Dependable Erection

Sunday, September 12, 2010

Developers

Next time Durham County is considering impact fees for new development, or transfer fees for resale property, and the development and real estate communities talk about what an onerous burden they are for both them and their potential customers, and our county commissioners fall all over themselves sucking up to these guys, someone will remind them of this article.
A growing number of developers and builders have been quietly slipping “resale fee” covenants into sales agreements of newly built homes in some subdivisions. In the Dupaix contract, the clause was in a separate 13-page document — called the declaration of covenants, conditions and restrictions — that wasn’t even included in the closing papers and did not require a signature.

The fee, sometimes called a capital recovery fee or private transfer fee, has been gaining popularity among companies that have been frantically searching for new ways to gain access to cash in the depressed housing market.

Emphasis added.

The article notes that developers claim that the fee allows them to "spread out the cost of building the roads, utilities and other infrastructure across all homeowners in a subdivision, rather than just the initial buyers."

Yeah, right.

Here's the money quote:
Someone selling a home for $500,000, for example, would have to pay the original developer $5,000. If the home sold again two years later for $750,000, the second seller would have to pony up $7,500 to the developer, and so on. Even if a home declines in value, the seller still must pay the 1 percent fee. Freehold gets a cut of the resale fee; if the fees are securitized, it retains a percentage of the cash generated from the securitization.

Freehold’s principals and lawyers have been aggressive in sales pitches to developers, but have declined to give details on their clients, securitization efforts or the company itself. Freehold moved its corporate office from Round Rock, Tex., to New York this year as it stepped up efforts to securitize the resale fees.


Remember three years ago, when adding a quarter cent to the "transfer tax" rate was going to be enough to put the home resale market out of business in Durham?

Now, i have no idea which, if any, Durham developments have this sell-on fee clause in their contracts. The article notes that they're appearing in developments in 43 states. But if developers think it's OK to tack on a 1% charge, essentially in perpetuity, to home resales, how can they, or their partners in the real estate industry, make the argument that a county tax would be so damaging to the market?

Basically, they just want to keep the money for themselves, and not for the common good. They need to be a bit more honest about that.

UPDATE - commenter Steve points out that the NC legislators last year passed a law banning this type of transfer fee. Good on them for being pro-active about this.

I'd like to see the lobbying reports that accompanied the debate.

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4 Comments:

  • Actually as of July, those fees are illegal in North Carolina. Here's the legislation

    Personally, I think they are a silly idea anyway [meaning they are great for the developer, but not anyone else]. Given that the average home is sold roughly every 7 years, that's twelve transactions at 1% apiece. Even without appreciation, that's quite a windfall.

    By Blogger Steve, at 11:46 AM  

  • Thanks for the note - i'll update the post.

    Good for NC legislators for being ahead of the curve on this.

    By Blogger Barry, at 11:58 AM  

  • Sickening; thanks for the heads-up on this Barry. Great NYT article.

    In fairness to the Realtors -- according to the story in the Times, the NAR also opposed the 1% developer resale tax idea, too, just as they did the quarter-cent tax idea here. I disagree with them on that latter point but at least they're consistent.

    By Blogger Kevin, at 12:31 PM  

  • "Many developers see the resale fee as a creative way to get new financing."

    I hate when people use the word "creative" to mean "underhanded" and "unethical".

    "Mr. White characterizes the resale fee as a win-win deal for the developer and the home buyer... [because] the developer can lower the initial price of a home to the first buyer."

    Yeah. And if you cut taxes to corporations, they'll lower prices to consumer and hire more people here in the U.S.

    By OpenID mrsdependable, at 1:23 PM  

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