Private Transfer Fees Affect Home Pricing and Marketability

Disclosure isn't often required with private transfer fees. Homebuyers may not find out how much they owe until closing. Image: Westend61/Getty Images

Over the last decade, real estate developers have begun to use private transfer fees to generate long-term income. The fees, typically 1% to 1.75% of the sale price of a property, have to be paid to the developer each time the title to the property changes hands, as it does during a home sale.

In some cases, a portion of the fee goes to the private company that structures the agreement, with a fraction of the fee sometimes going to open space preservation.

The issue

A private transfer fee, also known as a reconveyance fee, is generally added as a covenant to the deed on each new home a developer sells. That covenant attaches to the first sale and all future sales of the property, often for as long as 99 years. So every time the property is sold, the new buyers have to pay the developer a fee equal to a set percentage of the sales price until the covenant runs out.

Who supports private transfer fees?

Builders, developers, and environmental groups, including the Sierra Club and the Audubon Society, like private transfer fees. Environmental groups see the fees as a source of long-term funding, even though they generally receive a very small portion of a fee—typically around 5%—and there’s no required oversight of fund distribution. The fees can also push projects forward in areas where strong environmental groups have opposed or blocked developments.

Builders use private transfer fees because they’re a way to spread development costs over future sales. Developers charge the first buyer less, but expect to make up that discount by collecting a private transfer fee from future buyers. 

Private transfer fees give homebuyers a choice about how to pay for infrastructure and improvements. They pay less for a home today, but agree to pay a fee when they sell, or to find a buyer willing to pay the fee, proponents say.

Some communities use private transfer fees to fund charitable giving. The St. Joe (Florida) Community Foundation annually collects about $1 million in private transfer fees and contributes about $800,000 to local hospitals, museums, colleges, and recreational facilities. 

What opponents say

A home with private transfer fees may be harder to sell, or the owners may have to lower the sales price since their house will be more expensive than a comparable home when the price of the private transfer fee is included.

“Private transfer fees place an additional burden on both sellers and buyers. They make property less marketable in the present and place a long-term encumbrance on land. Given market fluctuations, it’s hard for consumers to determine exactly how private transfer fees will impact the value of land,” says R. Wilson Freyermuth, who teaches real estate law at the University of Missouri.

One particularly thorny aspect of private transfer fee is that disclosure isn’t often required. Buyers may not discover until closing that they owe an additional 1% of the sale price.

Private transfer fees can also cause title issues in jurisdictions where purchase agreements say the buyer will get fee simple title to the property (that’s a title with no restrictions), according to research by Frank C. Aiello, an assistant professor at Thomas M. Cooley Law School in Lansing, Mich.

Some of the largest players in the mortgage market, including Fannie Mae and Freddie Mac, won’t guarantee loans for homes carrying private transfer fees, which reduces the pool of potential buyers, Freyermuth adds.

Unlike transfer taxes collected by governments to fund spending that benefits the public, private transfer fees often enrich only the developer. When it’s time to sell a home that carries a private transfer fee, buyers may be influenced by whether they will get some benefit from the fee, such as having community open space improved.

“The argument for these fees has been that the market will bear them,” says NATIONAL ASSOICIATION OF REALTORS® Economist Paul Bishop. “The reasoning goes that if it’s a good property in a desirable neighborhood, a seller will be willing to shell out the extra fee. That may not be the case in markets across the country, where pricing is already depressed and a seller needs every advantage to maintain marketability.”

Opponents of private transfer fees used to fund charities argue that individuals should be able to make their own decisions about which non-profits to support, rather than being forced to contribute to a community foundation that in turn decides what causes to fund.

Who’s affected?

Seventeen states have passed laws that deal with private transfer fees. Arizona, Florida, Hawaii, Kansas, Illinois, Iowa, Louisiana, Maryland, Minnesota, Mississippi, Missouri, North Carolina, Oregon, Texas, Ohio, and Utah ban them. California requires pre-sale disclosure of private transfer fees.

Alabama, Rhode Island, and South Carolina are considering new rules on private transfer fees.

Regardless of whether more states ban the use of private transfer fees, it’s important to know how they work. If you own a house that carries a private transfer fee, educate yourself about the terms of that covenant, make sure that the fees are being properly applied, and disclose its existence when you sell your home.

If you’re buying a home, ask if it has a private transfer fee. If it does, carefully weigh how that might influence your home’s future value and whether you’ll receive any benefit from that future payment.

Sue Mellen is a longtime writer and editor who splits her time between a townhome in Massachusetts and a bungalow in Florida. Neither property carries a private transfer fee.