Looking into The Real Brokerage (REAX)

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The Real Brokerage (REAX) is a real estate brokerage house that operates virtually and has no brick and mortar offices. Currently there are over 21,770 real estate agents working for them and that is up 79% year over year. Revenue is 373M and is up 74% year over year. The company went public in 2020 on the TSX and moved over to the Nasdaq in 2021, they have dual HQ in Toronto and NYC serving both Canada and the US.

The brokerage splits 85/15 with agents which ends up giving the company a low gross margin as a majority of revenue comes through commissions on real estate transactions. The average home price is $383k that gets sold so the company transacted about 1,000 homes on the last quarter. Employees at the company get bought into the company through bonuses in stock such as meeting certain CAPs on volumes. A typical brokerage takes money from an agent per year and has a 70/30 split, so The Real Brokerage is a much better deal for agents who want to go out on their own.

They have a number of new initiatives with higher margins on software which sound sticky, and should improve overall margins. This includes a mortgage company, a title company, REAL Wallet, and LEO Copilot artificial intelligence.

Some of the more impressive accelerating metrics posted by the company last quarter are,

  • revenue +74% yoy
  • number of transactions +76% yoy
  • adj EBITDA 13.3 vs 3.5M year ago
  • number of agents +79% yoy
  • mortgage and title grew combined by 97% (One Real Mortgage +236%, One Real Title +45%)
  • welcomed over 2,000 new agents in the quarter

Reviewing the last year of financials,

Revenue and yoy growth
215M → 181M → 201 → 341 → 373
92% → 89% → 86% → 84% → 74%

EBITDA
-3.7M → -11 → -6.2 → -0.3 → -2.1

Net income
-4.0M → -12.0 → -16.1 → -1.2 → -2.6

Notice that the company has seasonality in line with the real estate business. The company is still unprofitable on a GAAP basis but it is getting close to crossing over the break even mark.

Some notes on the earnings call from November 7,

  • providing real estate agents with a compelling combination of financial incentives
  • all increase in numbers was organic
  • LEO Copilots created streamlined AI driven experience agents can navigate
  • embedding AI directly into the agent experience
  • Real Wallet, a financial platform designed to give agents enhanced control over their earnings and business finances
  • continue to gain significant market share from traditional brokerages, independents, and low cost players alike
  • platform of possibilities for entrepreneurial minded agents
  • +73% increase in brokerage revenue
  • gross margin of 8.6% (commission is mostly a pass through to agents, gets recognized fully as revenue, 85/15 split)
  • many agents reached their cap, getting more bonuses and lowering gross margin slightly
  • operating expenses 9.3% vs 10.6% of revenue year ago
  • no debt, 32M cash
  • median sale price of $383k up 4% yoy
  • Canada accounted for 14% of commission revenue, compared to 21% year ago (US brokers are taking a larger share)
  • expect seasonality for Q4 as per usual
  • analyst notes that “marginal flow through of adjusted EBITDA”, “actually accelerated”
  • CFO, “The operating leverage is definitely sustainable”
  • very excited about finally having the Real Wallet launched in agent’s hands
  • in Canada opened up lines of credit for agents who want
  • Real is open for business in all 50 states, 4 provinces in Canada
  • goal of opening Saskatchewan in 2025
  • will stay focused on US and Canada for now as extremely large markets
  • provide a great baseline to an agent to say, “hey, I can actually use my business as an asset, leverage and borrow for my business and continue to invest so I can smooth out the revenue flows in my business that allows them to have a much more stable business”

Notes from their S1 in 2021,

  • Founded 2014
  • nationwide referral network
  • help agents perform scalable efficient brokerage operation without brick and mortar
  • pay portion of final commissions to agents and brokers
  • will develop one stop shop for consumers
  • revenue Sept 2021 to 2022, 39M → 112M (+187%)
  • 99% of income from commissions
  • cost of sales on 112M was 103M, costs “represents real estate commission paid to company’s agents as well as outside brokerages and title fee for expenses”

The company has an enthusiastic fan base, with a number of real estate agents promoting on YouTube to boost their businesses even more. Here is one example explaining how the Real Brokerage portal works,

The company is about 1B market cap and is one of the few brokerages growing. EXPI is a similar business but flat revenues and doesn’t offer the same benefits of REAX.

