Part I: Broker fees divide industryBy Matt Carter, Wednesday, May 27, 2009.
Flickr photo by Tetsumo.
Editor's note: With more brokerages charging consumers flat fees on top of their traditional percentage-based commissions, Inman News explores the legal, ethical and competitive issues involved. Part I explores the industry's rationale for instituting the fees, and the reaction of agents. Part II will examine potential legal liability under the federal Real Estate Settlement Procedures Act (RESPA), and Part III looks at the online backlash from consumers and real estate professionals.
In what's become standard practice at a growing number of real estate brokerages, homebuyers and sellers are being asked to pay flat fees of several hundred dollars per transaction on top of the percentage-based commissions they've traditionally been assessed.
The fees can come as an unpleasant surprise to consumers, and some have charged that they violate federal law. Many real estate agents don't like the flat fees, either -- in most cases, they don't receive a cut, and some end up paying them out of their own commissions.
But with revenue dwindling and commission splits with agents shrinking, an increasing number of brokerages seem willing to run the risk of generating ill will, lawsuits, and revolts by their own agents in order to collect the additional fees at the closing table.
Some who defend the fees say real estate brokerages need to recoup rising overhead expenses and investments in technology. Collecting a flat fee that's paid directly to the brokerage is less onerous to consumers than boosting percentage-based commissions, they say.
As long as the fees are disclosed correctly -- defenders of the practice say -- they are not only legal but also ethical.
"All of the major full-service companies in markets across the country have made tremendous expenditures (in technology), because I think they felt consumers wanted and needed that stuff," said Jay Varon, a Washington, D.C.-based attorney whose clients include real estate brokerages that have instituted such fees.
"At the same time, agent splits have been increasing toward the agent, and the brokers are getting a smaller and smaller part of the overall commission pie."
Varon believes the flat fees have become "very widespread," with many brokerages concluding that "if they are going to continue to invest in technology, they need to increase the price" they charge for their services.
"It's more efficient if you increase it in a way that (the increase) is not shared with the sales agent, because that's part of the problem in the first place," he said.
No salesperson likes to tell their clients the price of the services they are offering has gone up, Varon said. But the alternative is to cut back on services or renegotiate commission splits.
The extra charges have been labeled administrative fees, technology fees, transaction fees, flat fees, and administrative brokerage commission (ABC) fees. Critics say they should be called "junk fees," because the brokerages collecting them are providing no additional services.
Many of the most vocal critics of the practice are agents and brokers who work or worked at brokerages that have instituted such fees.
Ronald Ogden, an associate broker at RE/MAX Metro in Salt Lake City, is among those who think "junk fees" is often the best way to describe the charges being added by many brokerages.
Ogden said his current brokerage lets agents decide whether or not they want to charge transaction fees. But he said a company he was previously with imposed a mandatory $199 fee on both buyers and sellers, which he decided to pay out of his own commission.
"I had a hard time explaining it (when the fee was instituted), because nothing had changed as far as the procedures that were performed for the client," Ogden recalled. "I felt the brokerage should be profitable with the (standard brokerage fee percentage), and raise (commission) rates if not."
The practice has become "quite prevalent" in the Salt Lake City area, Ogden said.
On several occasions when he challenged his former brokerage's practices, he was told that other companies were collecting a flat fee and that "to remain financially viable, we should charge it as well. Morally, I didn't feel good about asking my clients to pay an additional fee."
Ogden thinks brokerages are collecting the fees largely because they can. On a transaction involving hundreds of thousands of dollars, a fee of a few hundred dollars is easily lost on clients.
"They are just happy to be done with the transaction," Ogden said. "They say, 'Don't confuse me with the details.' "While some consumers may not be concerned about the fees, they have caused some agents to rethink their brokerage affiliation.
Marian Gregor, an agent in Ann Arbor, Mich., said she and more than 40 other agents left their brokerage and opened a new office after the owner instituted an administrative fee.
"The manager went to the owner of the firm, and she told him this was a very bad idea, and not to implement it" because agents would leave, Gregor said. "He didn't believe her, and a bunch of agents walked" when the fee was put in place.
Gregor said the incident occurred several years ago, and she declined to name the brokerage. But in Ann Arbor today, she said, "there are several firms that slap on this ridiculous fee."
If they're not collected at the closing table, agents may be required to pay the fees out of their own commissions.
In a recent Inman News column, St. Paul, Minn.-based real estate broker Teresa Boardman related how her previous brokerage had taken a $300 flat fee right out of her commission check.
Although her buyer had agreed to pay the fee, it hadn't been collected by the title company at closing. So her brokerage tried to take it out of her share of the percentage-based commission -- "a common business practice" in the area, Boardman said.
"It is far easier to take money out of an agent's check than it is to collect it any other way, and most agents just let it go," Boardman wrote.
Although Boardman ultimately prevailed, she said the practice "is so ingrained in our industry that no one wants to challenge it."
Not all agents are opposed to the fees, which aren't new in some markets.
Devon, Pa.-based real estate agent Michelle Leonard said every brokerage she has worked for dating back to 1987 has charged what she referred to as a "conveyance" fee.
"I've been selling real estate for 22 years, and most (clients) don't have a problem with the fee," Leonard said. The lone exception, Leonard said, was an attorney who had read and signed a disclosure statement revealing the fee before raising objections to it.
Leonard said that because it is disclosed up front, buyers and sellers are accepting of the $345 flat fee her brokerage, Long & Foster, charges in her market (Varon, who counts Long & Foster among his clients, said the fee can vary from market to market).
But not everyone who is assessed such fees is so complacent. A class-action lawsuit against a real estate brokerage in Alabama claims the company violated the federal Real Estate Settlement Procedures Act (RESPA) by imposing a $195 flat fee at closing -- leaving the company exposed to a potential $13 million in damages.
Next: A federal judge's ruling raises questions about the legality of brokerage flat fees under RESPA.