The mother of all outrageous fees?
A New York company recently announced a plan to collect 1% of the sale price of a home each and every time it's sold for the next century.
Many consumers are rightfully upset at the explosion of charges they now face when doing anything from not using their credit card to getting water on an airplane.
Well, as the saying goes, "You ain't seen nothing yet."
A company called Freehold Capital Partners has introduced a plan that will put all other fees to shame: a 1% "transfer fee" split between Freehold and the developer of your house every time it's sold over the next 99 years. So if you sell your house for $300,000, you'll owe $3,000. And if 20 years later it's sold for $600,000, that seller will owe $6,000. And if 30 years later the house has fallen down but the lot is sold for $1 million, the developers and Freehold get another $10,000.
According to this article in The Wall Street Journal (subscription required) and the company's online brochure, Freehold is attempting to team up with developers nationwide to create legal language within subdivision covenants that would allow them to collect the money. (Subdivision covenants, which you agree to when you buy a property, are typically reserved for things like requiring homeowners to maintain their yards or keep animals fenced in.) Once the covenant is included, title to property can't be transferred without paying the fee -- for the next century.
Freehold has said it already has agreements in place with thousands of developers nationwide representing "hundreds of billions of dollars worth of real estate" and is now on the verge of creating securities to be sold on Wall Street that will be backed by the stream of transfer fees. According to the WSJ article, Freehold hired a lobbyist in an attempt to get federal stimulus money -- taxpayer money -- to pay for the securitization effort, but apparently that didn't work out.
The company won't name the developers.
According to its website and brochure, Freehold justifies the fee by claiming that it spreads the cost of home development more fairly among the successive owners of a home and thus allows the developer to sell it for less initially. Here's a quote from the company's brochure:
When a developer can impose a 1% Capital Recovery Fee, the developer can lower the price, the buyer can buy for less in return for paying a fee years down the road, and each buyer passes along the savings to future buyers.
Each and every buyer also saves on closing costs, carrying costs, etc., and gets to use the initial savings to reduce other more expensive debt such as credit cards, consumer loans, etc.
In this classic example of corporate double-speak, Freehold is claiming that adding a 1% home-transfer fee for the next 99 years will allow homebuyers to more easily pay their credit card bills.
Critics respond that cashing in every time a house is sold enriches the developer and a completely unrelated third party for both inflation and improvements made by the homeowner. And then there's the obvious: There's no guarantee the developer will lower upfront prices to begin with.
While few consumers may be aware of Freehold, it hasn't escaped the notice of Washington and those involved in real estate. Fannie Mae and Freddie Mac, quasi-governmental agencies that currently insure more than 95% of all mortgages, have hinted that they may adopt rules that won't allow them to insure mortgages secured by property that has a private transfer fee. If they stop hinting and start adopting such rules, that could leave Freehold with a lot fewer potential partners.
The National Association of Realtors and the American Land Title Association, a national trade association for title companies, have also come out against transfer fees and are pushing to ban them in several states. According to the Journal, at a congressional hearing last month, Rep. Brad Sherman, D-Calif., called the fee a "new predatory financial scheme."
It looks unlikely that these fees will become common, at least in the near future.
But should they start showing up, at least there's one bright spot: They'll make paying $35 to check a bag on an airline look like chump change.
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