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New home buyer? Beware private transfer fee

If you bought a home built in 2004 or later, or if you plan to buy one, read the fine print in your closing documents: You could be required to pay a 1 percent fee to the builder when you sell it -- and so might every future seller, for up to the next 99 years. The legality of such fees -- which go by names such as “capital recovery fees,” “private transfer fees” and “home resale fees” -- is being duked out in Congress in the form of dueling bills.

In one corner, opponents of the fees argue it’s a scheme to unfairly strip homeowners of their equity while lining developers’ pockets. That group, which includes the National Association of Realtors and the American Land Title Association, has formed a coalition to advocate the Home Equity Protection Act of 2010, which seeks to ban private transfer fees on real estate. The Federal Housing Finance Agency is also trying to restrict Fannie Mae and Freddie Mac from insuring residential properties subject to these fees.

In the other corner is a coalition of builders, developers and others who support the fees. This group argues that these fees make new homes more affordable by spreading out to future buyers the initial cost of land development -- including things that aren’t part of the house, such as sewers and curbs – costs they say would otherwise be part of the original sale price and the sole responsibility of the first buyers.

They’re backing a different bill, which would permit the fees as long as there’s a standard disclosure statement, which buyers would be required to sign. No such standard exists now, leading to concern by opponents of the fees that hapless homeowners could get hoodwinked.

Some states have banned the fees, but they’re not illegal in New York. Still, home resale fees aren’t widely used on Long Island, says Garden City developer Alec Ornstein. “I’m involved in the industry on the national level and here on the local level, and it’s not something most builders are familiar with,” says Ornstein, president of Ornstein Leyton Company. “When we build out a community, we add those infrastructure costs and divide them equally among the lots or units in the development.”

Howard Kopel, chief executive of Sutton Alliance, a national title agency based in Valley Stream, says he is glad it’s not a common practice here. “I have been in the title insurance business since 1985, and can say that private transfer fees are extremely unusual in this area," he says. "It would be unfortunate if these fees were to become common, especially during such a severe real estate recession … Developers should ask a fair price for their property, and having gotten it, should be permanently out of the loop."

“I believe that the homeowners of New York should be protected against this predatory and harmful scheme,” adds Kopel, a Republican Nassau County legislator from Lawrence.

Ornstein says he wouldn’t be opposed to something that would allow him to offer lower prices while still covering his own costs, but he’s not convinced these fees make sense. “To the extent that we could provide homes at a lower cost so people can afford them, that’s a good thing. I don’t know that I’d put much stock into that income stream unless I was a very young man and had a long time to collect it. How do you predict that stream?” he says. “I wouldn’t want to depend on future turnovers of that property to collect a fee to help reduce the costs today.”

Freehold Capital Partners, the Manhattan-based consulting firm that invented the controversial fee in 2004, says the revenue streams generated from the fees can be bundled and sold to investors to provide liquidity to the developers. This upfront cash would help keep partially-completed projects from stalling during the economic slump, a spokesman says.

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