WASHINGTON -- Does it matter whether a real estate agent charges you a flat commission rate -- say 6 percent -- or quotes you a flat rate but adds hundreds of dollars on top of that as a separate charge labeled an "admin" or administrative fee?
A top federal housing official says it might matter a lot, especially when minimal or no separate services are performed to justify extra charges beyond the regular commission.
Helen R. Kanovsky, general counsel at the Department of Housing and Urban Development, clarified the government's position on controversial add-on fees in a recent letter to industry lawyers. During the past several years, many brokerage companies began adding extra fees onto their commissions to generate higher revenues. The fees came with a variety of names -- "processing" and "ABC" among others -- and were charged to sellers and buyers, payable at closing.
But a U.S. District Court decision last year threw the industry into an uproar when a judge concluded that add-on fees violate federal law when there are no specific services performed to justify the extra cost to consumers. Though the decision directly affected only an estimated 30,000 transactions by one brokerage firm based in Alabama, the National Association of Realtors and other industry groups urged brokers and agents to re-examine their approach to pricing.
HUD, which is the agency that oversees federal consumer protections in real estate settlements across the country, never issued detailed guidance to the industry following the court decision on what's legal -- and what's not -- until Kanovsky's letter. Here's what she said, in essence: Federal law does not govern how much realty brokers can charge their customers. But it does govern how brokers and agents disclose their compensation to consumers.
Commissions may be quoted "using a flat fee, a percentage of the sales price, or a combination" of the two. The revised HUD-1 settlement sheet in use nationwide since Jan. 1 has item lines where the commission charges and splits can be listed. However, Kanovsky warned that if the total charges "exceed the amount of the commission for listing and selling the home that are reflected in the real estate broker's or agent's listing agreement," then HUD has the legal power to review the extra charge "to determine whether additional services were provided" to justify the add-on.