The smell is that of Homer's rotting body. The story is not structured chronologically. It is told out of order, and this incident takes place prior to the section where Faulkner discusses Homer's disappearance. The reader can infer that Emily purchased the rat poison not to commit suicide, as the druggist suspected, but to keep Homer from shaming her further and totally abandoning her.
One can imagine that Emily could be driven to murder her one chance at love since her father drove away any love interests. When her father died, she was left all alone. So when Homer arrives, she has a chance at love again. However, while everyone in town seems to realize that he is just using her, Emily does not. So when it becomes clear to her that he is just using her and going to abandon her, one could see how she might be driven to poison him and keep him from leaving. Of course, it is Homer's corpse that the townspeople find in the upstairs bedroom when they finally breach the house after Emily's death. It is also Emily's gray hair they find on the pillow next to the corpse. Obviously, she kept Homer's body and slept next to it.
"He liked men, and it was known that he drank with the younger men in the Elks' Club"..Homer was not a homosexual, he liked men as friends, and liked to drink with them as I'm sure you do. You can't take everything so literal. Also think of the era this was, a. written in and b. set in. And Miss Emily wasn't a hermaphrodite either. Emily poisoned Homer, because she didn't want him to leave, because she didn't want to be lonely. It was Miss Emily's hair they found next to Homer's not the butler's. Emily wasn't dead along time before they found him. The butler wasn't playing with their dead bodies like dolls. The reason Tobe left when the women came into the house is because Miss Emily's death signified the death of the old south, which included slavery.
Back in the time when this story takes place it was unusual for a father to chase away suitors. Why? Why would Emily's father chase away guys and Emily did not get involved with a man until her father died. The man that Emily got involved with is Homer a Known homosexual. Emily had a secret that her father knew and protected her from the guys who would find out. Emily was a hermaphrodite. When her father died the only man she thought would accept her was a homosexual. When Homer found out he left for a while scared that he would tell others Emily poisoned him with rat poison when he returned. His rotting corps is what the smell was.
And by the way, it is not Emily's gray hair they find next to Homer, it is the butlers. Emily was dead for a long time and so was Homer. The Butler was playing with their dead bodies like they were dolls. That is why he was seen caring Homer in the kitchen and that is why he disappeared the second he let the ladies in the house.