Real Estate Ripoffs: Private Transfer Fees Gouge New-Home Buyers

You've probably never heard of them, but private transfer fee covenants exist in new-home real estate contracts in 45 states. These nasty little debt agreements hidden in the hundreds of pages of a new-home contract can mean someone gets a part of the profits on that home over a 99-year period.

Now the Federal Housing Finance Agency wants to stop the prevalence of these fees by restricting the purchase of mortgages by Fannie Mae, Freddie Mac and the Federal Home Loan Banks that include PTF covenants. Currently 15 states have banned these fees. One state, California, requires disclosure of these fees. Thirteen other states have legislation pending or are planning to introduce it in 2011. By the end of 2011 private transfer fees could be banned in as many as 28 states.

So how do PTFs work?
Generally, the way these covenants are structured is that a trustee collects a percentage of the final sales price (typically 1 percent) every time the property is resold. The trustee keeps a portion of this fee (typically 1 percent) and then distributes the remainder of the money collected to the developer (60 percent), the licensing company (30 percent) and the real estate broker (10 percent) for the first 30 years. Then for the remaining 69 years, the PTF covenant is split between the licensing company (90 percent) and the real estate broker (10 percent).

The new home purchaser is promised a lower-cost home in exchange for the PTF covenant. These covenants are supposed to lower the initial home purchase price because it offsets the developer's costs as the property is resold. In some cases these fees are collected to support a homeowner's association or community improvements.

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Here's how they work: Suppose the property is sold five years after purchase for $250,000. The PTF fee after the first resale would be $2,500, or 1 percent of the sale. Then suppose the home sells five years later for $350,000. In that case the PTF fee to be paid at closing would be $3,500 and so on, for the first 99 years of the life of the property.

As you can see, the primary person who gets the money long-term is the licensing company, and that's who is promoting these nasty little covenants to the builders. Freehold Capital Partners is trying to find a Wall Street bank that will securitize mortgages that include PTF covenants. If the FHFA is successful in restricting the purchase of mortgages, that may finally kill the deal.

These covenants were started about 10 years ago in California and Texas. In fact, one of the first ones noticed was a PTF covenant created for the Sierra Club and the Audubon Society, for environmental protections during the development of Fiddyment Farm in Roseville, Calif. That PTF covenant was for just 20 years, and its proceeds went to the preservation of open spaces.

When buying a new home, you're likely to benefit with a lower price. But watch out if you're buying a resale. Be sure to ask whoever is doing the title search whether or not a PTF covenant exists in the original sales documents. Also ask your attorney if they are legal in your state.

Lita Epstein has written more than 25 books including "The 250 Questions Everybody Should Ask About Buying Foreclosures."

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