July 11, 2008 at 8:00 AM ET
Traditionally, buying a home has been "free," at least with regard to real estate agents. Sellers pay steep commissions -- usually around 6 percent – which are split with the shoppers’ agent. That allows home buyers to focus their energy on hunting for hidden fees from their mortgage provider.
But a disturbing trend that has emerged recently threatens this tidy arrangement. Some buyers' agents are now slipping junk fees into their contracts. Usually labeled "administrative fees," they range from $195 to $500. While their legality is in dispute, they have become commonplace. Virginia real estate broker Frank Llosa, who exposes real estate agent tricks on his blog "FranklyRealty," says perhaps 40 percent of buyer contracts now have administrative fees tucked inside.
"I don't think it’s right," Llosa says. "I don't believe in administrative fees and I don't think any buyer should pay them."
These new junk fees are even more disturbing when they are not properly disclosed. Many buyers work with agents on a fairly informal basis and only sign an agency agreement when making an offer on a house. Then, they sign dozens of forms, making an agency contract with an administrative fee easy to miss – particularly since most have the expectation that the agent is working for free for them.
Sometimes the fees aren't disclosed until closing day. They don’t appear on the Good Faith Estimates provided by banks when pricing mortgages, for example. Instead, buyers’ agent fees first appear on the complex HUD-1 settlement form given to both parties at the closing table. At that point, it's difficult for a buyer to stop the proceedings and argue about the fee. That's why it's always best to ask for a preliminary HUD-1 draft estimate, which is often available 48 to 72 hours before closing.
The fees began appearing about five years ago, Llosa said. But now, say other experts, they seem to be in vogue as brokers struggle to stay afloat during the housing market bust. He said a few real estate brokerage firms are trying to attract talented agents by promising that deals will include administrative fees that they can keep.
When compared to the purchase of a $250,000 home, which could generate a $15,000 commission, a $250 junk administrative fee might seem trivial. But by the time agents split commissions with each other and their brokerage agency, commission checks could be whittled down to $3,000 to $4,000, so $250 is a sizable tack-on.
That doesn't mean you should pay it. Many buyers have simply refused to pay it, crossing it off the agency agreement, said New York-based real estate attorney Jeff Arouh.
"A sophisticated buyer may say, 'I'm not going to pay that fee,'” he said. But if the issue is unresolved until closing day, that's another matter, he said. “You might get angry, but are you going to lose a deal because of $250”
Against the law?
There is another critical question to be answered about administrative fees: Are they legal? A buyer named Vicki Busby, of Alabama, is suing her real estate agency over a $149 administrative fee she was forced to pay, and seeking class action status for the case. Believe it or not, there are laws against unfair fees.
The Real Estate Settlement Practices Act of 1974, which governs home purchases, includes provisions designed to prevent junk fees. Silly as it may sound, the law dictates that fees can only be collected for services actually provided. That means junk fees levied simply for the heck of it are not allowed.
When challenged, some real estate agents argue that administrative fees are office-related charges -- document preparation, and the like – that traditionally have been covered by the sizable commission checks. But Arouh said agents may be able to stay on the right side of the law if they simply itemize their services in a way that links the administrative fee to a particular service, such as assistance in mortgage application preparation.
He also said that's splitting hairs.
"The services of a real estate broker are those of a professional, and they agree to be compensated for providing a bundle of services and that bundle is reflected in commissions," he said. "I think administrative fees are inappropriate, but that’s my opinion. I come from the school of thought that if you are a professional you deal with (consumers) as a professional and you don't nickel and dime them."
That school, apparently, is suffering from severely reduced enrollment at the moment.
RED TAPE WRESTLING TIPS
• It's nice to go shopping with an agent without having a signed agreement, as that keeps you a free agent. But when the time comes to make an offer on a property, don't just gloss over the agency agreement because your agent now seems like a friend. Look specifically for the words "administrative fee." If you find them, refuse to pay it. No agent will lose a deal over the administrative fee.
• If you feel the agent was deceptive in communicating the fee to you -- you have the sense that her or she tried to sneak it by you while signing other papers, for example -- give that some thought. If your agent operates with that m/o, what else might he or she hide from you? Consider changing agents.
• Get a preliminary HUD-1 form as early as possible, and look for the words "administrative fee." If you see it before you get to the closing table, you'll have a much easier time fighting it.
• Remember, no matter whose relative the agent is, he or she has a strong incentive to persuade you to buy something -- anything. Agents make money by closing deals, period. So maintain an arm’s-length relationship.