When you buy a house, how often do you read every line of your sales contract? If new legislation fails to pass, you'll need to read before signing anything.
Resale fees, also known as capital recovery fees or private transfer fees, are fees that a seller pays to the developer, each and every time the home sells for a specified period of time.
A recent article by the New York Times, detailed the story of one family who bought their dream home, only to find that resale fees allowed the developer to collect 1 percent of the sales price from the seller every time the property changes hands -- for the next 99 years.
This particular detail is typically hidden deep inside the sales contract. And homebuyers simply sign away their rights to that 1 percent, without ever having knowledge of it. Why would a builder or developer want to use this questionable practice?
The New York Times explains it this way, "Many developers see the resale fee as a creative way to get new financing. They are hoping to one day use the trickle of cash from these fees as collateral for a loan, or to get cash up front if pools of the fees are packaged into securities to be bought and sold on Wall Street." As they see it, developers are desperate.
How are resale fees legal? They may not be for long.
In September of 2010, US House Representatives Maxine Waters and Albio Sires introduced a bill called the "Home Equity Protection Act of 2010." The bill seeks to amend the Real Estate Settlement Procedures Act (RESPA) by prohibiting the collection of resale fees.
Proponents of the bill and changes to the legality of resale fees, believe the fee robs homeowners of their equity when they sell their property.
In addition, the Federal Housing Finance Agency proposed a similar rule to curb use of resale fees. Their proposal would keep Fannie Mae and Freddie Mac from insuring or purchasing mortgages that include such fees.
These fees have been such a point of contention, that The Coalition to Stop Wall Street Home Resale Fees has been formed. They responded to the news of the proposed legislation, saying, "This bill is an important step in enhancing consumer protections against these for-profit fees and safeguarding our already fragile real estate market from further abuse." They continued, "These fees add no benefit or value to a property, and are little more than a predatory scheme meant to take advantage of unsuspecting homeowners. Our Coalition thanks Congresswoman Waters and the bill's co-sponsors for recognizing the danger that these fees pose to homeowners and the real estate market."
Evan Fuguet, Senior Policy Counsel at the Center for Responsible Lending, noted, "The Home Equity Protection Act of 2010 is a strong step forward that would help consumers across the country, preventing unwarranted and spurious increases in the costs of homeownership. Unlike conveyances that support the community, affordable housing or the environment, these private transfer fees have no added benefit for homeowners and home buyers, and are reminiscent of the irresponsible fee-packing behavior we witnessed during the heyday of abusive subprime home lending ."
Though I have not run into resale fees so far on the north shore. be sure to talk to your agent about your contract and if resale fees could be an issue for you.