Guy Gal believes real estate has a quality control problem. In his view, most agents are simply “hucksters and charlatans.”
“Nine out of every 10 agents shouldn’t be licensed, let alone actually doing transactions,” he said.
That thinking prompted Gal to start Side in 2017, a San Francisco-based venture-backed brokerage that thinks of itself as the industry’s red velvet rope.
The company’s motto? “Not all agents, just the best agents.”
Guy Gal
At first blush, Gal may sound like another hubristic techie millennial who thinks he can outfox established residential brokerages. But Side’s business model really could have distinctive competitive advantages, making it a draw for A-list names throughout California, and perhaps Florida and Texas.
Take office space. When Compass consolidated offices late last year, they acknowledged to The Real Deal they still had 32 offices in Southern California — or 32 lease payments for offices sitting empty amid the coronavirus pandemic.
Venture capital investors have cited such streamlining in pouring $70 million into Side. And experienced brokers, who take upstart companies with a healthy grain of salt, say Side poses a threat to their market share.
“I know I’m supposed to say that the incumbent brokerages are going to steamroll them like a tank,” said Michael Nourmand, president at Nourmand & Associates. “But I don’t meet them with the same skepticism as other startups.”
In fact, the main doubt about Side may be the obvious one: How can any three-year-old company possibly sustain itself in an already low-margin business during a frightening economic crisis?
Split wide open
Side has just one revenue stream: A 10 percent cut of their agent’s deal commissions, according to Gal. The 90-10 split applies to each of the company’s 700 agents.
Everyone here is a top agent, goes the thinking, so everyone gets a split typically given to star dealmakers.
The company’s revenue is not easy to verify. Gal said his sales team racked up $8 billion in 2019 sales volume, a figure that counts deals agents did before joining Side. Had Gal reported the number to RealTrends self-reported list of top brokerages, it would have placed Side as the 13th brokerage in the nation by sales volume.
Some brokers expressed skepticism of this self-reported number, though others allowed the sales volume is perhaps high due to Side’s largest operations being in the pricey Bay Area market.
Regardless, Side is losing money now, Gal admitted, with expenses that include an online brokerage platform, and $20 million in salaries and benefits to 165 employees (benefits that, Gal notes, do not include “Silicon Valley perks such as daily free meals, beer kegs, and on-site service.”)
After starting in the Bay Area, Side expanded to L.A. last year, recruiting Anthony Marguleas, whose Amalfi Estates is a key player in the Pacific Palisades.
Then in October they trumpeted the launch of Ben Bacal’s Revel Estate, poaching Bacal from Rodeo Realty.
Days after the announcement, Bacal, agent to stars like Matt Damon and film producer/Oracle heiress Megan Ellison, represented buyer Charles Cohen in the $94 million purchase of Bruce Makowsky’s Bel Air epic spec mansion “The Billionaire.”
And this month Side brought on Kofi Nartey’s Society Real Estate and Development, after Nartey said he recruited dozens of agents at Compass, while repping celebrity clients of his own, including basketball greats Michael Jordan and Kevin Durant.
Side now features 23 agent groups in Southern California, and over 100 agent teams, including in Texas and Florida. They launched in Miami last November, plucking Donnie Pingaro as their managing broker from Ocean Insiders.
Donnie Pingaro
Besides a standard split, Side is distinctive for shifting branding and operating expenses onto agent teams.
Unlike other brokerage’s agent teams – for example, Douglas Elliman’s Altman Brothers – Side doesn’t brand itself, acting instead as a white label brokerage.
That means that the Marguleas website has the distinctive lettering and promotional materials of Amalfi Estates, while Revel has its own aesthetic.
“Side has done a good job finding agents who are really good self-promoters,” said D.J. Grubb of Bay Area brokerage Grubb Co., who lost a top-performing agent, Dave Higgins, to Side.
The idea, Gal said, is “the agent as entrepreneur.”
And like other entrepreneurs, agents who join Side need their own capital.
Making office lease payments – such as the Beverly Hills spaces rented by Bacal and Nartey – are expenses borne by the agent teams, not Side.
Industry observers acknowledge the lack of leases is a huge plus.
Pressed on how much money Side saves amid months-long work-from-home orders, one industry insider said, “How about this metric? A shitload.”
