Why Real Estate Developers Get a Bad Reputation

The New York Times has an article today entitled, “A Fee that Only Developers Could Love”. It is a warning to buyers in new subdivisions that the rule remains “Buyer Beware”. You need to specifically ask when you are buying a property if it has a “resale fee” involved. It can also be called a capital recovery fee or private transfer fee.

As set up by one company mentioned in the article, Freehold Capital Partners, it is promoting the fee among developers. Anytime over the next 99 years that the home is resold, a 1% resale fee will be collected and will go to the developer and Freehold.

As reported by the NY Times,

Freehold Capital Partners, a real estate financing firm founded by the Texas developer Joseph B. Alderman III, has been leading the charge. According to William White, Freehold’s chief operating officer, the firm has signed up more than 5,000 developers who are adding the covenant to developments worth hundreds of billions of dollars that will be built out over the next decade in 43 states.

This sounds like a bad idea to me. It seems that the resale fee has not been presented up front to buyers and has not even been disclosed at closing.  As anyone knows who as bought a home there are tons of paperwork present. At the closing on our current house, the mortgage company tried to slip in signing up for a home equity loan and wanted us to sign paperwork we had never seen or discussed before.

In one case mentioned in the New York Times article, the resale fee was “in a separate 13 page document – called the declaration of covenants, conditions and restrictions – that wasn’t even included in the closing papers and did not require a signature.”

While the New York Times mentions that some 17 states have either banned or placed conditions on the use of a resale fee, it does not mention which states have banned the practice or what the limitations are.

They do note that

A COALITION of real estate trade groups, including the National Association of Realtors, the American Land Title Association and the Center for Responsible Lending, opposes resale fees and is lobbying federal and state authorities to ban them.

“The idea that someone who has no ownership stake or interest can continue to collect revenue off of a property that they may have built up to 99 years ago exploits an already complex transaction and doesn’t pass the smell test,” says Justin Ailes, director of government affairs at the land title association. The fee could hurt real estate values in the future if buyers are reluctant to purchase properties that have a 1 percent fee attached.

The coalition wrote to the Treasury secretary, Timothy F. Geithner, and to the Department of Housing and Urban Development, the Federal Housing Finance Agency, the Federal Trade Commission and others, urging them to bar the fees or use the consumer protection agency — to be created by the financial overhaul — to fight them ….

Opponents have made some headway. The Department of Housing and Urban Development recently issued a letter indicating that the fees violated its regulations and that the agency would not insure mortgages on properties that included them.

The Federal Housing Finance Agency is considering a proposal to prohibit the transfer fees on all mortgages financed by Fannie Mae, Freddie Mac and the Federal Home Loan Banks. And 17 states have either banned or placed conditions on the practice.

The article has a lot more detail and is worth reading. Here in Washington State I do not know if we have banned or restricted this practice but it certainly seems that a ban is the most appropriate response.  It is contrary to the idea of home ownership to have a clause existing for 99 years that specifically benefits developers and real estate financiers. Thirty year home loans are a big enough burden for most people, let alone adding liens to a home for more years than most people live in their lifetimes.