I am impressed with the CEO and founder Tamir Poleg and reviewed some of the investing conferences he presented at. Will likely do a follow on post regarding details there. One key take away is he says the business has done well when real estate is booming (2021) and when it had a downturn (2022-present). The company looks attractive to me given how much it is growing, and how close they are to flipping over to profitability.

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Forgive me if this is off-topic, but I wanted to give @wpr101 a collective thank you on behalf of the board for such frequent, in-depth write-ups not only of existing board favorites but in threads such as this, bringing new ideas to our attention.

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Thanks so much for bringing this very interesting company to the board. I did some research on this company and my interesting finding is that they have a (IMO) very low cap on the commission income they can get. From ChatGPT:

Real Brokerage offers an 85/15 commission split, where agents retain 85% of their commissions and pay 15% to the brokerage until they reach an annual cap. For solo agents, this cap is $12,000. Once agents reach this cap, they keep 100% of their commissions, subject to a per-transaction fee of $285, which reduces to $129 after achieving Elite Agent status.
For team structures, the caps are adjusted:

  • Team Leaders: $12,000 annual cap.
  • Team Members: $6,000 annual cap.
  • Mega Team Members: $4,000 annual cap.

These caps are consistent across all cities and states, ensuring transparency and fairness for all agents.

Although the company still takes a fixed transaction fee income from each sell, this extremely low cap can be both a good thing and a bad thing. The good side is that it can attract more agents to land on the platform, while the bad thing is that the company can not benefit from the appreciation of the overall housing price or the sell of high end houses. For example, the price of a single house can average to about $2 million in the SF Bay Area. The agents here could reach the commission cap with only one transaction.

With this low commission cap, the ‘expansion’ opportunity from each agent is limited. in order to keep hyper growth, it really requires the company to keep onboarding new agents at a high speed or requires the platform features (e.g. investing) to take off.

Cheers,
Luffy

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After spending a little bit more time to research, I started to highly doubt the company’s business model could be profitable. Basically, the company uses both high revenue share and insanely high stock rewards to attract agents, which is the reason of the significant agent growth and revenue growth. But I believe this is not a sustainably profitable model.

Here’re some quick financial numbers about the company as of 2024Q3:
TTM revenue: $1,095.4 million
TTM gross profits: $100.3 million
TTM stock based compensation: $57.2 million

The extremely low gross margin (9.16%) is at least partially due to the aggressive revenue share, while the high stock based compensation is just insane. It’s 57% of gross profit, as high as an early stage tech company in the silicon valley!

To list a few comparisons, Snowflake’s SBC is 59% of gross profit. Confluent pays 57% of gross profit as SBC, and Crowdstrike only has 27% of gross profit as SBC.

While people may think that the % of SBC may decrease as a company grows as a lot of tech companies did, I doubt it’s going to be the case for REAX. In fact, I find that there’s another company called eXp ($EXPI) which has roughly the same business model as Real Brokerage but has existed much longer in the industry. eXp’s current financial states are as follows:
TTM revenue: $4,458.2 million
TTM gross profits: $337.7 million
TTM stock based compensation: $167.0 million

So, still 49% of gross profits is SBC. eXp went public in 2014 and still has not achieved GAAP net income yet. It experienced a few years of hyper growth until 2021 when the growth somehow halted. Share price tanked since then as well. I have not dug into the reason yet.

Last but not least, it’s worth noting that the CEO of REAX only owns less than 5% of shares of the company.

