Wall Street Journal on PTF: “New-Home Buyers: Be Aware of Transfer Fee”

 By JENNIFER WATERS             (See CRE comments on WSJ website below)

AM  October 31, 2010

If you’re in the market for a newly built home, be on the lookout for a controversial cost called a private transfer fee. It has gotten the attention of Congress and could change how homeowners value their homes.

A private transfer fee, which is also known as a home-resale, capital-recovery or flip fee, is typically 1% of the sales price that a developer or a homeowners association collects at the time of a sale. It generally is directed toward capital improvements in a subdivision or condominium complex and is paid to a homeowners association.

But a growing number of developers are starting to charge a type of private transfer fee to cover the upfront costs of building streets and infrastructure in large residential developments. The fee, devised by Freehold Capital Partners, a New York-based real-estate consulting firm, kicks in every time a property sells, generally over a 99-year period.

Where Should the Money Go?

At issue now is whether such a fee, or pieces of it, should go anywhere but toward the property it’s tied to. Lawmakers and opponents like the National Association of Realtors and the American Land Title Association, claim that it’s a scheme to line the pockets of developers and Freehold. About 18 states outlaw the fees and a bill introduced in Congress in late September calls for prohibiting private-transfer fees that go to third parties unaffiliated with the property.

The Federal Housing Finance Agency is reviewing more than 4,000 comments on a proposal to ban Fannie Mae, Freddie Mac and the Federal Home Loan Banks from investing in mortgages on properties subject to these fees even if the money is directed to homeowners associations for capital costs and upkeep. The agency believes the fees will drain liquidity out of home values and will cloud an already-complicated title process.

“The risks and uncertainties for the housing market that come with the use of private transfer-fee covenants do not appear to be counterbalanced by sufficient positive effects,” says Edward DeMarco, FHFA’s acting director.

On a $250,000 home, the transfer fee would be $2,500. According to the Freehold plan, the biggest chunk of that revenue, at 50% to 70%, would go to the developer and a community nonprofit gets an automatic 5%.

A bevy of third-party agents would get a piece of the fee, too: 3% to the trustee who collects the fee from the title company and distributes it; 2% to the title company (though some states don’t allow title companies to collect such compensation); and 10% to 17% to the brokers who find the developers and set up the covenants, most of whom are Freehold agents now.

Freehold, which is doing the paperwork on the covenant and doesn’t charge any fees, would get the balance of the fee — about 5% to 30%, depending on the size of the project.

Critics argue that the costs to pave roads and install sewers should be figured into a newly built residential development project to begin with and that any moves to collect fees for such a long period of time are predatory.

“If a developer can’t pay for those things upfront, then he shouldn’t be doing the project,” says Armando Montelongo, a real-estate investor and president of Armando Montelongo Cos., a real-estate investment seminar company, and co-host of the cable show “Flip this House.”

The Coalition to Stop Wall Street Home Resale Fees, a group of Realtors, real-estate investors, housing alliances and consumer advocates, backs the FHFA’s proposal, charging that fees paid to third parties “lower a home’s equity, depress home prices and complicate the safe, efficient and legal transfer of real estate.”

Joseph Alderman, managing partner of Freehold, sees the fee as a means of spreading out costly infrastructure expenses and jump-starting half-finished subdivisions hobbled by the housing crisis. Developers can use the money to pay off debt and restart projects, he says.

Mr. Alderman also says it could make homes more affordable by lowering the price, the transactional costs and the carrying costs of the home. “A developer at Property A with this transfer fee will have to sell his lots cheaper than the guy across the street who doesn’t have them,” he says. “Who would pay the same amount of money for a like home when one has a transfer fee and the other one doesn’t? No one.”

If a home without the covenant sells for $250,000, a similar home with it should sell for $245,000, he says. With each sale, the price would be adjusted accordingly because of the 1% fee.

Real-estate attorney Rick Akin says he worries homebuyers won’t realize until too late that a private transfer fee is in the mounds of paperwork at the closing.

