Editor’s note: This is the final installment in a series of stories looking at the legal, ethical and competitive issues raised by the growing practice of brokerages charging consumers flat fees on top of percentage-based commissions. Part I explored the industry’s rationale for instituting the fees, while Part II examined potential legal liability under the Real Estate Settlement Procedures Act (RESPA).
Although questions about their legality remain, a growing number of real estate brokerages are charging consumers flat fees on top of their traditional percentage-based commissions.
Federal courts of appeal have issued differing rulings on whether such fees may violate the federal Real Estate Settlement Procedures Act (RESPA), but legal experts say brokerages can defend themselves against lawsuits by making sure the fees are properly disclosed (see Part II).
Brokerages that want to collect flat fees from consumers have another issue to consider, beyond their legal liability. What if consumers — or their own agents — revolt against the fees?
In an internal Q&A prepared to explain to agents their decision to implement a $149 administrative brokerage commission ("ABC") fee, managers at Birmingham, Ala.-based brokerage RealtySouth anticipated such concerns.
The five-page Q&A attempted to tackle every conceivable question: Wasn’t $149 "an awful lot to charge?" Would the fee be increased? Wasn’t RealtySouth "being greedy by imposing such a fee?" Would competitors use the fee against the company? What if a potential client decides to look for a company that doesn’t charge the fee? "Why do you keep putting these roadblocks in the way of of my doing business?" Wouldn’t other brokerages try to use the fee to recruit RealtySouth agents away from the firm?
In the Q&A, RealtySouth’s management assured employees they had considered the potential pitfalls, and viewed them as minor.
Although companies in other markets had reported "some initial resistance to the commission on the part of their agents," the fees had been a "non-issue" with consumers when "properly presented … as a fair and nominal charge to ensure that they continue to receive the protection and services they expect," RealtySouth managers said.
In looking at the experience of companies in other markets, they said, it seemed that when one company introduced a flat fee, others had followed in a matter of months.
Other real estate companies had been charging ABC fees since the mid-1990s, RealtySouth agents were told — often as much as $499 per transaction side. Considering the increased cost of doing business, "it is really a fair and nominal fee," equal to only 0.17 percent of the price of a $175,000 home, RealtySouth’s management said.
"We believe that most companies, if not charging such a commission now, will charge one in the future in order to survive and to continue to provide to consumers the services they expect," the Q&A predicted.
Open to debate
But RealtySouth and other brokerages began introducing ABC fees before Web 2.0 took root, providing consumers and real estate agents alike with many platforms to sound off on. Today, real estate professionals blog about seemingly every aspect of buying and selling a home, and consumers can explore issues in online forums and social media sites devoted to real estate.
Flat fees are being openly debated by consumers and Realtors online at sites including Trulia Voices, Zillow Advice, Active Rain, RELiberation, and Real Town. More often than not, agents are siding with consumers on the issue.
"This is one thing I absolutely don’t agree with our broker’s reason on," said one Idaho real estate agent in a comment on ActiveRain about the $200 flat fee her company imposes on sellers. "About half the time we simply don’t collect it from our sellers (most especially repeat clients and personal friends). Because of our volume, our broker doesn’t get on us about it — but it is a mandatory fee in our office."
"In Minnesota, we’re seeing this being abused by some brokerages," said another agent. "Some of them charge $300-$450. This is charged to the buyer and/or seller. And, if the same company does both sides, they charge it to BOTH sides."
Brokerages "are nickel-and-diming everyone to death," the Minnesota agent complained. "There is a per-transaction fee charged to the agents, too."
An agent in Las Vegas called the fees "total garbage" — a practice that "needs to go away." …CONTINUED
"After the thousands the brokerage gets through the split, it is just more of an insult than anything else to charge this fee," the Las Vegas agent said. "There is absolutely no justification of this fee that I have heard that holds any water."
The Red Tape Chronicles, an MSNBC blog that promises to unmask "corporate sneakiness," "government waste" and "outright scams," looked at the fees last year.
In "Sneaky fee alert: Agents ding home buyers," MSNBC reporter Bob Sullivan tapped real estate broker and blogger Frank Llosa as a source. Llosa’s blog, "FranklyRealty," he said, "exposes real estate agent tricks."
Sullivan worried that the "new junk fees" were "even more disturbing" when not properly disclosed. Unlike fees charged by lenders, he noted, flat fees charged by real estate brokers don’t appear on the Good Faith Estimates provided to borrowers when they apply for a loan.
Consumers may work with an agent for some time before signing a buyer or listing agreement. In the process of signing dozens of forms, they may not notice an administrative fee in an agency contract, Sullivan noted, so many aren’t aware of the fees until they see them on their HUD-1 settlement statement on closing day.
That’s a view shared by Scott Powell, the Birmingham, Ala.-based lead attorney in a class-action lawsuit on behalf of thousands of buyers and sellers who have paid RealtySouth’s $149 ABC Fee.
"Most of these purchasers and sellers never see the charge until it comes to closing," Powell said. He said many are so excited about the prospect of buying or selling a home that they aren’t going to object to a fee that represented a small fraction of the sales price.
"I would suspect most people don’t question it at the time, if they even notice it," Powell said.
If the debate online is somewhat one-sided, some agents and brokers have stepped forward to defend the practice.
Commenting on a post in an online forum at Trulia.com, Pittsburgh, Penn.-based agent Liz Caplan said her brokerage, Coldwell Banker Real Estate in Pittsburgh, charges a flat fee of $395 to buyers and sellers.
"I have never had this fee be an issue with my clients not wanting to pay the fee, and it is just another small part of the closing costs after lots of hard work," Caplan wrote. Contacted by Inman News, Caplan confirmed writing the post but declined further comment.
Coldwell Banker brokerages in other markets were mentioned in other online discussions of flat fees. While some are owned by independent franchisees, the Pittsburgh franchise is one of about two dozen around the nation owned and operated by NRT, according to the company’s Web site.
A spokeswoman for NRT referred an inquiry about the company’s policies regarding administrative fees to the Pittsburgh franchise, and declined further comment.
George Hacket, president of Coldwell Banker Real Estate in Pittsburgh, said in a statement that the company "takes great care to operate in full compliance with RESPA for the benefit of our customers and regularly provides training and education sessions to our managers and agents."
Jay Varon, a Washington, D.C.-based attorney whose clients include brokerages that charge such fees, said it’s important to put procedures in place "where conversations happen at the outset, and contracts are signed" disclosing the fees.
"Some agents don’t like to talk price right at the beginning," Varon said. Because most brokers imposing the fees are not sharing them with agents, many agents "aren’t motivated to explain it or collect it."
What’s your opinion? Leave your comments below or send a letter to the editor.