 Imagine if you will, Hector and his wife Andromache purchase a new home from a builder. They have paid for inspections, appraisals, possibly surveys, an option fee, closing costs, repairs, etc.
Fast forward 10 years … the couple has been paying their mortgage, homeowners insurance, HOA fees, property taxes, etc. Finally, they decide to sell their home. As they prepare to place house on the market, they are mortified to find out that they will owe the original developer 1% of the sales price. How could this be? Well-buried in the fine print of the neighborhood covenant, the builder has been lying in wait … one last fee stab that even Homer could not see coming. Although property transfer fees (i.e. taxes) are not levied by the state of Texas, there is a disturbing trend as builders and developers across the state have been signing up for a service that would attach private transfer fees to homes. The idea was the brainchild of a company originally started in Texas called Freehold Capital Partners. Freehold has an almost iconoclastic view that seeks to place land developers in the same class as copyright and patent holders. Namely, as a Freehold brochure states, they should be entitled to royalties since their creations “will be enjoyed for generations to come… .” What makes matters worse is that the transfer fee is inscribed on the neighborhood covenant, which developers file with the county clerk’s office prior to the completion of construction in a subdivision. So, even if a title search unearths the fee, the lengthy nature of neighborhood covenants would almost ensure that the property owners would not read every covenant and restriction. This fee is not just a one time occurrence; the encumbrance would last for 99 years and would assess 1% each time the property changed hands.
| Freehold Capital states that allowing developers to sell transfer fee rights to investors in secondary markets would allow the developer to add more amenities to the neighborhood or lower the costs of the home or possibly both. Whether this true is debatable, since at this time there have been no studies to confirm or deny these claims. Texas law already restricts private transfer fees. The Legislature did carve out a small exception for the fee, though, if it benefited certain groups, like charities, property owner associations, or governmental entities. Freehold has used this exception and is interpreting the statute to mean that a fee is legal if a portion collected goes to charity. Parts of the federal government are taking a stance on the issue. The general counsel for the Department of Housing and Urban Development has issued an opinion that private transfer fees clearly violate HUD’s regulations, which prohibit legal restrictions on conveyance. This proclamation bars any private transfer fees to be attached to any mortgage insured by the Federal Housing Administration. The Texas Association of REALTORS® has consistently fought all real estate transfer taxes in Texas, as they raise the price of homeownership. Such is the case with this latest tactic, since the seller of a home with a private transfer fee would likely raise the price to “pay” for that cost. Letting that Trojan horse through the gates would definitely be an unwelcome surprise that harms many Texas homebuyers. Read more on how real estate transfer fees hurt consumers |