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.
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.
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 email@example.com
Comments as Sunday Oct 31 9:43 EST
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Joe Alderman wrote:
Joe Alderman wrote: