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ARE YOUR REAL ESTATE BROKER's CHARGES LEGAL?

Real estate brokers charge fees for their services. That seems only fair.

Traditionally, commissions are based on an agreed percentage of a property's sale price. More recently, some brokers have adopted flat fee commission protocols.

Over the last several years, a growing number of local real estate brokers have begun to add fixed administrative brokerage charges to their sale-price based commissions. The admin charge is supposed to cover office overhead or related expenses. The fee amounts seem to vary from office to office. To the best of my knowledge and understanding, they are not shared with sales agents, but are retained by the office.

A recent court decision handed down by a Federal District Court in Alabama, Busby v. JRHBW Realty, calls the legality of such fees into question.

The 11th Federal Circuit has ruled that such charges violate the Real Estate Settlement Practices Act because the brokerages that impose the fees do not provide any additional services to the consumers who are being asked to pay them; they are unearned fees.

Does that make local broker admin charge RESPA compliant?

We here in Chicago are part of the 7th Federal Circuit, not the 11th. The two have historically had very different view of the RESPA regulations and there are some conflicts in their respective interpretations of the law. But the 7th Circuit has not yet made any pronouncements on these issues, so we might not have a clear answer any time soon.

Contact me for a review and recommendation or let me know if you have any questions about this issue.

(hat tip on this post to Los Angeles attorney Sherwin Root)

UPDATED: 7/21/09: more on this story here.

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