House Resale Fees are a Good Thing

Two-story_single-family_homeOn Saturday The New York Times discovered yet another example of evil business fleecing wholesome Americans. Resale Fees That Only Developers Could Love opens with the usual tropes.

Rebecca and Trent Dupaix of Eagle Mountain, Utah, spent a year searching for their dream home. The couple, who have five children, considered 15 to 20 houses before finding “the one.”

But four months after buying the “rock-and-stucco home” the dream turns to a nightmare when

the Dupaixs discovered that their sales contract included a “resale fee” that allows the developer to collect 1 percent of the sales price from the seller every time the property changes hands — for the next 99 years.

Incredibly, the resale fee arrangement was apparently not disclosed to the Dupaixs, something that is either outright fraud or spectacular incompetence on the part of the title company and whoever ran the closing. It can be inferred from the article that the Dupaixs did not have a lawyer.

Having established the scent of fraud, the Times quickly loses interest in the Dupaix case and moves on to the big picture of resale fees as a disturbing new trend.

In this, they are late to the party. The Washington Post and CNNMoney.com (The Latest Real Estate Rip-Off) had the story in August. The Wall Street Journal covered it relatively judiciously at the end of July. And the blog TechDirt called resale fees “obviously ridiculous” way back in March.

There is even an anti-resale fee group with a website. They call them “Wall Street home resale fees.” That’s subtle. They have now been banned in 11 states and Washington is being lobbied hard.

Somebody needs to speak up for resale fees, and it might as well be me.

I think that, in principle, this is a fairly clever way to partially finance the building of a new house. A resale fee for the next 99 years ought to be worth a meaningful percentage of the total value of the place. That should reduce the selling price, making it easier for families to buy houses without borrowing more money.

Of course, there is no free lunch here. A house subject to a resale fee lien ought to cost less because the economic value for the homeowner is less. The owner, and future owners for 99 years, give up a little of the presumed price appreciation over time. But so what? I thought the point was to have a place to live.

My crude calculation is that a 1% resale fee is worth about 3.5% off the property value. (I assume a 7% chance of the house being sold per year, appreciation equal to inflation, and a discount rate of inflation plus 1.5%. Your mileage may vary.) Why not a 5% resale fee, which should reduce the cost of a new house to the purchaser by 17.5%? How is that not a good thing?

Lobbying against this scheme is led by title insurance companies and real estate brokers. The title insurance companies are against it, as far as I can tell, because it will modestly complicate their otherwise very profitable and stress-free lives. The brokers feel the same way about adding complications to real estate transactions. Oh, and also it would reduce sale prices and they get paid on commission.

Unsurprisingly, the anti-fee lobbyists do not give as reasons to oppose this that it will cause them hassle and cost them money. Which is not to say that the arguments they do give are particularly coherent. Indeed, many are in such conflict with the basic principles of economics and logic that you have to wonder how a reporter for a major media outlet could quote them.

Here are two examples I won’t even bother discussing.

From CNNMoney:

"It’s of no benefit to consumers," said Kathleen Day, of the Center for Responsible Lending. "It’s another innovative way to price gouge. Every extra dollar they suck out of people’s wallets takes away from other spending. It’s not good for the economy."

From the WSJ:

Kurt Pfotenhauer, chief executive of the American Land Title Association, said the fees would slow the economic recovery by further depressing house prices.

Mostly, the anti-fee people don’t even give reasons. The closest thing the (pretty negative) Post article has to an explanation of the argument against is a quote from Mr. Pfotenhauer saying "It’s a pretty slick way to make money, but it’s bad public policy and bad for consumers." There is no elaboration on how exactly it is bad policy or bad for consumers.

No elaboration is necessary because to the folks at the Post, the Times, CNN, and many places like them, it is a given that anything that involves money and is more complicated than buying a book on Amazon is a bad idea, and likely just another scam from the evil business types. It is not merely a question of ignorance or of a knee-jerk resistance to change, it is a deep seated anti-business, and particularly anti-finance bias.

So much easier than actually thinking about an issue.

No Comments

  • By Jack, September 14, 2010 @ 12:54 pm

    I could see your point if the arrangements were clearly laid out for potential buyers–they would then be able to get a discount on the house and would have an appropriate understanding that their eventual resale value may be similarly lower. But if that’s not happening, someone gets stuck paying more for the house than they would have otherwise (maybe they wouldn’t have even bothered buying the house if they didn’t like the agreement) and getting less when they sell the house ethically.

