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
{book1}
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.[2] 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.
A new real estate cost to watch for: Developer's private transfer fee
Kenneth R. Harney Saturday, March 6, 2010How 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.
Developers Embrace New 'Flip Tax'
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
Property Details for 79 EDGEWOOD Irvine, CA 92618
——————————————————————————
3 Beds
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
Tract Kell
——————————————————————————
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?
If the buyers agree to the fee, is it a rip off?
In this instance, I say yes. Despite popular belief, disclosure is not sufficient to justify every fee and charge, particularly in complex transactions like this one where you have no ability to negotiate out the offending clause.
This reminds me of the easement at the North Korea Towers that costs the HOA half of its monthly dues. It is the same mechanism in disguise, and it is just as egregious.
Curious – what easement is it?
From what I understand, and I may be incorrect, there is some property easement where the HOA must pay the easement holder something like $500 per month per unit forever. I have to imagine this was a savvy developer who arranged that intentionally to maintain a cash cow nobody could assail.
Yes you’re right IR. The easement has to do with the nearby Park Place property and the adjoining parking garage.
How many people actually know what they are signing these days? Have you seen how thick escrow papers have gotten over the past 5 years. I can see everyone jumpping on this trend. Who is to say we all can’t have our own fee(tax) for anything we do? If our govts,banks and parasites can get away with it why can’t developers?
The thing in the washer is a reflection of a Dyson vacuum cleaner elsewhere in the room.
http://images.google.com/images?sourceid=navclient&rlz=1T4GGLL_enUS309US309&q=dyson vacuum cleaner&safe=active&um=1&ie=UTF-8&sa=N&hl=en&tab=wi
good catch.
I’m kind of surprised that a true SFR this small and this new exists in Irvine. I thought most properties this size in Irvine would either be older, or condos or at least townhouses.
The house has an attached garage…i guess that becomes an SFR in irvine
Older SFRs in Irvine has lots larger than 5000 sq feet.. unless they are “bungalows” in which case they are condos.
Newer SFRs, even those 3500 sq foot McMansions are on 5000 sq foot or smaller lots (see TRidge and Quail Hill). It’s incredible.
Ladera Ranch has had a fee like this since inception 10 years ago (I’ve bought and sold two homes there).
Not sure it goes to the developer, but there’s a 1/4 point “beautification” fee (or something like that) due at sale.
This is on top of done of the highest Mello Roos AND TWO HOAs (each of my homes had a Master Ladera HOA and a Neighborhood HOA).
I’ve learned my lesson and won’t even look at home in Ladera/Stepford.
Luckily, I sold both at a profit (late 2002 and late 2005).
🙂
Is March the beginning of the spring selling season? On Saturday I saw more open house signs than I’ve seen for quite some time in Woodbridge. Every corner had one or two signs.
Typically, yes. It was one year ago this week that inventory in Irvine peaked for 2009, which is unusual. I expect inventory to continue to climb this year into May or June.
More short sales?
I’ve slowly grown to hate developers as much as real estate agents over my 14 years of living in California. Every autumn there are fires in places houses shouldn’t be built and every winter there are mudslides that follow. Every year we pay for it somehow. Who got rich building the houses? Developers. Do they have to pay for any of the mess their building has caused? No. We do. Politicians are constantly getting caught taking under the table money from developers. They are the greediest leaches in so Cal.
Oops –
Leech = blood sucking worm
Leach = slow percolation of water through soil
Need more coffee…
http://lansner.freedomblogging.com/2010/03/15/raffle-prize-is-high-rise-condo/59585/
IPSF raffles off 1,445 square-foot condo in the 3000 The Plaza tower on Jamboree and a year rent-free in a two-bedroom apartment at The Park at Irvine Spectrum Center.
First time i saw them offer a rental as a prize. Sign of the times?
Does 3000 The Plaza even feed into the IUSD school district?
