Posted by nithi.vivatrat on August 25, 2009
The paperback edition of Freakonomics went on sale today, and Levitt/Dubner posted on their blog the only new content in this edition, which is a Q&A with the authors derived from the wonderful Freakonomics blog. I thought you would find this excerpt interesting:
Q: Of the examples discussed in the book, which have gained the greatest traction in the popular/political discussion? — Rick Groves
A: There has been a lot of talk about the relationship between legalized abortion and the crime rate. And some governments have cited the low wages of street-level drug dealers as an incentive to young people to go legit. But on a day-to-day level, the part of the book that’s probably spurred the most change is our discussion of real-estate agents. The standard fixed-commission, full-service Realtor model is gradually melting away [emphasis added]. Even the White House weighed in, with the Real Estate Settlement Procedures Act, which is meant to increase transparency between Realtors and their customers.
In my posts, I have never claimed that the commission model will disappear (though it doesn’t hurt when the Freakonomics guys say so). I do, however, believe that the commission-free, fee-for-service model will be a popular option for an increasingly large segment of consumers. To each their own, as the saying goes…
Posted by nithi.vivatrat on June 9, 2009
If you don’t read CalculatedRisk, you’re missing out on some valuable insights on financial and economic matters. There are two posts from the other day that I thought you might appreciate:
Enjoy!
Posted by nithi.vivatrat on May 27, 2009
As I talk to folks about the SmithAdams fee-for-service approach to real estate brokerage, I hear responses ranging from this:
“Way to go! It’s time to get rid of the commission model!”
to this:
“I don’t know – do you really think fee-for-service will replace commissions?”
To both, let me say this: hold your horses. We have no expectation that the fee-for-service model will completely replace the traditional commission model.
Why should there be only one way? You can hire an attorney on retainer or on contingency. We believe the same options should exist for real estate brokerage. No single way will be the right fit for everybody, so consumers should have choices.
That’s what SmithAdams is really about: giving consumers choice in real estate brokerage. No two consumers are identical — each person’s needs and wants are different. Consumers should be able to choose what services they need and are willing to pay for. If a consumer wants to pay based on a commission fee model, so be it. Likewise, if a consumer prefers a fee-for-service, pay-as-you-go model, that should be available too.
Here’s my long-term vision of a world of peaceful coexistence and competition between the two fee models. As more and more consumers opt for a fee-for-service approach, there will be more scrutiny of fees by consumers as well as demands for transparency. Commission-paid agents will need to better link their value-add to their fees. The good ones will have no difficulty doing so and will continue to thrive in this environment. The ones who cannot will eventually leave the profession. Over the long run, the overall quality of service to consumers should rise — whichever fee model an individual consumer chooses. Sounds like a good outcome to me. What do you think?
Posted by nithi.vivatrat on March 24, 2009
The Real Estate Matters column in Saturday’s Washington Post identified some of the reasons why this is a great market for first-time home buyers, ranging from the falling home prices, low interest rates, and the tax credit. I would add this reason why I believe the first-timer segment will grow as a proportion of all home buyers: by definition, first-time home buyers will not be saddled by the prospect of selling a current home at a loss, which definitely undermines the impetus to move.
The column got me thinking about why SmithAdams is such a great fit for home buyers, first-time or otherwise. I was talking to a buyer client this morning who summarized it neatly for me:
“If I do my own research and find the house on my own that I want to buy, why should I pay a 3% commission? I just wanted help determining the offering price, preparing and presenting the offer, and negotiating the deal. SmithAdams did just that, and I didn’t have to pay for anything I didn’t need or ask for.”
In this market, there are many opportunities to identify bargains relative to prices over the past few years. Doing so will require you to do some homework and research. SmithAdams can certainly help do this for you. But, if you indeed do that homework yourself, shouldn’t you be rewarded with lower fees? I think so. If you agree, give us a call.
