HUD clarifies the application of realty add-on fees

Real Estate Agent with HomeSmart Realty West BRE #01786169

I just read an article in The Washington Post which reminded me of a conversation I had with some agents in my office about a month ago. I know we have all been seeing extra fees popping up in Shortsales. 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 labeled an "admin" or administrative fee?

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 fees onto their commissions to generate higher revenue. 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 Judge’s decision last year threw the industry into an uproar when he concluded that add-on fees violate federal law when there are no specific services performed to justify the extra cost. This forced the National Association of Realtors and other industry groups to urge brokers and agents to reexamine their approach to pricing.

HUD 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 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.

Buyers should ask about all compensation and fees in any transaction. If you're asked to pay fees you've never heard of, or that come with vague justifications, don't roll over. Just say no.

Comments (2)

Edward & Celia Maddox
The Celtic Connection Realty - Queen Creek, AZ

Thanks for posting. We learn a lot from Active Rain blogs. Best Regards,

Mar 23, 2010 03:14 AM
Tony and Suzanne Marriott, Associate Brokers
Serving the Greater Phoenix and Scottsdale Metropolitan Area - Scottsdale, AZ
Haven Express @ Keller Williams Arizona Realty

If you have to ask whether or not it should be disclosed, it's always wiser to disclose.  That avoids any issues after the fact.

Jul 19, 2010 12:00 PM

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