By Kenneth R. Harney
Saturday, February 9, 2008
Just about anybody who has bought a home or taken out a mortgage in the past five years has run into them in some form: mysterious fees charged by real estate brokers, lenders, builders and title agents -- "admin," "processing," "doc-prep" and "regulatory compliance" are among the opaque names -- that added $200 to $500 to the bottom line at settlement.
You might have asked a real estate agent to explain why an administrative fee of $450 was needed when you were already paying tens of thousands of dollars in commissions. The answer you might have received: Don't blame me. My broker requires it. I don't get a penny of it.
In a lawsuit involving a real estate firm's $149 mandatory fee and a home buyer who challenged it, the U.S. Circuit Court of Appeals for the 11th Circuit reversed a lower court's denial of class-action standing. The class action is intended to cover all consumers forced to pay what the brokerage firm termed its ABC fee -- an administrative brokerage commission.
Vicki V. Busby of Jefferson, Ala., sued Realty South, a large Birmingham-based broker, charging that in addition to paying a substantial commission to the firm and its sales agent, she was required to pay the ABC fee. In Vicki V. Busby v. JRHBW Realty , Inc., Busby said there was no evidence that the firm had performed any services beyond those covered by commissions.
The appeals court ruled that the lower court had erred in not considering the factual issue -- was any specific work done to justify the extra charge? -- in making its decision to deny Busby's request for class-action certification. The case, which now goes back to U.S. District Court, is the latest in a long-running battle pitting real estate, mortgage and title companies against consumers protesting so-called junk fees and settlement-sheet add-ons.
The Department of Housing and Urban Development has ruled for years that any fee imposed in connection with a residential real estate transaction must be for services actually rendered. Some federal courts have agreed with HUD's interpretation of the Real Estate Settlement Procedures Act. Others have disagreed.
In the Busby case, the appeals court "bolstered HUD's interpretation that if a real estate broker cannot produce evidence of the services it performed for the administrative [or other add-on] fees it charges, a violation may exist," said Phillip L. Schulman, a Washington lawyer with K&L Gates and an authority on real estate settlement issues.
In an interview, Schulman said the court's ruling "underscores the importance of performing actual services in exchange for" fees charged in connection with real estate and mortgage transactions.
In other words, a brokerage firm cannot simply dream up new fees and force them upon its unwitting clients. Many brokers have imposed extra charges because their sales agents demanded bigger shares of listing and selling commissions.
Laurie Janik, general counsel of the National Association of Realtors, said brokers are fully within their legal rights to receive compensation "for the increasing costs they incur to run their businesses," such as those for communications technology, taxes, lease payments and marketing, to name just a few. They should be able "to recoup these legitimate expenses," especially in an environment of declining commission rates and higher splits with agents.
Janik said brokers should consider moving to a standardized, well-disclosed, flat-fee-plus-commission. For example, listing and sales agreements could specify that a firm charges a base fee, say $500, plus commissions of 4 to 6 percent of the property's selling price, split between listing and selling agents.
With that approach, Janik said, consumers, agents and brokers would "all know upfront" where the fees will flow. "If the sellers or buyers don't like that arrangement, they can walk down the street to another broker."
How should consumers handle the issue in light of recent court rulings? Always ask agents upfront whether there are any administrative or processing fees beyond the commissions. If the answer is yes, ask what specific services are rendered to earn them and who pockets the money.
If you don't like what you hear, shop around for a better deal. In real estate transactions, all compensation is negotiable. If you don't push for lower fees, you'll usually pay the max.
Harney's e-mail address is email@example.com.