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A Texas Real Estate Attorney Comments on Private Transfer Fees – Part I

house1.JPGImagine buying your dream house and everything is going swimmingly. The closing date approaches, but you notice something odd in the paperwork. A “reconveyance fee” is listed as a deed restriction and requires all future buyers over the next ninety-nine years to pay one percent of the home’s sales price as a “transfer fee” to a homeowners’ association.

Over the past decade, thousands of Texas home buyers have found these strange “reconveyance fee” and “transfer fee” provisions in their dream home’s deed. Commonly referred to as “private transfer fee covenants,” these types of fees are completely foreign to most home buyers and sellers.

A private transfer fee covenant is a fee payable to a private third party (frequently the property’s developer or the local homeowners’ association) which becomes due every time the property is sold to a new buyer. These fees frequently purport to continue for ninety-nine years, and they are usually recorded in the county records or included as a covenant in the deed for every home in a new subdivision. The transfer fee is usually 1% of the final sales price, and either the home’s buyer or the home’s seller could be required to pay it.

If the fee goes unpaid, the private party who is entitled to the fee can obtain a lien against the property in the amount of the total unpaid fee, plus interest. The lien remains on the property and can create a cloud on the property’s title, which makes the property unmarketable.

If this system sounds crazy to you, you’re not alone. Many states have completely banned private transfer fees, and the federal government is also considering taking action. The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, recently proposed a rule that would prohibit Fannie, Freddie, and all federal home loan banks from investing in mortgages that carry private transfer-fee covenants.

Some states, like Texas, distinguish between private transfer fees payable to the developer, and private transfer fees payable to a homeowners’ association. After all, what right does a home’s developer have to a portion of the purchase price after the home’s first sale? Most of us don’t send a check to Toyota or Ford when we re-sell our automobiles. Why would we do so with our homes?

Advocates of private transfer fees payable to developers argue that transfer fees promote development and homebuilding because the developer knows that he will be able to share in the property’s appreciation. On the other hand, both consumer advocates and the title insurance industry find this argument to be unconvincing. The American Land Title Association, for example, argues that private transfer fees depress home prices, exploit the complexity of real estate transactions, and increase the risk of clouded title issues.

In my next blog post, I’ll discuss the history of these fees and the state of Texas’ response to them.

If you have questions about a private transfer fee covenant, call me at (888) 818-5880.