Posted by nithi.vivatrat on May 11, 2009
My apologies for my hiatus — lots of activity at SmithAdams keeping me busy, but I hope to get back on the blogging horse starting now.
I hope everyone had a wonderful Mother’s Day weekend. You might have missed Kenneth Harney’s Post article titled “Challenging Brokers’ Add-On Fees.” In it, Mr. Harney explains how U.S. District Judge Virginia Emerson Hopkins ruled against RealtySouth for charging clients an “administrative brokerage commission” (or an “ABC” fee). The court found no evidence that the consumer received any additional service for the fee beyond that which was already covered by the regular commission, violating a federal real estate settlement statutory ban against “unearned” fees.
This is good news for those of us advocating greater transparency and choice for consumers in real estate. Extra fees should not be surreptitiously slipped into an already complicated process. At SmithAdams, we believe that consumers should have total control over what services they choose and pay for. This ruling reinforces that competition, consumer choice, and the laws of supply and demand should determine pricing — not unilateral action by the provider of the service. Hooray!
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.
WAIT! There is more to read… read on »
Posted by nithi.vivatrat on April 8, 2009
When it comes to designing compensation programs, my good friend and experienced HR executive repeats this mantra: “compensation drives behavior.” As I talk to people about the incentives created by the traditional commission fee structure in real estate, this refrain often comes to mind. I thought of it again as I read the April 1 Washington Post article “Four Banks Are First to Return U.S. Aid,” discussing that, while returning taxpayer money would typically be viewed as a good thing, in this case it threatens to undermine the goal of increasing lending (so much irony here).
The primary reason these banks are rushing to repay this money?
“Banks seeking permission to repay the Treasury, however, argue that compensation restrictions are the real threat to lending. Neil M. Barofsky, the special inspector general who oversees the investment program, testified before Congress yesterday that a survey of nearly 400 aid recipients found widespread concern that limits on pay will hamper retention of top employees, putting aid recipients at a competitive disadvantage.”
It should not be surprising that executives at banks receiving TARP money, especially those that were not in bad shape, would prefer not to have constraints on their pay. Indeed, that same day, the House of Representatives approved the Pay for Performance Act of 2009 that prohibits “unreasonable or excessive” compensation or bonus payments that are “not directly based on performance-based measures” (it’s important for the Members to show the appropriate outrage to their constituents).
To recap: we got into this mess partly because certain people were getting highly compensated for making loans they shouldn’t have been making; now that we need lending to increase to stimulate the economy, we’re going to implement curbs on compensation to the executives at the banks that take federal funds intended to spur that lending. Anyone else confused/frustrated/angry?
In conclusion: never underestimate the unintended behaviors and outcomes that compensation methods can create.
Posted by nithi.vivatrat on March 27, 2009
Craig and I were chatting yesterday about my March 24th blogpost regarding SmithAdams for buyers and an interesting issue came up. It was my assumption that MOST people shopping for homes sign an exclusive buyer representation agreement with the agent helping them. Craig corrected my misconception — in fact, MANY people shopping for homes do NOT readily sign any type of representation agreement with their agent.
I suppose one might think, “I just want to look at this property – why should I commit to any type of agreement before I know I can work well with this agent or that I will like any of the properties he or she will show me?” This attitude is likely exacerbated by the exclusive buyer representation agreements put in front of buyer prospects by most agents (there ARE non-exclusive buyer representation agreements, but that is a topic for another day). I can certainly understand why home shoppers might not want the commitment. WAIT! There is more to read… read on »
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 March 10, 2009
When talking to people about SmithAdams, the first question I frequently get is this: “You’re starting a real estate business in this economy? What are you thinking?”
Paul Graham, essayist, partner at Y Combinator, and all-around renaissance man, explains, in much more eloquent language than I can muster, that this is the perfect time to start a new company. This point is especially relevant for SmithAdams:
“That doesn’t mean you can ignore the economy. Both customers and investors will be feeling pinched. It’s not necessarily a problem if customers feel pinched: you may even be able to benefit from it, by making things that save money. Startups often make things cheaper, so in that respect they’re better positioned to prosper in a recession than big companies.”
That’s precisely what I’m setting out to do. SmithAdams fee-for-service model can save consumers money. In this housing market, I think any of us would benefit from real estate transactions being more efficient and less costly.
To this point, I believe potential customers are more likely to be open to new ways of doing business in times like these. During the recent flush years when real estate property values were skyrocketing and homes were sold in a weekend, few questioned the wisdom of paying a 3% (one-sided) commission on property transactions — a commission that often translated into thousands of dollars. With the realty market in disarray, the SmithAdams value proposition has resonated strongly with almost everyone to whom I have spoken about our company.
Now is the time to apply the simplicity and straightforwardness of a fee-for-service model, similar to other professional services industries, to the business of real estate. Despite new technology and other changes in the real estate marketplace, the commission-based fee model has not evolved in decades. The bursting of the housing bubble presents an ideal time to reevaluate current real estate practices. Now is the time to start SmithAdams.
I welcome your comments and feedback.
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 »
