November 14, 2019 - 9:16am EST by
2019 2020
Price: 10.06 EPS 0 0
Shares Out. (in M): 64 P/E 0 0
Market Cap (in $M): 648 P/FCF 0 0
Net Debt (in $M): -32 EBIT 0 0
TEV ($): 616 TEV/EBIT 0 0
Borrow Cost: Available 0-15% cost

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The traditional real estate brokerage model is under assault. Brokers have been slow to adopt new technologies which has given rise to a new generation of tech-enabled disruptors looking to upend the industry. Real estate startups have been raising unprecedented amounts of venture capital and many are actively challenging the entire "6%" commission construct. The result has been a steady deterioration of retained commission dollars and, thus, compression of industry-wide margins.

EXP World Holdings (ticker: EXPI) is perceived to be an emerging disruptor positioned at the forefront of this industry revolution. EXPI is a rapidly growing virtual real estate brokerage where agents work remotely and interact with each other in a 3D, fully immersive, cloud office complex. By avoiding the high fixed-cost burden of physical brick-and-mortar locations staffed with local administrative personnel, EXPI is able to offer agents a lower commission cap structure. The brokerage is experiencing rapid agent growth due to this favorable commission cap, generous stock-based compensation, and a revenue share program that relies on an MLM-esque recruiting strategy not dissimilar to programs founds at competitors.

The Unicorn Hunter, however, believes EXPI's underlying business model is structurally unprofitable and will ultimately prove to be worthless:

EXPI went public via a reserve merger process and primarily exists as a compensation vehicle for agents. As such, EXPI will likely never generate any economic returns for shareholders who will face relentless dilution.

  • The agent-level unit economics of this business appear to be structurally impaired. Highly productive "ICON" agents generate little-to-no economic value for shareholders while competitors offer agent commission splits that are priced 25-73% below EXPI.

  • EXPI has grown rapidly through an MLM-esque recruiting strategy which has resulted in agent productivity that is well below the NAR industry average; in fact, 24% of EXPI's agents produce zero revenue.

  • The cloud office campus which is central to EXPI's virtual technology offering is likely worthless, does not constitute a competitive advantage, and could easily be replicated by competitors with minimal investment.

  • The Unicorn Hunter has uncovered several regulatory complaints that suggest EXPI has materially failed in their duties as a supervising broker. Oversights include hiring a convicted felon that defrauded consumers and allowing an unlicensed person to sell real estate.


Glenn Sanford, the CEO of EXPI, claims to have a long history with reverse merger transactions. Glenn applied this knowledge to eshippers.com, a company that he founded in 1998 that reverse merged into a Canadian shell company and ultimately resulted in a wipe out for shareholders, including himself. According to the video linked above, Glenn claims to have been $40,000 more in debt after the implosion as compared to when he started the venture.

Glenn then pursued a career in real estate, eventually founding EXPI as a traditional real estate brokerage in 2007. As the global financial crisis materialized, EXPI was forced to close offices and reformulate the business model into its current virtual cloud-based offering. EXPI subsequently went public via a reverse merger in 2013, where Glenn acquired shares in a shell company "Desert Canadians Ltd.", which then acquired the EXPI assets. EXPI has since garnered institutional sell side analyst coverage and up-listed to the Nasdaq exchange last year. As a result of the reverse merger transaction and subsequent implementation of the agent equity-based compensation program, agent growth accelerated from ~350 agents in 2013 to 23,034 agents as of 3Q19.

EXPI admitted in a 12/27/2018 press release that the primary purpose behind EXPI’s existence as a publicly traded security is to serve as a conduit for agent compensation: "In 2013, eXp Realty became a public company for the primary purpose of sharing equity with its agents." Despite explosive agent growth, EXPI has yet to generate positive operating profits and agent productivity remains well below the NAR reported industry average.