Do Disclosures Help?

There’s another bill in Congress right now that aims to insure that these covenants are properly disclosed. But Mr. Akin doesn’t think that holds much water. “A homebuyer is so inundated with disclosures when they buy and usually do not know what documents are important,” he says. “The fee will probably be just a surprise when they decide to sell.”

Freehold’s Mr. Alderman admits that disclosure doesn’t necessarily help consumers. “If you have 500 disclosures, you might as well have none,” he says. “No one will read them all.”

Still, he insists that the fees will be a wash to consumers. “It’s an easy message to say that developers are lining their pockets for a shockingly long time, but it’s just not true.”

Write to Jennifer Waters at jennifer.waters@dowjones.com

 Comments as  Sunday Oct 31 9:43 EST

jim tozzi wrote:

The Center for Regulatory Effectiveness (CRE) has a Discussion Forum dedicated to this issue, please see the Interactive Public Docekt (IPD) at http://www.thecre.com/tForum/ CRE has reviewed the comments submitted to FHFA and has identifed a number of issues and is requesting public comment on them. CRE has developed the IPD so the public can continue to participate in this important public policy issue subsequent to the close of the public comment period.

 

Joe Alderman wrote: 

A properly prepared title commitment reveals the existence of all encumbrances, including transfer fees and similar assessments. In addition, Freehold’s strong support for additional disclosure is well known and widely publicized.

Joe Alderman wrote:

Ms. Waters wrote that “Mr. Alderman admits that disclosure doesn’t necessarily help consumers.”

During the interview Ms. Waters asked me about disclosures in general, and suggested that not everyone reads disclosure documents. I conceded the point (and so her statement is true in that respect) but I suggested that the fact that not everyone will read the disclosure documents provided to them does nothing to dispel the fact that disclosures can be a helpful part of the home buying process.

I pointed out that the fee is not only disclosed on a properly prepared title commitment, but that Freehold promotes full disclosure through a variety of mechanisms, and always has. By virtue of an agreement Freehold obtained earlier this year, buyers sign a separate disclosure document for closings undertaken at Fidelity Title, Chicago Title, Commonwealth Title, Lawyers Title, and Ticor Title.

When disclosure legislation was passed in California, the transfer fee was added to the mandatory Seller Disclosure Form given to all buyers before the buyer becomes committed to the purchase decision. The fee was also added to the typical sales contract, and there is also additional disclosure. As such, the existence of the fee is not “buried” inside complex documents or otherwise hidden, and it is in fact readily apparent to even the most casual of homebuyers. This transparency explains why the estimated 10 million homes nationwide with a transfer fee are routinely bought and sold, and have been for decades.

There are two primary purposes for allowing transfer fees. (1) To spread out the infrastructure costs for building a master-planned community. Instead of charging the first owner of a house the total cost of sewers, public and private roads, utilities, and water services – the fees are spread out over 99 years allowing any owner benefiting from the fees to pay their portion of the fees. (2) The transfer fee program would allow funds to be invested NOW into construction projects, which in turn could create up to 5 million+ jobs and help get the economy back on track, ending this devastating recession.

It is a 1% transfer fee which starts the SECOND time a home is sold and it is clearly identified in disclosure documents. There are no surprises for buyers or sellers. It does not just magically appear in closing documents, as some would like you to believe.

Is a 1% transfer fee a huge deception being pulled on the buying public? No more than the 6% commission you would pay a real estate broker for selling your home. With the creation of 5 million jobs and an end to the recession, wouldn’t it make more sense to pay your agent a 5% commission and a 1% transfer fee for the same amount of money?

The government wants you to look at transfer fees as an evil act by developers. Are you aware of the fact that there is a 3.8% government home transfer tax in the new health care bill? Are you aware that bill HR4646 is purposing that every time you deposit money in your bank account you will be charged a 1% tax to pay the federal government’s debt? Most people are not aware of these fees.

The biggest bang for the buck is to allow transfer fees. It could create jobs and help end the recession now!

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