Luffy

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Food for thought if an agent is refereed by another agent that continues to sell houses the agent that refereed them gets 1/3 of REAX cut of the commission at the minimum. So the cap of 12,000 is most likely at 8,000 dollars that REAX can earn. It also drops down if the referring agent has refereed 5 agents it gets 60% of REAX cut, this trends up to over 25 of refereed agents. So if an agent referees over 25 agents, REAX gives up their entire commission cut for the refereed agents. To make maters worse for REAX bottom line they also give cuts based on the agents you refereed who then recruit more agents. While this is great for real estate agent acquisition it does severally limit the companies upside growth to its ability to add more agents.

Drew

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Some observations, for what they are worth.

  • Seemingly a terrific opportunity for agents who already have a big following and have a solid reputation of integrity in an area - bigger commissions It seems a new agent in the area, however, would struggle with personal marketing.
  • I could find no info on listing data, so it seems they are primarily lunching off properties on the market who have been listed by other firms.
  • In Michigan there are 20-30 agents in Detroit and under 6 outside Detroit
  • I live in the 2nd largest city in Michigan and there are no agents serving this area.
    The closest agent is in a rural town 50 miles from where I live.
  • In reviewing the Real Broker, all properties were listed by another real estate firm. This means the listing portion of the commission, typically 50% of the total goes to the listing agent and firm.
  • Any buyer confidence in the quality of the agent would come from the agent, since there is no “image of integrity” coming from the parent firm.
  • Their are two specialties for agents - Military and Luxury. No agents came up in the luxury category and all agents came up when Military was clicked. Military = agents who specialize in helping vets with real estate transactions.

I would not list a property with them.

I would get a bid from them on a property I was already investigating to buy, but only because I have purchased a number of properties in the past.

I would not recommend a new buyer use this firm.

Will not be a buyer of REAX

Gray

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Great callouts there about how the 85/15 commission split and the CAP works. I had initially thought that Real keeps 15% on all transactions, so that is a quite different understanding now that once the broker reaches the CAP they keep the full commission.

On the profit break down the last quarter is 372.5M of revenue, and they had 13.3M of adj EBITDA, while GAAP EBITDA was -2.1M. My understanding is they paid about ~15M of stock this quarter.

I believe for this business to be successful as a stock we will need to see them grow agents significantly, along with continuing their fintech initiatives which have higher margins. There were a number of items from their last three investing presentation conferences that indicate to me they can grow both agents and get higher margins,

  • the amount of existing licensed agents is 1.5M in the US and 150k in Canada. (Getting 10% of the market, would be 165k agents)
  • their business is 1 employee per 140 agents, and the company can get up to 1 employee per 200 agents likely, compares to traditional brokerages with a 1 to 20 ratio
  • building an end to end experience for home buyers, a consumer facing app, will go all the way from listing → mortgage → closing
  • title business is 80% gross margin, mortgage business is 50% gross margin, brokerage is around 10%
  • Real Wallet debit card will have Real keeping the 1.2% interchange fee
  • number six brokerage in the market right now (market is fragmented)
  • 12-15 states with title and mortgage suggests analyst (additional volume as states get approved)
  • whole team of devs and product is about 100 employees
  • San Diego sees 30% of all real estate brokers are with Real, spreads through networking in local communities
  • app can draft contracts and e-signatures
  • brokers pay $249 joining fee, $750 annual fee (some traditional brokers charge 100k just to be part of the firm)
  • wallet will “have very high double digit margins”
  • growing gross profit much better than OpEx

I see a lot of evidence here the company is building a superior technology platform for real estate brokers. The company is scaling better than other real estate brokers can while offering more attractive economics for the licensed brokers. Will be looking closely at upcoming quarters to see if they can continue the trend of improving profitability.

My biggest concerns are still around the business model though and how revenue gets accounted for. It is somewhat different than other businesses the board typically looks at.

