Isn’t capitalism wonderful?
For all the beatings our laissez-fair, invisible hand system has taken over the past few years, we still can’t help but marvel at the creative, sometimes obvious, often ingenious and too-often confounding ways in which people across this country continue to make money.
As long as no rule is broken and no deal made with intent to harm, then we’re all free to continue to find new ways to make a buck. It’s a system that has resulted in massive wealth and mind-boggling innovation in this country, and many others.
The latest money-making idea to catch our eye involves controversial private transfer fees on property transactions.
In a nutshell, it works like this: A homebuyer decides to purchase a lot and home in a residential subdivision developed by XYZ Development Co. In exchange for a nominally lower initial sales price, the homebuyer agrees to pay said transfer fee, equal to 1 percent of the sale price, when re-selling the home in the future. The transfer fee is amended to the land title, and subsequent property transfers all result in this fee for the next 99 years.
The homebuyer gets a discounted price on a home in exchange for smaller gains on its eventual re-sale.
The developer’s gains are less obvious, but no less noteworthy. For the plan to work for a developer, the initial 99-year agreement entered into by the buyer must be monetized upfront, to help offset development costs and enable said lower prices on developed homes.
The most obvious method is through securitization, in which a pool of investors purchases the rights to all future revenue from the developer, essentially creating bonds based on future cash flows that can be sold to deep-pocketed money managers.
On its surface, the transfer fee works in its own ingenious way. The consumer and the developer save money (which can be likened to making money), and investors get a nice, safe revenue stream
But a deeper examination reveals some flaws in this moneymaking venture, mostly regarding title, valuation and disclosure details.
In most real estate transactions, real estate agents and lenders typically do not do title searches, and so may not be aware of the private transfer covenant until a title company gets involved at closing. At that point, depending on policy considerations and language, the actual transfer fee itself may either result in no sale, or at best a renegotiation of terms.
The terms themselves get sticky at this point, too. Assuming an appraiser was also unaware of the transfer covenant, it seems safe to say he used nearby properties as comps when determining value – comps that may not have been subjected to similar transfer fees.
It could rightfully be argued that a home with such a stipulation attached would be worth less than an otherwise similar or identical home. But how much less? Submitting an accurate appraisal, already crucial to the homebuying process, becomes inherently more difficult in these situations.
And that’s the thing with these increasingly clever moneymaking ideas. The grand idea is always subject to the vagaries and tiny details of the law, consumer whimsy and prevailing thought.
But in this case, the grand idea stands. When and if perfected, it can and should be seen as a viable economic inducement to development. It may be controversial, but what isn’t? Assuming proper disclosure methods are followed, this truly is a caveat emptor situation. A buyer doesn’t have to purchase a home with a transfer fee attached.
Of course, pro-consumer groups have sprung up in opposition to the new fees in their entirety, and 17 states have now outlawed or restricted the fees, as is their right.
But in Massachusetts, we think the fees may have a place. Upfront housing costs are enormous locally, and with proper disclosure and regulation, private transfer fees can be one way, for some folks, to reduce housing costs.
Given the right set of rules, investors make money, and developers and consumers save it.
Isn’t capitalism wonderful?
