Are Your License and Reputation Worth a Few Hundred Dollars? Ethical Considerations for Real Estate Professionals in a Distressed Economy

In response to the economic conditions facing the real estate practice, highlighted by fewer transactions at lower sales prices, many real estate professionals have turned to charging broker administrative fees (sometimes referred to as “compliance,” “regulatory” or “transaction” fees). These fees, imposed upon the buyer, the seller, or both, range from $100 to as high as $1,000 and are charged in addition to the commission earned. A common practice in Metro Detroit involves the listing agent charging the fee to the buyer, even though the listing agent might not also represent the buyer as a dual agent. Under those circumstances administrative fees seldom represent compensation for a specific service rendered. Rather, they go to satisfy general overhead that would otherwise factor into the commission “split” between a broker and its agents.

The propriety of charging administrative fees to one or more parties to a real estate transaction has been the subject of ethical disputes and protracted litigation. Buyers and sellers have challenged these fees and the conditions under which they are imposed as being contrary to the Real Estate Settlement Procedures Act (RESPA). Under RESPA, a real estate broker may not charge a fee that is (i) unreasonably excessive in light of the services actually performed in exchange for it, or (ii) for nominal or duplicative work, or where no services are rendered at all. Specifically, section 8 of RESPA provides, among other things, “No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service … other than for services actually performed.” On this point, a ruling from a United States District Court for the Northern District of Alabama (Busby v. JRHBW Realty, Inc. d/b/a Realty South) is particularly noteworthy.

Vicki Busby purchased a home in Jefferson, Alabama on a new mortgage loan. At the closing, JRHBW Realty, Inc. charged Busby an administrative fee of $149, over and above the percentage commission. This fee was separately itemized on the HUD-1 settlement statement. After paying the fee, Busby filed a class action lawsuit alleging that the fee violated RESPA because no services were rendered to her in exchange for it, or if there were, the services were nominal and duplicative of those rendered to earn the percentage commission. After an appeal, the District Court ruled against the real estate firm, finding that no specific settlement service had been performed to earn the administrative fee it charged beyond the percentage commission.

This ruling begs the question of how a real estate broker could justify charging an administrative fee in addition to the commission earned in connection with the transaction and not violate RESPA. Resolution of this issue entails, among other things, the relationship between the broker and the party or parties paying the fee, the services being rendered, and the party to whom they are rendered. In the typical case of a listing broker charging the fee to the buyer (especially a buyer represented by another broker), and the purchase is under a new mortgage, it is difficult to avoid a RESPA violation.

Aside from the RESPA issues are secondary legal and ethical issues related to charging administrative fees. In another RESPA case, the federal government joined as a plaintiff because the listing broker described the administrative fee as being a “regulatory compliance fee” and thus giving the impression that paying the fee was mandatory under the law. Additionally, a common complaint regarding listing brokers and agents in transactions involving bank-owned (or “REO”) properties is the refusal to accept or present an offer unless the buyer agrees to pay the demanded administrative fee to that broker. This practice likely violates the Michigan Administrative Code, which requires real estate licensees to present signed purchase offers to sellers immediately upon receipt. Similarly, this practice violates most standard-form listing agreements, giving sellers a potential opportunity to sue agents unable to sell listings as a consequence.

Demanding the buyer’s agreement to pay an administrative fee approaching $1,000 as a condition of presenting the offer or consummating the sale is most prevalent in communities such as the City of Detroit, where the landscape contains an abundance of REO properties paying commissions of $1,000 or less. In most instances these nominal commissions are not sufficient to pay the broker’s overhead costs associated with maintaining the listing and closing the sale.

Ultimately, whether a broker charges administrative fees is a business decision that requires due consideration to the legal, ethical and goodwill issues presented by the situation. These are matters best reviewed with legal counsel, who can best evaluate a broker’s circumstances and offer options to avoid lost business opportunities, a damaged reputation in the community and the profession, costly litigation, or even real estate license revocation.

If you have questions regarding RESPA or other real estate matters, please contact Randy Barker, a member of Berry Moorman’s Real Estate Practice Group.