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Private Transfer Fees – Soon to be Ancient History?

Imagine you bought a new car from the dealership. The car treated you well for a number of years, but at some point, you decided you were ready for a newer model. Now imagine when you sold that car you had to pay a percentage of the price you sold it for back to the dealership! And also, imagine that the person you sold your used car to would also have to pay that fee to the dealership, if he/she ever decided to sell. If you apply this example to home ownership, you get private transfer fees! A previous owner, potentially the very first owner, negotiates a fee in the initial sale that stays with the property, allowing that owner to receive a percentage of the sales price every time the property is sold. Sound fishy? You aren’t the only one who thinks so!

Private transfer fees (“PTFs”) enable sellers to preserve a financial interest in property of which they no longer maintain possession. The fee, generally 1%, is inserted into sales contracts and filed in public record. It can run perpetually, requiring payment to the designated party each time the attached property is sold. Most commonly, this fee is employed by developers of properties with high turnover, in order to capitalize as the property is transferred. These developers claim that the proceeds help pay for improvement costs, as well as fund future development projects.

As the industry becomes more rigidly regulated, secondary fees are being more closely scrutinized to gain a better understanding of potential long-term consequences. While developers claim that PTFs are a harmless, and in some cases beneficial, method of fee implementation for consumers and industry alike, industry is beginning to disagree. In reality, the initial negotiation and implementation of PTFs eliminate a future buyer’s, or seller’s, opportunity to negotiate as long as the restriction remains attached to the property and it also potentially decreases the value of the attached property over time, should multiple third parties claim a share of future proceeds. Overall, it seems the only ones who benefits from PTFs are those who receive it! Regulators have recognized this, and they are doing something about it.

As time passes, the use of private transfer fees continues to become stringently limited in an effort to minimize potential consequences of its implementation. Many states have already made strides in prohibiting, or at the least restricting, continued use of PTFs. The Federal Housing Finance Agency has gone as far as publishing a new rule, limiting Fannie Mae, Freddie Mac and Federal Home Loan Banks from dealing with properties encumbered by these fees. Moreover, PTFs already violate 24 CFR 203.41 for FHA Loans, prohibiting legal restrictions on conveyance. Moving forward, industry and consumers should be wary of the lasting consequences associated with such an imposition and stay clear. However, based on the efforts made by regulators over the past few years, it is more than likely that before long, private transfer fees will become ancient history.