AskDong

The traditional real estate has been facing a continuing onslaught by price innovators such as redfin. I used a traditional agent when I purchased my condo in 2002. I’m not sure I would do so again. 6% is a lot to pay. Typically, the seller’s agent shares half of the 6% with the buyer’s agent.

As a buyer of real estate, we often ignore the transaction cost. We don’t see that cost directly, and passively accept that the seller is “paying” for it. However, like any other surcharge, it really is the buyer paying. The seller is only handing over money that has come from the buyer. There’s no question a good portion of that 6% commission could be passed back to the buyer.

Redfin.com undercuts competitors by charging a flat $3,000 fee to sell a house. Then, you use them to buy a home, Redfin.com will give back to you most of the 3% they, the buyer’s agent, would typically receive from the sale. Their business model depends on a higher transaction volume, and lower levels of service. This business model appeals in particular to prospective buyers such as myself. I tend to scour online and do my own research to look for real estate. I don’t need or usually want an agent to accompany me on a tour of a home. I do however want an agent to help me close a deal. I appreciate the assistance in looking through paperwork, and knowing all the steps that need to take place. That experience my agent brought on my first purchase was invaluable.

Of course, traditional real estate agents are not happy with the assault on their livelihood. The National Associations of Realtors has made attempts to keep the Multiple Listing Service (MLS) from being used by realtors that would undercut the 6% commission. There is currently a case at the Department of Justice accusing the Association of anti-competitive practices. The MLS is effectively a monopoly on house listings. While there are no natural barriers to prevent competing real estate agents from starting something similar to MLS, the dominance and wide spread use of MLS make it near impossible to successfully market real estate without it.

In the long run, I do believe that the traditional 6% commission will go the way of the dinosaur. This is not to say that traditional real estate agents or high commissions will disappear. Rather, I believe that agents will become both more competitive in pricing, and be more creative in how they price. The fact is, some houses are a lot of work to sell, and others not so much. Agents should be compensated for the amount of work they actually need to put into a sale, and not just some simple percentage of the cost of the house. I for one think that staging, which is currently very popular, will become a much more important part of the real estate agent’s set of services and pay structure.

Before I get into my review of the book and my assessment of Chuck Feeney, I want to give a shout out to the Boston Public Library. Without them I wouldn’t have been able to read this book. 

Like most self made men, Chuck Feeney has led an interesting life.  He and his business partner, Robert Miller, founded what would become the dominant Duty Free shopping enterprise in the world, Duty Free Shoppers (DFS).  Chuck, who grew up of modest means in

The early years of Chuck Feeney’s business are covered in frantic detail, but Conor O’Clery concentrates most of his effort on telling how Feeney began his enterprise of giving his money away.   Feeney’s foundation, the Atlantic Foundation, has not behaved as a standard foundation would.   Previous to 1997, the Foundation was able to maintain the strictest veil of secrecy.  His giving was all done clandestinely and with the strictest anonymity on Feeney’s behalf.  In addition, the Foundation, because it’s based in Bermuda, was able to operate in a way that no

The success of Chuck Feeney is very much a story about being the right person at the right place at the right time with an emphasis on the person.   I sometimes think back to my days in college and wonder why I didn’t start Yahoo or one of the many smaller internet portals that have come and gone (not without making the founders fabulously rich).  I was in the right place at the right time, but I wasn’t the right person.  The right person recognizes opportunity and takes the required risk.  Chuck Feeney showed his appetite for risk when he first set off for Europe with no job and no prospects.  All he knew was that post war

The Billionaire Who Wasn’t, is officially sanctioned by Chuck Feeney and his foundation, Atlantic Philanthropies.  As a result it’s not surprising that the man is canonized by the author, Conor O’Clery.  O’Clery does not completely ignore what are some dark spots in the life of Chuck Feeney, but he does fail to add enough color.   There are paragraphs that beg more questions, but instead of answering or attempting to answer those questions, O’Clery quickly moves on.  Even the best of men have failings, and strained relationships.  Feeney is certainly no exception. 

J.D. at Get Rich Slowly had a post on learning to love the not so big house. I couldn’t agree with him more. I’m both sympathetic to builders and buyers of McMansions. Who doesn’t want cathedral ceilings, 5 bedrooms, a “great room”, and a “mud room”? And builders build them because buyers buy them. It’s simple supply and demand.

