How to Avoid a Home Builder's Fee

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Home builders are tacking on fees to sale prices, threatening both the home’s resale price and homeowners' long-term investments.

Just when Americans began to breathe easier with new curbs on credit and debit card fees, a new homeowners fee emerged. That is, the “resale fee” paid to the builder by all of a home’s future sellers.

The New York Times reports the builder charges not just the home’s first owner, but subsequent owners who sell during the next 99 years. Typically, the fee is 1% of the sales price — $2,000 on a $200,000 home, $5,000 on a $500,000 home. It takes the form of a deed restriction that the property’s owners have no power to undo, and potentially reduces the home’s resale price.

Also called a “capital recovery fee” or “private transfer fee,” the requirement may be deep in legal documents buyers don’t always read. The Times cites buyers who were unaware of the fee until they closed on the sale, at which point it was too late to negotiate an offsetting reduction in the home’s sales price.

Does this fee provide anything to the home’s first and future owners? Perhaps, but there are factors to consider.

Freehold Capital Partners, a firm that helps builders set up the fee, argues on its website that the charge is a “win-win” solution to problems faced by both builders and home buyers. Builders use the fee to spread the costs of land improvements over a succession of owners rather than concentrating them on the home’s first purchaser. As a result, each home buyer should pay less, Freehold says.

Freehold argues that homebuyers aware of the fee will negotiate an offsetting reduction in the purchase price. But because of that, it does not appear to be in the builder’s best interest to trumpet the fee. In fact, Freehold’s website promotes the fee as a way for builders to increase their profits through a long-term “income stream,” or by selling rights to future fee income to investors like hedge funds.

While a fee, assuming it is adequately disclosed, should play into the supply-demand equation and be reflected in the home’s sales price, the home buyer should keep the potential downsides in mind.

When it’s time to sell the home, you may find the fee discourages some home shoppers who will not want to pay it when they sell. And, as Freehold suggests, your buyers may hold out for a lower price to compensate for the feel they will have to pay someday.

Also, the 1% fee will be applied to your total sales price, which may reflect additions, renovations and other property improvements completed at your own expense. In this case, the builder will profit from your investment without sharing any of the cost or risk. The builder, of course, will also benefit from any home-price appreciation, while contributing nothing to that gain in value.

Finally, if the fee were truly charged for the benefit of the homeowner and community, it would go into a fund dedicated to replacing sidewalks, repaving and other neighborhood needs. Instead, goes to the builder, or investors who bought rights to the income from the builder.

To avoid being surprised by an undesirable fee, be certain to read all documents related to the sale. Keep in mind that since the fee transfers with the property, it could apply even if you are buying from another individual as well as from a builder.

To avoid last-minute revelations, you could write into any purchase contract a provision denying the seller the right to impose such a fee. The seller, of course, can refuse, but that will bring the fee to light so you can negotiate.

Be sure to alert your title-search firm of your concern about such fees. Your paperwork with the title company should clearly state it is the firm’s responsibility to uncover any such fee.

Finally, inform your real estate agent clearly, and in writing, that you must be notified whenever a home you’re shown has such a fee. This will make your agent responsible for getting this information out of the seller.

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