Are Reconveyance Fees the Next Real Estate Rip-off, Or Worry Over Nothing?

In a recent CNN Money article, the author hoots and hollers about the next big real estate rip-off: home resale fees.  The fee, which essentially stipulates that as a housing development is being developed, the developer writes into all home purchase contracts that they are to receive a 1% resale fee every time that home is sold in the future for up to 99 years.  The article claims that this is such a rip-off, compares into to nothing more than price gouging, and says it has absolutely no value to consumers.  Hence, it has politicians and consumer advocates’ attention.  But are these groups really all that informed?

For one, this issue has attracted the attention of Washington, where Rep. Brad Sherman, D-Calif., is leading a charge against the fees. “Consumers are not in a position to deal with another level of complexity, one that pits plain vanilla homes against ones that come with fees,” he said.

But this guy is an idiot. We don’t need the government to hold our hands every time we open up our wallet. I wrote about this topic, also known as reconveyance fees, in a blog post back in January.  People who are up in arms about this concept are missing the point.  On the surface, sure, it looks like home buyers are getting suckered.  But they aren’t.  Why, you ask?  Because they have the knowledge of this fee going in.  If they, don’t its because of a fundamental lack of reading comprehension by them or their attorney in review of the contract.  And while this fee is sucky in nature, it doesn’t mean that a home buyer has to view the comparison of a purchase of a home with a reconveyance fee and one without one as an apples to apples comparison.  When you look at two houses, are they identical?  Never.  One may be in a slightly better location or school district, but another may have the new kitchen and bamboo floors you’ve always wanted.  One might be more expensive than the other, but the less expensive one is older and may need a new roof soon that you would have to come out of pocket for.

When I bought my condo, there was a competing condo development whose prices were far lower than their competitors for the amount of home you were getting.  I did a little investigating and found out the reason is that the association’s condo fees were excessively high.  When you factored in this cost in addition to a mortgage payment, your all in costs were just as much, if not more than if you bought a pricier house with cheaper condo fees.

My point is that there are ALWAYS trade-offs when it comes to home buying, and the notion of a reconveyance fee should be nothing more than another one of these factors.  If you know that you will have to pay the developer an extra 1% when you sell your home, on top of whatever you may have to pay a broker, you can just lower your offer price by that amount to compensate for it.  As long as you factor all-in costs into your home-buying decision and not just the purchase price, there shouldn’t be anything to worry about.  Furthermore, with regard to the cost of selling, there is no rule that your real estate broker has to be paid 6%.  I am sure you can find a broker willing to market your home for 5%, so that the extra 1% you have to pay the developer nets the same level of expenses to you at the end of the day.