Can eXp’s virtual world work in New York?

The Sim City-style brokerage is gaining traction nationally, but it’s now attempting to bust into the NYC market — the least hospitable in the country
By E.B. Solomont | June 01, 2019 01:00PM

In 2015, eXp Realty CEO Glenn Sanford boarded a 43-foot motor coach and set off from Bellingham, Washington, to barnstorm the country. Over the course of 11 months at “lunch and learn” sessions in hotels, country clubs and local Realtor association offices, Sanford pitched brokers in 28 states (and two Canadian provinces) on the benefits of virtual brokerage.

When the financial crisis hit, Sanford — known for his soft-spoken and laid-back style in an industry full of alpha dogs — was forced to shutter two brokerage offices he was running. The experience prompted him to rethink a business that was dependent on bricks and mortar.

The past few years haven’t been kind to residential brokerages, which have endured a punishing housing slowdown and rising costs of doing business. But eXp and Sanford — who ran a team selling $60 million worth of real estate a year at Keller Williams in the early aughts — are outliers among the bunch.

Since Sanford’s bus tour, eXp has been growing exponentially, even amid a technology reckoning and as a wave of venture-funded players have disrupted the residential brokerage sector.

The company, which Sanford co-founded in 2009, ended 2018 with 15,570 agents — up from 2,401 in 2016. By the end of 2019’s first quarter, that number was already up to nearly 18,000.

“We have come into the world at the right time,” said Mitch Robinson, eXp’s senior vice president of marketing, who previously worked at Expedia and Zillow.

Robinson said many of the agents who join eXp do so because they’re questioning the value of working at traditional firms when they’re doing most of their business outside of their offices. “They’re like, ‘Gee, am I paying out part of my commission to pay for this empty office?’” he said.

Indeed, the financial burden of brick-and-mortar offices has become an existential threat to some firms.

Realogy — the largest real estate conglomerate in the U.S., with brands including the Corcoran Group, Sotheby’s International Realty and Coldwell Banker — has said it’s looking for $70 million a year in savings, in part by reducing its physical footprint. During a recent earnings call, Douglas Elliman also said it would undertake “substantial” cost cutting, in payroll and other areas.

Meanwhile, in New York last year, Town Residential downsized its office footprint but ultimately shuttered brokerage operations after founder and CEO Andrew Heiberger said it was impossible to support the high cost of offices and rising commission payouts.

“I have said all along that the traditional brokerage model is broken,” Heiberger told The Real Deal last month.

“This seems to be one model that is a fix — especially since splits continue to rise and recruiting costs, rents and salaries are unsustainable if you want to make a profit,” said Heiberger, who also founded Buttonwood Development and Citi Habitats.

But while eXp is riding high at the moment, it’s also grappling with high executive turnover and a string of alleged regulatory violations in California. In additional, several prominent critics, including former executives, have suggested that the company’s top agents are more focused on recruiting new brokers than on selling real estate — a fact that, if true, calls into question whether eXp’s model is sustainable.

As the company deals with those growing pains, however, it’s planning one of its boldest moves to date: launching in New York City, one of the least hospitable markets to outside brands.

“We’re in every state; it would be kind of silly not to be here,” said Kim Canavan, eXp’s designated managing broker for New York State. 

In April, eXp held two informational sessions for prospective agents at the Park Lane Hotel in Manhattan. And it’s been going after top residential executives in New York — two of them told TRD they’d been approached by eXp but did not want their names disclosed.

So far, only a handful of agents have bitten in New York. But that doesn’t mean they’re not hearing eXp out.

“I think it would be seriously myopic to say no one will be interested,” said Mark Chin, managing director of Keller Williams Tribeca, who noted that he’s had several frank conversations with his top agents who’ve been approached by eXp brokers.

But he expressed skepticism that in a market like New York, agents will be satisfied with a virtual network of training and mentorship. “It’s the hardest market in the U.S. in terms of deal pressure,” he said. “Agents want marketing and tech support and access to senior people who will guide them.”

Virtual world, real perks

Sanford was one of Keller Williams’ top agents before he launched eXp in Bellingham — nestled between Seattle and Vancouver — 10 years ago.

Unlike the heads of many competing tech-focused brokerages, Sanford, who speaks with a slight twang that gives away Bellingham’s proximity to the Canadian border, bootstrapped a cloud-based company with no physical offices. Instead, agents work in a SimCity-style virtual world (dubbed eXp World) populated by avatars.

The display looks a lot like a video game — set on a colorful digitized corporate campus with multiple buildings, offices and even a digital lake. Agents can move their avatars from one location to another, visiting the “transaction management” building, attending virtual training sessions or meeting with executives hanging in their “offices.”

In 2013, eXp went public and began trading as a penny stock on a mid-tier exchange called OTCQB. But in 2018 it was uplisted to Nasdaq and blew away all expectations when it skyrocketed to a $1 billion market cap on its first day of trading. (Its market cap has since dropped; as of late May it stood at $655.6 million.)