Posted by nithi.vivatrat on March 17, 2009
On Sunday, the New York Times had this article about the growing use of buyer’s agents on Long Island. The article implied that buyer’s agents are fairly rare there; my feeling is this is less true in the DC area. Regardless, my focus is on this issue: the article cites real estate brokers who now focus exclusively as buyer’s agents to eliminate “the ’smoke and mirrors’ and ‘dual-agency conflict that has caused so much mistrust among consumers and real estate agents.’”
It is true that when there is a documented and disclosed (this is important) relationship between a buyer-client and a real estate broker, then the broker representing the buyer has a fiduciary responsibility to represent the buyer’s interests. This is clearly stated in Article 1 of the NAR Code of Ethics (Standards of Practice 1-1 and 1-13). Classes for agents pursing an Accredited Buyer’s Representative (ABR) designation.
That being said, it is hard to ignore the reality that, in a traditional commission model, the buyer’s representative gets paid a commission amount stipulated by the listing agreement and only at the consummation of a transaction. Sure, this means that buyers don’t have to pay any fees unless a purchase actually occurs. But as I have pointed out in earlier posts, the commission model, even for buyer representation, creates real potential for conflicts of interest that the SmithAdams fee-for-service model avoids. And by the way, most buyer representation agreements keep open the potential for dual-representation, should the buyer agree (I wouldn’t).
So, of course I think it is better for any buyer to have his or her own representative. I just think buyers should be fully educated on dynamics that the NYT piece glossed over.
Posted by nithi.vivatrat on January 24, 2009
In prior posts, I have argued how the commission model is an arbitrary method of calculating the fees to buy or sell your home with no direct connection to the value of services you were provided. Another major disadvantage of the commission model is that it impedes your ability to pick and choose, and only pay for, the specific services you want.
Consumers today are becoming more and more informed regarding real estate information, and many do their own homework when it comes to selling or buying a home. Yet today, those consumers will likely still end up having to use a real estate broker — and pay a considerable commission — to complete any transaction, even if they already did a substantial portion of the legwork. WAIT! There is more to read… read on »
Posted by nithi.vivatrat on January 21, 2009
Complicating the issue with real estate commissions is a widespread belief that only the seller pays the commission, not the buyer. Mark S. Nadel, a DC lawyer who writes on public policy issues, debunks this myth:
“Sellers who agree to pay a 6% commission to their real estate broker and to accept a bid of $500,000 for their home are, therefore, actually willing to settle for net proceeds of $470,000. Since the sellers’ broker has agreed to accept a net $15,000 commission for his or her own services, the sellers would accept a $485,000 bid from a buyer if there was no buyer’s agent to compensate. If, however, the buyer has an agent, and the sellers’ agent has promised half the $30,000 commission to that agent, then, to enable the sellers to clear $470,000, the seller must demand $15,000 more from the buyer. Thus, the commission to the buyer’s agent ultimately comes out of the buyer’s pocket.”
Let’s walk through this example step-by-step again for clarity. WAIT! There is more to read… read on »
Posted by nithi.vivatrat on January 19, 2009
You may be surprised by the how much real estate commissions are paid by consumers in a year — I know I was. In 2007, US consumers spent nearly $80 billion (yes, that’s a “B”) on real estate brokerage fees. The turmoil in the market is likely to put a dent in that — REALTrends believes that new and existing home sales in 2008 will be close to 5 million units, down from 5.65 million in 2007 and a sharp decline from mid-2008 forecasts — but even with, say, a 20% reduction, that’s still $64 billion in fees.
It’s common to see a commission rate on the order of 5-7% of the final sale price of a property split in some fashion between the seller’s and buyer’s brokers. A fixed commission rate is so commonplace that many consumers believe it is non-negotiable, though state law dictates that these fees are absolutely subject to negotiation. The relative lack of price competition (compared to other industries) has been well documented by the US GAO as well as the Justice Department Antitrust Division. But my concern goes beyond the level of competition in the marketplace — my issue is with the entire commission model itself.
WAIT! There is more to read… read on »
