Developers are embracing a new reconveyance fee designed to strip sellers of their equity for the next 100 years.
Today's featured property has fully recovered to peak pricing… NOT!
Irvine Home Address … 79 EDGEWOOD Irvine, CA 92618
Resale Home Price …… $699,000
I want your ugly
I want your disease
I want your everything
As long as it’s free
I want your horror
I want your design
‘Cause you’re a criminal
Lady Gaga — Bad Romance
It is human nature to want everything, and if you can get it for free, that makes it even better. There is a program where developers extract free money from houses they build over the next 100 years. Well, it isn't exactly free: it comes out of seller's equity. It is a great deal for developers. For sellers, not so much.
Most of my professional life, I have worked with real estate developers. I spent almost 20 years acting as a project manager, developer representative, and most recently as a land planner. I have worked closely with brilliant and very wealthy individuals. I am fortunate to work with men I admire; although, I have witnessed the actions of many I do not.
Developers are primarily motivated by money, and if there is a method for squeezing a few extra dollars out of real estate, most developers will embrace it. In fact, my livelihood depends on my ability to help developers create, find, and obtain the value in their land. Adding and extracting value has societal benefit, but not every tool available to developers benefits society, and some exist only to enrich developers. Mello Roos is a classic example in California of a financing racket that enriches developers. The latest scam in the development world is called Reconveyance Fee Rights.
Community Facilities District Act enriches developers
According to Wikipedia:
A Mello-Roos District is an area where a special property tax on real estate, in addition to the normal property tax, is imposed on those real property owners within a Community Facilities District. These districts seek public financing through the sale of bonds for the purpose of financing public improvements and services. These services may include streets, water, sewage and drainage, electricity, infrastructure, schools, parks and police protection to newly developing areas. The tax paid is used to make the payments of principal and interest on the bonds.
When a homebuyer in California purchases a property, most believe they have completely paid for the house. Not so. Instead of building subdivisions with their own money, real estate developers float bonds to pay for the improvements, and buyers pay for these improvements through their tax bills as a special levy. What should be an expense of doing business borne by the developer instead gets passed on to the consumer.
Imagine you purchased a new Ford. After you buy you find out the tires were not paid for as part of the car, and you will have an additional payment for the tires separate from any payments you may have for the car. That is what happens to homebuyers when they purchase in a neighborhood with Mello Roos — and nearly every neighborhood built since 1982 either has or had Mello Roos fees attached to them.
Revenues from Community Facility District bonds serve to make marginal project feasible, and as long as owners realize they have a large tax liability, then I see no real harm in the legislation. It is a big bonus to developers, but there are so many special tax breaks given out for dubious reasons that this one sinks into the morass and generates little outrage.
Reconveyance Fee Rights
A group of entrepreneurs has put together a gross ripoff of future homeowners by leaching seller equity. From the Freehold Capital Partners' website:
Simply put, a Reconveyance Fee Instrument represents the right to receive 1% of the gross sales price each time a particular piece of real estate property sells. These rights represent a valuable, fully collateralized long-term income stream with no risk of default.
realtor commissions are too high, but at least realtors participate in the transaction and provide some justification for the piece of seller equity they get at closing. No such justification exists for what Freehold Capital Partners is proposing. It is simply theft.
How about this for a new and ingenious real estate money machine? Every time a house sells during the next 99 years, 1 percent of the price goes back to the original developer or is shared among investor partners. Ka-ching!
The levy won't be subject to haggling between future buyers and sellers, either. That's because it's a covenanted mandate — a novel type of lien on the underlying real estate — called a private transfer fee. It's not a government transfer tax. Nor is it a homeowner association or environmental protection covenant. It's purely a private requirement that runs with the land. If a seller refuses to pay it to a third-party trustee at closing, the sale won't proceed.
It isn't something a seller can fight because no party at the closing table can negotiate. The seller's choices are (1) pay the fee, or (2) don't sell the house. I suppose they could try to sue some asset-backed security holder somewhere, but how far do you think that will get?
Guess who doesn't like this idea?
The National Association of Realtors and the American Land Title Association, for example, are asking their members to persuade legislators to prohibit or limit the use of investor-oriented private-transfer-fee programs. Even the National Association of Home Builders, some of whose members reportedly have signed up to participate in the transfer fee program, isn't convinced that the idea is sound.
"It's a very creative concept," said David Ledford, the builder association's senior vice president for housing finance, "but it's largely untested and controversial politically."
realtors hate the idea for obvious reasons: they don't want anyone else in the seller's wallet at closing because it draws undo attention to how much they are getting. The National Association of Home Builders doesn't like the idea, partly because they see it for the fraud it is, and partly because they know the inevitable lawsuits will mostly be directed toward its members.
For its part, Freehold maintains that its transfer-fee covenants are good for consumers and good for cash-strapped builders. Curtis Campbell, a spokesman for the firm, said in an e-mail that "private transfer fees represent an adaptation in how to pay for development costs" incurred by builders "at a time when funding is not available" to them on "reasonable terms."
Did you giggle when you read that? I did. I can tell you from personal observation that builders have no shortage of capital available to them right now. Most builders have restructured their debt, and they have plenty of cash on hand which they are currently using to buy up land.
By creating future revenue streams — which builders can monetize upfront by selling to investors — the plan allows developers to sell houses for lower prices than they otherwise could, Campbell said.
