eXp Realty - Pyramid Scheme or Not?
Are you looking into eXp Realty but unsure if you should make a move because you think it might be a pyramid scheme or multi-level marketing? Did a fellow real estate agent just join the company, and now you see all sorts of recruiting messages coming from him or her?
Since around 2016, when eXp Realty started gaining momentum, they've created a stir amongst the real estate agent community. Regardless of whether you are for or against what eXp Realty represents, it's essential to know the full picture of the business model so you can decide whether to investigate further.
Hopefully, by the end of this post, you'll know if eXp Realty is a pyramid scheme or not, you'll also understand how eXp's business model works.
What is a Pyramid Scheme?
To answer the question of whether or not eXp Realty is a pyramid scheme or not, I think it's necessary to define what a pyramid scheme is.
Lexico defines it as "a form of investment (illegal in the US and elsewhere) in which each paying participant recruits two further participants, with returns being given to early participants using money contributed by later ones.
Pyramid schemes are 100% recruiting based. The pyramid scheme rewards individuals for recruiting others and paying out a commission for doing so. There are two types of schemes that have taken place in the past— "Product-based" and "Naked" pyramid schemes.
"Naked" Pyramid Scheme
The "Naked" pyramid scheme is where no individual sells products, and commissions are earned directly by recruiting others. It would look like this:
One person recruits ten other people to participate in this "investment opportunity." The 10 each pay the recruiter $100. The recruiter now says to them to go out and get 10 to do the same thing. If each recruit is successful, they each earn 0. $1000 for the ten recruits minus their initial $100 "investment."
Pretty easy to understand. But here's where the issue is. Even if all 10 of those people are successful, they would have brought 100 people into this scheme. Those 100 would need to get 1000, and so on. Eventually, there will be a level when no one can make back their investment, and the entire pyramid topples.
"Product-based" Pyramid Scheme
The "Product-based" pyramid scheme works the same way but introduces a "product" that acts as the investment—a $500 starter kit or something similar. The recruiter then gets a percentage of the starter kit. Eventually, like the example above, the market is saturated with people trying to sell this same product. This saturation leads to people at the bottom, unable to earn back their initial investment and the entire scheme collapsing.
Pyramid Scheme vs. Multi-level Marketing (MLM) Company
We all know that a pyramid scheme is illegal, but what about another type of business model that gets a ton of criticism? A multi-level marketing business or "MLM"?
Multi-level marketing companies have been around for nearly a century. Almost everyone is familiar with some of the larger brands, including Amway, Mary Kay, Herbalife, Scentsy, Rodan + Fields, and Beachbody, to name a few. You're among the few if you haven't been approached by multiple distributors to join one of these companies.
Investopedia defines multi-level marketing as "a strategy some direct sales companies use to encourage existing distributors to recruit new distributors who are paid a percentage of their recruits' sales. The recruits are the distributor's "downline." Distributors also make money through direct sales of products to customers.
The main difference here is the intent. Pyramid schemes focus on recruiting other salespeople, MLM companies focus on selling products. Multi-level marketing companies concentrate on rewarding recruiters if and when they sell a product or manage a team. Managers get a percentage of each of their recruits' sales.
So by these benchmarks, I think it's safe to say, eXp Realty is not a pyramid scheme. But is it a multi-level marketing company? Well, get into that next.
Is eXp Realty a Multi-level Marketing Company?
The answer to this question is yes and no. eXp Realty is a real estate brokerage first and foremost. It doesn't even fall onto Wikipedia's extensive list of multi-level marketing companies. That said, eXp does have a form of MLM-type compensation in what is called "Revenue Sharing." This is the part that gives eXp Realty the reputation that it is an MLM company. We'll get more into what revenue sharing is later on.
The bottom line, there are three components to an MLM company. First, the MLM company must sell a product or service. Second, distributors of an MLM company earn income through selling the product or service. Third, distributors also receive income from recruiting other distributors who also sell the product or service. Each MLM companies exact compensation plan differs.
Keep this in mind when we talk about revenue sharing in the next section.
What is Revenue Sharing?
eXp Realty offers a form of compensation to its agents and brokers called "Revenue Sharing".
Definition of Revenue Sharing
Wikipedia defines revenue sharing as "the distribution of revenue, that is the total amount of income generated by the sale of goods and services among the stakeholders or contributors. It should not be confused with profit shares, in which scheme only the profit is shared, i.e., the revenue left over after costs have been removed, nor with stock shares, which may be bought and sold and whose value may fluctuate.
Revenue shares are often used in industries such as game development, wherein a studio lacks sufficient capital or investment to pay upfront, or in instances when a studio or company wishes to share the risks and rewards with its team members. Revenue shares allow the stakeholders to realize returns as soon as revenue is earned before any costs are deducted."
Why Do Companies Offer Revenue Sharing
Many businesses from different industries offer some form of revenue or profit share. Typically, companies that offer revenue share do so to incentivize quick growth without incurring much of the overhead seen otherwise. With revenue sharing, the company doesn't need to spend nearly as much money in marketing and hiring employees to help the company grow like a traditional one. Instead, they pay current employees or contractors based on performance for their contribution of the companies growth.