Challenged Agent-Level Unit Economics

EXPI generates revenue from commissions and fees:

  • Commissions: EXPI retains 20% of an agent's gross commission income ("GCI") up to a maximum of $16,000. Thereafter, the agent retains 100% of his or her GCI. Agents can also elect to receive 5% of total commission income in the form of company stock at a 20% discount to market.

  • Fees: fees consist of an initial $149 startup fee, a $250 per-transaction fee that is reduced to $75 once $5,000 has been paid to EXPI, a monthly $85 cloud brokerage fee, a $25 per-transaction broker review fee, and a $40 per-transaction risk management fee which is capped at $500.

In other words, EXPI is simply a traditional real estate broker that offers lower pricing, which is the primary, and perhaps only, value proposition to agents. Meanwhile, the brokerage industry is in a state of massive transformation, driven by an influx of capital that is driving widespread disruption across the industry:

  • Zillow controls the vast majority of online real estate traffic and is attempting to extract incremental economics out of broker commissions through the introduction of its success-based "flex" pricing model

  • Discount brokerages like Redfin are offering cheaper and/or unbundled services, seeking to challenge the entire "6%" commission construct

  • Armed with a war chest of capital from SoftBank, sovereign wealth funds, and pension funds, Compass seems to have embraced a growth-at-all-costs philosophy by shelling out seven figure agent sign-on bonuses, offering favorable commission splits, and investing aggressively in technology 

  • iBuyers like OpenDoor, OfferPad, Zillow, and Redfin are providing instant, hassle-free liquidity to sellers and taking meaningful share in homogenous housing markets like Phoenix, Las Vegas, etc.

On the other hand, EXPI does not possess meaningful share of online real estate traffic, is not challenging the traditional commission structure, and does not appear to have a competitive or robust technology offering. It is against this backdrop that EXPI suddenly doesn't look like the "disruptor" that is being sold to the investment community. Incidentally, the brokerage industry has long been characterized by having virtually zero barriers to entry. While requirements vary by state, anyone who takes a handful of classes, pays a couple hundred dollars, and passes an exam can become a licensed real estate broker. There is also nothing proprietary about EXPI's commission structure. In fact, many competitors have already replicated the EXPI commission model, including Real, Fathom, Virtual Realty Group, Voro, Premier Agents Network, among others.

Founded in 2014, Real is a rapidly growing virtual real estate brokerage that has reportedly grown to an agent base of approximately 1,100 agents. The compensation model at Real may look familiar: they offer a $12,000 commission cap, equity-based compensation, and a revenue share program. In other words, there is already a competitor in the market offering an identical compensation package that is priced at 25% less than EXPI.

Founded in 2010, Fathom Realty is yet another rapidly growing virtual real estate brokerage. According to their website, Fathom has already amassed an agent base of >3,400 agents across 21 states. Fathom also offers an equity-based compensation program for agents and, worse yet, an extremely competitive commission cap structure. To provide a comparative example, consider the scenarios outlined below.

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The first example contemplates six transactions at a 2.5% commission rate (EXPI average metrics) while the second example contemplates eleven transactions at a 3.0% commission rate (NAR industry average transactions and the traditional commission split). Both scenarios contemplate a $280,000 home price. Please note that this example does not consider stock-based compensation. As is evident in these two hypothetical examples, Fathom is effectively priced 72-73% below EXPI. Earlier this year, Fathom announced their plans to confidentially file an S-1. In addition to detracting from the investment narrative, a Fathom IPO could very highlight these pricing discrepancies, thereby exposing the inherent lack of pricing power in the EXPI commission model. In the Unicorn Hunter's experience, having competitors priced at a 25-73% discount is generally not a favorable industry set up for any company. Indeed, in a hyper competitive industry with no barriers to entry, commission caps will devolve into a race-to-the-bottom for virtual brokerages, further pressuring the structural economics of this business.

