Real-Estate Junk Fees Make Home Buying, Housing Market More Expensive
A typical home sale involves two main parties: the buyer and the seller. But there are plenty of others who stand to benefit on closing day: agents who brokered the deal, the title company, attorneys, appraisers, mortgage lenders. Sign on the dotted line, and a whole bunch of people get paid.
Most of these entities make their money off fees, some of which are straightforward — such as the inspector who gets paid to make sure the roof isn't leaking — and others that are more opaque, like title insurance. But there's one vague, under-the-radar fee that brokerages have more recently injected into the homebuying process. The fee goes by many names: an administrative fee, a transaction fee, or even a "regulatory compliance" fee. When it pops up on a closing statement, the charges can range from a few hundred dollars to nearly $1,000. And it doesn't matter whether you're a buyer or seller — your agent might end up passing you the bill. Ostensibly, real-estate brokerages use this flat fee to cover the costs of processing paperwork, meeting regulatory requirements, and handling all the other little details associated with shepherding a deal to the finish line. But there's little transparency, as well as plenty of room for abuse.
The admin fee, as it's most commonly known, has divided the real-estate industry and stoked fury among consumer advocates. Proponents say the fee, which is added on top of the commissions that buyers and sellers already pay their agents, helps brokerages keep the lights on. Detractors call it a blatant cash grab, or worse.
"It gets called so many different things," Amelia Robinette, a broker in northern Virginia, told me. "It should just be called a bullshit fee."
Despite the controversy, all signs indicate that brokerages large and small have increasingly embraced the admin fee in recent years. It's hard to get a firm grasp on just how widespread it is since settlement statements aren't public record. But experienced agents across the country told me that they'd seen the fee grow more common — and costly. In a statement to Insider, the National Association of Realtors acknowledged that "many real estate brokerages charge an administrative fee to help offset costs."
At a time when the NAR and the largest real-estate brokerages in the US are already facing multibillion-dollar class-action lawsuits over the commissions their agents charge, the rise of the admin fee hardly aids their case. The fee also raises a broader question of just how many additional costs buyers and sellers should have to bear, especially since home prices have increased by more than 40% over the past three years and agents already claim about 5% of the sale price in a typical transaction, according to the real-estate-data company RealTrends.
"It just has to be looked at as a junk fee," Stephen Brobeck, a senior fellow at the Consumer Federation of America, told me. "They can get away with it, so they charge it."
How brokerages make their money
When you enlist a real-estate agent to help you buy or sell a home, one of the first things you'll want to ask them is how they get paid. The vast majority of real-estate agents are independent contractors who rely on commissions to earn a living. In the US, those commissions typically amount to between 5% and 6% of the sale price of the home, split between the buyer's and seller's agents.
Agents don't usually get to take home all of that commission, since most are affiliated with a brokerage that also gets a slice. Brokerages can offer all kinds of services to agents — marketing, mentorship, office space, transaction coordinators — to help them close more deals. But the main thing brokerages provide are the back-end operations and legal protections that ensure everything is done by the book. In exchange for the help, agents cut the brokerage in on their revenue. Brokerages split money with their agents in a variety of ways. One might take a percentage of each commission, another might just charge agents a flat "desk fee" each month, and others might tack on a flat fee per transaction that comes out of the agent's pocket. Regardless of how the money is exchanged, the business between brokerages and their agents typically happens out of sight from buyers and sellers, who have plenty of other things to worry about. But the admin fee is different.
"It gets called so many different things. It should just be called a bullshit fee."
Unlike commissions, which mostly go to the agent, the proceeds from the admin fee go straight to the brokerage. The fee shows up in plain black and white on closing papers, though it can easily get lost among all the other charges that litter those documents. The various, official-sounding names for the fee add to the confusion. In one agreement I reviewed, a brokerage in North Carolina calls it a "regulatory compliance cost," while other agents told me it could be listed as a "transaction," "broker," or "technology" fee. Brokerages may justify the fee in any number of ways, telling clients that it goes toward the costs of storing documents, maintaining staff to process paperwork, insurance, legal reviews, or other expenses that can basically be summed up as overhead costs.
The idea of admin fees has been around for a while, but agents told me they saw them become more popular around the global financial crisis, when brokerages were struggling to stay afloat in the wake of the housing bust. More recently, agents told me, some brokerages have been letting agents keep bigger portions of their commission checks — even as much as 100% — to lure them to their teams. These sweetheart deals come with the caveat that they charge clients an admin fee per transaction, essentially shifting the broker's revenue stream from the agent directly to the client.
"Brokerages have to be so competitive to recruit agents that a lot of them will give up a big chunk of that commission," Bryan Clapper, a broker in the Minneapolis-St. Paul area who doesn't charge the fee, told me.
The size of the fee runs the gamut, though it typically ranges between $250 and $500, Brobeck told me. An agent in Las Vegas who recently switched brokerage firms and requested anonymity to talk about their fee structures told me he interviewed with seven brokerages when he was making the change. All charged an admin fee, usually between $400 and $600. Agents who feel uneasy about the fee — of which there are many — can choose to just pay it out of their own pocket instead and may never even mention it to their client. Either way, the brokerage is getting the money and padding its profits in the process.
"Essentially, we're just fronting the cost for them to recruit agents," Wendy Gilch, a consumer advocate, podcast host, and the founder of Selling Later Search, told me.