    All in all, it sounds like more of a headache than a feature to me.

  • By jim, September 14, 2010 @ 1:02 pm

    The basic idea is fine. Get a house cheaper now for a 1% fee when you sell it. OK I can live with that. But I’d really be concerned with the details.

    Frank says: “My crude calculation is that a 1% resale fee is worth about 3.5% off the property value.”

    The NYT article says: “For example, he says, a typical $250,000 home may be able to sell for about $5,000 less.”

    So its worth a 3.5% discount and the example is a 2% discount. Now I’m not sure if that example $5k figure is typical or not. But if these figures are valid then somewhere the home buyer is losing 1.5% of the value of the home or about $3125. Since the transaction isn’t exactly straight forward for a home owner to really see what the cost/benefit is this is where it becomes a bit shady. Few home buyers will really be able to understand the costs and know if they’re getting gouged on fees or not. If I told you that you could get 2% off the sale price today for 1% fee in the future that sounds good, but its really a 3.5% reduction in value for 2% off the price.

  • By Neil, September 14, 2010 @ 1:27 pm

    If they actually reduced prices, I’d agree with you. But as with so many add on fees, they are hidden in the fine print to the point that the casual reader of the sales contract wouldn’t notice they were there. It’s not used to reduce prices, it’s used to increase profits by successfully hiding extra costs.

    Yes, their lawyers and other people involved in the sale should point it out to them, but you and I both know that this doesn’t always happen.

    So I sympathise with the “ban the fee” movement. However, I think a more straightforward one would be to simply regulate so that the fee must be expressly disclosed (one of those clauses you have to initial), including the present value of the fee. Most people can’t understand present value, but if you tell them “these additional fees are reducing the price by $7500,” they’ll be able to compare the house to other similar ones.

    Or maybe regulation is more complicated than an outright ban. Either way, the use of these fees is currently intended to take advantage of the general public’s ignorance, not give them a discount today in return for an extra cost tomorrow.

  • By Steve, September 14, 2010 @ 1:49 pm

    If these schemes were good for the consumer there would be an after-market for adding them to existing houses. As others have said, they are simply a way for the builders in question to sneak a little bit more money out of the transaction, that money coming out of the pockets of unsuspecting and/or innumerate consumers. Also, I read another estimate that put the value at 5% (supposedly what the builder can get if they sell the future income to third party.) Finally, this almost seems like a “there’s no such thing as bad publicity” ploy to me.

  • By Jon Barclay, September 14, 2010 @ 1:59 pm

    If these fees were common they would be factored into the price. As it is though buyers, agents, and title companies don’t read CC&Rs and don’t have any clue what the buyers are getting into.

    One additional facet not touched on is that HOAs are starting to include resale fees to raise revenue. When a developer forms the HOA they can include the resale fee to boost HOA revenues and make the HOA dues lower. Most buyers will consider the HOA dues when buying a house, but not even realize the .5% or 1% “transfer” fee is being charged.

  • By Dan, September 14, 2010 @ 2:01 pm

    Any fee whose sole basis for existence is that it can be inserted virtually undetected into an already ridiculously lengthy contract on the assumption that nobody will notice it is a fee that doesn’t pass the smell test, to borrow a phrase from someone quoted in the NYT story.

    I know this will elicit an angry response from our man Frank about how people are responsible for reading contracts they sign. And I suppose that’s true. I guess I’m just naive and idealistic in thinking that actively seeking to screw your customers is not good practice.

  • By Hibryd, September 14, 2010 @ 4:26 pm

    Why 99 years, though? Why should a company who produced a housing product receive “royalties” that outlast patent protections AND the current public domain laws for corporate creations?

    Furthermore, what house lasts 99 years without needing major work? If you have to replace the roof and do some foundation work, does that portion of the house become exempt from the 1%, since you’re no longer selling the builder’s old product?

    I can think of one logical reason against it, though: it incentivises the builder to make a crapier product. Warranties on construction only last a few years. If lots of defects crop up after that protection expires, it could push whoever owns it to sell the place rather than deal with constant repairs. The builder benefits more from a high volume of future sales, even if that home is selling for a lower price, thus it’s in their best interest to intentionally build houses with lots of problems. Cheaper construction now and more sales revenue coming in later – it’s a win-win!