Behold The Mighty "ICON" Agent

Agents are awarded "ICON" status based on the following criteria:

  • Generate GCI of $500,000

  • Close a minimum of ten transactions

  • Pay a minimum of $5,000 of transaction fees to EXPI

EXPI awards the entire $16,000 commission cap back to ICON agents in the form of company stock, which vests over a three-year period. Consider the illustrative examples below, giving effect to various transaction counts, average home prices, commission splits, fees, stock awards, and fair value of stock discounts (5% of commissions at a 20% discount to market).

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As illustrated in these charts, ICON agents would appear to generate little-to-no economic value for EXPI shareholders. ICON agents are effectively keeping their entire commission and, in some cases, may even be retaining >100% of their gross commission income when giving effect to the stock discount. This is, in part, why EXPI generates single digit gross margins, well below the levels of discount brokers like Redfin in the 28-32% range. 

Investors should ask themselves the following questions:

  1. Will EXPI be able to retain agents if they attempt to tweak their compensation model, considering that significantly cheaper competitors are already in the market? 

  2. Furthermore, if EXPI is unable to demonstrate profitability with 23,034 agents on the platform, how many are required to reach "scale"?

In light of the fact that EXPI went public with the primary purpose of issuing stock to agents, it should be no surprise that shareholder dilution has been an unfortunate byproduct of ICON equity awards. Apparently, EXPI also acknowledged this issue and introduced a new "sustainable" equity program in December 2018. While this may sound like a positive development, the only change from the previous program was that agents are now awarded a set dollar amount of stock rather than a set number of shares. In conjunction with this announcement, EXPI also introduced a $25 million share repurchase program to help offset dilution. However, the efficacy of this program remains in question since EXPI has already recognized $42.4 million of combined stock-based compensation year-to-date while only repurchasing $17.6 million of stock. Despite these efforts, the share count continues to grow at ~8% annually which seems rather unsustainable, particularly considering the challenging agent-level unit economics.

Why Is Agent Productivity So Low?

Agents have a multi-tiered revenue share opportunity at their disposal whereby they can recruit agents and earn passive income as those agents close transactions. This multi-level recruiting mechanism contemplates seven different recruiting tiers, each with their own graduated revenue share percentage. This is, in part, what has allowed EXPI to grow their agent count so rapidly over the past several years.

Here is a video of Eugene "Gene The Machine" Frederick pitching prospective agents on the virtues of EXPI's revenue share program. Presumably this video was filmed in mid-2017 since Gene states that he had been at the company for 28 months and had joined EXPI in April 2015. He states that within twelve months, he had recruited 15 people in his first tier and a total of 183 agents across all of his tiers. Over the next twelve months, this had ballooned to 22 agents in his first tier and 1,382 agents across all tiers. Curiously, he then states that he expects to finish the month with ~2,100 agents, or nearly half of the agents at the entire company at that point in time. If nearly half of the agents in the company roll up to one agent under the revenue share plan, how many agents are really profiting off this program? 

Indeed, Gene's commentary would appear to be corroborated by EXPI's proxy, which states that Glenn Sanford, Jason Gesing, Eugene Frederick, and Susan Truax collectively earned ~$4.2 million in revenue share payments in 2018. This implies that a lot of agents are rolling up to just four executives in the revenue share program. Incidentally, this recruiting pitch likely worked well as EXPI skyrocketed from being a penny stock to an all-time high of $19.71. In the video linked above, Gene emphasizes the fact the stock had risen from $0.15 to $3.65, drawing parallels between EXPI and Netflix. However, one has to wonder how heavily a languishing stock price will weigh on both prospective agent interest as well as existing agent attrition now that the stock has declined ~50%.

According to the National Association of Realtors, the average real estate agent closed 11 transactions in 2018. By comparison, the average EXPI agent only closed about ~6.5 transactions in 2018. Why is EXPI agent productivity ~41% lower than the industry average?