Nice post..IHB has become a must read these days.
A house with the exact same plan, in the same area sold for 635k. 635k was borderline high for that area what makes these homeowners think that a 64k increase in 6 months is justified. On the other hand this is irvine, the house will probably sell by the end of the day today.
I wanted to email you about a pending REO, 19 Bellicanto. It was REO for a long time but the bank was not listing it. It was listed a couple of weeks ago but some flipper picked up within hours of listing.
This has nothing to do with today’s post, well, I guess it *kinda* does, but here’s a house for sale in the RBA that will put any overpriced property in Orange County to shame.
http://www.redfin.com/CA/Hayward/261-Laurel-Ave-94541/home/1919464
Try listing a sewage flooded house in Irvine for $900K! I dare any of you.
RBA! RBA! RBA! RBA!
oops… wrong link.
http://www.redfin.com/CA/San-Mateo/1647-Overland-Dr-94403/home/750341
this is the sewage flooded house for $900K. I’ll repeat that, because it bears repeating.
It’s a house, available for debt leveraged purchase, for just shy of one million US dollars. And it’s flooded with sewage.
Now THAT’S an honest listing!
“Enter at your own risk. 1st floor is flooded with sewage. recommend wearing a mask before entering. ”
Something’s fishy with the numbers:
Apr 25, 2000 Sold $852,000
Apr 26, 2002 Sold $910,000
But yeah, you’re right, no one would dare do such a thing in Irvine.
I think I may have said it once before – Irvine real estate is crazy with Kool-Aid intoxication, but the bay area is much worse.
Only a contractor or flipper would take this on. I don’t care what you sell this for, I don’t know anyone that would want to a) deal with it b) live in a house where they KNOW it was flooded with sewage.
I would never ever ever be able to enjoy the house with that knowledge. Imagine going barefoot? I don’t care what kind of hydrochloric acid you used to clean it, its not happening. The only way I would feel comfortable is if you ripped the entire 1st floor apart and threw it out and built it anew. But if a flipper does the clean up and doesnt tell the next buyer, no one’s the wiser (until your new neighbors inform you) and then find where the flipper lives and pump some sewage into their house.
-m
That’s one craptacular listing.
Even without it’s fertilized flooring, is it a $900k home?
My .02c
Soylent Green Is People.
How much a property should be discounted so that the owners over the 99 year period will break even?
There is no way to answer that question. Since the tax is only triggered when the property sells, it is possible that the property could transfer through inheritance and never trigger the fee. Most likely, it will be turned over every seven years, and the holder of the fee will get paid 1% of current property value 14 times during a 100 year period.
To me, this should be a 1% discount at sale, but in the real world, it will not make a difference. It becomes another sale objection a seller must overcome.
It’s true that most of the buyers are blindly bidding for real-estate. For example, I bet most of the buyers, when they think about tax benefits of home ownership, they forget that they just lost the standard deduction.
In order to compute the required discount, one needs to have access to average ownership time (7 years seems fine, although is that mean or average?) and, most importantly, rate of appreciation for the 99 years.
I’m almost certain that the discount is far higher than 1%, since it’s a penalty not only for the current owner, but for the future owners. It’s almost like a New York co-op. You’ll buy at a discount and you’ll sell at a discount just because there’s somebody between you and your property.
But I’m lazy to compute the discount, since there are so many variables… You save on mortgage, you save on property tax, but you lose on sale price.
As I said, I am lazy. But here’s why I believe the discount should be substantial:
Let’s assume the following things:
– market value of a similar home (w/ no strings attached) stays flat at 100k
– tax is not influenced by this discount (you pay tax on 100k, even if the real value is discounted)
– money is free – it doesn’t matter for you, the owner, that you pay mortgage for 95k or for 100k
– average ownership duration – 10 years
After a hundred year, its value will be exactly the same to one that never was enslaved.
