Posted on 03/30/2010 8:10:56 AM PDT by Responsibility2nd
Here's a new concept in real estate: Buy a house, and when you go to sell it years later, owe the original developer or builder 1 percent of the sales price.
Freehold Capital Partners, a company started in Texas, is selling developers across the country on a plan that would attach a private transfer fee to homes, allowing developers to profit for generations.
The fee, written into neighborhood restrictions, would encumber the property for 99 years and throw 1 percent of the sale price back to the developer — or his or her estate or another investor — and Freehold each time the home changes hands.
It's an idea that's drawn the attention of some state legislatures and real estate trade organizations, which are fighting to stop the transfer fees from gaining a spot in the market.
Critics say such fees could taint entire neighborhoods, making it difficult to sell homes, and could complicate title records for decades. If the fee is not paid by the seller, a lien is placed on the property and the title becomes muddy.
And then there's the basic question: “What it comes down to is, 20 years later, why is the developer still profiting?” asked Jeremy Yohe, director of communications with the American Land Title Association, the national association for title companies.
Freehold, which started in Austin, compares the transfer fees to mineral rights and calls land development a creative process on par with writing a book.
“Just like authors who write books and musicians who write songs that will be enjoyed for generations to come, those who improve property are also engaged in the creative process, and the economics of the transaction should reflect that reality,” a Freehold brochure says.
Freehold says it has signed up developers, including many across Texas, who hold more than $500 billion in residential and commercial property — but it will not name any of them.
Because courthouse property records are filed by owner name, it's difficult to track the company's activities in Texas and know which developers have signed on to the program.
Title companies that have been watching Freehold say it's possible that a homeowner could have a transfer fee in a neighborhood covenant and not realize it until he or she resells a home. Even if a transfer fee were to turn up in a title search, few people read all the neighborhood covenants and restrictions before signing.
A spokesman for Freehold says the company favors clearly disclosing private transfer fees in a standalone document. But in Texas, there's no legal requirement to do so. And under the standard real estate contract in Texas, home buyers agree to accept any restrictions that are common to the subdivision.
Freehold founder Joe Alderman refused requests for an interview, and spokesman Curtis Campbell would only answer questions by e-mail.
In response to the company's sales pitch, Texas lawmakers have passed restrictions on private transfer fees, but they are not banned. Some other states have banned such fees outright.
The American Land Title Association and the National Association of Realtors wrote model legislation banning private transfer fees that members can present to legislators. And last week, the trade groups asked the U.S. Housing and Urban Development Department to clarify that it prohibits the use of private transfer fees on government-insured mortgages.
“It's a limit on property. If you don't pay the fee, the property doesn't transfer, and you don't have clear title,” said Gerry Allen, community outreach manager with the National Association of Realtors. “There's nothing to say that anybody who owns a home can't attach this to their property. You could have a whole chain of these.”
Legislative efforts
Florida, Oregon, Missouri and Kansas have banned transfer fees in recent years. This month, Utah legislators banned them, and a bill to do the same is pending in Louisiana.
Texas law restricts private transfer fees but says some groups can collect them, including charities, property owner associations or governmental entities.
Freehold has interpreted this to mean that if a slice of the transfer fee — 5 percent — goes to charity, the developer and Freehold can collect the rest.
“This industry felt like they could create a nonprofit and get around it,” said Trent Thomas, chief of staff for state Rep. Drew Darby, R-San Angelo. Darby owns a title company and has sponsored legislation to try to further restrict private transfer fees.
After the California Association of Realtors learned about transfer fees, the trade group took the issue to state lawmakers in 2007.
“I could put one in my deed that would require every future (seller) to pay a fee to me personally,” said Alex Creel, senior vice president of government affairs for the group. “We used to joke that you could create a college fund.”
But developers aligned with environmental groups and affordable housing advocates, promising that a percentage of the fee would help set aside open space or create affordable housing. It proved an unbeatable coalition, and CAR settled for a law that requires clear disclosure of transfer fees.
“We had 210,000 members at the time, we have a big PAC, lots of money, lots of resources, four lobbyists. We have a very sophisticated operation. We couldn't beat it,” Creel said. “We couldn't believe it. It just seemed like such a bad idea.”
The largest private transfer fee Creel has seen was 1.75 percent in a community where homes sell in the range of $800,000 to the low millions — meaning homeowners will have to pay a fee of around $17,500 when they sell their homes.
Patent pending?
Freehold was based in Austin before moving its headquarters to New York this year to be at the “heart of the financial markets.”
While the company says it has a patent pending, the U.S. Patent and Trademark Office denied the patent last year and lists the application as “abandoned.”
Company spokesman Campbell said by e-mail that Freehold has filed a continuation patent to pick up the claims of the first patent.
The company name makes reference to English law — “freehold” essentially means outright property ownership.
A few years ago, a predecessor company called Freehold Licensing tried to sell individual homeowners, as well as builders and developers, on the idea of transfer fees.
