WASHINGTON — A federal district court has handed down a ruling in a class-action suit 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 brokerage firms in recent years: charging consumers "admin," "processing," "ABC" and other mystery fees ranging from $150 to $500 per transaction. The fees are tacked onto regular commissions and sometimes come as last-minute surprises on settlement sheets.
Typically the charges are imposed by the brokerage company owners 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 that "it's the broker's policy — we don't get any of this money."
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For their part, brokers say they need the add-on fees to stay in business, especially when their commission splits with top agents can exceed 90 percent, 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 realty brokerage industry, U.S. District Judge Virginia Emerson Hopkins in Birmingham, Ala., ruled that when a realty firm charges clients an admin fee, for which no specific settlement services are performed, the fee violates federal law.
The case involved RealtySouth, one of the 20 major brokerage units of Minneapolis-based HomeServices of America Inc., the second- largest realty firm in the country. RealtySouth was sued by homebuyer Vicki V. 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 company 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 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 the decision. Strandmo confirmed that charging admin fees "is a very widespread practice," not only in his firm's realty offices but throughout the industry.
What should consumers do? 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."