Real-estate mystery fees under attack

WASHINGTON — A federal-district court has handed down a ruling in a class-action lawsuit that could have a direct impact on the fees you pay to the real-estate company at closings, whether as a buyer or seller.

The decision targets one of the most commonplace practices adopted by real-estate brokerage firms in recent years: charging consumers "admin," "processing," "ABC" and other mystery fees ranging from $150 to as much as $500 per transaction.

The fees are tacked on top of regular commissions and sometimes come as last-minute surprises on settlement sheets.

Typically the charges are imposed by the owners of the brokerage and go straight to their accounts, rather than being shared with sales agents.

When pressed about why buyers or sellers should be hit with hundreds of dollars extra at closing when thousands of dollars of commissions are already being charged in the deal, some sales agents say, "it's the broker's policy — we don't get any of this money."

For their part, brokers say they need the add-on fees to stay in business, especially when top agents can demand most of the commission that is split with the broker, sales volumes are down and overhead expenses keep rising.

The general counsel of the National Association of Realtors, Laurie Janik, defends the fees, arguing that brokers "ought to be able to charge what they need to make a profit."

But are these add-on fees legal? In a decision late last month that is sending shudders through the real-estate-brokerage industry, U.S. District Judge Virginia Emerson Hopkins in Birmingham, Ala., ruled that when a real-estate firm charges clients an "admin" fee, for which no specific settlement services are performed, the fee violates federal law.

Major brokerage firm

The case involved RealtySouth, one of the 20 major brokerage units of Minneapolis-based HomeServices of America, the second-largest real-estate firm in the country.

RealtySouth was sued by homebuyer Vicki Busby of Jefferson, Ala., when she was required to pay a $149 "ABC" fee — an administrative brokerage commission. The court found no evidence that the brokerage performed any services beyond those covered by the commission, thereby violating a federal real-estate settlement statutory ban against "unearned" fees.

Other federal courts have interpreted the statutory language on unearned fees differently, so the RealtySouth case does not settle the issue.

Busby's lawyers estimate the class of affected consumers to number approximately 30,000 — all RealtySouth clients who've paid ABC fees in recent years that were, based on the district court's ruling, illegal.

Dana Strandmo, general counsel and senior vice president for HomeServices of America, said the company hasn't decided whether to appeal. Strandmo confirmed "admin" fees "is a very widespread practice."

Frank Borges Llosa, a broker who runs Frankly Realty in Northern Virginia and an outspoken critic of what he calls "bogus admin fees," blames brokers and agents for their increasingly commonplace use.

In a posting on his blog, Llosa said brokers "are charging (these fees) because they can't make enough from the agents. Why? Because the agents are demanding (bigger) splits" of the commission dollar, leaving brokers with less and less.

Llosa provided this hypothetical example: Say an agent who gets a 60 percent split of the commissions he or she brings in — the broker gets 40 percent — is approached by a competing brokerage firm that will pay 70 percent, but also imposes a $300 admin fee that either the agent or the client has to pay.

After switching to the new brokerage, said Llosa, the agent now tells clients, "Oops, sorry, this firm charges $300 more per deal, nothing I can do about it."

Charging clients

Meanwhile on a $10,000 commission the new company gives the agent $1,000 more while charging $300 to their clients.

"It's really despicable," Llosa said in an interview.

Janik at the National Association of Realtors says brokerages need to move to a more standardized system of flat-fee-plus-commission compensation that is prominently disclosed to all clients.

Listing agreements might, for instance, indicate that the company's compensation includes a base fee — say $500 — plus a standard sales commission of X percent.

"If (brokers) do it that way and don't get fancy," she said, they should be immune from legal attacks over unearned fees, such as in the RealtySouth case.

What should consumers do? Number one, make sure you get full disclosure about all compensation and fees associated with any sale or purchase, upfront.

Then, if you don't like what you see, you can always take Janik's advice: "Walk down the street to another broker."

Kenneth R. Harney: kenharney@earthlink.net