“Maybe you planted a tree, added on a room or rehabbed a home,” the Web site said in 2007. “Fifty years from now, when a family is enjoying the property that you improved, and making a profit by selling the property you improved, why shouldn't you benefit? Of course you should.”
Founder Alderman put a transfer fee on his own nine-bedroom home in Round Rock in 2005, according to public records. He took it off in 2009 when the home was listed for sale.
An e-mail from Campbell said the timing was coincidental. But, he said, “one of the things we like about our program, and which resonates well with developers, is that they can terminate the instrument if they decide to do so.”
Today, Freehold markets to large landholders — not individuals — and says it will create a secondary market for selling the rights to transfer fees.
The idea is that developers would get money upfront from investors, who would get a 99-year income stream.
The pitch
The Freehold pitch sounds good to many in the industry who need money now to finance a project.
“It's a phenomenal plan,” said Greg Blume, a Houston-based developer who plans to use transfer fees in the Savannah Plantation development in Brazoria County. “It's just one more way of trying to finance and fund any type of real estate project.”
Selling transfer fee rights to investors would mean a developer could add more amenities to a neighborhood or sell for less than the competition — or both. “It just makes sense,” Blume said. “You can do more for the project and have less debt.”
Blume said developers in all the state's major markets are signing up with Freehold. There's no cost to sign up, but because there's no secondary market, no one has seen any money.
San Antonio subdivision developer Norman Dugas talked to Freehold representatives a few years ago. But he decided such fees would create too much of a marketing hurdle.
“The guy across the street, the competition, is going to say, ‘Those guys are sticking you with this transfer fee,'” Dugas said. “I just don't quite think it's going to go over. For the fee to work, it would have to be so desirable or attractive a property that people just had to get in there.”
What reasonable person would agree to this?
The same idiots who agree to sub-prime/balloon notes.
This is why I read every word of every contract I ever sign. I would not buy a home under this contract unless I got a discount sufficient to cover the extra cost that they are delaying and to cover the reduced value due to added difficulty in selling a house with such a gross provision attached. BTW, I would love to get the builders on a home that was going to stay in the family forever - go ahead and defer your profits without realizing that we’re not the transients you hoped for.
It would be kind of funny if a developer did this for a big neighborhood, everybody moved in, and nobody sold a house for 99 years, just passing them to the kids.
I wonder what would happen if someone with this kind of contract walked away from an underwater house? Would the bank be liable? Are banks going to take a big hit from this?
What a crock....This is gonna give realtors a new idea. I am sure they would like a piece of this future pie, as well. A homeowner already shares his “profits” with local government in the form of increased property taxes - or at least he did when the housing market was booming. What’s another 1%? Has Pelosi heard of this? She might like to cook up some new legislation. Can anyone say “Government Assisted Seller’s Program”(GASP)? Of course we will need another 16,500 IRS agents to make sure the assistance fee is collected....
My builder (from 1983) went out of business years ago.
But if he had imposed a 1% fee to him or his heirs or whoever he designates, then wouldn’t that open himself up to huge problems later on if I wanted to sue because of foundation problems or siding problems or whatever?
Luckily for me, he built a good home.
But imagine a builder being that accessible - that available for 99 years. If I were a builder, that 1 percent would just not be worth it.
Might be of interest ping.
This is one of those big “gotchas” that can only hurt Conservatives.
The same people who used to write credit card agreements are now in the title business apparently.
After getting their pocket picked over and over and over, the public suddenly finds they have no stomach for free markets and deregulation.
(of course the Democrats will ban this practice, only to devise a more onerous tax that works in similar fashion...but I digress)
Just because the seller (or developer in this case) asks for it, doesn’t mean they are going to get it.
If someone tried to slip a clause like this in a contract, I’d tell them where to stick it. There is plenty of houses for sale—plenty of COMPETITION.
Nobody is twisting your arm to buy a house with this kind of rider. It’s like neighborhood covenents. If you don’t want to live under them, don’t buy a house in a neighborhood with covenents.
You nailed it.
Nobody is twisting your arm to buy a house with this kind of rider. It’s like neighborhood covenents. If you don’t want to live under them, don’t buy a house in a neighborhood with covenents.
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And yet.... Millions of people voluntarily buy into homes with oppressive HOA dues and restrictions.
Go figure.
Yet another reason not to buy into places with “homeowner associations”.
Boycott home developers/developments and HOA neighborhoods.
The homes are generally poorly built, often on “fill” land. Who knows what problems are lurking in these places?
Excellent point.
I wonder if some of the same posters who say here "as long as it's in the contract. it's legal and I'm OK with it" are also posting on other housing threads that underwater homeowners should not mail in the keys and return their houses to the bank because, contract notwithstanding, they have a "moral obligation" to pay off the full amount borrowed.
It’s amazing how creative people can be when it comes to dipping their hands into other peoples’ pockets.
I hope the Texas legislature nips this thing in the bud.
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