Appraisals, Commissions and Fees... Oh My! - For What It's Worth - Comcast.net Finance

If you've ever bought a home and found it remarkable that the property appraised for just the amount it was listed for, there may have been more than coincidence behind the matching numbers. Loan officers learn quickly which appraisers are generous in the valuations and which appraisers are vulnerable to pressure from a lender.

Now, the government has stepped in with a new set of regulations designed to end collusion of any sort between lenders and appraisers.

Some people believe a big part of the mortgage mess we're in was caused by inflated home appraisals. Mortgage brokers and banks have been accused of pressuring appraisers to assign valuations to fit the loan so that home purchases and refinancing applications would go through, rather than allowing appraisers to determine a property's value independently, free of influence from lenders and real-estate agents.

No more. New federal regulations known as the "Home Valuation Code of Conduct" (HVCC) take effect May 1, 2009. And while they are designed to bring transparency to the home-loan process, they also may end up increasing consumers’ costs for an appraisal.

Silence Is Golden

These HVCC rules require that mortgage lenders and banks refrain from communicating with appraisers on any loans that eventually will be sold to Fannie Mae and Freddie Mac. Fannie and Freddie, as you may know, are corporations chartered by the U.S. government to purchase mortgages and keep a stable supply of money available to lenders for home loans. They are huge -- Freddie Mac purchased one loan every 10 seconds in 2006 -- so the new rules surely will impact many home loans. Fannie and Freddie have each come out with statements about the HVCC rules.

So who will take over the role of assigning an appraiser to evaluate a home? A third-party -- an appraisal-management company -- will handle this task... for a fee, of course. It is this part of the HVCC that has appraisers more than a little upset, and some industry professionals believe many experienced appraisers will leave the business. I suspect the cost of appraisals will increase to compensate the appraisal-management companies, one more way the fees associated with buying a home will rise for consumers.

For more information about the HVCC, check out this document from the Washington, D.C.-based Appraisal Institute.

The Skinny on Agent Commissions

Speaking of real estate and fees, one of the most interesting bits of information I have learned in my current marketing role at a real-estate brokerage concerns how commission works and... this may come as a surprise, how little money many agents receive from a transaction.

As anyone who has sold a home knows all too painfully, the commission, which usually adds up to thousands of dollars, is paid by the home seller. It is usually a percentage of the final sales price on the property, and the amount is split between the agent representing the seller and the agent assisting the buyer.

The split between the two agents usually is 50/50, though not always. Some agents will offer a higher commission to "the buy side" as an incentive to encourage agents to show the house (commission to the buy side is shown in the multiple listing information for a property.)

Likewise, some agents will shortchange the buy side because they need to bring a certain percentage commission -- say 3% -- to their brokerage. If they have listed the property at 5% commission and split the commission 50/50, or 2.5% to each side, they may have to make up the half percent out of pocket, which is why they may keep 3% for themselves and offer 2% to the buyer agent. The brokerage I work for has a policy stating that all commission must be split 50/50 between agents.

Not the Payoff You'd Expect

Before I worked for a real-estate company, I thought agents collected and kept most of the commission from a transaction. I didn't realize that they share a large part of their commission with their brokerage office; that they pay most, if not all, of their marketing expenses; and that there are various recurring fees they must pay monthly and annually. In sum, an agent's earnings don’t add up as quickly as you might think.

Here’s an example based on the sale of a $300,000 home with a 6% commission and an agent who splits his or her earnings with the brokerage on a 60/40 split:

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* most offices have some version of this; my company has a 6% royalty fee
** photography, sales brochures, signage, print ads, online listing fees, direct mail, open house catering, etc. (varies by listing)

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That $4,076 is a nice paycheck but a far cry from the $18,000 the seller paid. Remember, too, like everyone else, real-estate agents pay income tax, so that will cut into the total takeaway as well. If this listing required many showings, was on the market for an extended time or required extensive negotiation to bring it to settlement, you can see that an agent's hourly wages could diminish significantly.

Commission Is Negotiable

Finally, if there's one thing to remember from this column, it's that the commission rate is negotiable. Repeat after me: Real-estate commission rates are negotiable.

Whether or not an agent will agree to list your house for less than the usual commission rate of course depends on a variety of factors. They range from the perceived difficulty in finding a buyer (not surprisingly, commission rates hold up pretty well in a buyer's market such as the one occurring now in most of the U.S.) to what competing firms in the local market charge to whether the sales manager or company owner will chew them out if they accept a reduced commission. And some agents are so busy that they simply refuse listings if the seller won't pay full commission.

-- Valerie Patterson oversees all online and print marketing efforts at Kurfiss Sotheby's International Realty, a privately-owned real-estate firm based in the Philadelphia area. Prior to joining Kurfiss, she was the producer of The Wall Street Journal's free real-estate site, RealEstateJournal.com.

Do you think agents are paid too much in commission? Will you negotiate commission the next time you list a house?

Message Edited by Val_A_Patterson on 05-01-2009 01:53 PM