New broker fees anger clients and their agents

Nation's housing

April 07, 2002|By KENNETH HARNEY

ALREADY unpopular with consumers and under legal scrutiny by federal investigators, so-called "transaction fees" by real estate brokers are attracting an even tougher set of critics: sales agents themselves.

Transaction fees - also known as "administration" or "regulatory compliance" fees - have been introduced by many brokerages during the past 18 months. Often ranging from $250 to $595, they are surcharges to homebuyers and sellers on top of the regular 6 percent or 7 percent sales commissions.

Large brokerages say the add-on fees are necessary to pay for costly investments in new technology and to counter shrinking profit margins.

Some admit that they are primarily intended to compensate brokers for the steadily larger commission splits firms must pay to keep their top-producing agents.

Whereas brokers once split commissions 50-50 with most sales agents, during the 1990s the splits with top agents hit 80 percent or even higher.

Like elite professional athletes, high-volume agents - who legally are independent contractors - have been free to follow the money, switching from one brokerage firm to another, based on the size of commission splits.

For example, a $400,000 home sold at a 6 percent commission will generate $24,000 in gross commissions for the realty agents involved. Assuming that agents representing different brokerage firms listed and sold the property, the splits might go as follows:

Three percent of the selling price - $12,000 - goes to the listing firm. If the listing agent is under a 50-50 split arrangement with the firm's licensed broker, the agent gets half of the $12,000 - $6,000 - and the broker also takes $6,000.

However, if the listing agent is a star performer and gets an 80-20 split, then the broker ends up with $2,400 and the agent takes $9,600.

The same split scenario would hold for the selling agent. Stars increasingly demand and get the lion's share of the commission dollar, while their brokers end up with less.

`Squeezed hard'

Stephen H. Murray, a Denver real estate brokerage consultant and co-editor of Real Trends, an industry publication, says brokers indeed "have been getting squeezed hard" by commission splits, Internet-related marketing investments and other rising costs.

His firm has conducted studies documenting the biggest brokers' declining profit margins - down to 3.5 percent of annual revenue in the latest survey.

To counter the profit pinch, dozens of firms have switched to transaction-fee compensation approaches. The fees vary widely, even among the branch offices of individual firms.

For instance, a company might levy a $150 or $250 fee on top of commissions on all listings at one office, requiring the home sellers to pay them at closing. In other offices, the same firm might impose $150 each on the seller and the buyer.

In virtually all brokerages imposing extra transaction fees, the money flows directly to headquarters. But the burden of presenting the fees to sellers and buyers falls on the shoulders of the broker's affiliated sales agents.

That, in turn, has sometimes produced sharp resentment by the sales agents themselves.

"I'm embarrassed at a listing presentation to have to tell the owner of a $500,000 house that my firm also wants an extra fee on top of the commission," said a sales agent who works with one of the country's largest independent realty firms.

"So I don't even bring it up. I pay for it myself," rather than lose the listing to a competing broker who doesn't quote add-on fees.

Imposition of transaction fees has produced mini-exoduses of sales agents at some firms.

In the suburbs north of New York City, for example, one prominent firm lost agents responsible for $400,000 in annual commission revenues when headquarters insisted that all sales agents collect $150 each from sellers and buyers.

`Lost some of our best'

Matt Williams, a broker who ran one office for that firm, said "we lost some of our best people" when the fees were mandated.

"They [the agents] just wouldn't stand for it," said Williams, now a broker for Realty Executives in East Fishkill, N.Y. "They said, `How can we possibly explain to our customers that a 6 percent commission isn't enough?'"

His former company, which he requested not be identified, took in $20,000 in add-on fees during the year but lost $400,000 in commissions because of the flight of agents - a net loss of $380,000.

What are your options as a seller or buyer? Do you have to pay transaction fees? Not necessarily. Everything in real estate is negotiable.

When you're already paying thousands in commissions, demand that the transaction fee disappear. And it probably will - unless you agreed in writing up front to pay it.

Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071. Or e-mail him at kenharney@aol.com.

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