Last quarter, which included the full year 2020 results, I wrote that EXPI turned the corner and is now the most serious competitor to most of the traditional brokerage models in the industry today. Nothing from its Q1 results changes my mind on that assessment, as I wrote last quarter:
Absent some kind of major misstep by EXPI, or major changes in the overall economics of housing, I believe that EXPI will be the dominant force in the mid-low segment of the market while Compass will be a real threat in the high segment of the market. The traditional leaders of today — Realogy and HomeServices of America on the high end, and RE/MAX and KW on the mid-low segment — are facing real threats.
Now, with Compass having reported, I think we have to include Compass into the traditional leaders of the high end as well. Everyone faces a real challenge from the hypergrowth engine that is EXPI.
The Numbers
As I said in my previous posts, you can get the reported numbers right off of the earnings releases. If you want them from me for some reason, let me know.
The overall results are very impressive:
First Quarter 2021 Operational Highlights:
- Agents and brokers on the eXp Realty platform increased 77% to 50,333 at the end of the first quarter of 2021, compared to 28,449 at the end of the first quarter of 2020.
- Residential and commercial transaction sides closed increased 95% to 73,878 in the first quarter of 2021, compared to 37,882 in the same year-ago quarter.
- Residential and commercial transaction volume closed increased 123% to $24.5 billion in the first quarter of 2021, compared to $11.0 billion in the same year-ago quarter.
- eXp Realty expanded into four new international locations and territories in the first quarter of 2021, including Puerto Rico, Brazil, Italy, and Hong Kong. Subsequent to the end of the first quarter, the Company successfully launched in Colombia, and announced plans to establish operations in Spain and Israel by the end of the second quarter of 2021.
- eXp Realty ended the first quarter of 2021 with a 73 global Net Promoter Score, a measure of agent satisfaction, through the Company’s intense focus on the agent experience. This compares to a 70 global Net Promoter Score at the end of the first quarter of 2020.
Of course, I keep an eye on other metrics as well — primarily productivity and profitability metrics, because of the core narrative of EXPI: growth in agent count and market share, at the cost of productivity and profitability. Last year, we saw EXPI turn the corner on both. So how did they do in Q1?
Productivity Gains
Below are EXPI’s Key Metrics from the start of 2019 through end of Q1:
A real positive, which I noted last quarter, is that transactions and sales volume are growing faster than agent count. That trend held steady in Q1, with transactions up 95% YOY and Sales Volume up 123% YOY but agent count up “only” 77% YOY. That’s important because it raises the per agent productivity figures: 1.5 transactions per agent is 10% better YOY, and if 2021 holds to the same crazy market conditions as 2021, we can anticipate extremely good remainder of 2021 for EXPI.
The strong implication is that EXPI is having more and more success recruiting better and better agents. That is validated by the fact that RE/MAX recently sued EXPI for “tortious interference” for “improperly soliciting RE/MAX franchisees to join.” Here’s the text of an email I received from RE/MAX:
Dear RE/MAX Affiliates,
On May 20, 2021, we filed a lawsuit against eXp for tortious interference with RE/MAX franchise agreements. While we generally do not comment on pending litigation, I want everyone to understand the actions we are taking to protect our brand and the reasons behind them.
The lawsuit focuses on tortious interference, which is in reference to eXp improperly soliciting RE/MAX franchisees to join eXp despite knowing that our franchisees are bound by a contract to operate their RE/MAX franchises through a specified term. These solicitations have occurred throughout the country as part of eXp’s recruitment system. Franchisees defaulting on their contracts damage all of us – including other franchisees – and although we have issued letters to eXp to cease such unlawful behavior, they have refused to stop.
In addition to improperly interfering with our franchise agreements, eXp also has misrepresented RE/MAX through false advertising. For example, an eXp website misrepresented the RE/MAX commission split and incorrectly claimed that RE/MAX imposes an 18K-20K mandatory cap. Both statements are categorically false. As eXp is aware, RE/MAX imposes no uniform commission split or cap.
We welcome fair competition within the industry, but this type of behavior is not that. Misleading agents and encouraging franchisees to default on their contracts are unlawful business practices. We will not stand idly by as they attempt to tarnish our brand. Today, we fight back – on behalf of our affiliates as well as our company.
As you well know, reputation is everything in our industry. I’m proud that the RE/MAX name has become synonymous with both professionalism and integrity. That reputation is earned every day through our actions and behavior. Thank you for continuing to do your part to make the RE/MAX name rise above the competition.
Sincerely,
Adam
Adam Contos
CEO, RE/MAX Holdings Inc.
It doesn’t matter whether RE/MAX will win or not in this lawsuit; what matters is that RE/MAX felt it had to sue EXPI. They would never have done such a thing if EXPI wasn’t having success raping and pillaging their brokerage ranks. In fact, I assume that EXPI has been successfully wooing productive brokerages, teams and agents away from RE/MAX since it isn’t likely that RE/MAX would have brought an expensive lawsuit (is there any other kind?) to keep unproductive brokers and agents. (What sucks for RE/MAX, of course, is that they might have a contract with the brokerage who has the franchise agreement, but nobody anywhere has a contract with the 1099 independent contractor agents without whom the brokerage is pointless.)
So, productivity trend continues to be very positive for EXPI.
Profitability: Mixed Bag, But Positive
Second, the profitability picture kinda sorta improves… in that Net Income per agent jumped 1,843% YOY to $96 per agent, and Gross Profit per agent increased 8% YOY. It’s a bit of a mixed bag in that agent splits went up, resulting in a 11% decline in Company Dollar YOY. But then again, EXPI had real Company Dollar and with a very lightweight G&A infrastructure, most of that dropped to the bottom line. I believe they call that “operating leverage” — EXPI has it. Others… maybe do? Maybe don’t?
