What Are Private Transfer Fees?

by 20 Mar 2012

(TheNicheReport.com) -- After FHFA recently announced they were limiting certain types of Private Transfer Fees via Fannie & Freddie, many may have asked "What are these fees?"

In the music business, royalty fees are payments made to an individual or entity that may have an ownership or interest in a specific musical piece, like a song. The payment is often made to the creator -the songwriter- and it represent a benefit derived from the usage of a song, particularly when it is played for profit.

Royalty fees are payments made to an individual or entity that may have an ownership or interest in a specific musical piece, like a song. The payment is often made to the creator -the songwriter- and it represent a benefit derived from the usage of a song, particularly when it is played for profit.  Royalty-like payments have worked their way into the world of real estate. Private transfer fees are sources of income for individuals or entities that seek to squeeze every penny out of real estate transactions, even after closing. In fact, private transfer fees seek to be paid out every time a closing ensues.

Just like royalty payments in the music entertainment business, private transfer fees in real estate can go on for quite a while.  The fees are extracted by means of special deeds on the property. Such a deed may require all future buyers or recipients of the property to pay one percent of the transaction amount to an individual, a business entity or a trust fund. A title and escrow agent will collect the private transfer fee from the buyer at closing and in turn remit the payment as specified in the closing instructions by the deed.

The Investors Behind Private Transfer Fees

It may not be surprising to learn that Wall Street advisors are behind private transfer fees. The deeds that these fees are specified on tend to include payment terms lasting up to 99 years. The underlying value of these deeds -the properties- become an income-producing financial instrument that can be packaged into a marketable financial security, just like those subprime mortgage pools of the early 21st century.

What these fees guarantee is confusion for both buyers and sellers. Closing fees are always negotiable, but they can often stand in the way of a closing if they are murky and surprising like these private transfer fees seem to be. The parties involved in the closing could always negotiate the selling price to avoid paying too much on private transfer fees, but the truly alarming fact is that these fees may get in the way of mortgages issued by HUD and the FHA.

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