Around the country a growing number of real estate brokers are now seeking commissions for their work as well as something new, administrative fees that sometimes total hundreds of dollars.
Brokers who charge such fees make several points:
- Brokerage has become increasingly complex and costly over time.
- There is vastly more paperwork and liability than in the past.
- Brokers should be compensated for an array of new expenses including such items as computers, web sites, and digital cameras.
Besides, they say, everyone seeks more compensation, so why not brokers and salespeople?
While it's true that the cost of being in business has increased, it's equally true that home values have risen. As a result brokerage fees have generally gone up as well.
For example, according to the National Association of Home Builders, a typical residence sold for $89,500 in 1989 while the median existing home price reached $133,300 in 1999. If commissions remained steady, say 6 percent, then brokerage fees increased from $5,370 to $7,998 in a typical transaction.
Rather than raise prices directly, administrative fees allow brokers to increase income indirectly, a common practice in many fields. Lenders, for example, have "junk" fees that mysteriously show up at closings, and car dealers are famous for their add-ons, ups, and extras. So rather than raising commissions, one way for brokers to generate more income is to bury extra costs elsewhere in the deal.
While brokerage fees have ordinarily risen with home prices, administrative fees have a regressive impact. That is, if Broker Smith charges a $200 administrative fee for all transactions, the cost is relatively higher for a $100,000 home than one priced at $300,000.
Not all regulators are thrilled with administrative fees (or as they're sometimes known, "regulatory compliance" fees or "compliance" charges).
In Arizona, for instance, such charges are not allowed. The state's Department of Real Estate explains its position this way:
Are you charging your clients "transaction fees" to offset the cost of preparing paperwork generated by a real estate transaction? If so, you're violating the law.
Article XXVI of the Arizona Constitution gives real estate licensees the power "when acting in such capacity as broker or salesperson for the parties, or agent for one of the parties to a sale, exchange, trade, or the renting and leasing of property . . . the right to draft, or fill out and complete, without charge, any and all instruments incident thereto . . ."
If you are charging clients "transaction fees," stop. The Department considers this a serious violation of a licensee's constitutional privilege. You may, however, increase the amount of commission you charge your clients to offset the cost of paperwork preparation.
The catch is that brokers cannot readily raise percentage fees. Such charges are highly visible and in a marketplace teeming with competitors, the one sure way to lose business is to charge more.
But are there cases where fees and commissions make sense?
If consistent with state rules, brokers who offer a menu-of-services are likely to have both fees for some services and percentage commissions for others. Consumers might well choose several services and thus several payment formats.
Or, brokers might trade less risk for a lower potential commission.
This could be done by having a non-refundable fee up-front which is a credit against a below-market commission. In this instance, the broker is assured that some costs will be covered even if a home does not sell, while the owner knows that if there is a sale the final cost will be lower than might otherwise be the case. In effect, such arrangements create a retainer.
Buyers and sellers care about the bottom line and one thing is certain: Brokers with lower overall costs will surely mention that fact when seeking business. As a result, administrative fees as an add-on cost are unlikley to become commonplace.
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Question Of The Week
Q We want to ban smoking in the single-family homes we rent because we think it's a fire hazard and unhealthy. Can we do this?
A Is a tenant smoking ban allowed in your jurisdiction? If allowed, how do you enforce it without violating the tenant's right to privacy? What if a guest smokes on the property -- do you toss out the tenant?
As to whether smoking is unhealthy, that's hardly a debatable issue. What is debatable is whether landlords can establish personal health standards for tenants. Can a landlord rent only to non-smoking vegetarians? Non-drinkers? Tri-athletes?
Seen the other way, can an owner who smokes require tenants to also smoke?
Ask a local attorney if a tenant smoking ban is lawful in your jurisdiction -- there are smoker's groups which have lobbied against various smoking bans. Whether yes or no, be sure to supply the property with multiple smoke detectors and a fire extinguisher.
Weekly Resource
How much can you borrow with FHA financing in your community? Given the ever-greater complexity of the program, it's always best to check the FHA Loan Limit page.
Administrative Fees Spark Debate 
