Builders are tacking on transfer fees that are charged each time a home is sold.

You’d think that transfer taxes can only be charged by the government, right? WRONG!

Builders have found a way to fund their pet projects (i.e. projects they’ve been arm-twisted into funding) by creating "funds" that all future buyers of their homes will pay into. They call it a "transfer fee" or a "reconveyance fee", and even if you buy the home with this requirement attached to the deed 20 years from now, you’re likely to be required to pay it.

State Senator Lou Correa (Anaheim) has introduced a bill to stop this practice, stating that only the goverment can impose taxes and that this "transfer fee" is essentially a tax. The fee is generally 1% of the sales price, but can range from about 0.5% to 1.5% and is used most commonly to pay for open space, affordable housing and for environmental mitigation. Typically this assessment lasts for 20 to 25 years, but it can potentially have no limit.

Even the California Association of Realtors (CAR) calls the fee a "private transfer tax" that sidesteps a state requirement that taxes be approved by voters. CAR’s position, as stated in their recent press release, is that this private transfer tax essentially charges future homeowners for the developer’s costs that should have been paid up front.

CAR President Colleen Badagliacco stated that "This is an alarming trend in California, one that gives non-government entities like developers the power to tax, while threatening the dream of homeownership by pushing prices higher. While the highest private transfer tax rate we are aware of currently is 1.75 percent of the home’s value, under existing law there’s no upper limit."

So, now we have Mello Roos taxes that are paid to the government for infrastructure that the builder didn’t pay for up front, as well as this "reconveyance fee" that is snuck in under the covers.

Lennar currently charges 0.05% on home sales in certain Orange County developments to fund a charity helping the homeless and those living in substandard housing. This would amount to a $500 fee on a home sold for $1 million. Apparently about 20,000 homes built since 2003 are affected by this fee.

What’s really tacky about this whole thing is that the builder claims to be giving to charity when they set up this fee structure. WHAT? Isn’t it the consumer’s dollars that are going to this "charity" every time the home is sold for the next 20 to 25 years? The builder gets the deduction for "donating" to charity, but you the homeowner have to ante up the dollars. Now that’s just WRONG!

SB 670 was introduced by Senator Correa to stop this practice, and it reads in part:

"Often, the imposition of these fees is used to settle disputes between builders and parties who are opposed to a development or, in the alternative, by builders to avoid proactively a lawsuit by these opponents or to smooth development negotiations with the local government. Typically, in return for an agreement by the opponents to the development to not pursue a lawsuit based on one of the state’s environmental protection acts, the builder agrees to the imposition of one or more fees through a covenant that remains in effect through each sale of a home."

And here’s the scary part:

"The requirements for disclosing the existence of a transfer fee are limited. In addition, the requirement for payment of the fee can be masked by it not applying to the first buyer but only to subsequent buyers."

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