The problem with admin fees
Buyers already shoulder a litany of add-on charges when they purchase a home. Closing costs for a single-family home in 2021 averaged $6,905 on top of the price of the house, a 13.4% increase from the year prior, according to ClosingCorp, a real-estate-data provider. In that context, it's easy to see how a $500 admin fee might slip through the cracks. But as the cost of a home continues to rise, buyers must scrounge together increasingly large sums of cash to cover their down payment and closing costs, which typically come straight out of their pockets. Sellers also face closing costs of their own.
Admin fees may be one of the most polarizing topics among real-estate agents today. On Reddit threads and other forums, many agents lament what they see as shameless price gouging. When Robinette worked with a brokerage that charged an admin fee, she opted to eat the cost herself, she told me. Now that she runs her own firm, she's a vocal opponent of what she calls a "junk fee."
"Certainly they go toward the bottom line of any brokerage," Robinette told me. "But it's just gravy. It's all about increasing the profit."
The agent I spoke with in Las Vegas said his brokerage allowed him to keep 100% of his commission and charged a roughly $600 admin fee per transaction. He told me he'd be happy if the fee "went away completely" but said it'd become almost standard in the industry. The size of the fees had only grown, the agent said, since buying activity plummeted from the heady days earlier in the pandemic.
"Everybody has this idea of, 'Oh, real-estate brokerages, they're swimming in cash,'" the agent told me. "Well most of them aren't, and a lot of them are going under, especially now that the market's slowed."
A forthcoming agent will disclose any admin fee right at the beginning of the process. Often a buyer or a seller will sign an agreement with their agent that outlines the fees they can expect to pay — when they list their house, for example, or before they make their first offer on one. But that doesn't always happen, and the legal requirements can vary from state to state. Sometimes clients simply don't read through the documents they're signing. Naturally, that can lead to surprises in the final days before closing.
It's just gravy. It's all about increasing the profit.
"The biggest thing is just disclosing it, explaining what it is, and then going on from there," Tucker May, a broker in the Houston area who's affiliated with The Heyl Group at Keller Williams, told me. May, whose firm charges an admin fee that can range from $495 to $695, said the fees had generated more conversations since home prices took off earlier in the pandemic.
"If a client is in a scenario where they're not going to be able to have the cash to close if they pay this fee, then I don't charge it," May told me. "It's negotiable. It's not a set amount. It's really whatever we're able to agree to."
Technically, as the NAR also said in a statement to Insider, there's always room for negotiation when it comes to agent compensation. There's no law that says you need to pay an admin fee, and you can refuse to pay it or take your business to another agent. But in practice, it might be tough for a client to walk away from their agent, particularly if the agent has access to desirable listings or has already guided them through a significant portion of the process. Several agents, like May, told me they're fine covering the fee themselves or lobbying their brokerage to waive it if their client raises an issue. Doing so might not be a big deal for a well-established agent who's consistently closing deals. But newer agents, who earn a median gross income of just $8,800, might be more motivated to just pass it along to clients.
"I'm in a place in my business right now where I can justify paying that," the Las Vegas agent told me. "But I know other agents who are single moms and scraping by."
Previous lawsuits have challenged the legality of admin fees. In 2009, a US district judge in Alabama ruled against a brokerage in a class-action lawsuit there, finding that the firm hadn't performed any specific services that warranted an additional charge on top of the commission. But that ruling was limited in scope, directly affecting only about 30,000 transactions involving that single brokerage firm. And it appears to have done little to hamper the spread of admin fees in the years since, as brokerages have tried to do a better job justifying their fees. Perhaps with that case in mind, the NAR told me in a statement: "It's important that brokers tie the fees to actual services rendered and costs incurred, and disclose that to sellers and buyers."
But Brobeck said brokerages often didn't adequately explain the fee to consumers, adding that buyers and sellers should always question the additional charge.
"It should be challenged by anyone," Brobeck told me. "Any homebuyer or -seller that is asked to pay this fee, they should ask their agent, 'Why isn't the 5% or 6% commission sufficient to cover all your costs?'"
The larger issue at stake in real estate
The debate over admin fees has taken on added urgency now that Americans are being squeezed by higher home prices and broader inflation. Mortgage rates have more than doubled since the end of 2021, and 77% of homeowners said they had to pay for an unexpected repair in the first year of owning their home, with the majority shelling out more than $1,000 for the fix, a survey from the insurance firm Hippo found. At the same time, agents and brokerages may be more incentivized to try and squeeze clients for revenue. A slowdown in transaction activity has forced a reckoning among agents and brokerages as the boom times from earlier in the pandemic fade into memory. Just as in the aftermath of the housing crash in 2008, brokerages may be more motivated to find more ways to make a profit.
The problem is, it's not nickel-and-diming. We're talking here about hundreds of dollars in every single case.
"Junk fees" in real estate aren't the only charges that have drawn heightened scrutiny since the pandemic started. President Joe Biden called on Congress earlier this year to pass the Junk Fee Prevention Act, which would crack down on hidden or unexpected fees associated with hotels, concerts, airline travel, and phone service, among other industries. A statement from the White House said eliminating such fees would save consumers billions of dollars each year. The plan makes no mention of real-estate services, but Biden's administration has already signaled it has its eyes on the industry. Early in his tenure, the Justice Department attempted to reopen an antitrust investigation against the NAR over agent commissions, though a federal judge ruled earlier this year that the department must honor a previous settlement reached in November 2020.
Compared with the tens or hundreds of thousands of dollars that you may fork over to buy a home, a relatively tiny fee might not seem worth the trouble. But it's a battle worth fighting, Brobeck told me.
"The problem is, it's not nickel-and-diming," Brobeck said. "We're talking here about hundreds of dollars in every single case."
James Rodriguez is a senior reporter for Insider.
Source: Business Insider