  • By Frank Curmudgeon, September 14, 2010 @ 5:10 pm

    Just to be clear, although I do indeed have little sympathy for people who would spend $275,000 without reading everything they are signing, or at least hire a lawyer to do it for them, I consider sneaking a resale fee into the deal and hoping nobody notices to be wrong and almost certainly illegal.

    Jim: The 2% quote is from the guy who is buying the cash streams from builders, i.e. it is his offering price. I think it is worth more than that.

    Hybrid: 99 years is the traditional almost-forever term for such things as land leases. I’ve no idea if there is a legal basis for it, but I am pretty sure that a term of “forever” would be a no-go.

    In principle, I think this would have the effect of increasing a builder’s interest in building a longer-lasting home, since he would have an interest in its value for the next 99 years.

  • By jim, September 14, 2010 @ 7:33 pm

    I didn’t think that $5k was a real number. But still I’d be concerned that a lot of the value of the fees are not really being passed on the the buyer but are instead going to line someones pockets.

    If a 1% resale fee is worth 3.5% of the present value of the house then could I get a house for free by agreeing to a 28.5% resale fee? ;-)

    On a tangent, the British had a 99 year lease on Hong Kong.

  • By John Mc, September 14, 2010 @ 10:51 pm

    You want worse? The development arm of the City of Boston does this on a regular basis. Give the developer a discount on development costs. Condos sell at full retail price (no discounts here), and the City pockets resale fees in perpetuity… Talk about corrupt government.

  • By Frank2, September 15, 2010 @ 1:06 am

    Wouldn’t that “1% Resale Fee” item be something a decent attorney would X out when he was reviewing the contract?

  • By Craig, September 15, 2010 @ 10:19 am

    I’ll cop to a fundamentally “anti-finance” attitude. The finance types certainly don’t sit around coming up with these increasingly complicated and subtle whim-whams for the _benefit_ of consumers. Neither do the mathematicians employed by the big casinos sit around working out the exact rules of blackjack that give the player the biggest edge.

    In the referenced case, the fact that this resale fee was fraudulently hidden is not incidental, but rather illuminating: screwing the purchaser with a gotcha clause is the point of the exercise. The whole mechanism stinks of both feudalism and three-card monte, and either alone should be grounds for decent people to oppose this kind of garbage.

    For a site that carries at least some implication of being a watchdog, I have noted a disturbing willingness to condone the activities of sharps who yell “Suckers!” and laugh themselves silly when their little traps are sprung. Perhaps that’s too harsh of me, and I have had either too much coffee this morning or not enough–possibly both.

  • By Frank Curmudgeon, September 15, 2010 @ 12:08 pm

    Jim: There may be a second-order effect I am not including in my calculations….

    John Mc: If you think that’s an example of corrupt government you haven’t lived in Boston for very long.

    Frank2: Heck yes, and if an incompetent one missed it, you’d have a good case to sue him for malpractice.

    Craig: We finance types sit around and think of ways to add value and in so doing make money for ourselves, just like all business people do. I think there is a world of difference between taking advantage of poor decisions made by well informed adults and taking advantage of, and even helping to create, the ignorance of others. Just because I fault a buyer for not reading what he agrees to carefully doesn’t mean I don’t think he is a victim of fraud.

  • By Hibryd, September 15, 2010 @ 12:30 pm

    Frank: “In principle, I think this would have the effect of increasing a builder’s interest in building a longer-lasting home, since he would have an interest in its value for the next 99 years.”

    Nah, people stay in good homes, and the builder wouldn’t make money from that. Wouldn’t the builder prefer to have 99 years of owners saying “screw this money pit, we’re outta here”?

    Unless you’re implying that yes, major repairs *would* be deducted from the 1% they have coming from future sales.

  • By Hibryd, September 15, 2010 @ 12:38 pm

    Although to tell the truth, we’re *both* assuming that a company is willing to plan 99 years in advance, when most executives don’t think past their retirement at best, and next quarter at the worst.

  • By Oldsmoboi, October 9, 2010 @ 11:03 am

    If there was a way to opt out of that fee for a corresponding increase in sale price, then I’d be ok with it.

    The reality is, the building developer realize that housing prices are down, with further to go, but that doesn’t mean they won’t shoot back up again 10-15-20 years in the future. The developers are trying to get their fingers into the pie ahead of the game the next time “Flip This House” becomes popular.

    The part of this article that really made me laugh though: The assumption that *anything* the developers add or do is for the benefit of the consumer. ;-) That’s a good one I might just turn into a children’s book.

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