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What’s A Private Transfer Fee In Real Estate?

Usually when we think of a real estate sale we think that the interest of the seller ends with closing. It is, after all, called “closing” for a reason.

Now, however, some sellers are trying to maintain a financial interest in a property for decades after it’s been sold, not with a mortgage or a loan but with something called a private transfer fee.

To understand how this works, imagine that Wilson sells a home for $500,000 but that as a condition of the sale Wilson gets to insert a deed requirement which says that for the next 99 years every buyer will have to pay a sum equal to 1 percent of the sale price each time the property is sold. The money is paid to a fund set up by Wilson. The money in that fund can be used for anything Wilson or Wilson’s heirs want.

Developer Pay-Offs

In some cases developers justify private transfer fees this way: The money is given to a private group such as an environmental organization. In exchange the environmental group approves of the development. Or, the money could go to a religious organization, charity or cause.

Wall Street

According to the American Land Title Association, private transfer fees are “a controversial new financial scheme that is facing opposition across the country. Developers, in consultation with Wall Street advisers, are attempting to add language to home purchase contracts requiring that a percentage of the sales price be paid to the original corporate owner of a property every time the property is sold, typically for 99 years. The right to collect these Wall Street Home Resale Fees would then be securitized and sold to enrich investors at the cost of stealing equity from consumers, forcing homeowners to pay a large fee to sell their homes and adding a complicated legal roadblock to the home sale process.”


Conflicts

Regardless of how the money is used, private transfer fees create a number of substantial problems.

First, Wilson might want a 1 percent fee but the next seller, Grafton, might also add a deed restriction saying that he and his descendants are also to get a 1 percent fee. Each seller could claim a share of future transaction proceeds, thus increasing the transfer cost of the property over time — but not the value.

Second, in those cases where a charity is a beneficiary, private transfer fees are still ugly. If the organization is truly a charity then contributions should be voluntary and based on the merit of the organization and agreement with its positions and views. With private transfer fees, the organization is receiving money that has been forcibly extracted from a transaction without regard to the wishes of a future buyer or seller.

Third, there can be the appearance of a conflict of interest — if not an outright conflict — when an organization receives funds from a developer and then, somehow, gives a green light to a project from which it will benefit.

Fourth, while a current buyer and seller might negotiate such a fee, there is no opportunity for negotiation by future buyers and sellers as long as the deed restriction remains in place.

Fifth, you simply can’t finance a home with an FHA loan when a private transfer fee is part of the deal. HUD spokesman Lemar Wooley explains that “private transfer fees violate HUD’s regulations at 24 CFR 203.41, which prohibit ‘legal restrictions on conveyance,’ defined to include limits on the amount of sales proceeds retainable by the seller.

“HUD also requires lenders to convey clear marketable title in exchange for insurance benefits.”

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Posted in: Closing

3 Comments on "What’s A Private Transfer Fee In Real Estate?"

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  1. Denver says:

    As long as transfer fees are disclosed on the advertised pages for the property it should be fine. AND explained clearly in bold letters to the buyer it should be fine. In fact all real estate Ads should include all cost to the buyer like property taxes, hoa fees, insurance cost, etc..

    Yes, a house could cost just 10k, but the hidden cost would be 50k a year. Insane.
    Good luck on re-selling it.

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