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November 18, 2017

Coming: The Transaction Fee

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Coming: The Transaction Fee

This flat “processing” charge to buyers and sellers is popular in Florida. Now it's spreading elsewhere. Brokers love it, but the fee is not without controversy.

MIAMI—It’s the latest trend in reducing broker overhead.

It’s called a transaction fee.

The majority of the large realty brokers in Florida currently charge a transaction fee, according to brokers there.

Consumers, for the most part, have accepted it, but lawyers and closing companies have criticized it. The Florida Real Estate Commission has raised concerns about whether all practitioners are doing a good job of disclosing the fee in advance.

Despite those obstacles, however, the transaction fee appears to be gaining popularity and spreading to other states.

“There's no question that there's a lot of broker interest,” says Mike Pappas, president of the Keyes Co., which has 30 offices in south and central Florida. Keyes has used a transaction fee since 1996.

Started With Top Producers

A transaction fee is a flat charge to the seller or buyer—or both—to offset the costs of processing paperwork. It’s added to the broker's commission. It’s sometimes called an administrative processing fee, a processing and handling fee, or a regulatory compliance fee and can range from a low of $100 per transaction side to a high of $395 or more, according to Florida brokers.

The fee originated among top producers receiving 100 percent of the commission. In recent years, some top producers started charging flat fees to offset certain processing costs, according to brokers. This practice by top producers is said to exist in almost every state.

About five years ago, brokers say, the practice spread in Florida from top producers to the brokerage companies themselves.

In 1993, Century 21--Allstate Realty & Investments Inc., North Miami, introduced a transaction fee in conjunction with the hiring of an attorney to coordinate closings for its 50 salespeople.

“We found that salespeople couldn't handle more than 10 to 15 deals at a time because they had to spend so much time doing follow-up on the paperwork,” says Patrick Killen, president. The attorney, who is called a transaction coordinator, improved the level of service to clients and customers while freeing up the sales associates to solicit more business, Killen says.

To recover the cost of the transaction coordinator, Killen started charging a $100 fee to both sellers and buyers.

The approach has been a success, he says. “About 98 percent of the public accepts the fee without question. Customer service has risen dramatically, and sales associates are able to handle more deals simultaneously.”

Rising Tide of Paperwork

Pappas of Keyes Co. says his company charges a fee of $110 for each transaction side. The fee is designed to offset the cost to the broker for added paperwork and document storage in connection with governmental regulations, including those dealing with flood zones, radon gas, and lead-based paint. Among other things, Florida requires brokers to keep records of all residential transactions for a minimum of five years. “We couldn't afford to absorb all those rising costs anymore,” he says.

The fee has been both accepted and understood by consumers, according to Pappas.

Coldwell Banker Residential Real Estate Inc., Southeast Florida,whose headquarters is in Weston, Fla., introduced a handling fee of $110 per transaction side earlier this year. George Corey, senior vice president, says the company was the last of the major state brokers to do so. The company has 2,000 sales associates and more than 50 offices in the five southeastern counties.

In the past, brokers depended on the appreciation of the value of housing to increase their commission revenue and to cover rising business costs. “But property values today aren’t increasing the way they did in the past,” Corey notes. Business expenses such as rent, insurance, and increased paperwork have escalated more rapidly than commission revenue.

Requesting a commission increase of 1 percentage point would have been too much of an adjustment, Corey says. A much smaller flat fee was just enough to cover rising costs without hurting the consumer. “Believe me, we’re not making a profit on a $110 fee.”

How rapidly have Florida brokers been adopting transaction fees? Pappas estimates that 18 months ago, competitors were charging transaction fees on about 20 percent of the sales in the market. Today about 60 percent to 70 percent of market transactions involve a fee, he believes.

The trend may be spreading to other states. In recent months, at least two large realty companies in the Baltimore area have started transaction fees for sellers.

Must Be Disclosed Early

A transaction fee can create problems if it isn’t properly disclosed. Jim Mitchell, attorney for the Florida Real Estate Commission, confirmed that the commission has received complaints involving salespeople who allegedly didn’t fully disclose the fees until closing.

Mitchell recently told a meeting of REALTORS® in Florida that transaction fees need to be disclosed to the parties as soon as the real estate professional starts performing service.

Florida real estate professionals who fail to make the proper disclosures could find themselves charged with “dishonest dealing,” which is a license law violation, Mitchell says.

The transaction fee is not without controversy within the broker community. Brokers such as Killen of Century 21, who earmarks transaction fees to support a transaction coordinator, complain that some brokerages are using the fee to bolster profit—without adding any extra service. “All the talk about offsetting the cost of government regulations is just a smoke screen,” says Killen. “If they need more money, all they have to do is negotiate with the client and ask for a higher commission.”

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