We've already examined why an ICON agent would join EXPI: because they retain substantially all of their gross commission income in addition to revenue share payments. Mathematically, though, this implies that there is a very large cohort of unproductive agents; agents who likely close few, if any, transactions and spend most of their time recruiting other agents. In fact, at the Stephen’s conference on 11/7/2018, in response to a question about fees charged to agents, EXPI casually disclosed that 24% of EXPI agents close zero transactions: “What we did is the $35 a month that we now call the university fee, originally we were charging $420 on the first transaction every year but about 24% of our agents don’t do any transactions and yet they’re on the platform and a lot of them are doing recruiting or doing the recruiting side and they weren’t really big revenue generators for us so we said, ‘hey we need them to also contribute effectively the $420’ and then we also added to that, for those who are non-active selling agents, their first $250 of their passive income or revenue share comes to the company as another stream of income.”

Indeed, this explains why agent productivity is well below industry average levels: because a quarter of EXPI agents are effectively phantom agents who close zero transactions.

Cloud Brokerage Or "Donkey Kong" Technology?

As a virtual real estate broker, the centralized cloud office complex is the cornerstone of the EXPI thesis, allowing the company to employ a flexible, low fixed cost operating structure. However, upon further inspection, it is unclear what value, if any, this platform provides as it concerns increasing agent productivity. The "technology" underpinning the virtual office complex is powered by VirBELA, a virtual collaboration company that EXPI acquired in November 2018. VirBELA created the avatar world through which agents interact with each other, pictured below:

(Source: eXp Realty Maryland)


(Source: SingularityHub.com)


(Source: Business Insider)

It may not be difficult to see why Keller Williams CEO, Gary Keller, apparently referred to the technology as old gaming technology: "It’s old game technology. That’s their digital cloud-based platform. Old gaming technology. All you have to do is go look at your Sony PlayStation, or your Xbox, and then go look at that — it’s like you’re looking at Donkey Kong or Pac-Man technology."

The VirBELA technology was created in 2012, developed by two college graduate students when they won a $1.7 million GMAC grant to develop a virtual interactive world for MBA students. EXPI acquired VirBELA for $11 million in total compensation, comprised of $7 million of cash and $4 million of stock. This appears to be a disastrous allocation of shareholder capital, for two primary reasons:

  1. The acquisition is not accretive to the P&L. EXPI was by far the largest VirBELA customer, representing 78% of total VirBELA revenue in 2017. That is to say that without EXPI, VirBELA likely had no real, viable future.

  2. EXPI appears to have vastly overpaid for the technology. VirBELA's technology assets were only six years old at the time of acquisition and were developed with minimal capital investment. In fact, according to the pro forma purchase price allocations, VirBELA's technology was valued at a paltry $297,000.

Technology to enable remote working is not unique to EXPI. Real estate brokers have many solutions at their disposal to create a virtual work environment. As an example, traditional real estate broker Keller Williams has made a very public pledge to invest heavily in building out their technology offering. Reportedly, KW has partnered with mashme to provide an immersive, virtual solution that allows for video, chat, and content sharing for up to 160 users at once. In a world where dozens of online collaboration, video conferencing, and work management software solutions exist, investors should be left questioning the true competitive advantage of VirBELA's offering.

Major Regulatory Violations Could Imperil The Business

As a quick background, real estate licensure is administered on a state-by-state basis, not at a federal level. Each state maintains a real estate commission that is responsible for licensing as well as regulatory oversight and enforcement. The integrity of record keeping, ease-of-search, and access to information varies by state, rendering it a challenge for investors to conduct due diligence in this area. Additionally, for states that require a formal document submission request, this can also prove to be a lengthy and costly exercise for investors. As a result, the Unicorn Hunter believes the investment community may be overlooking a number of regulatory issues as they pertain to EXPI.

For context, let's start with asking: what are the duties and responsibilities of a supervising real estate broker?

For those not familiar, broker supervisory responsibilities include, but are not limited to:

  • Providing marketing/advertising resources and oversight for agents

  • Responsible for overseeing agent compliance with real estate laws

  • Monitoring trust accounts to ensure proper handling of client funds

  • Verifying that your agents are actually licensed

The Unicorn Hunter has uncovered a number of regulatory complaints and violations from several states that suggest EXPI has materially failed in all of these categories to demonstrate competency in acting as a supervisory broker

Many of the violations involving EXPI contain some combination of advertising or operational oversights. Examples of this variety can be found in states like Alaska. The Alaska Real Estate Commission charged three separate EXPI agents (case numbers 2018-001343, 2019-000207, and 2019-000208) with failing "to provide adequate supervision" by 1) failing to register agent home office locations as branch locations with the commission, and 2) allowing agents to use those home office addresses in signage and/or advertising materials. 

While these may not seem like serious issues from an enforcement standpoint, the Unicorn Hunter is disturbed by the nature of these violations. Registering branch office locations is critical supervision for any virtual cloud-based brokerage since the thesis behind the model calls for avoiding high fixed-cost expenses like rent which requires agents to work from home office locations. The Alaska Real Estate Commission sentenced each one of these brokers to probationary periods ranging from 12-18 months, total fines ranging from $2,500-5,000, and further requiring varying levels of continuing education. A $16,000 commission cap starts to look less enticing if brokers are not providing the oversight to keep agents from violating real estate laws, thereby being subjected to fines and license probationary periods.

The accusations levied against EXPI by the Texas Real Estate Commission in complaint #181747 are more serious:

  1. In this particular instance, an EXPI agent failed to provide a customer with a comparative market analysis as required by Texas real estate law.

  2. Worse yet, the EXPI agent represented both sides of a real estate transaction and failed to obtain written consent from both parties to act as an intermediary.

In other words, EXPI appears to have violated its basic fiduciary responsibilities by failing to provide proper disclosure to customers in an instance where EXPI was representing both sides of a transaction; a situation that is fraught with inherent conflicts of interest for both transacting parties. In fact, the Commissioner outright states in the conclusion section that EXPI was negligent in "supervising a sales agent's acts or omissions" as set forth in the complaint.

Minutes from the Alabama Real Estate Commission's ("AREC") September 2018 meeting outline two formal complaints levied against EXPI agents. The violations cited in formal complaint #3458 are not dissimilar to those found in Alaska. In this complaint, AREC accuses the qualifying broker of not registering a home office address as a branch location and permitting an agent to operate a company that was not registered with AREC. In the case of formal complaint #3457, EXPI's qualifying broker evidently failed to be a signatory on an agent's trust account and to monitor account transactions. Why, you may ask, is this a big deal? 

Because not only was the agent convicted of five separate violations of Alabama real estate law for improper handling of trust account funds, the agent was arrested by the Orange Beach Police Department for defrauding consumers out of at least $60,000.

The AREC complaint accuses the agent of the following:

  • Improperly citing her property management company as a licensed entity

  • Two separate counts of failing to remit customer trust account funds 

  • Commingling customer and personal funds

  • Procuring her real estate license by making material misrepresentations

The agent was arrested by police for double charging customers and stealing deposit fees. Apparently, this agent was also stealing directly from property owners, as many complained that the agent never paid them for managed rentals. To be fair, AREC dismissed the charges regarding EXPI's qualifying broker being a signatory on the agent's account, however they did find the qualifying broker guilty of failing to monitor transactions in the trust account. 

Perhaps this should have been vetted in EXPI's hiring process, where they evidently failed to realize that they were hiring a convicted felon. This agent had previously committed similar crimes in Louisiana and was ordered by a court to pay restitution of $95,000. This agent then failed to submit any payments which triggered the revocation of her probation, forcing her to serve two years out of a five year prison sentence:

A close up of a newspaper

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(Source: Excerpt from Page 2 of Alabama Complaint)

While the rapid agent growth at EXPI is certainly impressive, the Unicorn Hunter believes investors would be justified in questioning the quality of such rapid hiring given the facts presented in the AREC complaint. Oddly, despite all of this, this agent still appears to be listed on EXPI's website despite being arrested and having her real estate license revoked by the state of Alabama.

