Been a while since I’ve blogged — sorry about that. Some big changes at SmithAdams coming — more about that later. I did want to make sure that everyone saw Joseph Gyourko’s piece in the Washington Post yesterday taking a critical look at the conventional wisdom about the benefits of homeownership. I am a homeowner, but I think a lot of people become homeowners for the wrong reasons. If you’re going to become a homeowner, it should be with eyes wide open and not because you’re going along with the mythology. Definitely worth reading — happy Monday!
>>> 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…
Unfortunately, it’s not available in the DC area yet. That doesn’t mean homeowners in our area shouldn’t be thinking about how to improve energy efficiency in their homes. Last March, Green Inc, the wonderfully pragmatic environmental blog at the New York Times, invited five practical environmentalists to think about how to green your house and lifestyle in a realistic way. From Katharine Wroth’s suggestions for cutting your utility bills by 25% (great selling point at an open house!) to Josh Dorfman’s explanation of how to make a “dumb” house “smart,” their tips are realistic and fairly inexpensive.
If you are feeling more ambitious, think about conducting an “energy audit” on your home. Auditing his own home, Tom Zeller Jr. found that “as much as 25 percent of your heating and cooling dollars escape through unseen cracks and gaps in your home, which are usually found in attics, basements, duct systems, and around floors, doors, and windows. If you combine all the holes and gaps in a typical house, it can be like leaving a window or door wide open year round.” Plus, seeing thermal images of your house to track air flows and leaks is just cool.
All these little things can add up as you think about positioning your house in today’s market. Using some of these suggestions, you are also helping the earth one baby-step at a time.
When I tell people who knew me from my tech sector days that I’ve launched a new venture, I’m often asked, “Another tech company, right?” When I answer, “Actually, I’m launching a new type of real estate brokerage firm,” the response I usually get is “Really?”
Of the handful of business ideas I considered for “the next thing,” why did I choose real estate? Leaving aside the reasons I have already given as to why I thought this was perfect timing to start a company, let me explain why I focused on this particular industry.
First, the real estate brokerage industry is way overdue for evolution. Despite all of the technological advancements affecting this industry (internet-based information sources, mapping platforms, and others) over the past decade, the fundamental business process has not changed. Innovation is the exciting part of business.
Finally, of all the business plans I considered, this one was in an industry where I could directly impact individual consumers. My last company provided consulting services to large corporations as well as government agencies; there, the projects I enjoyed the most were those I felt had a direct impact on individuals, such as our work in education analytics. This time around, I wanted to work in an area where people could easily relate to what I did and how my business could impact them.
That has been the best part of launching SmithAdams. While I always had to explain what data warehousing was, I never have to define real estate brokerage to people. Many folks have their war stories about good and bad experiences with real estate transactions. So I get to focus on explaining how SmithAdams is different and how we help the consumer save money and improve the overall experience for real people. I love this job.
If you are feeling more ambitious, think about conducting an “energy audit” on your home.