Additionally, most companies find that when they reward employees or contractors for helping to find talent and grow the company, they often end up with a better, more qualified workforce.
Revenue Sharing at eXp Realty
Revenue Sharing is no different at eXp Realty. eXp Realty has significantly reduced its amount of overhead compared to a traditional real estate brokerage. They do this by eliminating company paid brick and mortar offices and hosting all company support and training in their virtual office called eXp World. Additionally, because eXp Realty is one real estate brokerage and not a franchise model, there are no regions or franchises to sell and pay for. These cost savings then translate into revenue share for eXp Realty agents helping to grow the company.
Revenue share at eXp Realty works like this. When you recruit an agent to the company, you share in the revenue that an agent brings in indefinitely as long as you and that agent are with the company. Additionally, if that agent attracts another agent to the company, you share in that revenue as well. This benefit goes on for seven generations, or tiers.
Check out my in-depth post on how eXp Realty Revenue Share works.
What is eXp Realty?
eXp Realty is part of the publicly-traded company eXp World Holdings (EXPI) on the Nasdaq stock exchange. eXp is audited by the SEC and is 100% completely legal.
eXp Realty was founded in 2009 by Glenn Sanford and now is home to over 20,000 real estate agents in all 50 US states and nearly all the Canadian provinces.
Agents at eXp Realty are all on an 80/20 commission split with a $16,000 cap and pay an $85/month fee. This fee covers a vast amount of tools and resources for agents to use in their real estate business. These tools include kvCORE, Skyslope, eXp World, Workplace by Facebook, and many more.
Because eXp Realty is a publicly-traded company, agents have the opportunity to participate in equity ownership opportunities. These opportunities include receiving stock whenever an agent sells their first home each year, caps, or attracts an agent to the company, and that agent sells their first home.
Next, the ICON agent award program awards high producing real estate agents their entire $16,000 cap back in the form of company stock, once the agent meets a very attainable benchmark.
Finally, eXp Realty offers equity similar almost to a 401k in that they allow agents to participate in a program whereby the agent can have 5% of their gross commission automatically purchase eXp stock at a 20% discount from its current trade price.
Similar Business Models in the Real Estate Industry
eXp Realty's business model is unique, but not the only one out there in the real estate world. Remember earlier, when I mentioned our founder Glenn Sanford.
Glenn created eXp Realty in 2009 after beginning his real estate career at Keller-Williams. Keller-Williams, widely considered a fantastic real estate brokerage, also offers a compensation model similar to "Revenue Sharing" called "Profit-sharing," which pays out seven tiers.
Glenn took the idea of profit-sharing and took it a step further. He said that if we cut out the overhead, removed the franchise model, and all the middle-men, eXp Realty would be able to pay agents off the top in revenue share vs. after all expenses of the market center in profit share.
Keller-Williams formed in 1983, and 6 years later, in 1989 started to offer profit sharing to its agents. This profit-sharing quickly helped the company to grow to the level it's at today, with over 150,000 agents.
Early on, however, many in the real estate industry said the same things about Keller-Williams as they do today about eXp Realty. But if you ask most agents their thought about Keller-Williams, not many would classify this brokerage as a pyramid scheme or even an MLM.
My Take: Is eXp Realty a Pyramid Scheme, MLM, or neither?
I hope that through this post, you will see how eXp Realty is most certainly not a pyramid scheme. Whether you wish to classify it as a multi-level marketing company is up to you.
I, for one, don't classify eXp Realty as an MLM. Even if eXp Realty did not offer revenue share, the component that puts eXp into the discussion of MLM, I would still choose to hang my real estate license here for all the other benefits discussed above.
At no other brokerage would I, as a high-producing real estate agent, be able to earn my cap back every year in the form of company stock through the ICON program. Also, I could not gain access to kvCORE, Skyslope, and a huge private community of like-minded agents for just $85/month. These benefits alone far outweigh any other brokerage I've seen out there currently.
The Real Trends Five Hundred report for 2019 ranked eXp Realty the #1 top moving real estate brokerage by transaction count from 2017 to 2018. eXp Realty was just named the largest independent real estate brokerage in North America, by transaction count, for 2019.
Because of this, I strongly feel eXp Realty is a real estate brokerage and not an MLM. It is a real estate brokerage that offers real estate entrepreneurs unique opportunities like stock and revenue share. But simply because the business model is unique and offers additional compensation opportunities doesn't water down the fact that eXp Realty is a real estate brokerage and one that is doing a lot of real estate business across the country!
In conclusion, eXp Realty is most certainly not a pyramid scheme. If you are researching eXp Realty and are turned off by something you may have heard or read, I encourage you to investigate further. Revenue share is a great opportunity, but it's only one part of the opportunity at eXp Realty.
I would not let what others say about the model or company as a whole dictate what you ultimately decide to do with your real estate business. There is far too much at stake to not do your in-depth investigation into the company.