New Indiana Law Eliminates Hidden Real Estate Transfer Fees

On May 18th, 2011, posted in: John Bethell Title Company Blog by

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Imagine for a moment that you’ve sold your house. While reviewing the settlement statement at your closing you see a charge equal to one percent of the selling price going from you to an investment banker in New York City. “What the heck is that for?” you demand to know. “Well”, says the closing agent, “all the properties in your development are subject to a private transfer fee.”

The closer goes on to explain that the original developer created a covenant that provides that for the next 99 years every time a property in your development is sold, one percent of the sales price must be paid to the developer. The developer then sold this right to receive these payments on your property and every other property in the development to the New York investment banker. The investment banker packaged this stream of future payments along with payments from many other developers and sold them as a security to other investors seeking a steady and somewhat predictable source of income.

Insisting that you didn’t know about this when you bought your property, the closer pulls out a copy of the
recorded subdivision covenants and restrictions. “It’s right here in black and white,” he says, “on page 47 after the ‘no RV’s in the driveway’ and right before the ‘no chickens in the backyard.’”

This doesn’t sound like a closing that I’d want to conduct.  And I don’t think that I’d want to be the real estate agent that sold them the house, either.

These covenants exist in a number of states and are still legal in about twenty two of them. I am not aware that any such restrictions had yet been created in Monroe County. Fortunately, thanks to a new law passed in Indiana, we won’t have to worry about that any more.

House Bill 1541 was signed into law this week by Governor Daniels. It expressly prohibits these kinds of “Private Transfer Fees.” The bill was the work of the Indiana Land Title Association and was supported by many other real estate trade groups including the Indiana Realtors Association. This is a victory for the free and unencumbered transfer of real property. These fees are predatory and in many states difficult to find in the public record.

The new law also elimates the risk caused by unscrupulous title companies that do not search for recorded restrictions. Instead, they put general exclusions in their policies to avoid liability for such things.

The Federal Housing Finance Agency has proposed a rule that would prohibit any government mortgage agency from participating in a mortgage on properties that are subject to these fees. Hopefully such a ban will go a long way to eliminating these private transfer fees and forcing their purveyors to crawl back under the rock from whence they came.

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