Then, you’ll have 9 sales during the 100 years of reconveyance fee, after the initial sale by the builder (sale 0). Each will cost you 1% of the transaction. The value will look like (in reverse order):
* after 90 years: ~100k (almost no strings attached, only 9 more years of slavery) – fee 1k.
* after 80 years: ~99k (will lose 1k in 10 years from now) – fee 0.99k.
* after 70 years: ~98.01k (will lose 0.99k in 10 years from now) – fee 0.9801k.
* after 60 years: ~97.03k (will lose 0.98k in 10 years from now) – fee 0.9703k.
* after 50 years: ~96.06k (will lose 0.97k in 10 years from now) – fee 0.9606k.
* after 40 years: ~95.1k (will lose 0.9606k in 10 years from now) – fee 0.951k.
* after 30 years: ~95.1k (will lose 0.9606k in 10 years from now) – fee 0.951k.
* after 20 years: ~94.148k (will lose 0.951k in 10 years from now) – fee 0.941k.
* after 10 years: ~93.206k (will lose 0.941k in 10 years from now) – fee 0.932k.
Therefore, the discount when the buyer buys it from the developer with slavery for 99 years should be 93.206k-0.932k = 92.27k
So, for this scenario, the expected discount should be 7.73%. That means tens of thousands for houses in SoCal!
Sleepy, sorry:
Correction: “Therefore, the right price when the buyer buys it from the developer with slavery for 99 years should be 93.206k-0.932k = 92.27k”
Notice the opinion passed off as news in this article:
Housing Real-Estate Recovery Signaled as Fed Unwinds
By Kathleen M. Howley and Rich Miller
March 15 (Bloomberg) — The U.S. housing market is poised to withstand the removal of government and Federal Reserve stimulus programs and rebound later in the year, contributing to annual economic growth for the first time since 2006.
Increases in jobs, credit and affordable homes will help offset the end of the Fed’s purchases of mortgage-backed securities this month and the expiration of a federal homebuyer tax credit in April. Sales will rise about 6 percent this year, and housing will account for 0.25 percentage point of the 3.6 percent growth, according to forecasts by Dean Maki, chief U.S. economist for Barclays Capital in New York.
“I would bet even odds that we’re at a bottom and that we’re going to see improvement in the coming months,” said Karl Case, co-creator of the S&P/Case-Shiller Home Price Index and a professor of economics at Wellesley College in Wellesley, Massachusetts.
Be sure to keep this article around, and maybe even find a contact email for the authors so we can point and laugh at the end of the year, by which point I’m sure they will have changed their story anyway.
Don’t keep your hopes up. Remember this: mark-to-fantasy accounting still exists and so banks are in no rush to unload those shadow inventories that we’ve been discussing for eons. Furthermore, ZIRP is clearly getting more investors out of the woods trying to find the next best investment with decent returns.
Unless we see a huge dumping by current debtowners this year, don’t expect the housing price to drop anytime soon.
Short sale tax shortchanges ex-homeowners
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/03/15/MNO21CEDUK.DTL
This isn’t one of those things that just gets “slipped by.” If it was put in place, it would become common knowledge to almost all buyers.
I would think it would then be factored into the price, like a Mello Roos obligation or HOA obligation.
Although, because it only springs up in the future, and most can’t think past their next mortgage payment (much less an indeterminate, but likely many, years down the road), maybe not.
but, anyways, I refused to buy in any Mello Roos area, and I would refuse to buy in any area that had this Transfer Fee.
Agreed, the question is how will you find out about it until you are well into escrow and spot it in the fine print? A nervous first time buyer probably would not even know to look for the fee.
I’ve had a hard enough time trying to figure out what Mello Roos is for any place I was interested in (it’s on the OC tax assessor’s website). I’ll make it easy though for anyone interested in a place w/ Mello Roos: in general it doubles your property tax, or more.
the dyson is not in the washer. it’s a reflection in the mirror-like door.