Some other notes from those conferences,

  • Q2 grew 84% revenue with a 3% growth in the housing market
  • every agent has to be affiliated with a broker
  • platform for tech, eliminate the need for offices and human labor
  • offering brokerage automation
  • increased revenue by 14x+ since IPO
  • grew in bad years for real estate as overall transactions dropped in real estate
  • Real gives agents freedom and flexibility along with compelling economics
  • helps agents save more time and make more money
  • have a mobile OS, CRM, 24/7 support, can draft contracts, have dashboards
  • not a consumer facing brand yet
  • marketing for agents, can get them business cards, posters, and customized content
  • each person gets an individually branded website and app
  • strong community, exchange leads, interact, celebrate success, can chat nationally, locally or 1 on 1 in the app
  • by far the most efficient broker in the USA
  • almost 100% of Real agents are shareholders
  • culture very unique and special which attracts agents
  • insurance will be in the full solution eventually
  • consumer app will streamline the buying process, committing to giving mortgage, development began 1.5 years ago and adding more features over time
  • Real Wallet, new product never seen before, deposits money in digital wallet, issues debit card
  • lots of data insights into brokers data, equity holdings, etc
  • can underwrite agents to individual credit lines
  • will have credit cards available on the wallet as well
  • well positioned to capitalize on the housing recovery
  • branching into becoming a fintech more, EXPI is only a brokerage not offering extras and has 80/20 split
  • social network, like a giant Facebook + messenger, lots of agent meetups
  • every agent has to go to a lender and title person, want to break this tie and streamline
  • offering guarantees on title and mortgage pre-approval so deals to not get held up
  • adapting to NAR settlement, buyer now has to sign ahead of time to have the agent represent
  • growing because able to attract agents easily
  • lots of ways to make money for agents outside of just commissions
  • attracting more experienced agents who outperform, will not take new agents just licensed
  • grew like crazy and 2020 and 2021
  • on growing the CEO said, “I’m not sure that the market conditions really matter to us”
  • agents are independent contractors who need a brokerage to sponsor them
  • other brokerages are “milking agents in lots of ways”
  • 22k agents, about 12% hit the CAP (would have thought this is a lot higher, or does this mean many agents are underperforming?)
  • very low churn on agents, around 2% per quarter, others in industry are around 10%
  • newer agents take about two months to ramp up
  • added 8,000 agents this year
  • 2020 had about 800 agents, close to 23k now
  • only 10% of agents are engaged in “agent attraction”
  • agents can earn more by recruiting other agents
  • mentorship culture, fully remote company, flywheel effect
  • 50/50 hires of individuals and teams, can onboard whole other teams from other brokerages
  • economics + revenue share saves time for teams
  • equity incentive program, every time they CAP they get an RSU grant
  • a percentage of commission goes to company shares where they get a mtach
  • pure tech play even though running a brokerage
  • not doing CRM yet, agents still want to own this aspect
  • automating items like processing transactions and back office ops
  • AI upload on docs, catches mistakes within 3 seconds
  • home buying journey is broken for buyers
  • LEO AI assistant knows how you speak and what you want to ask on gathering info from clients, does not feel like a bot
  • mortgage and title has been traditionally hard to do electronically
  • industry shifting to content creation, 30% of most successful RE agents are on REAL
  • 55% of sales are buy side, 45% sell side
  • did establish more of a luxury market, more demand coming from here
  • this year market has been less effected by seasonality
  • nobody in the market has double digit market share, lots of legacy players
  • EXPI has lost agents, attrition happening
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I find this requirement very confusing. I was a real estate agent for a while many years ago. As a licensed agent it was a requirement (in Washington State) that I had to hang my license in an active broker’s office. As an agent for the broker, the broker got a percentage of every closed transaction in which I was the listing agent, the selling agent or both.

Obviously, I must be missing something here as they have a lot of agents signed up. I just fail to see how this works. Does the broker forgo their share of the commission? What would be the incentive for a broker to have agents that don’t produce revenue? I don’t get it.

One other thing that just went unmentioned was participation in the multiple listing service (MLS) in the area in which the agent works. The MLS is the lifeblood of real estate sales. Every listing within a geographic area listed by a participating brokerage gets listed with MLS so that every agent has access to the property information. This is the primary reason that fisbo (for sale by owner) is so difficult. Fisbo property information has extremely limited exposure, and there’s a level of distrust with respect to even dealing directly with a seller. With agents spread over two countries, they would have to subscribe to a ton of MLSs.

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