Would you pay a higher commission for charity?

Posted by nithi.vivatrat on June 10, 2009

@Rob Hahn, founder of strategy consulting firm 7DS Associates, tweeted this query yesterday:

>>> Would you pay 8% commission rate to sell your house, if you knew that the brokerage was donating 40% of profits to charity of your choice?

Interesting question though I thought the answer was obvious. But hey, Rob sent it, so I figured there’s something to this and perhaps I should do the math.

This ended up being an even more interesting theoretical exercise that I had initially thought. As is the case with many situations, it depends what metrics you decide are important. If your cost of doing a real estate transaction is your only metric, then obviously paying a higher commission rate would be silly. On the other hand, if maximizing proceeds to charity is also important to you, then you might decide something else. With both constraints, you should look at total net after-tax costs.

Rob’s tweet said “40% of profits”, but for fun let’s assume this imaginary brokerage would give 40% of the commission income of each transaction to a charity of your choice. I’ve attached a screenshot of the math below (which I did quickly — please alert me of any issues) for 5 scenarios assuming a $300,000 sale price and a marginal tax rate of 35%. The scenarios are as follows:

• A: 8% commission ($24,000), brokerage gives $9600 (40% of $24,000) to charity of your choice
• B1: 5% commission, and you make a separate $9600 charitable contribution
• B2: 5% commission, and you make the appropriate contribution to have net after-tax costs of $24,000 (to match the cost of Scenario A)
• C1: 6% commission, and you make a separate $9600 charitable contribution
• C2: 6% commission, and you make the appropriate contribution to have net after-tax costs of $24,000 (to match the cost of Scenario A)
• D1: 7% commission, and you make a separate $9600 charitable contribution
• D2: 7% commission, and you make the appropriate contribution to have net after-tax costs of $24,000 (to match the cost of Scenario A)

(click to enlarge)

The key factor is the prevailing seller commission rate (the cost of your alternative to the 8% brokerage). At a prevailing seller commission rate of 5%, your charity gets much more bang for your same buck if you choose a 5% brokerage and make a separate charitable contribution, assuming you can take the whole deduction (compare Scenarios B1 and B2 against Scenario A). At 6%, you’re roughly indifferent (compare Scenarios C1 and C2 against A). At 7%, on the other hand, your charity would get more proceeds by choosing the 8% brokerage (compare Scenarios D1 and D2 against A).

The marginal tax rate is also factor — the higher the margin tax rate, the more it favors the scenario where you make a separate contribution and get a tax deduction.

So, conclusion: not as wacky an idea as I originally thought. It would be interesting to see if any consumers would go for this idea. Of course, the truly best scenario is to go with SmithAdams’ commission-free a la carte services, and then donate your savings to charity

DISCLAIMER: I am not a professional tax adviser, you should consult with your adviser for real guidance. In fact, I really wouldn’t listen to anything I have to say…