eXp Realty (EXPI -3.80%) has grown to 67,000 agents in just over a decade, and it is still expanding at a rapid pace. In this Fool Live video clip, recorded on Nov. 19, Fool.com contributors Matt Frankel and Jason Hall, along with editor Deidre Woollard, discuss eXp's broker-centric business model and why it's been so successful.
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Matt Frankel: 67,000 could just still be in the relatively early stages of growth. They're getting a lot of people coming from other more traditional real estate agents like Century 21 and things like that. They offer a much more generous compensation structure. They cap agent commissions that the broker takes a $16,000 a year, which is actually unheard of in the brokerage business. That means to say, Deidre, is a high producing real estate agent and earns half a million dollars of commission this year. The most eXP could take is $16,000. That's an unheard-of commission split for high-producing agents, which is really why they're growing so quick. How sustainable do you think this is in the context of the brokerage business? Do you think the cloud-based brokerage model like eXP is the future of traditional brokers?
Deidre Woollard: One of the things I think is really interesting is that how they're growing and what their structure is. The way that they're recruiting at all of their agents are very aggressive recruiters. Why are they aggressive recruiters? Partly because there is a split that happens and you get a share of the people you bring in commission, which to me, it does feel a little multilevel marketing. It is something that concerns me a little bit about this. But it also has a little bit, that also has led to rapid growth in the company and it's hard to argue with that.
Frankel: It's definitely a unique model. He [CEO Glenn Sanford] said something about 10% of their agents don't actually sell any houses anymore. They're just there to build teams and make their money that way by building up their teams.
Woollard: Yes, that's what worries me because that makes me think of the LulaRich documentary and LulaRoe and how, a totally different business, but how they went from selling the clothing to just recruiting. That number makes me a little bit worried.
Frankel: There's a right and a wrong way to incentivize building out teams. Whether or not they're doing it the right or the wrong way remains to be seen. You can't grow exponentially forever. One of the big takeaways that I remember from watching that LulaRich documentary, is that if one person's recruiting say four people, and then those each recruit four people, you can only do that for eight layers before you have more people than exist on the planet Earth. It can't last forever.
But you can recruit a team, make some money on them, and keep this growing for quite some time. You're not just relying on commissions. Well, 10% of their agents are relying on other people's income. But at the end of the day, real estate is still at a $2 trillion annual market in the United States. These people are selling houses. There's money to be made even if that kind of growth plateaus eventually. It remains to be seen at this point whether or not they're growing in a sustainable and responsible way.
Woollard: Well, it's not unheard of in real estate in general for there to be agents that are referrals only. I know plenty of agents that used to be active sellers, but now are agents, but they keep their license. One of the reasons they keep their license is for referrals. Plenty of agents in retirement end up just referring to other agents and getting a share of commissions and making a nice little side income that way. It's not something that's completely new to real estate at all.
Hall: I think it's important to remember, too, that lots and lots of companies have referral bonuses and that sort of thing. They're not recurring and perpetuity like some of these things can be, but they exist, and real estate is really super high turnover because its' sales and it's hard, and there's lots of rejection. Part of the reason it pays so well is because it is a hard thing to do well. I think, sometimes, we forget that. It's one of the reasons that it can't get structured the way it does and a lot of commission type jobs pay very well because if you're good, you're good, and most people just suck at it and can't do it. I think one of the reasons you build those incentives is because there is so much turnover. If somebody can get 1% of the people they refer to stick over an extended period of time, that's incredibly valuable. It's incredibly valuable to the organization and to the individual.