Beware developer fees for resale of a home

Posted: October 03, 2010

You buy a newly constructed house. Two years later, you sell it, only to discover you have to share the money with the builder.

That's because, among the reams of paper you signed at the original closing, there was a "private-transfer-fee" provision requiring you to pay a sum to the developer when you sold the house.

Sometimes, the private-transfer-fee provision continues for as long as 99 years, taking a little bit of money out of every sale - still more proof that it pays to read everything before you sign, or to hire a real estate lawyer to do it for you.

In August, the Federal Housing Finance Agency took steps to restrict government-sponsored enterprises - Fannie Mae, Freddie Mac, and the 12 Federal Home Loan Banks - from investing in mortgages with private-transfer-fee covenants.

So far this year, 12 states have adopted legislation banning private-transfer fees. The American Land Title Association is working to have the fees declared illegal everywhere else.

The Pennsylvania Association of Realtors contends that developers have begun attaching private-transfer fee covenants to sales contracts, the justification being "to help the developer recoup the costs of making capital improvements to the land and in turn reducing the price of the home."

The association is supporting a Senate bill that would prohibit all future transfer fees and create burdensome reporting and disclosure requirements for ones that exist.

"There seems to be general agreement the concept is crazy," said Marshal Granor, a principal in Granor Price Homes in Horsham, who is also a lawyer. Granor has never inserted such a fee in his sales contracts, but he recalls being approached by a Poconos builder in the late 1990s who asked Granor to set one up for him.

Builders have long argued that they are creating wealth for everyone else but themselves.

"Especially in hard times, the builder might not make any profit on a lovely home, which, years later, is worth a mint," Granor said. "The builder [or developer] is merely looking for a small honorarium for creating this value for all who come later."

In the most widely promoted version of this arrangement, a developer obtains documents and advice on creating such covenants from a licensing company in exchange for a percentage of the transfer fees.

The covenant requires that at each sale of each parcel of property (for up to 99 years), a consumer, either the buyer or seller, must pay a transfer fee to the developer. The fee is usually a percentage of the final sale price, typically 1 percent, collected by a trustee.

If a consumer does not pay, a lien is established against the property for the unpaid fee, plus interest. Before the property can be sold or refinanced, the lien must be satisfied.

Under the arrangement, the covenant fee is split among the licensing company, the developer, and the real estate broker for the first 30 years it is in effect. For the remaining 69 years, the fee is split between licensing company and broker.

Granor said there are legal problems with such fees, including the law-school nemesis known as "the rule against perpetuities," under which long-term restrictions beyond a "life in being, plus 21 years" cannot be established.

The Land Title Association said it is not entirely certain how these covenants affect consumers, "but there is a strong potential" for negative effects on how ownership rights are determined and how real estate is valued and transferred legally, safely and efficiently.

Weichert Realtors agent Alec Schwartz isn't a fan of the transfer fees the Senate bill targets, but supports a developer's right to include restrictive covenants into homeowners' or condo association documents.

"The Statute of Frauds protects consumers by granting buyers the ability to terminate an agreement of sale in any purchase of such a property," Schwartz said. "This is not another place for government involvement."


Inquirer real estate writer Alan J. Heavens is the author of "Remodeling on the Money" (Kaplan Publishing). His home improvement column appears Fridays in Home & Design. Contact real estate Alan J. Heavens at 215-854-2472 or aheavens@phillynews.com.

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