ career.

And, as if DJing wasn’t tiring enough, Reffkin spent the rest of his time with his mother establishing a non-profit. 

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A Better Chance, a nonprofit, matched outstanding kids of color from underprivileged neighborhoods with the best public schools in the area.

Reffkin attended Columbia University after graduating from high school. He worked at McKinsey, returned to Columbia for his MBA, and had several Lazard and The White Hou jobs.

Following his one-year service at the White House, he returned to New York and pushed his career at Goldman Sachs. He rose through the ranks to become the company’s COO and Chief of Staff.

Reffkin continued his philanthropic work while at Goldman. He founded the non-profit New York Needs You in 2007. (now called America Needs You). 

His objective is to raise a million dollars by running a marathon in each of the fifty-two states. When he ran the New York Marathon in 2013, he became the first to earn a million dollars.

It was also at that time that he met Allon, who would become one of his co-founders. Allon’s business record is also nothing to sneeze at.

During his Ph.D. studies at the University of New South Wales, he came up with the search engine algorithm for Orion as a 26-year-old. 

He sold his company to Google after a bidding war between Microsoft, Yahoo, and Google, where he stayed for four years.

After leaving Google, he founded Julpan, an algorithm that examined how people exchanged information across social networks. 

A year later, Twitter acquired the company, and Allon became its Director of New York Engineering.

Both of his inventions had a significant impact on the businesses that acquired them. His star rose swiftly, and investors began knocking on his door, literally begging him to take their money if he ever had another idea.

That concept manifested itself in Urban Compass, the alias under which it was initially released. Initially, the platform functioned as a hyperlocal social network. 

It employed data collectors who drove around neighborhoods and commented on the network’s best features to ensure sufficient information on it.

Fortunately, Reffkin and Allon got a head start by securing $8 million from investors, including Founders Fund, Goldman Sachs, Thrive Capital, and former American Express CEO Kenneth Chenault.

Half a year after announcing its original investment round, Urban Compass eventually published its beta version in May 2013. 

Former New York mayor and 2020 presidential candidate Michael Bloomberg officially unveiled Compass, demonstrating how much influence its founders had already amassed.

Compass’s first source of revenue was from the relocation services it provides to corporations and their workers. 

The company allegedly turned a profit during the first few months of operation. This enabled them to raise an additional $20 million in investment (announced in September 2020).

Nonetheless, despite its apparent success, the corporation underwent a significant turn in 2014. Rather than serving other businesses, it decided to become a licensed real-estate brokerage. (alongside renaming itself to Compass only).

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The company would advertise properties on its platform while also assisting consumers in buying and selling homes through their brokers – a model with better margins and a considerably larger upside. 

Compass followed in Apple’s footsteps by owning the entire value chain, from lead generation to contract closure.

Another factor was the company’s intense focus on quality. It began plucking agents from traditional brokerages with millions of dollars in capital. 

The Corcoran Group, based in New York, even sued Compass because its new staff took private information with them.

In 2015, the company opted to expand into its second city, Washington, D.C. A Compass broker allegedly helped arrange the sales of Scott Bommer’s Lily Pond Lane homes, which was the (at the time) fifth most expensive sales in U.S. history, in a $110 million deal.

Compass made a significant step forward when Softbank led the company’s Series E round in December 2017, netting it an additional $450 million in funding. It made certain that the money was put to good use.

Compass embarked on a buying binge, acquiring big real estate brokerages around the country. It also went on a massive hiring binge and began recruiting the top real estate agents in the field, giving some very substantial bonus packages. By 2018, the company had engaged over 7,000 agents across the country.

Compass was also able to differentiate itself in terms of technology thanks to the money. It built a technical base in Seattle, led by Joseph Sirosh, former Microsoft CTO of AI. It spent a lot of money on machine learning capabilities to help its agents make better decisions.

Its concierge service assists them in determining to price, the optimal time for a sale, and even how to stage residences. Compass even purchased Contactually, a business that created CRM software for real estate agents, now part of its tool ecosystem.

However, its triumph came at a cost. Major competitors, such as Zillow and Realology, have sued them for recruiting their staff and allegedly forcing them to carry technological secrets with them.

Nonetheless, these problems have not slowed the company’s ascension to the top. Compass went public in April 2021 after pricing their IPO at the low end.

Compass now collaborates with over 13,000 agents across 100 offices in the United States.

Key Takeaways From Compass Business Model

Robert Reffkin and Ori Allon founded Compass, an American property technology company. 

The company’s primary focus is on offering services to real estate purchasers and sellers in high-margin markets.

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Compass collects and distributes a sales commission on each property sold. Compass offers professional development opportunities to these self-employed individuals in areas such as marketing and finance, to name a few.

Compass also generates money by referring bridging loans, which are underwritten by participating lenders.