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 (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

No comments yet.

RSS feed for comments on this post. TrackBack URI

Leave a comment

WordPress Themes