“It’s kitschy until you try it,” said Robinson, referring to eXp World. “Listen, right now I’m sitting in my basement. I haven’t shaved today, and I’ve got two monitors in front of me. A half hour ago I was having an important conversation with our CEO, who was on his boat. I’m more productive and engaged.”

But it’s not just being able to skip a shave or work from a boat that’s luring brokers in.

The firm — which gives agents access to Regus offices around the country for in-person meetings — also offers real-world perks like company stock and a revenue-sharing program. In addition, agents start at a high 80 percent commission split on their first $80,000 in gross commission income and only have to pay the firm a maximum of $16,000 a year on their commissions.

Keller Williams has been a prime poaching target for eXp.

Although that firm also has profit-sharing — in which agents get a slice of the profits once expenses are paid — eXp agents say they’re pocketing more money because nothing comes off the top.

The revenue-sharing program at eXp also rewards agents who bring others to the firm, giving them a piece of the revenue generated by agents in their “downline” (as recruits are known).

“In 10 weeks, we’ve already done a lot more than we could have ever done at the other companies we were with,” said Tracy Ellis, a Missouri agent who works with her husband, Rick Ellis.

The Ellises sold $32 million worth of real estate at Keller Williams last year and have brought 11 people to eXp to date.

The firm’s formula seems to be working.

At the end of 2019’s first quarter, eXp logged $5.8 billion in sales — up 149 percent year over year. Revenue rose 153 percent to $157 million, with a net loss of $6.3 million — down from $10.7 million a year ago.

Kyle Whissel, who runs Whissel Realty Group in San Diego, said he’s rejected multiple offers to be acquired over the years because he always felt agents who worked for a large company were paying for a brand name.

Images from eXp World, the virtual campus that offers training sessions and other services for the firm’s brokers.

But last year, he decided to join eXp. “There’s a level of pride and desire to see the company succeed,” said Whissel, whose 30-person team is on track to sell $175 million to $200 million this year.

Kevin Kauffman — who with Fred Weaver leads a 50-person team dubbed Group 46:10 Network in Arizona that closed $150 million in sales last year — echoed the sentiment.

Because agents have a vested interest in making sure recruits succeed, many are generous with advice — a significant departure from the industry’s cutthroat culture.  “It creates an environment of ‘We’re in it together,’” he said.

Though eXp declined to say where most of its agents are located, the company said its roster is strongest in California, South Florida and Texas. The last of that bunch, no doubt, is a result of the large number of agents who’ve defected from Keller Williams, which is based in Austin.

Canavan said the company held off on entering the New York market until the time was right. “The plan of growth was, once the company was truly established and could meet the needs of New York City agents and the idiosyncrasies that go along with that market, then we launch,” she said.

Canavan and Corcoran alum Matt Parrella — who is heading eXp’s New York City operation — hosted the firm’s April Park Lane info session.

Though Parella was tight-lipped about how many agents he wants to bring on, in recent weeks the company has inundated brokers and executives in the city with emails and phone calls. The CEO of one of the city’s biggest firms received a message on LinkedIn suggesting she consider “the idea of working with another realty group.”

“It’s not surprising that eXp is gong full-bore, because that’s just how they operate. They’re incredibly aggressive,” said Chin, who acknowledged that eXp has targeted Keller Williams around the country and may do so again in New York.

He said he wasn’t surprised when he, too, got a recruiting call from eXp.

“They want me in their revenue-share because I’m a recruiter. If I go out and recruit 100 people, that’s me — and the 100 people I recruit,” Chin said.

Though Chin didn’t dismiss eXp as a competitor, he predicted it would be hard for the company to break into the market — no matter how prepared it thinks it is for New York’s nuances.

“They have a one-size-fits-all training platform, but that doesn’t really work for New York,” Chin said. “You can’t have the same training program for someone who lives in Scottsdale as someone who’s selling co-ops in the city.”

Chin acknowledged that Keller Williams had the same issues when it came to New York, and he spent two years customizing the training program. “It’s a heavy lift,” he said.

Annuity for agents

As eXp’s star rises nationally, traditional firms have seen their margins shrink.

Images from eXp World, the virtual campus that offers training sessions and other services for the firm’s brokers.

In May, Realogy’s market cap plunged to $827 million, dipping below the $1 billion marker for the first time since the company went public seven years ago. Just one year earlier, the company was valued at $3.3 billion — which itself was down from a high of $7.4 billion in 2013.

“In today’s environment, people like to work more remotely and more mobile,” said Realogy CFO Charlotte Simonelli, during a first quarter earnings call in which she detailed the plan to reevaluate its physical footprint.

Warburg Realty President Clelia Peters — who is also co-founder of MetaProp, a real estate tech accelerator and investor — said brokers seem to be “into” the entirely virtual system.