OK, that one isn't funny, that lie is so offensive it makes me angry. Mr. Campbell is insinuating that customers may actually benefit from this practice with lower prices. No way. The builder is going to sell the house at market, and a transfer fee is not going to create conditions where buyers get bargains from builders.
There is no rational justification for this fee. It is only being charged because they think they can get away with it. The facts are obvious, and the feeble rationalizations are laughably stupid.
And as if we haven't learned a lesson about slice-and-dice packaging of mortgages, Freehold Capital apparently wants to "securitize" pools of transfer fees that can then be spun off and sold to investors.
Yes, let's bring in all the complicated issues of securitization. That way, when this all blows up, the syndicators will already have their money and the government can step in and bail everyone out.
Will cooler heads prevail? Will the legislatures around the country strike this one down?
Now this is, as you might imagine, controversial. So much so, some states have apparently either limited or banned these "private transfer fees." OK, I should have known you'd want to know which ones: Kansas, Oregon, Florida and Missouri, just plain ban the practice, according to the paper, while Texas and California have some restrictions on it.
But most states do not address the issue of these fees at all, so it is something you the potential home buyer should look for before signing a contract for a new home. That's vital because the fees (which are paid by the seller) are not subject to negotiation. If you end up selling a house one day that has one of these private transfer fee deals attached to it, you either pay a trustee at closing or, sorry, no sale!
Developers think this is a swell concept because they can, over years, get back some of the initial upfront costs of the project without having to have the first buyer of the property cough up the entire amount. However, others argue that, in the long run, homes with transfer fees attached will actually become more difficult to sell, which, if you happen to be the current homeowner, is not such a good thing!
If you think you may be able to fight this in court someday, think again. Not so easy, apparently.
On the PR Newswire this past weekend, one expert on private transfer fees delivered a commentary of sorts. Says attorney RJon Robins, a member of the Florida Bar's Real Property, Probate & Trust Law Section, "…absent a specific statutory prohibition, a well-crafted private transfer fee covenant will likely be enforceable, particularly when undertaken in connection with a real estate development project."
So how long before the Irvine Company does this on the Ranch? Should you buy now before they figure out they can get a piece of your equity as well? Perhaps the California restrictions prevent them, or perhaps they recognize this fee for the theft it is and don't want to participate. I hope it's the latter.
Irvine Home Address … 79 EDGEWOOD Irvine, CA 92618
Resale Home Price … $699,000
Home Purchase Price … $650,000
Home Purchase Date …. 6/7/2006
Net Gain (Loss) ………. $7,060
Percent Change ………. 7.5%
Annual Appreciation … 1.8%
Cost of Ownership
$699,000 ………. Asking Price
$139,800 ………. 20% Down Conventional
5.00% …………… Mortgage Interest Rate
$559,200 ………. 30-Year Mortgage
$144,735 ………. Income Requirement
$3,002 ………. Monthly Mortgage Payment
$606 ………. Property Tax
$225 ………. Special Taxes and Levies (Mello Roos)
$58 ………. Homeowners Insurance
$139 ………. Homeowners Association Fees
$4,030 ………. Monthly Cash Outlays
-$734 ………. Tax Savings (% of Interest and Property Tax)
-$672 ………. Equity Hidden in Payment
$272 ………. Lost Income to Down Payment (net of taxes)
$87 ………. Maintenance and Replacement Reserves
$2,983 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$6,990 ………. Furnishing and Move In @1%
$6,990 ………. Closing Costs @1%
$5,592 ………… Interest Points @1% of Loan
$139,800 ………. Down Payment
$159,372 ………. Total Cash Costs
$45,700 ………… Emergency Cash Reserves
$205,072 ………. Total Savings Needed
2 full 1 part baths Baths
1,650 sq ft Home size
($424 / sq ft)
4,444 sq ft Lot Size
Year Built 2000
2 Days on Market
MLS Number S608565
Single Family, Residential Property Type
Oak Creek Community
Darling home located in desirable Oakcreek in the gated community of Kelsey Lane*3 spacious bedrooms, 2.5 baths*Popular style great room w/open living, dining & kitchen*Living/family room has upgraded brick fireplace w/battenboard detail & white mantel & is wired for surround sound*Dining room is large w/plenty of space for a computer niche*Spacious white on white kitchen has thermafoil cabinets w/high-end knobs, tile countertops, large pantry, center island, new faucet & dishwasher*Lovely master bedroom w/distrelled wood floor & bath w/tub & stall shower, double sinks, walk-in closet*Large secondary bedrooms*Features include Pergo-style pine flooring, newer high quality Berber carpet, white plantation shutters, crown molding, designer paint*Beautiful backyard w/large outdoor entertaining area w/bbq, large bar w/seating, firepit, raised beds, & extra-large grassy sideyard perfect for a swingset*Garage has lots of cabinets & epoxy floor*Walk to pool,spa,tennis & school too
Another writer who confuses asterisks for periods. This punctuation is working its way into realtorspeak.
Past the bubble peak?
This owner has priced this property to get out at breakeven — a property purchased at the peak of the bubble. WTF? Have we so restricted inventory and pimped interest rates that sellers can get prices higher than 2006?
What do you see?
This owner likes the color green and working out.
Is it creepy to have pictures of sexy dead people over a headboard (the image is Marilyn Monroe)? When would you look at this picture and under what circumstances?
Is this place small, or is the furniture too large?
Can anyone identify what is in the washer?
Is that like Jesus Toast or Virgin Mary Grilled Cheese?