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Business & Tech

UPDATE: New Woodinville Homebuyers: Watch for "Transfer Fees"

These fees are not common in Washington state but they have cropped up in real estate papers and can be surprising.

Editor's Note: On Wednesday, April 13, these transfer fees became illegal in Washington state. 

Just when you think you have heard about all of the problems that could crop up along the way to closing on a new home, one more appears. Although unusual and more or less specific to new homes, developers have created a way to ensure a stream of income long after a home is sold.

Private transfer fees, typically 1 percent of the cost of a home, have to be paid to the developer every time a home is sold or title to the property changes hands. The fee is added as a covenant to the deed for a length of time that the developer chooses, sometimes for as long as 99 years. These funds can be paid to the developer or trustees for the management of the funds.

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Even though developers insert the covenant into the deed, many buyers of new construction do not take the time to read all of the language. When they try to sell, they are caught unaware at closing and are often left in a quandary about how to justify the loss of expected income.    

The National Association of Realtors is working with the Legislature to eliminate these fees. Luckily, in Washington state, there is very little incidence of this practice. It has been done, however, and, it would be wise for anyone buying a new home or one that was built since 2004 to check the deed for any language of private transfer fees. The Legislature is aware of the problems that this can cause, however, and is taking steps to stop this from continuing. A bill was introduced in this session that has worked its way between the two branches and is on the way to the governor’s desk for signature. Although new transfer fees will be prohibited, ones that are already recorded will not be affected.

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Private transfer fees have been used in 43 states. Only 18 have outlawed them.  Washington is close to making it 19. Besides the added cost to the seller, Fannie Mae and Freddie Mac, and the U.S. Department of Housing and Urban Development will not guarantee a loan with private transfer fees. What does the buyer do when the mortgage they expect to use will no longer be insured by these entities? Sellers should read the covenants attached to their deeds and make sure these restrictions are known to potential buyers.

Do transfer fees provide a public good? Developers believe that they can sell a home for less enabling more people to afford one of their homes when they know that they will be compensated in the future. This may be true, but when these buyers go to sell, the expected cost to sell will be higher. Is it better to pay more in the beginning or pay more when you sell? 

So where does all the money go? Five percent of every transfer fee goes to a nonprofit organization that shows some benefit to the community. The money could go to a religious organization, a charity, infrastructure (such as roads), or some other cause that the developers designate or the community designs. Environmental groups use the funds for clean water and air projects. 

Buyers and sellers have responsibilities. If you own a home that carries a private transfer fee, make sure that the fees are properly applied and disclose their existence to possible buyers. If you are a buyer, ask if the home you are buying carries a transfer fee and make an informed decision on how it will influence your home’s future value. Buyers and sellers need to see that the added costs are used for a betterment of the community which benefits the value of their home.

Joan Probala is the managing broker for Issaquah Windermere (Windermere Real Estate/East Inc.). She has 30 years of experience in real estate, construction and sales.

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