Problems at eXp World Holdings Inc (EXPI)
Problems at eXp World Holdings Inc (EXPI)
eXp World Holdings (NASDAQ: EXPI — $2.77 billion) is a high-flying virtual real estate brokerage. Since going public through a reverse merger in 2013, eXp’s stock is up over 3,500% fueled by rapid agent growth in a multi-level marketing model. The company’s rise has been matched with dubious accounting, regulatory snafus, an SEC subpoena, high insider selling, and a questionable recruiting pipeline promoted by a prominent Scientologist.
eXp World Holdings was founded by Glenn Sanford in October 2009 as a “cloud brokerage” that saved costs by cutting out physical offices. Today, Mr. Sanford serves as eXp’s CEO, Chairman, and controlling (~54%) shareholder. Before founding eXp, Mr. Sanford started his career helping companies go public through reverse mergers, and in 1998 Mr. Sanford formed eShippers, an outsourced logistics company that went public in a dot-com bubble reverse merger. Today, eShippers is a $2 million penny stock on the TSX Venture Exchange that is going through another reverse merger with an exploratory gold miner.
Like Mr. Sanford’s prior ventures, eXp also went public through a reverse merger with OTC-listed Desert Canadians Ltd in 2013 and uplisted to the NASDAQ in May 2018. eXp earns money by charging its agents a $149 start-up fee, a $50/month technology fee, a $35/month education fee, a 20% cut of initial commission income, as well as transaction fees, errors & omissions fees, risk management fees, broker review fees, and mentorship fees. Since 2018, eXp’s agent count has grown from 15,570 to over 71,000 today. That growth is aided by an aggressive recruiting operation, where realtors can earn cash and stock awards by recruiting other agents.
For example, in a September 2021 agent attraction training video titled, “How I Attracted 1000 agents to eXp My First Year” an eXp agent gave advice on “objection handling for recruiting realtors.” In addition, one slide said,
“Think about who you would like to approach about the eXp opportunity... Reach out to five people a day for the first 30 days. This will be 150 potential realtors with whom you will be in touch (even if cold calling is necessary). If we can convert ONLY 20% you will have 30 realtors onboard your successful business!” (~50-minute mark)
“If you bring somebody on, part of the onboarding process is making sure they bring somebody along with them, so they have success right out of the gate. Help somebody bring somebody else into eXp immediately provides them a sense of momentum.” (~53-minute mark)
The document also referred to prospective realtors as “clients.”
In a December 2021 YouTube video titled, “A Pyramid Scheme? We Tell You The Truth About eXp Realty” two agents say,
“Sometimes you’ve got people that don’t understand how a cloud brokerage works and they maybe don’t want you to understand this opportunity. So the bottom line is eXp a pyramid scheme? No. No. It’s not. It’s definitely not…”
Another May 2021 recruitment video says, in part,
“It’s like being at Apple when they started. Google when they started. Facebook, YouTube, Netflix, Amazon… The four pillars of eXp are: 1) Leads 2) Training and Education 3) Stock awards 4) Revenue share… The ultimate form of leverage is recruiting. So, stop saying you aren’t a recruiter. I will help you recruit.”
The recruitment video also highlights a “cascading revenue share” where agents can earn more by recruiting new agents and earn money on their downline recruits. Many of these incentives are paid out in eXp stock.
The recruitment video highlights three agents who were successful at recruiting others. One agent earned over $1 million in stock over four years. Another agent earned $2.9 million in stock over three years. A third agent earned over $1.5 million in stock over two years. Some agents can also buy eXp stock at a discount and get a bonus $16,000 in stock by teaching an eXp recruiting class online.
Over the last five years, eXp’s diluted shares outstanding have grown from ~106 million to ~158 million. Paying out stock to existing agents in order to earn cash fees from new agents works as long as the market believes your story, and as long as you can keep a strong recruitment pipeline.
To help recruit and educate agents, eXp partnered with internet celebrity Grant Cardone, who has millions of social media followers. Below, Mr. Sanford and Mr. Cardone talk at his Miami conference:
Mr. Cardone is a real estate motivational speaker, star of his own reality tv show, and a prominent Scientologist. He is reportedly a level eight “Operating Thetan” and a major donor to the Church of Scientology.
eXp’s aggressive recruitment and compensation practices have raised concerns with some employees. On Glassdoor employees have posted,
“Not great, kinda of feels like a pyramid scheme”
“Upper-level management only cares about the Multi-Level Marketing aspect. They don’t attract quality brokers and if they do, those ones don’t stay.”
“The company culture is the very worst in the industry. The culture is about recruiting, but it is literally a lottery.”
“They are obsessed to grow their team structure, not to sell properties.”
“Almost everyone cares more about revenue share than the actual business.”