But if productivity continues to rise, and past a certain point, each additional dollar of gross profit translates into more and more net profit because of operating leverage… well, that’s a rather positive picture for EXPI.
The key, it seems to me, is in the words of Dave Conord, President, US Growth from the call:
We’re really thrilled about our accelerating agent growth. We’ve now outpaced prior quarters for three straight quarters. Coming off a record year in 2020 with over 5,500 agents added in Q1 alone, we carried that momentum into Q1 2021 and we doubled our gross agent adds, exceeding 11,000. We focused on attracting independent brokerages and top teams to maximize revenue. We added to our base agent growth 51 brokerages and 63 teams for more than $4.9 billion additional transaction volume in Q1.
As long as EXPI continues to focus on brokerages and teams, things will turn out just fine for them.
Ancillary Revenues
Last quarter, I noted that EXPI made perfectly clear that it is operating the brokerage as something like a loss-leader. At a minimum, brokerage is going to be a low margin business that lets EXPI recruit thousands and thousands of agents, so they can make money doing something else.
In the Q4 call, Glenn Sanford called out mortgage, title and escrow as “where we would expand gross margins.” In the Q1 call, we get something a little bit different:
I mean, just thinking about all of the various different places where we can allow innovation to take place and to provide a platform for people to innovate on all kinds of parts of the value-stream from coaching, training, lead gen, to relocation companies, to unique title and escrow offerings, to mortgage, to all of this stuff. It’s on the verge of starting to emerge. And so, I think if we look out two more quarters, we’ll start to see some of these actually taking root and then also creating some fruits from what’s going on.
That’s slightly different from the implication that EXPI will be launching title, escrow and mortgage — like Compass has done and will do. That’s a slightly broader approach, something more like a, “We’d like to be a platform for a ton of title, escrow and mortgage companies to connect with our agents.” That makes EXPI something a bit more like Zillow and a bit less like Realogy.
It’s an intriguing wrinkle, though frankly, it may mean nothing at all. It might just be Glenn Sanford saying “platform” in the same way that Robert Reffkin of Compass says “platform” and Ryan Schneider of Realogy says “platform” when they all mean in-house title, escrow and mortgage.
Express Offers and Opendoor
There is, however, the possibility of an interesting little wrinkle. This is EXPI’s in-house seller lead generation platform masquerading as an iBuyer offering. Glenn Sanford:
We’re continuing to get traction in a number of different service offerings. The one that I continue to come back to because I think it’s the most innovative and has a lot of legs to grow in the short run is the Express Offers platform, and you can check that out at expressoffers.com. But we continue to get traction from a number of buyers and sellers to actually transact on the iBuyer front without any capital risk from us. But more importantly, we’re getting thousands of leads — of listing leads into the hands of agents to go and potentially actually list put an eXp Realty sign out in the ground to actually market those homes as fully marketed listings.
Most brokerages that offer this — including Realogy and Redfin, by the way — are sending low-ball investor offers and hoping that most homeowners will just choose to list with them. EXPI likely means to do the same.
However, combining Glenn’s statements about being a platform — which I take more seriously than Schneider or Reffkin saying the same thing for some reason — with the above, where EXPI just wants listing leads with zero capital risk, I wonder if Express Offers could be something for say Opendoor to take advantage of.
There is no doubt in my mind that Opendoor’s offers would beat the pants off of most other investor offers since its offers are market maker offers, rather than discount-from-market-price offers. Unlike Zillow, Opendoor has customer acquisition costs, and it is used to paying referrals to agents just for sending them deals. Being able to leverage EXPI’s massive agent base as a lead-gen source could be something Opendoor could take advantage of, while Opendoor could be more willing than Zillow to let EXPI keep the seller leads since it doesn’t have a Premier Agent kind of a business to operate.
Opendoor isn’t beating Zillow online anytime soon; maybe Express Offers lets Opendoor beat Zillow on the ground.
Could EXPI Contend for the Iron Throne?
Back when I wrote my Red Dot on The Platform, I didn’t consider EXPI to be one of the Houses in contention, although I did consider Compass as a sleeper pick. Since then, EXPI has exploded in hypergrowth and hit NASDAQ; it’s a real deal public company with stock traded on the open market and a market cap of $4 billion at the time of this writing. Compass just went public early this year with a market cap of $5.4 billion but it has nothing like the history of growth and profit that EXPI has garnered in a few short years.
Now, I must consider whether EXPI could be a sleeper pick.
I think the answer is yes… as a sleeper pick. I think House Zillow is still in the lead, but they have not yet been able to seal the deal. Zillow’s move to IDX to power its industry leading website might have actually hurt its chances to close the loop because it had to become a brokerage in order to do so, and the entry of CoStar into the mix complicates things greatly.
EXPI, on the other hand, has done nothing but grow, grow, and grow.
It has a platform as much as anybody else not named Zillow or Redfin can be said to have a platform, and its advantage of having no physical locations (unless required by law) and a single online gamified presence helps with the idea of being a platform. That EXPI has no enormous technology staff, no in-house technology worth mentioning, no in-house title and escrow, no significant mortgage JV, and no iBuyer partnership suggests that maybe its lack of stuff is its advantage if all it wants to do is to aggregate agents and offer them (and their transactions) as a marketplace to third parties.
It’s possible. EXPI might be a sleeper for The Platform… but its competitors in brokerage aren’t sleeping on them. In fact, it’s safe to say they’re causing a bit of insomnia.
-rsh
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