The Mechanics of the SmithAdams Fee Structure for a Home Buyer

Posted by nithi.vivatrat on April 13, 2009

When I talk to prospective homebuyers about SmithAdams, I spend much of the time, not surprisingly, explaining how our fee structure works. I thought it would be useful to recap a typical recent conversation:

“How do we get started?”

To get started, SmithAdams presents you with an engagement letter similar to that of an attorney. This letter describes the terms of our relationship, the scope of work, and the fees associated with our services. Our invoicing process is described in detail in this letter as well. Unlike the typical buyer representation agreement, there are no stipulations about exclusivity. By mutually agreeing to the terms of the project as described in the letter, you and SmithAdams are on the same page as to how we will work together.

“So SmithAdams bills me during the course of the project?”

That is correct. We invoice on a monthly basis for services that were performed in the prior month. Our invoice provides detail on what work was done, when, and by whom.

“How does SmithAdams’ fee structure align our interests?”

In the SmithAdams model, you only pay for work performed. We faithfully represent you, our client, in the same way that a fee-for-service lawyer or accountant does.

The commission model introduces certain conflicts of interest. A commission-paid agent gets paid only when a transaction is closed, so his or her economic incentive is to make sure a deal, any deal, occurs – even if it’s not the best deal for you. Our fee structure avoids this issue.

“If SmithAdams is the buyer’s agent, what happens to the fees that go to you at closing?”

When a property is put on the market (before SmithAdams gets involved), the listing agreement specifies the commission that will go to the buyer’s agent. At closing, the buyer’s agent commission will be paid to SmithAdams, and we will deposit these funds into our escrow account. SmithAdams will then rebate you this amount, less any incurred but unpaid fees.

For example, take a hypothetical transaction in which the final price is $500,000, the incurred fees already paid are $1500, and the fees incurred but not paid are $2000. This is how the rebate would work:

Final Transaction Price = $500,000
Commission to buyer agent (specified in listing agreement) = 3%
Commission to buyer agent = $500,000 * 3% = $15,000

Fees incurred already paid: $1500
Fees incurred but not paid: $2000
Rebate to buyer = $15,000 - $2000 = $13,000

Total fees paid by buyer = $3500
Savings to buyer = $15,000 - $3500 = $11,500

“Could I end up paying more with SmithAdams than going with a traditional commission-paid agent?”

No. Our engagement letter will define a reasonable scope of work that we can both agree on, and our fees will be capped at 3% of the final transaction price for that work. This way, you will never pay more using SmithAdams than with a traditional commission-paid agent for the same scope of work.

Conversely, there is a high risk of overpaying a traditional commission-paid agent. Using the same example as above, if it took 100 solid hours of effort to close that transaction, then you paid that agent $150 per hour for his / her services. But if the process took only 50 hours of solid effort (still more than a standard work week fully committed to the property), then you paid $300 per hour. Let’s say the process only took 15 hours of solid effort from the agent. In that scenario, you just paid $1000 an hour! With SmithAdams, you avoid this problem by only paying for the work we do.

“What if I NEVER buy a property through you? Won’t I still have to pay SmithAdams?”

If a transaction never occurs, it is true that you still have to pay fees for services we have provided. However, if you continue working with us until a transaction does occur, then our fee cap still applies, and you will never pay us more than 3% of the final transaction price. If, for example, those fees were already paid in the course of our monthly invoices, then the entire 3% commission would be rebated to you after closing.

“Why should I do it this way?”

Our buyer clients are those who are generally confident that they will buy some piece of property at some point in time – so it’s not a matter of if, but a matter of when. In the meantime, they want to have confidence that the person advising them is free from conflicts of interest. Further, these buyer clients tend to be those that do a lot of their own research and want to be rewarded for that work in the form of cost savings, instead of helping someone else earn a commission.

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