According to eXp’s securities filings, regulators are seeking more information as well:
“On June 1, 2021, the Company received a subpoena issued by the staff of the Division of Enforcement of the Securities and Exchange Commission requesting certain documentation and information relating to the Company and to its commission and agent compensation practices during 2018 and 2019.”
eXp disclosed the subpoena in its Q3 10-Q filed on November 3, 2021 – five months after receiving it.
The SEC is not the only regulator concerned about eXp.
For example, in March 2019, the California Department of Real Estate filed a complaint against eXp alleging 72 state regulatory violations, including 17 agents listing office addresses that were not properly registered, 22 agents not listing a license number on advertising, cases involving agents with expired licenses, and cases involving eXp failing to notify the California Department of Real Estate about new hires.
A former President of the California Association of Mortgage Brokers said, “This is egregious. This is a lot of violations.” Another source said, “the number of violations is almost unprecedented.”
Following the Enforcement Action, Jeff Oboyski, Assistant Enforcement Commissioner, put out a bulletin on “Technology and Supervision in the Real Estate Industry” and wrote,
“Although there is no statute in the real estate law that specifically prohibits ‘virtual brokerages’ in California, licensees who engage in such a business model when offering real estate services should be aware they must make sure they continue to comply with all the applicable real estate laws and regulations. One of the provisions of the law, states that every licensed real estate broker shall have and maintain a definite place of business.”
Complaints filed with State Attorneys General raise more questions about whether eXp is operating at the highest standards. For example, in one complaint to the Washington State Attorney General, obtained through a Freedom of Information Act request, a realtor wrote,
“The company has no office. They use a broker's house as their local address which I don't have access to. They don't have a home office or corporate phone number. They refused to return voicemails requesting to cancel. I am requesting a full refund for the charges I incurred as I never received anything from EXP.”
The Bear Cave also obtained 199 pages of consumer complaints from the Florida Attorney General through a FOIA request. One December 2021 complaint highlights an eXp Realtor that had previously been arrested for felony theft. A second complaint reads, in part, “a lot of fraudulent activities have occurred. I am a disabled vet. They took advantage of me.” A third complaint filed with the Florida State Attorney General reads,
“This realtor made a quick claim deed, had it notarized and forged my deceased father's signatures from a property that I was left in his will.”
According to LinkedIn, over 535 eXp employees/realtors graduated from the University of Phoenix, more than any other college.
In November 2021 eXp set aside $10 million to settle allegations of “violations under the Telephone Consumer Protection Act.” In addition, in February 2020, eXp’s former Senior Vice President of Agent Development filed a lawsuit under the Arizona Wage Act alleging eXp withheld some of her income. Specifically, she alleged she was “promised that, along with her base salary and other benefits, she would receive 50% of eXp’s gross revenue generated by the eXp Mentor Program that [she] would develop and grow. The revenue consisted of the mentor fee charged to participating agents.” That case is currently in oral arguments.
In September 2021, professional photographer David G. Oppenheimer sued eXp Realty after eXp Realty and/or its agents allegedly used his licensed photography without compensation and then took over four months to remove the licensed photography from its website. That litigation is ongoing and in discovery.
Other anomalies abound.
For example, eXp’s revenue grew from approximately $999.8 million in Q2 2021 to $1.077 billion in Q4 2021. Yet, customer deposits held by eXp perplexingly decreased from $93.8 million in Q2 2021 to $67.7 million in Q4 2021.
For the year ended December 2021, eXp also changed its revenue recognition policy by adding this sentence:
“The Company estimates and accrues revenue to which it is entitled to for closed transactions but has yet to receive all the necessary closing documents.”
According to an SEC Full-Text Search, eXp is the only company to ever use that disclosure in its revenue recognition policy.
eXp’s CFO since November 2018 is Jeff Whiteside. Before joining eXp, Mr. Whiteside was the auction director for the Saratoga Auction Museum. eXp’s Chief Accounting Officer departed in May 2020 and was replaced by Kent Cheng, CPA. Before joining eXp, Mr. Cheng was the corporate controller for Ocean Spray Cranberries. eXp is audited by Deloitte.
In a November 2021 Miami interview with Grant Cardone, Glenn Sanford predicted that eXp would be the first brokerage in history “to sell a trillion dollars of real estate in one year.” Two months later, eXp’s President of Brokerage Operations resigned “to pursue other opportunities.”
Insiders may be doubtful about Mr. Sanford’s prediction. Since January 2021, eXp insiders have sold approximately $81 million in stock.
Caveat emptor.
This article is not investment advice and represents the opinions of its author, Edwin Dorsey. You can reach the author by email at edwin@585research.com or on Twitter @StockJabber. This article is for paid subscribers of The Bear Cave newsletter. If this article was forwarded to you please consider becoming a paid subscriber to receive articles like this twice every month. Learn more here.