Buyers in for future shock
Builders of housing developments generally are required to pay for the construction of roads, sewers and schools for the new residents. It’s a given that those costs are passed along to the buyers of those homes.
What isn’t a given is that, for years, some builders in California and a handful of other states have been passing along other costs of doing business -- appeasing environmentalists and local governments to get their projects approved -- to subsequent buyers as well.
The builders attach private transfer fees, which range from about 0.05% to 1.75% of the purchase price, to the deed, which must be paid every time the home is sold.
Typically set at 1%, fees on a home sold for $550,000 would be $5,500. The fees can remain in effect 20 to 25 years or longer.
Builders use the money to fulfill promises made during the approval process, such as preserving agricultural land and wetlands, creating green space or funding affordable housing and programs for the homeless.
Theoretically, 50 years from now the funds would go to the developers’ successors, whose priorities and causes buyers may not approve of or know about.
The California Assn. of Realtors, which became aware of the practice about 18 months ago and opposes it, says it adds a hidden expense to the price of homes and makes them even less affordable.
The group argues that although there have been no reports of abuses, no one is watching the store and the potential exists for the money to be diverted to other purposes -- including personal use.
Environmentalists and builders -- unlikely bedfellows -- defend the collection of these fees. They say the money helps pay for quality-of-life amenities that benefit whole communities and therefore should be borne by all owners -- present and future.
Although the practice is legal, few homeowners are aware they are being charged these fees. The issue is raising a major dust storm.
Senate Bill 670 -- set for a hearing on Tuesday -- would halt these private transfer fees. The measure is backed by state Sen. Lou Correa (D-Santa Ana) and supported by the California Assn. of Realtors. The hearing will be before the California Senate’s Transportation and Housing Committee.
Those in favor of the bill say the practice is ripe for fraud and see it as a stealth tax.
“Future home buyers are carrying the burden that historically has been shared under other established taxes,” said Alex Creel, chief lobbyist for the state Realtors group. “Developers ... are benefiting at the expense of those buyers.”
It’s in the fine print
Opponents of the Correa bill are quick to point out that buyers are free, of course, not to purchase a home if they object to paying the fee.
Disclosure of private transfer fees, however, often are buried in the Covenants, Conditions & Restrictions paperwork and specific dollar amounts may not be discovered until the close of escrow.
Builders are backing an Assembly bill that would keep the practice of charging these fees but require spelling out the use of the money and mandate that the funds must be used for public benefit.
The state builders’ association is “all for increasing the amount and timing of disclosure,” said Kimberley Dellinger, legislative advocate for the California Building Industry Assn. Under AB 1574, buyers would learn about the fees early in the process.
Industry analysts do not know how prevalent transfer fees are, but the practice is gaining notice in California and Texas as developers seek to deflect rising construction costs because of locally mandated improvement requirements.
The California Council of Land Trusts, California League of Conservation Voters, Orange County Community Housing Corp. and other transfer-fee advocates argue that these mitigation fees should be paid in perpetuity, meaning not just by the initial buyer, but also by subsequent buyers.
“Reconveyance fees are simply a mechanism by which a builder can meet all the demands placed on them and finance the costs,” Dellinger said. “If you don’t spread this out, then you have to multiply the fee by 10 to 20 times and put it all on the first buyer. That hurts affordability too.”
One Southland developer assesses the fees to fund causes that some might not associate with housing developments.
Lennar Homes charges 0.05% on home purchases to provide funding for the Lennar Charitable Housing Foundation, a nonprofit organization that helps support the homeless and those living in substandard housing, said Jeff Roos, Southwestern regional president. That translates to $150 on a home that resells for $300,000.
About 20,000 homes are in the program, from which Lennar derives no tax or other financial benefits.
“When buyers see what their contribution over time will provide, it’s significant,” Roos added.
