Just about anybody who bought a home or took out a mortgage in the past five years has run into them in some form: mysterious fees that added $200 to $500 to the bottom line at settlement.
You might have asked a realty agent to explain why an administrative fee of $450 was needed when you were already paying thousands of dollars in commissions. Good question. The answer likely was like this: Don't blame me. My broker requires it. I don't a get a penny of it.
Now a federal appellate court has weighed in with a decision involving a realty firm's $149 mandatory add-on fee and a home buyer who challenged it. The 11th U.S. Circuit Court of Appeals reversed a lower court's denial of class action standing in the suit by Vicki B. Busby of Jefferson, Ala. The class action is intended to cover all consumers forced to pay what the brokerage firm termed its "ABC" fee - an administrative brokerage commission.
Busby filed suit against RealtySouth, a large Birmingham-based broker, charging that in addition to paying a substantial commission to the firm and its sales agent, she was nonetheless required to pay the ABC fee. Busby said there was no evidence that the firm had actually performed any extra services, above and beyond the brokerage services compensated by the commissions, and therefore the ABC fee violated federal law.
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 the district court, is the latest in a long battle pitting realty, 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 disagreed with HUD's interpretation of the Real Estate Settlement Procedures Act. Others have agreed.
Court wants proof of services
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," according to Washington attorney Phillip L. Schulman of K&L Gates, an authority on real estate settlement issues.
In an interview, Schulman said the court's ruling is not the final word on the matter, but it "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 dream up new fees and force them upon their clients. Many brokers have imposed extra charges because sales agents demanded higher splits of the listing and selling commission dollars.
Laurie Janik, general counsel for the National Association of Realtors, argues that brokers are within their legal rights to receive compensation "for the increasing costs they incur to run their businesses" - 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 approach to handle the problem. 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 selling price, split between listing and selling agents.
Using that approach, according to Janik, consumers, agents and brokers "all know up front" 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? Number one: Always ask agents up front about the existence and size of administrative or processing add-ons beyond the commissions. If the add-ons do exist, 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. Remember: In real estate transactions, all compensation is negotiable. If you don't push for lower fees, you'll usually pay the max.
E-mail Kenneth R. Harney at firstname.lastname@example.org.