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Last April, Techdirt pointed out that a financial firm in Texas was trying to attach “private transfer fees” to homes, so that developers would get a little bit of each sale as it passed among owners in the years to come. It sounded crazy then–imagine having to pay royalties on clothes or furniture whenever you resold them–but the firm is aggressively expanding its plan and has signed up more than 5,000 developers across the country, reports the New York Times. If you buy a new house in the next decade, look for a “resale fee” covenant hidden in a separate document that might not be included in your closing papers or even require a signature.
The Times says that one goal of including these resale fees is to pool them into new securities that can be sold on Wall Street. They could offer new revenue to struggling developers, but the real winner is the Texas financial firm masterminding this scheme, Freehold Capital Partners:
Someone selling a home for $500,000, for example, would have to pay the original developer $5,000. If the home sold again two years later for $750,000, the second seller would have to pony up $7,500 to the developer, and so on. Even if a home declines in value, the seller still must pay the 1 percent fee. Freehold gets a cut of the resale fee; if the fees are securitized, it retains a percentage of the cash generated from the securitization.
Freehold’s principals and lawyers have been aggressive in sales pitches to developers, but have declined to give details on their clients, securitization efforts or the company itself. Freehold moved its corporate office from Round Rock, Tex., to New York this year as it stepped up efforts to securitize the resale fees.
One thought on “Developers Spiking Homeowner Contracts With Hidden Resale Fee Covenants”
The main purpose of the transfer fee program is to create financing to get the real estate and building industries back on their feet again by generating jobs to revitalize the economy. A secondary benefit is to help spread out the costs of the infrastructure facilities over 99 years instead of charging the costs to the first homebuyer. In California there is a Mello Roos tax which is added to the annual property taxes, payable each year equal at approximately 1% of the original cost of the property plus your normal property taxes. A transfer tax paid ten times over 99 years would be considered a huge bargain.
A transfer fee is a way to create financing in a destroyed real estate market. A financial source, such as Wall Street or the U.S. government, lends a builder funds to re-start their existing projects. They fund these projects because they will earn back their invested dollars from the transfer fees. The transfer fees do not go into the builder’s pocket – they pay back the investor, (Wall Street – The U.S. government).
In most regulated states there are no surprises about hidden transfer fees when you purchase or sell a home. It is a recorded document that all parties sign-off on at point of sale – with full disclosure by all parties. The purpose and fiduciary duty of a title company is to insure that all parties are fully aware of these fees. There are no surprises.
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