#012 - Fathom Holdings
Fathom Holdings is not your typical real estate brokerage. Fathom takes a flat $450 transaction fee instead of 20-30% of an agent’s commission. Fathom is looking to disrupt the brokerage industry.
Fathom Holdings - (NASDAQ: FTHM)
Fathom Holdings is not your typical real estate brokerage. Fathom takes a flat $450 transaction fee instead of taking 20-30% of an agent’s commission. Fathom offers all the services a normal real estate brokerage might.
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Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.
Industry Overview
Fathom Holdings competes in the real estate brokerage industry and is looking to disrupt the industry by giving agents more of their commission.
The average real estate brokerage might charge an agent a 20 - 30% fee on their commission. If an agent has a commission of $3,000, the brokerage might take $600 - $900. Fathom would take a flat rate of $450. The average commission for a real estate agent is 3%.
Some quick stats from the National Association of Realtors:
5.34 million existing homes were sold in 2019
682,000 newly constructed homes were sold in 2019
106,548 real estate brokerage firms operating in the United States
1.4 million real estate agents in the United States
This industry is large and fragmented and will likely remain so. Fathom isn’t the only company looking to disrupt the traditional real estate brokerage market, but is one of the only companies that gives its agent nearly 100% of their commissions.
One of the more notable competitors is eXp World Holdings which has a similar but different business model. I’ll research that company one day.
Business Overview
Fathom Holdings is a real estate brokerage. Fathom charges its real estate agents a flat fee of $450 per transaction. Typical real estate brokerages may charge agents 20 - 30% of their commission.
Let’s walk through an example. An agent sells a $300,000 house and charges a 3% commission. An agent at a typical real estate brokerage might have to pay 30% of their 3% commission to the brokerage for leads and other services offered to agents as a member of a real estate brokerage firm. The agent takes home ~$6,300 after paying the brokerage.
If a Fathom agent sold a $300,000 house and charged a 3% commission fee, the agent’s take-home pay would be ~$8,550. This is a huge difference for agents assuming all other factors are equal. If Fathom can offer all the same services that traditional brokerages offer, why wouldn’t an agent switch to Fathom? Fathom is already looking to offer these services for agents that typical real estate brokerages might already offer. These include “an internal leads program for agents; offering mortgage and title services; and offering additional smaller ancillary services to both agents and clients.”
Fathom boasts a monthly agent attribution rate of 1.5%. This is one of the lowest rates in the industry and goes to show how much Fathom values its agents.
Total Addressable Market
This is a very rough estimate but assuming 6,000,000 homes sold per year x $450 transaction fee = $2.7 billion. This is the best-case scenario for Fathom’s gross profit, meaning this will never happen but this is the total addressable market. Fathom’s gross profit = net revenues. The gross profit margin seems incredibly low without recognizing what is recognized as revenue.
Assuming Fathom can one day sell 3% of homes in the United States and can collect a transaction fee of $450 per home, this is $81 million in gross profit. This doesn’t include any additional revenue streams that Fathom might be able to tack onto the average transaction.
At the end of 2019, Fathom had ~4,000 agents. Fathom has less than 0.3% of the real estate agents in this market. There is plenty of room to expand the number of agents that are part of Fathom. Many Fathom agents refer other agents to join Fathom because of the culture and the commission structure.
Competitive Advantages
Competition Cannibalization
Competitors willing to compete with Fathom would either have to reinvent themselves, start from scratch, or offer agents more of their commission. Think, a traditional real estate brokerage has built a business around charging 30% commission fees. If agents are confident in their ability to sell homes, why wouldn’t they work with Fathom? Successful agents will collect more income than other brokerages.
Offices are an expensive and ineffective way of reaching clients. Only 1% of clients find an agent by walking into an office. Makes little sense when lead generation is likely done online and Fathom can compete with other traditional brokerages. Clients likely ask friends and colleagues for agent recommendations. Clients don’t seek a specific brokerage to work with. Clients work with an agent. The agent owns the relationship, not the brokerage.
Typical brokerages have expensive offices. These brokerages rely on their agent’s commission to pay for these bloated expenses. Other brokerages typically don’t allow agents to decrease their commission because it directly affects the brokerage. In a down market, this hurts agents.
Scale / Lowest Cost
Fathom attracts real estate agents -> more transactions -> higher revenues -> offer more real estate services for agents and clients -> attracts more agents.
Fathom attracts real estate agents -> more transactions -> higher contribution margin -> lower transaction fees -> attract more agents.
The two examples above are likely Fathom’s flywheel effects. Fathom can decrease transaction fees to put more pressure on traditional brokerages. Assuming a fixed base of costs, the contribution margin from more agents and transactions likely drive Fathom’s margins higher. Why would Fathom lower transaction fees if they are already the lowest? This would give Fathom an even stronger competitive advantage as new real estate brokerages looking to compete with Fathom are likely unable to offer lower fees since the startup costs could be so high.