“Everyone talks so much about Compass, but eXp is a far more innovative company in so many different ways,” said Peters. “They’ve set out to solve some of the ills of brokerage in that they’re significantly reducing overhead costs, and they’re trying to create almost an annuity for their brokers — a longer-term, more predictable and sustainable opportunity with a passive income stream.”

Last year, analyst Tom White at financial services firm D.A. Davidson crunched the numbers and found that a mid-tier agent at eXp can net around 22 percent more gross commission income than a counterpart at a competing firm. (White, who is not connected to the firm, analyzed data from eXp, Berkshire Hathaway HomeServices, Re/Max, Century 21 and Keller Williams.) In some cases, eXp agents retain as much as 36 percent more, he found.

And the company isn’t the only virtual brokerage trying to disrupt the terrain.

Fathom Realty, a Dallas-based virtual brokerage with 2,724 agents, announced in March that it plans to IPO. And Purplebricks, a discount brokerage with no physical offices, has tried to expand beyond its roots in the U.K. The latter — which launched in the U.S. in 2017 — has, however, faced hurdles. It shuttered its Australia operation last month and announced plans to review its U.S. operations.

K.P. Reddy of Shadow Ventures, a venture-capital firm in Atlanta, said that many brokerages building tech tools recognize that being mobile is “pretty much a given.” But he said a good number of incumbents are still in denial.

“It’s very much like, ‘These are all great tools that can make us more efficient,’” he said. “I don’t think they think these tools will evolve and change how they do business.”

Although a slew of AI-powered firms may one day cut out the broker entirely, eXp is not saying the industry doesn’t need agents, he added.

“They’re saying, ‘Let’s reduce the very high costs of office space, the office manager and drain of resources,’” Reddy said. “If you can do it better without those things, it’s a great iterative move.”

Animal Farm?

Despite the eXp buzz, the firm has landed in the crosshairs of one prominent critic: Gary Keller.

The founder of Keller Williams, the massive franchise brokerage with 159,000 agents, has derided eXp’s virtual world as an “animal farm” built on “old game technology.”

Keller has good reason to be upset. His firm has been hit hardest by eXp’s growth — partly because of Sanford’s roots at the brokerage, but also because both companies reward agents for recruiting colleagues and give them a slice of the profits (or revenue).

“You know you have got under a competitor’s CEO skin when they can’t help calling one of our underlying technologies an Animal Farm and has to resort to calling it Donkey Kong now that we own it,” Sanford tweeted in January in response to Keller’s critique. (Sanford was not available to be interviewed for this story).

But eXp has faced challenges in recent months as it’s grappled with agent oversight and international expansion.

California’s Department of Real Estate has launched probes into alleged eXp violations related to licensure and advertising.

And even for a fast-growing startup, eXp has seen significant executive turnover.

Last month, Scott Petronis, the firm’s chief technology officer, left to join Redefy, a flat-free brokerage based in Denver. COO Mary Frances Coleman left in January, and Vikki Bartholomae, the firm’s president, departed in November to join Side, a tech-focused brokerage that targets top producers. 

“You have a company that has very high ambitions and a CEO who’s got to have it his way,” said one industry observer. “Glenn is an autocrat; he gives very little latitude to senior executives to make decisions.”

But Sanford’s lofty dream of transforming residential brokerage has also been an asset.

“So much of the industry is sort of lemmings-esque,” said Russ Cofano, a former executive at Move, parent company to Realtor.com. “They don’t want to stray too far away from what everyone else is doing. Glenn was very different in that regard.”

However, Cofano — who met Sanford at a Move broker advisory board meeting and joined eXp a few years later, serving as president and general counsel in 2016 and 2017 — said he himself hit a wall after about a year attempting to take eXp “from startup to enterprise.”

“Glenn believes in what’s called a holacracy model of management,” where ideas bubble up from within the company, he said. “He didn’t want any one person or group of people [in] control.”
Although the strategy empowered agents, Cofano ultimately didn’t buy into that style, particularly for a public company with shareholders.

And, he said, as time went on, he had nagging concerns that some of the highest-paid people were making money off of recruiting — not off of selling real estate. “I thought that wasn’t going to be a sustainable value proposition,” he said.

In addition, eXp has failed to capture significant market share in major metro areas that it’s already in, such as Los Angeles and Miami.

Earlier this year, Stephen Sheldon, an analyst at investment bank and financial service firm William Blair, raised concerns about eXp’s margins. “Gross margins were below our estimate, driven by both the impact of highly productive agents reaching their commission [caps] earlier in the year and lower fees given higher agent turnover the past few quarters,” he wrote.

More recently, the company has stated that its goal is to pay out no more than 50 percent of earnings to agents as revenue-share.

But executives at eXp say these hurdles are to be expected for a fast-growing firm.

Robinson likened eXp to a space shuttle hurtling through the atmosphere only to lose an exterior tile or two.

“We have a startup mentality; that just means that you’re moving way faster than others do, and you may make a couple of mistakes along the way,” he said. “You can also be more agile, more gritty.”