The Nation's Housing
HUD taking a closer look at added realty fees
Does it matter whether a real estate agent charges you a flat commission rate -- say 6 percent -- or quotes you a flat rate but adds hundreds of dollars labeled an "admin" or administrative fee?
A top federal housing official says it might matter a lot, especially when minimal or no separate services are performed to justify charges beyond the regular commission.
Helen R. Kanovsky, general counsel at the Department of Housing and Urban Development, clarified the government's position on controversial add-on fees in a recent letter to industry lawyers. During the past several years, many brokerage companies began adding fees onto their commissions to generate higher revenue. The fees came with a variety of names -- "processing" and "ABC" among others -- and were charged to sellers and buyers, payable at closing.
But a U.S. District Court decision last year threw the industry into an uproar when a judge concluded that add-on fees violate federal law when there are no specific services performed to justify the extra cost. Though the decision directly affected only an estimated 30,000 transactions by one brokerage firm based in Alabama, the National Association of Realtors and other industry groups urged brokers and agents to reexamine their approach to pricing.
HUD, the agency that oversees federal consumer protections in real estate settlements across the country, never issued detailed guidance to the industry following the court decision on what's legal -- and what's not -- until Kanovsky's letter. Here's what she said, in essence: Federal law does not govern how much realty brokers can charge their customers. But it does govern how brokers and agents disclose their compensation to consumers.
Commissions may be quoted "using a flat fee, a percentage of the sales price, or a combination" of the two. The revised HUD-1 settlement sheet in use nationwide since Jan. 1 has lines where the commission charges and splits can be listed. However, Kanovsky warned that if the total charges "exceed the amount of the commission for listing and selling the home that are reflected in the real estate broker's or agent's listing agreement," then HUD has the legal power to review the extra charge "to determine whether additional services were provided" to justify the add-on.
If little or no services are performed, HUD would treat this as a violation of the Real Estate Settlement Procedures Act, subject to significant penalties. Kanovsky also warned about fees charged when there is no contract or agreement permitting the agent or broker to impose those charges. For example, if a listing broker charged the buyer an administrative fee of $250 but there was no contractual language sanctioning the charge, HUD might treat that add-on as an illegal fee.
What's the likely practical effect of HUD's clarifications? According to Steve Murray, a consultant to real estate brokers and editor of Real Trends, an industry journal, many of the largest firms tightened up their procedures on commission rates and fees in the wake of last year's district court decision.
But some smaller and midsize firms "probably haven't gotten the word yet," Murray says, and are still quoting fees in ways that could -- if consumers filed complaints with HUD -- put agents and brokers in legal jeopardy. Still other firms have agents who tack on and pocket their own extra fees on top of the broker's commission and administrative fees -- a practice that Murray considers vulnerable to legal challenge.
Brokers who quote admin fees on top of their commissions insist that they constitute an integral part of their compensation package and are fully justified by the work provided to clients. Chris Heller of Heller Real Estate Group in Encinitas, Calif., says his standard charge is 6 percent plus a $695 "transaction" or admin fee.
The fee pays for the work of the "administrative people" who assist on all transactions, according to Heller. Only two out of 10 clients even ask about the charge or its purpose, he said, "and maybe one out of 10 takes issue with it."
Northern Virginia broker Frank Borges Llosa, who runs Frankly Realty, is critical of add-on fees, calling them "sneaky" and "bogus." He says he welcomes HUD's clarification on the issue, and believes that when all compensation is quoted as "the commission, it's a lot clearer" to consumers, and "it's more open to negotiation" upfront.
Bottom line: Ask about all compensation and fees in any transaction. If you're asked to pay fees you've never heard of, or that come with vague justifications, don't roll over. Just say no.