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 26, 2009
BostonRealEstateNow, Boston.com’s real estate blog, had this post yesterday discussing the fee-for-service model of real estate. The post specifically mentioned Bill Wendel of Real Estate Cafe, a pioneering fee-for-service brokerage in the Boston area. Bill was also cited in this 2004 WSJ article about differing fee models in real estate.
The BostonRealEstateNow makes these two very good points:
Consumers have three choices:
- Buy and sell on your own.
- 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!
Posted by nithi.vivatrat on June 7, 2009
As I talk to people about the unbundled, fee-for-service model governing SmithAdams, I am occasionally asked, “Are you a discount brokerage?” The simple answer is NO. SmithAdams differs from a discount brokerage in a couple primary ways:
- Discount brokerages provide a reduced set of services for a lower commission rate. In contrast, SmithAdams doesn’t charge commissions at all. Our fee model is similar to that of an attorney, accountant, or consultant. Your accountant’s fees to do your taxes are based on how much work is performed, not a percentage of your net worth. The SmithAdams fee model works the same way – we charge based on the amount of work we do.
- While discount brokerages offer a reduced set of services, SmithAdams provides our clients with the full range of services (if not more) than traditional full-service brokerages – but on an a la carte basis.
The SmithAdams approach is very different than the norm in the real estate industry. We believe this approach achieves two important goals for our clients:
First, SmithAdams is able to customize each engagement (and the associated fees) based on the particular needs of each client. We don’t spend (or bill) time putting together home tours for homebuyers who have already performed their own market research and already know the property they want to buy. We might, however, spend time staging the home of a seller if that is critical to achieving the client’s goals. In any case, our work and our fees are tailored to the particular needs of each project.
Second, our model removes the conflicts of interest inherent in a commission model (even a discount commission). As I have written before in previous posts, a conflict of interest exists when your advisor (from whom you expect to receive objective guidance) gets paid based on whether or not you close a deal. I’m not saying this conflict of interest by definition causes poor behavior, but it is nevertheless a conflicted situation with which one may be uncomfortable (I know I am).
Notice that these two points above did NOT include “saving you money.” Sure, many people can save thousands of dollars with the SmithAdams model. But the primary goals of the SmithAdams approach are to align our services with our clients’ individual needs and to raise the quality of service to consumers. Cost is an important factor, of course, but it is not the only thing. More important, we think, are the quality of the client outcome and the overall customer experience.
Our clients do not choose SmithAdams purely for the chance of saving money. In fact, our clients pay our non-contingent fees on a monthly basis. Rather, our clients work with SmithAdams because they believe that we make their real estate experience better, and that SmithAdams will zealously advocate for their interests. Our clients are confident that they receive value from every hour we spend working on their behalf, and they are happy to pay for it.
And that is why SmithAdams is not a discount brokerage.
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 May 21, 2009
These days, it is not uncommon for folks shopping for homes to do a lot of the tasks traditionally associated with a real estate agent: surveying neighborhoods, identifying listings, touring properties (via open houses), analyzing comparables, even contacting homeowners. The DIY home buyer has been greatly empowered by the proliferation of online real estate information resources such as Zillow, Trulia, and Hotpads that have eroded the information advantage of brokers. The most difficult part of the process for a non-professional, not surprisingly, starts after that: actually making an offer, negotiating the best deal possible, and working through the process to get to a successful close. This is where a real estate professional can add the most value. It is also, in my opinion, where the commission model makes the least sense.
Enter SmithAdams. Using our flat-fee, a la carte buyer services, the DIY home buyer can have the best of both worlds: no commissions but access to a real estate professional on an as-needed basis. Similarly to the way one would consult a lawyer, accountant, architect, or other professional on a fee-for-service basis, one can use a SmithAdams consultant – and pay only for the time used.
So to all you DIY buyers: SmithAdams is your trusted advisor, free from the influence of commissions and available at a reasonable cost. Don’t just take my word for it – read this case study of DIY buyer who used SmithAdams to get the job done.
Posted by nithi.vivatrat on May 18, 2009
Given how much of the discussion on this blog revolves around comparing the commission fee model to the SmithAdams fee-for-service model, I thought you might be interested in this lively discussion about brokerage commissions at ThinkOOB.com. It’s great to see that we are not the only ones actively thinking about this issue. I hope my contribution added to the dialogue.
ThinkOOB.com was created by Al Lewis, founder and president of Disease Management Purchasing Consortium International (DMPC) as well as all-around big thinker, to be a “community blog that rewards lay people for coming up with solutions to society’s problems.” To this end, ThinkOOB.com is offering a million-dollar prize to the first idea originated there that becomes policy at the state or federal level. There are some great discussions going on at that site.
In the context of government economic policy, Al coined a phrase that I love: the “methadone economy,” equating the new federal stimulus programs to a substitute — but still very addictive — for the “heroin” of the bubble economy. Great turn of phrase.
Posted by nithi.vivatrat on May 15, 2009
Some of you may have noticed that Christine Varney, Assistant Attorney General and head of the Justice Department’s Antitrust Division, made headlines in the past few days by clearly indicating the beginning of heightened antitrust enforcement. She also recently withdrew a Bush administration report that advocated less aggressive antitrust laws.
What you might have missed is the Justice Department’s announcement last week of a settlement with Consolidated Multiple Listing Service, Inc. (CMLS) of Columbia, SC. The Justice department argued that CMLS implemented anti-competitive restrictions such as prohibitions on home offices and “active involvement” requirements that would essentially rule out fee-for-service brokers who only charged for the specific services the consumer desired (a la SmithAdams). The result, according to the settlement: “Columbia-area home sellers [were] unable to hire brokers with innovative business models such as ‘fee-for-service’ brokers who would provide only the services the sellers desired at a lower cost than full service brokers typically charged.”
Fortunately for consumers, CMLS agreed to repeal these anti-competitive rules to settle the case. See the full text of the CMLS settlement here on the DoJ Antitrust Division web site.
Assistant Attorney General Varney commented in the DoJ press release:
“Today’s settlement will remove unlawful impediments to competition for real estate brokerage services in the Columbia area and will lead to more choices and lower brokerage fees for South Carolina consumers. For most Americans, purchasing a home is the most significant purchase of their life. This settlement demonstrates the Department of Justice’s continuing commitment to preserve competition in the real estate brokerage industry.”
Score another point for consumer choice.
