Monday, December 6, 2010

Developers Strike Back -- The Transfer Fee

Homeowners weren't the only ones pushed underwater when the housing bubble busted. Developers, too thrived on their clients' seemingly endless access to large loans. When the well dried up and property values sunk below loan obligations, builders reeled.

But not to fret. We are a country of creative financing. Increasing numbers of developers are quietly inserting a resale fee -- a covenant of sorts -- into the original sales agreement.  These resale fees (also known as reconveyance fees, capital recovery fees, residential transfer fees, and transfer fee covenants) generally charge 1% every time the home is resold. The 1% fee is paid by the seller or the buyer at the time of closing and is required every time the property changes hands, often for 99 years.

Someone selling a home for $400,000, for example, would have to pay the original developer $4,000.  If the same home sold again two years later for $650,000, the second seller would have to fork over $6,500 to the developer, and so on.  Even if a home declines in value, the seller still must pay the 1% fee.

If you don't think this passes the smell test, you're not alone.  "We believe that transfer fees are illegal, and if you retain us, we will fight to have them refunded to you," boasts a law firm's web page. In fact, a few states (see e.g., Arizona, A.R.S. § 33-442; Minnesota, M.S.A. § 513.74) recently restricted transfer fees by statute. For the states that have not done so, beware, the transfer fee is evolving. At least one real estate financing firm is trying to securitize these fees to be bought and sold on Wall Street. 

Sound familiar?

McKay Cunningham

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