Fathom can continue to decrease the transaction fees if it can collect additional revenue directly from clients through additional revenue streams. Assuming a high attach rate on real estate transactions and a large base of transactions, these additional revenue streams could be very attractive. CEO and Founder Josh Harley had this to say about additional revenue streams:
“As our technology and our low commission-split model attracts more agents and transactions to our platform, we plan to incorporate multiple ways in which to generate even more revenue on each sale. We plan for this to include revenue streams such as: introducing an internal leads program for agents; offering mortgage and title services; and offering additional smaller ancillary services to both agents and clients.”
I don't want to make a stretch or seem overly confident, but Fathom has an opportunity to have “scale economics shared” in the real estate brokerage industry. Just as Amazon used its scale to offer the lowest prices for consumers, Fathom has this opportunity ahead of it. Call me crazy, but if you’re not thinking big, you’re not thinking.
Financials
It’s important to recognize that the revenue that Fathom Holdings collects is the amount that agents collect before Fathom takes its $450 transaction fee. Gross profit can be thought of as “net revenues.” This is why the gross profit margin seems low. Valuation seems steep but Fathom is growing very fast and could grow into its valuation over time.
2019
Revenue = ~ $110 million
Revenue growth = ~ 41.8%
Gross profit = ~ $6 million
Gross profit margin = ~ 5.4%
GAAP EBIT = ~ -$4 million
GAAP EBIT margin = ~ -3.6%
Agents = 4,006
Transaction volume = 17,800
2018
Revenue = ~ $77 million
Gross profit = ~ $4 million
Gross profit margin = ~ 5.0%
GAAP EBIT = ~ -$1.5 million
GAAP EBIT margin = ~ -2.0%
Agents = 2,724
Transaction volume = 13,000
What’s Interesting
Management / Servant Leadership
Fathom is led by its founder and CEO Josh Harley. Like other founder-led businesses, Josh is incentivized alongside shareholders to build for the long-term. Josh is incredibly focused on serving real estate agents and disrupting this industry.
I am very proud of Fathom. Fathom may be my baby, but I did not build it alone. I surrounded myself with people who are both smart and wise, and with one strong shared vision, we built Fathom together. Fathom has a team of incredible and diverse leaders who I am proud to serve beside.
- Josh Harley
Although this may seem like the bare minimum for a CEO/Founder, the willingness to recognize that Fathom wasn’t built by one man is good to hear from the CEO. Harley also talks about servant leadership which is another characteristic I look for in CEOs and Founders.
As a Marine Corps Veteran, I am driven to win, and I surround myself with leaders who share that same passion and discipline. We welcome criticism and use it to become better. We value people from all walks of life and embrace their ideas. With the right people and the right passion, we really do have a business model that will redefine the industry.
- Josh Harley
The management and executive team own more than 60% of the shares outstanding. If this isn’t an aligned management team, I don’t know what is.
Changing Real Estate Industry
Real estate agents aren’t likely to be disintermediated anytime soon. The overwhelming majority of home sales are completed with a real estate agent. If companies were able to disintermediate the real estate agent through reducing commission fees, agents at Fathom could simply reduce their own commission fee to be more competitive while likely offering their expertise of the home’s value and other knowledge that clients would be willing to pay for.
89% of sellers were assisted by a real estate agent when selling their home.
- National Association of Realtors
Fathom benefits from the ongoing price pressures and the introduction of technology into the real estate industry. Real estate agents can cut prices to be more competitive in down markets and if there are other sources of price pressure from technology or other companies. Other companies are looking to lower the average commission fee on real estate transactions, but Fathom’s real estate agents can also lower their commission while using their industry and area expertise to their client’s advantage.
Future Questions
Competition
Fathom isn’t the only company looking to disrupt the real estate brokerage industry. This industry is unlikely to have a winner take all dynamic. At first glance, Fathom seems to be the cheapest real estate brokerage for most agents. Fathom takes a flat fee instead of any portion of an agent’s commission.
It might be difficult for a competitor to match Fathom’s low transaction fees due to a company’s inability or unwillingness to decrease revenue. Bloated companies are unlikely to reinvent themselves in order to be competitive with Fathom. Some companies might, but Fathom has a headstart and might have more agents than other traditional brokerages because Fathom can operate across states and move fast due since they don’t rely on having a local office for their agents.
Valuation
Valuation is a concern. I hate to touch on valuation in a shallow dive, but Fathom could also grow into its valuation over time if it can continue to have high growth rates and increasing gross profit margins.
Conclusion
Fathom is a great business run by a great CEO/Founder that is disrupting a large industry. What’s not to love? There are many more details that I did not feel to include as it wasn’t as important as other information but taken paints a very convincing picture of Fathom as a business and an investment.
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