The Nest

NestApple's Real Estate Blog

Featuring real estate articles and information to help real estate buyers and sellers. The Nest features writings from Georges Benoliel and other real estate professionals. Georges is the Co-Founder of NestApple and has been working as an active real estate investor for over a decade.

Real Estate Ponzi Scheme: when old fashion brokers deceit investors

Go Back To Previous Page

Next time you go out for sushi in New York or Los Angeles, don’t bother ordering halibut. Chances are it’s not halibut at all. Did you know that when you eat out at restaurants, the fish that is served to you is not the one you actually ordered (at least in 43% of the cases). DNA tests highlighted this “bait-and-switch or “fish fraud”, whatever you want to call it.

The Real-Estate / Fintech startup Compass invented the “venture capital bait-and-switch”: for their investors as well as for their own employees/brokers. This week, Compass announced that it has raised another $100 million that will be spent to expand its sales and rental listings service to every major city in the U.S., as well as build new CRM technology to integrate client, listings and transactions data. This Series E values the company at a whopping $1.8 billion (pre-money). Compass wants to shake up how people find places but is not revealing too many details about what form its business would take.

This winter, the VC market is “hot”: investors are cash rich, the S&P & the Nasdaq are both at record highs and spreads are at historical tights. This is that time of the cycle when investors are so desperate to deploy their cash and ride the wave that they do not make the difference between a real unicorn and Ponzi scheme like you do not make difference between halibut and tilapia at the sushi counter. Interestingly, Compass has over $100 million in the bank before the raise, so the firm didn’t need the money. Strange, isn’t it? It brings the company’s total raised to date to $325 million.

Here is the catch: to everybody (except their investors obviously), Compass looks more like a traditional realty broker. It employs more than 2,000 agents, who take a percentage of the selling price and give 15 to 30 percent to Compass. It lures the industry’s top talent with lavish signing bonuses or stock options and specializes in high-margin, luxury homes in upscale, coastal markets. The much-touted technology is, according to several agents, not that different from what other brokers provide.

What compass calls “technology” are in fact marketing tools. Think of a software to book client appointments instead of a notepad: this is not “tech”. This recent article from Bloomberg casts a doubt on this very rich valuation.

visiting a NYC homeSince its founding in 2013, Compass has grown to 2,000 agents in 10 regions, sometimes offering them generous stock options, with plans to add another 10 markets by 2020. It claims it had $180 million in revenue last year and is on track to make $350 million this year. But no profits, just losses. While brokerage valuations are typically based on multiples of a firm’s earnings, Compass instead raised money using FinTech-like multiples; but let me put it straight: Compass is not a FinTech, it is a real estate brokerage agency and no one can change the fact that the success of the Compass model will be based on traditional brokerage metrics.

These metrics are changing as I am writing this article. Compass raised money on the basis of high growth, and high margins. This is a blatant lie to their current and new investors. The old 6% model is already over; 5% is the new 6% and I predict 4% and very soon 3%, maybe even 2%?

Technology has changed the way business is done in ways that were unimaginable a decade ago. Experts say that residential real estate practices should adapt and evolve now that buyers and sellers have unlimited access to property listings and other information that was once hard to get. Twenty years ago, brokers were receiving apartments listings over fax, had access to information not available to the general public and were considered to have an insight into the business. Brokers are still useful and play a major role in real estate transactions however it is realistic to say their role has changed and should therefore be reflected in the commissions they receive.

This is why Compass rushed to raise cash at a valuation which is not just “rich” but unrealistic while the company was actually already sitting on cash. With that cash, Compass is spending millions bringing top-notch superstar elite agents into their company, designing their website and advertising to generate traffic for its website.

Unfortunately for them, the real estate market is going the other way around with higher transparency, disintermediation and lower fees. Let me make a prediction for 2018: just like Uber is the largest transportation company in the world without owning a single vehicle, and Airbnb is the largest hospitality company in the world without owning a single hotel room, new companies will emerge and completely transform the real estate system as we currently know it.

This is where NestApple comes in: NestApple is a disruptive brokerage firm offering cash back to buyers. For every broker commission NestApple receives, its clients automatically get 2/3 back. On top of that, NestApple makes a charitable donation after each deal to a local non-for-profit in the area where the closing took place. NestApple will become the largest brokerage firm without a single broker. Just like Amazon is creating an Armageddon in the retail industry and shopping malls, NestApple is the new model which is going after the traditional brokerage firms. Old fashion brokerage firms can certainly raise cash with the valuation multiples of FinTech and claim they have sticky capital, however, even the more patient investors will soon knock at their door and want to see returns on their money.

The clock is ticking till these investors realize they paid for halibut and were served … tilapia.



Georges Benoliel Founder of NestApple - NestApple NYC cashback rebate

Georges Benoliel

Georges has been working in Wall Street for the last 16 years trading derivatives with hedge funds. He has been an active real estate investor for over a decade. Georges graduated from HEC Business School in Paris and holds a master in Finance from ESADE Barcelona.