Dan Kerzner, a DC-area technology VP, chose SmithAdams to represent him in the sale of his Arlington condo. Here is a Q&A about his experience with us:
Q: Why did you choose SmithAdams to sell your home?
A: I chose SmithAdams for a couple of reasons. First, I was not comfortable with the possibility of any conflict of interest between my real estate advisor and myself – the SmithAdams fee-for-service model helped me avoid this issue. Secondly, SmithAdams allowed me to choose the specific services I needed. As a do-it-myself kind of person, I was originally planning on managing this process myself as a for-sale-by-owner. By using SmithAdams, I could get the best of all worlds – the cost control of a FSBO with the benefits of a full-service brokerage — all on an a la carte basis.
Q: Weren’t you concerned about paying fees up-front even if your property didn’t sell?
A: I knew with certainty that I was going to sell the property at some point, so I would have had to eventually pay a commission to someone anyway if I didn’t do an FSBO. With SmithAdams, I had control of what services they performed, so I controlled the amount of fees I would incur. In the traditional commission model, I give up the control of what I pay for and what I get. SmithAdams allows me to manage the work and the fees.
Q: Did you save money with SmithAdams?
A: Yes — my total fees to SmithAdams were less than 1% of the final sale price, far less than the 3% I would have had to pay to a traditional agent (not to mention the commission that will go to the buyer’s agent).
Q: Where do you think SmithAdams added value in your real estate process?
A: Off the bat, SmithAdams was far better than using a flat-fee MLS listing service, which was my original plan. SmithAdams crafted compelling MLS, Zillow, and Trulia listings and answered questions from buyer agents (even though we were listed as the primary contact). SmithAdams also represented our interests well during negotiations, helping us work through some sticky issues with the other party.
Q: Would you recommend SmithAdams to others?
A: I would definitely recommend SmithAdams to anyone who wants to proactively manage the fees incurred in their real estate transactions. The fee-for-service model works with other professions, so why not real estate? With SmithAdams, I get great service from a professional team for reasonable hourly rates — SmithAdams was a great fit for me to sell my property.
Pay a broker per hour; maybe pay for services that don’t lead to a purchase or a sale.
Pay a broker by commission; pay nothing unless the purchase or sale happens. (There are some hybrid models that give rebates on commissions, but you are still paying commissions.)
And
The fee-for-service model is perfect for a consumer who is self-motivated and interested in doing a lot of his/her own footwork and research.
I made this comment — hopefully it will be approved soon:
Down in the metro DC area, SmithAdams (http://www.smithadams.com) offers consumers a fee-for-service alternative to the commission mode of real estate. Your statement that “The fee-for-service model is perfect for a consumer who is self-motivated and interested in doing a lot of his/her own footwork and research” is spot-on — that is exactly our sweet spot, as is a growing segment of consumers who are uncomfortable with certain aspects of the commission model (such as the potential for conflicts of interest).
You are right that many consumers fear paying hourly — but more and more of them are doing the math and making individual risk/reward calculations that lean towards choosing a fee-for-service model. In a world where the information advantage of the broker over the consumer has eroded significantly, many consumers just want to pay a broker to help them through the transaction — and pay the same way they would pay a lawyer — by the hour, even on a non-contingent basis.
You put it perfectly — the fee-for-service model is just one option that consumers should have — and each consumer can make the choice right for him or her. The commission model will always be a choice for many consumers, but the fee-for-service option should be there for others. Bill Wendel is definitely a pioneer in this area, to the great benefit of Boston area consumers. Thanks for your post!
I’ve always felt that a balloon was a better analogy than a bubble (in no way am I claiming to be the first) to describe an economic contraction in a particular sector or area, such as housing or consumer spending. It’s not that the market in question “pops” and disappears — it just deflates to a different size after the “air” get sucked out.
Using this methodology, we find striking results: from 2002 to 2006, homeowners borrowed $0.25 to $0.30 for every $1 increase in their home equity. Our microeconomic estimates suggest a large macroeconomic impact: withdrawals of home equity by households accounted for 2.3% of GDP each year from 2002 to 2006.
I am writing to thank you for everything you have done over the past year to suture our economic wounds and stimulate our housing market. It has been very helpful. Now, please stop.
What I loved about her article was how her anecdotes put a human face on real, unintended consequences of these programs. An informative and persuasive read — I’d comment more, but I urge you to just read it.
Just now, I was about to press “publish” on a well-sourced post containing general, publicly-available news (nothing nasty) about a large brokerage company, but then I suddenly realized it could be misconstrued as a violation of Section 15 of the NAR Code of Ethics. It got me thinking — it’s interesting to be part of an industry which essentially has its own set of rules beyond standard state and federal laws, covering areas of behavior such as libel and non-competition. Is the implication that the same laws that govern behavior in other industries are not adequate? Can it be proven that these rules “improve behavior”? And do these rules benefit the consumer, as well as the industry participants?
I don’t have the answers to these questions, though I am forming my opinions — I just throw that out there for folks to think about.
I hope everybody had a wonderful weekend! On Saturday, the Washington Post had this article with a compelling lead-in:
At what point does the real estate industry’s penchant for boosterism — and the sunny outlook that comes naturally to any good salesman — get in the way of buyers and sellers looking for guidance they can trust?
I will make this one comment: regardless if abuse is prevalent or not, it cannot be disputed that there is an unavoidable conflict of interest here — a direct result of the traditional commission fee model. When your adviser is compensated based on whether or not you take a certain course of action, there is a conflict. I discussed this in my very first post titled “The Problem with Real Estate Commissions”.
The SmithAdams approach avoids this conflict of interest. To that point, we will shortly be enabling you to self-subscribe to detailed market updates for your zip code or area. Click the thumbnail to the right to see a sample report (PDF format) for condos in select Arlington zip codes. If you don’t want to wait until the self-subscribe function is set up, just let me know (1) what area you are interested in and (2) condo/townhouse or single-family home, and I’ll email it to you.
Speaking of Arlington, if you somehow still haven’t seen the Arlington rap on Youtube, here it is:
CalculatedRisk reports how an economic turnaround NEED NOT be immediately accompanied by increased hiring. This will continue to be a drag on housing prices and transaction velocity. When people don’t have jobs or are still afraid of losing them, they will be less likely to buy a home even when mortgage rates are low. Lenders will also be skittish in a poor job market. In addition, a lack of improvement in the job market will also cause foreclosures to persist as a problem. My opinion: wait for the hiring trend to improve before we see a sustained improvement in housing prices and transaction velocity.
>>> 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…
