The latest real estate rip-off?
Would you be willing to pay the original builder a fee when you resell your home? That’s an obligation some developers are trying to slap on homeowners in their communities.
Many condo and townhouse dwellers are already familiar with the "flip tax," more formally known as a resale fee. Typically calculated as a percentage of the sale price, it’s a fee due to the condo association or community when an owner sells. These charges fund common-area maintenance or provide a boost to reserve funds, which benefits the association’s homeowners.
But in some new developments, homebuilders are including in contracts a 1% fee to be paid to them every time the house is sold — for 99 years. And the money doesn’t go for improvements or upkeep: It’s just money in the builders’ pockets.
That has the real estate industry and consumer protection groups up in arms.
"It’s of no benefit to consumers," said Kathleen Day, of the Center for Responsible Lending. "It’s another innovative way to price gouge. Every extra dollar they suck out of people’s wallets takes away from other spending. It’s not good for the economy."
The issue has attracted the attention of Washington, where Rep. Brad Sherman, D-Calif., is leading a charge against the fees. "Consumers are not in a position to deal with another level of complexity, one that pits plain vanilla homes against ones that come with fees," he said.
Freehold Capital Partners, the New York-based financial company that is developing the program, claims it has already signed up thousands of developers nationwide, representing hundreds of billions of dollars of development.
The company’s plan is to monetize that future income — essentially allowing developers to get paid now rather than later. To do that, Freehold would bundle together the estimated income from the future fees and sell that package to investors. It claims this new "asset" would be worth about 5% of the original home prices.
One company that is working with Freehold is Thieman Enterprises, a developer based in Ohio. "I think it’s a fantastic program," said owner Ted Thieman. "I can get my development going again."
He said he needs the upfront cash to fund the building of infrastructure — roads, sewers and other essentials. Working with Freehold to sell the fee package on to investors would potentially give him enough cash to get projects going and land construction loans more easily.
Ohio, though, has banned the practice. Thieman thinks that removing this potential funding source will discourage development low interest personal loan. He said he will relocate one of his development plans to West Virginia, where he has acquired land. He’s disappointed for his home state.
"We can bring billions into Ohio and jump-start the economy," he said.
A Utah builder, Development Associates, initiated a similar program several years ago in order to recover some of the up-front costs of its developments. But after complaints from homebuyers, who said they were unaware of the fees, the company withdrew them.
Some developers regularly include "transfer fees" in their sales contracts, including Lennar, one of the nation’s largest builders. But the fees Lennar collects go to local housing-assistance organizations and charities, not back into its own pocket. That has helped keep the practice off lawmakers’ radar.
Still, most real estate experts are against these fees. A coalition of real estate industry organizations and community groups recently sent a letter to Treasury Secretary Tim Geithner recommending that he not allow Freehold’s securitization plan to go forward.
In the letter, the coalition quoted Rep. Sherman, who called the fees "a new predatory scheme."
In the past month, the Federal Housing Finance Agency proposed restricting Fannie Mae and Freddie Mac from buying or backing any mortgages that include home resale fees.
Freehold, of course, defends the program. Chief Operating Officer William White argues that the 1% resale fee will actually benefit consumers by lowering home prices: "No one will pay the same for a home with a [resale fee] as they would for the same home without the fee," he said.
That would make buying a home easier — but reselling one at a profit harder. Meanwhile, builders could offset their lower initial selling prices by either collecting on the back-end income stream from future sales, or selling those future earnings off to investors.
No securitization package has yet been created, according to White. But he’s optimistic: "We have been pleased with Wall Street’s response to date."
Whether the program will ever gets off the ground is an open question: 18 states have already banned or restricted the practice, and if the FHFA proposal goes through, it could derail it entirely.
Sherman does not think the idea is dead. Not yet.
"We’ve wounded the beast, but we haven’t put a stake through its heart," he said.