The coup de grace is served by the California Department of Real Estate ("DRE"), which filed a monumental complaint accusing EXPI of 72 separate violations of real estate law. California DRE complaint H-6686 SAC contains numerous violations, outlined below:

  • Advertising violations where agents did not display EXPI's identity as prominently as the agent team name information

  • Failing to register seventeen separate agent home addresses as registered branch locations with the Department of Real Estate

  • Advertising violations for displaying unregistered DBA entities as the broker

  • Failing to list agent license numbers in advertising materials

  • Failing to notify the DRE that EXPI had hired five new agents

However, by far the most offensive violation listed in the complaint is that EXPI allowed a salesperson with an expired license to sell real estate for nearly eight months. The Unicorn Hunter is not an expert in real estate law or disciplinary actions, but this seems like the type of offense that could easily result in a suspension or revocation of a real estate broker license. If the California DRE was to pursue license revocation, EXPI could potentially lose the ability to operate in California where they employ ~2,485 salespeople (according to the CA DRE website), representing ~11% of total agent account as of 9/30/2019. According to the document, EXPI, the supervising broker, and the unlicensed salesperson are currently going through discovery with the Bureau of Real Estate. Who knows what else the real estate commissioner may find. Regardless of whatever disciplinary actions may or may not be imposed, the Unicorn Hunter believes these complaints are evidence of a systemic lack of oversight at EXPI. 

Broker supervision requires the establishment of policies, rules, procedures, and systems to oversee and manage agents. An assistant real estate commissioner wrote in the Spring 2019 California DRE bulletin: “The more virtual a business becomes, the greater the scope and complexity of a supervisory system of oversight is needed to ensure compliance.”

Indeed, it would appear that EXPI has underinvested in compliance infrastructure and that additional investment will likely be required. At a minimum, EXPI will need to build the necessary infrastructure to provide basic procedural oversight for agents in ensuring adherence to real estate law. As these issues relate to the sustainability of the business model, agents should ask themselves if the risk they are assuming by working under EXPI as a supervising broker is worth the marginal commission dollar.

The Unicorn Hunter Believes This Business Is Worthless

In summary, the Unicorn Hunter believes that EXPI's underlying business model has structurally unprofitable unit economics and that the business will ultimately prove to be worthless:

  • ICON agents generate no substantive economic value for shareholders

  • Competing virtual real estate brokerages are priced 25-73% below EXPI

  • Twenty-four percent of agents produce zero revenue

  • EXPI's technology offering possesses no clear competitive advantage

  • Regulatory violations could imperil the business and lead to agent attrition

EXPI is unlikely to ever generate any economic returns for shareholders who will face dilution since the stock is evidently being treated as a compensation vehicle to promote agent ownership. The Unicorn Hunter also believes that this business model could prove to be reflexive in that a stagnating stock price could trigger higher agent attrition which could potentially cascade into a complete meltdown of the business model. 


Continued Rapid Agent Growth: EXPI has been growing agent count rapidly for many years. As mentioned in this report, I believe that true disruptors will continue to extract economics out of the real estate brokerage industry and that competing virtual brokerages priced 25-73% lower than EXPI should results in agent attrition and therefore impede growth rates.

Acquisition Risk: I believe EXPI offers limited value to a potential acquiror outside of the existing agent base. The strategic value of the agent base is also limited by the fact that 24% of agents close zero transactions and that agent attrition should increase meaningfully under a less-favorable compensation structure.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Agent attrition from some combination of: competition, unfavorable adjustments to the compensation model, or a stagnating stock price

Emerging competition and/or competitive pricing pressure

Continued shareholder dilution

Regulatory disciplinary action

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