Paul J. Harrington – Rejected fees

Most homebuyers and sellers are accustomed to the standard commissions that have been charged by real estate firms for years. Nowadays, more and more firms are also charging extra fees on top of the standard commission.

But the practice of adding these fees – sometimes referred to as transaction or process and handling fees – has drawn the attention of and elicited concern from at least one leader of the nation’s top industry group.

The concern arises because of a federal agency’s interpretation of a section of the Real Estate Settlements Procedures Act. The U.S. Department of Housing and Urban Development issued a policy statement last fall saying that the law prohibits fees or charges for which nominal or no work was performed or fees that exceed the reasonable value of services provided.

Realtors fear that could be construed as applying to the add-on fees that firms are increasingly imposing on clients and may be viewed as unearned fees.

The National Association of Realtors does not agree with HUD’s interpretation, according to Laurie Janik, general counsel for the organization. NAR leaders have started meeting with HUD officials to erase any ambiguities and concerns that may arise.

Janik said she has talked with brokers who have expressed concern in the wake of HUD’s policy announcement.

While NAR has not collected information or conducted any formal studies to determine how many firms across the county are currently charging these types of fees, anecdotal information suggests that more and more companies are sliding these additional fees into buyer and seller settlement agreements.

I would not say it’s rare, said Janik, referring to companies that use add-on fees. I would say it’s fairly commonplace.

NAR did an informal survey of members inquiring about extra service fees to prepare for meetings with HUD officials, but Janik could not provide the results last week.

Realtors interviewed by Banker & Tradesman said the practice of charging transaction fees in addition to commissions is not very common in Massachusetts.

The Massachusetts Association of Realtors does not keep track of how many firms charge such fees. Since it’s viewed as an individual business decision, MAR does not monitor or try to influence the practice, according to the group’s spokesman.

Ralph Miller, president of The Realty Guild, which is a network of Bay State independent real estate offices, said he has not noticed many independent real estate companies in this state tacking on transaction fees. But Miller, the broker/owner of Hughes & Hughes Real Estate Co. in Natick, said he has heard of some bigger firms in other parts of the country, including New York, engaging in the practice.

If it’s happening, it’s not happening among the independents, he said.

Companies often charge the fees to compensate for added costs associated with paperwork and regulatory compliance, explained Paul J. Harrington, president of Lexington-based The DeWolfe Cos.

The fees can range anywhere from $150 to $300, he said.

‘Moot Issue’
Officials at DeWolfe examined the possibility of using add-on fees at one time, but after a thorough analysis decided against it.

DeWolfe’s analysis showed that there wasn’t a direct correlation between the company’s hard costs associated with regulatory compliance and the like to make the argument that the fees would be paying for those expenses.

We felt we couldn’t justify charging an additional fee of any significance and calling it a regulatory compliance fee, said Harrington.

Also, DeWolfe leaders didn’t think it was a good idea to charge extra fees in light of rising home prices and because homebuyers are already struggling to pay for closing costs and down payments, said Harrington.

It became more of a moot issue, he said.

In some states, including Connecticut, regulators have questioned companies because of the labels they’ve been attaching to these add-on fees, said Harrington.

Regulators have determined in some cases that the fees might have been deceptively labeled, misleading consumers into believing that the extra charges were government-related or mandated when they weren’t.

Nelson Zide, who is part owner of ERA Key Realty Services with offices in seven Bay State communities, said the concept is fairly new in Massachusetts. But like Miller, Zide said companies in other states – including Florida and California – have been charging transaction fees for some time now.

Some Realtors even advocate for the extra fees, he said.

It [the extra fees] has to do with the increased cost of doing business, explained Zide, whose ERA offices are located in Framingham, Hopkinton, Milford, Franklin, Whitinsville, Oxford and Spencer.

Today, Realtors face much more paperwork, regulation and educational requirements – all of which mean added expenses, he said. Firms pass the cost onto buyers and sellers through transaction fees, instead of increasing commissions, said Zide, who added that he has considered applying add-on fees, but never has.

But Massachusetts firms may not be as heavily regulated as in other states, said Zide, and therefore they haven’t been as quick to embrace such fees.

Carolyn Chodat, owner of Classic Properties in Medway, said her company does not charge clients extra fees. However, she said some entrepreneurial brokers might be tempted to combine the standard percentage commission they charge with other fees. They may look at real estate agents, for example, who don’t collect commissions but instead charge flat fees or charge for services they provide and wonder whether they can do both – charge a commission and fees for services.

They may look at that and say, Why don’t we dovetail these two? said Chodat.

Mounting pressure to reduce commissions may be at the crux of the extra fees, she explained. If the broker decides to drop the commission that the real estate company typically charges, the broker may be trying to recoup the lost money with added fees.

Chodat said Realtors may need more ethical and legal guidance on blending traditional commission with extra service fees and hopes NAR comes out with a formal policy on that issue.

I would like to see NAR state [its] policy position for … brokers who are trying to blend additional fees with traditional commissions, said Chodat.