There’s a natural tendency on the part of most people to want both more room, and more rooms. I live in a one bedroom apartment. I often think it would be great to have an office and spare bedroom. I would be happy to have more storage room as well. I don’t find anything wrong it in itself to want more. The problem is when the desire for more meets builders who can deliver beyond. On the business side, a classic mantra goes along the lines of, “deliver more than the customer wants.”

Often times, though, the consumers of housing are unclear of what they really want in the end. For instance, as I said, I would like an office and a spare bedroom. Does that mean I need two rooms, an office and an extra bedroom? At first blush it might seem like that. In reality what I need is an office that can be easily used as a spare bedroom. I imagine in the end, I, like many other people, are really interested in functionality rather than more space. The greatest problem with McMansions is not that they meet needs, but that they meet needs and wants inefficiently. I want a spare bedroom. I want an office. However, I realize if my apartment were designed with efficiency in mind, I wouldn’t actually even need more space than I really have.

What I really love about my current apartment is the open large living area–basically one continuous living room/dining room/kitchen. I stake off one corner for some file cabinets. I stake off another area for a desk. Both areas are relatively unobtrusive so when I do entertain people I have great space to host. I also realize that with a few smart additions the space could host a spare bedroom. The spare bedroom would be temporary in nature, portioned by either pocket doors, folding doors, or French doors that would allow the space to be normally used as standard living space. Efficient and adaptable space is both economically and environmentally more sound. Smart design beats big design.

I like to think that as people become both more environmentally conscious, and also realize from experience that bigger isn’t always better, the McMansion will be an early 21st century relic. Some towns like Wellesley, one of Boston’s posh suburbs, has tried to actively put limits on the rise of more McMansions. The town is following the lead of two other affluent Boston towns, Lincoln and Weston. I certainly applaud what hopefully will be positive results, I’m also conflicted about how I feel about legislating good/modest taste. While I believe the Government has the right to legislate safety, and local government has the right through zoning to make good use of space, I don’t believe the Government should be in the business of telling people what’s in good or bad taste. I just hope good and sensible taste prevails.

I found this surprisingly useful link at Harvard Economist, Greg Mankiw’s blog. I say surprisingly because as Mankiw admits most research papers in Economics tend to be very academic in focus, and narrow in scope. It’s seldom one can read a paper and say, “hmm, I could’ve used this paper last year.” While the calculator is definitely useful, the paper by Sumit Agarwaland, John Driscoll, and David Laibson is probably not the most interesting read.

I skimmed the paper, and while I can’t comment on the accuracy of the math, I think the underlying premise is a great basis for deciding what minimum rate you might need to refinance. The fact that they have provided an online tool to solve for this rate is fantastic. I only wish the the paper were easier to read, but I guess academics aren’t being academics if they don’t talk about “closed form” or don’t have plenty of greek letters sprinkled about in their paper. The real value of this solution as opposed to the typical solutions that many individuals (including myself) do on their own is that this “closed form” solution incorporates the value of the option of waiting that’s embedded in the value of the current mortgage. The calculation I typically make is what the paper calls a NPV (Net Present Value) calculation. I make an assumption on how long I will be in the house and then compare if refinancing makes sense just in terms of how much money I pay, valued in today’s dollars by discounting future flows.

The value of this option to wait and see if interest rate will continue to drop can be very valuable, and is generally ignored in the mainstream financial press. If interest rates drop below my current mortgage rate (5.375%), I’ll be sure to use this calculator in my evaluation.

I’ll be on vacation this week. I’m going on a 5 day cruise with my family to Bermuda. My brother was able to spot a pretty good deal back in July leaving out of New York. Since we won’t need to fly, this keeps the cost of the cruise down to just the cost of the cruise itself. The cruise fare is about $520 a person not including taxes and supplemental charges and a little over $600 with those charges on Royal Caribbean’s Explorer of the Sea, a member of the Voyager series of ships - one of the larger class of cruise ships in service today only topped by the Queen Mary 2 and the Freedom class of ships.

At just over $100/day this represents a fantastic deal for a cruise. One of the reason we were able to get such a great deal is my parents are both are over 55 and qualify for a senior citizen discount. One of the beauty’s of the discount is only one person in the cabin needs to be over 55 for the lower rate to apply to everyone in the cabin. We split the booking of my parents into two rooms, voila we were able to achieve the discount for 5 people. Even without the discount the fare would still have been a good deal at little over $700 a person.

I hope to have my regular schedule of posts, once a day during the weekday and at least one post on the weekend. However, given that I will be on open water most of the time, I can’t guarantee that schedule. I do not expect I’ll be particularly responsive on email or in comments. For that I preemptively apologize.