New Resale Fee Proposed by Builders Called “Predatory Scheme”

Real estate watchdogs and consumer protection agencies are speaking out against a new fee being charged on the sale of new homes. A number of developers of townhomes and condos are including a new 1% fee in sales contracts to be paid to the developer every time the house sells for the next 99 years. Condo owners are already typically subject to a resale fee, or “flip tax”, calculated as a percentage of the original sales price to be paid to the homeowners association. These fees are used for maintenance costs in the community or to boost reserve funds. The new fee developers are charging is never seen by the homeowners association, but instead goes straight to the developer.

Spearheading the new tax is a company called Freehold Capital Partners, a New York-based finance company. They claim to have signed up thousands of developers across the nation representing developments valued in the hundreds of billions. Freehold’s plan involves monetizing the future income by bundling the estimated value of the future fees to sell to investors. The company is estimating future fees on a property to be about 5 percent of the selling price. Developers have been enthusiastic about the prospect, saying that the capital generated will allow them to get back to normal development activity much sooner. They say that the upfront cash from the Freehold plan will help to cover costs associated with infrastructure (roads, sewers, etc.) that typically cause delays in the development of a new community. Also, the cash would improve developers’ bottom lines, which would aid in their ability to get loans.

The practice has been banned in Ohio, prompting some Ohio developers are moving projects to neighboring states. A Utah developer had tried to implement a similar program several years ago to help recover recoup some of the upfront costs associated with a development, but canceled the program in response to homebuyer objections. The practice of including transfer fees has been utilized regularly, and by some of the nation’s largest builders, but since those fees were always put into the pockets of homeowner associations or local charities, lawmakers have not taken notice. The Freehold plan to securitize and sell these fees has caught the attention of numerous lawmakers, and even many real estate experts oppose the plan. Recently, in fact, a coalition of housing industry groups and community organizations sent a letter opposing the practice to Secretary of the Treasury Timothy Geithner. In the letter, the group calls the practice a new “predatory scheme” and asks Geithner to disallow the plan. The Federal Housing Finance Agency early this month proposed a restriction on Fannie Mae and Freddie Mac preventing the two government conservatorships from buying or backing any loans that have the fees in their contracts.

Freehold representatives, meanwhile, argue that the fees will actually benefit consumers in the long run by lowering home prices, arguing that buyers will not pay the same for a home with the resale fee as they would for one without. Buying a home would become easier, but re-selling for a profit would be more difficult. In the meantime, builders would benefit by off-setting the losses on sales price by selling the future resale fees to investors. An official securitization plan has not yet been drafted, though Freehold representatives say that it’s not too far off. The company says that response from investors so far has been quite positive. In addition to Ohio, 17 other states have already banned or restricted the practice, and the FHFA proposal, if adopted, could pretty much kill the practice completely..

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