Side’s agents also pay most of their own marketing costs.
Why this trade-off appeals to agents, Gal said, is nuts-and-bolts support. “We will facilitate the transaction and handle all the back-office work,” Gal said.
Gal says he has “four-hour recruiting meetings” with potential agents, persuading dealmakers that Side “attacks all the things that cost an agent time.”
One other carrot: Side will not recruit a competing outfit. Marguleas and Amalfi Estates, for example, will not vie for Palisades deals with another Side team.
Side has so far netted $70 million total venture capital funding, led by Trinity Ventures and Sapphire Ventures.
Patricia Nakache, a partner at Trinity Ventures, said Side’s focus on “quality over quantity” will make “topline growth more predictable” and “drive down the cost of operations.”
“We believe that the combination of those two factors will lead to a very profitable business,” Nackache said.
Most large brokerages were built before the Internet era, and haven’t evolved with the times to support their agents. – Paul Levine, managing director at Sapphire Ventures
Side is Trinity Ventures first brokerage investment, though Nackache says the company has, “a deep history and track record in real estate tech investing” including money they put into LoopNet, which went public and was acquired by CoStar for $900 million, as well as DotLoop, which Zillow later bought.
Like Trinity, Sapphire Ventures has invested in real estate tech, but not brokerages, leading a $30 million round for New York real estate analytics firm, Reonomy.
“Most large brokers were built before the Internet era, and haven’t evolved with the times to support their agents,” Paul Levine, managing director at Sapphire Ventures, said in an email. “By focusing exclusively on serving top agents and teams, and leveraging a mix of technology and human support, we believe Side is well-positioned to build a large and profitable business.”
Path to profitability?
A 2013 article on tech news website Pando delivered a post-mortem on a deal very much of its time. One online video content producer and aggregator, Joyous, acquired another, Kingmaker, whose CEO was an introspective Gal.
Pando quotes Gal as saying, “If I could have gone back, I would have built more and generated more traction before raising money, and then I would have spent it more surgically.”
Gal today says Kingmaker should have been more deliberate. With that lesson in mind, Side is in “no rush to expand to New York, Illinois” and other markets beyond California, Texas, and Florida.
But like Kingmaker then, Side is unprofitable and VC reliant. “We could be profitable whenever we want, if we were to stop innovating and growing,” Gal said.
Others aren’t so sure, particularly given the 90-10 commission split.
“The commission split is too heavy,” Grubb said. “There’s no money for the brokerage when you go much beyond a 70-30 split.”
One reason that other shops don’t copy Side’s “Just the best agents” motto is there are workhorse agents who come through on deals with 70-30 or even 60-40 splits, brokers said.
“In a low volume market like now, this kind of company is in trouble,” Grubb said.
The commission split is too heavy. There’s no money for the brokerage when you go much beyond a 70-30 split. – DJ Grubb, CEO of San Francisco-based brokerage Grubb Co.
Another issue is that while Side cuts out much of middle management, some of those managers can be useful in generating leads or connecting agents with sellers.
What Side may lack is “a manager saying, ‘hey, my guy can’t get a showing from so-and-so in Malibu, do you know them?” said one industry figure.
But Side’s chief concern is trying to grow amid a historic economic downturn in an already shaky industry.
“Starting any brokerage is a capital-intensive process with tough margins,” said Nourmand, whose father started Nourmand & Associates. “Whenever anybody asks me whether to start a brokerage, I say ‘Don’t do it.’”
Added Nourmand, “I enjoy my work. But less than 10 percent of my wealth is in the brokerage” (explaining that most is in property ownership).
Obviously, we are doing a little bit less than we would like to right now. – Guy Gal, CEO of Side
An unfamiliar brand could be particularly susceptible in the current market. “This is when the brokerages with a stickiness of culture rally the troops on Zoom meetings,” Grubb said.
“Obviously, we are doing a little bit less than we would like to right now,” Gal said, when asked about operating amid a pandemic.
But Gal also insisted that Side is better equipped to deal with the crisis than most – especially since a historically bad market could mean survival of the fittest.
“The part-time agents are leaving the industry now because they can’t do the easy sales,” Gal proclaimed, adding, “We will reorganize the industry for the better.”