There are a lot of issues that come up in the State Capitol, and, where the significant legislation is concerned, you can usually see a breakdown occurring on partisan lines. This is because there are distinct differences between the philosophies of the parties, and when bills seek in increase the size and scope of the government, Democrats support them and Republicans oppose them. Similarly, when legislation shrinks government, it is often hard to get a Democrat to support it. There are some pieces of legislation, though that will divide Democrats or Republicans, and clearly Senate Bill 670 authored by State Senator Lou Correa (D-Santa Ana), and advocated by state realtors, is one of those bills.
Senator Correa’s bill seek to ban a type of ‘transfer cost’ that is starting to become more prevalent in home sales. The very short version of what happens is this — a home builder places this transfer cost (or fee) on the original deed, requiring that some small percentage of the purchase price (typically one percent or less) be paid to the builder at the time of sale, and perhaps what is most unusual, and disturbing to most, is that because it is imbedded in the deed, every time in the future that the home is sold, the original developer continues to get that fee.
What is the fee spent on? From what I have read, it really varies. In some cases the money from this fee goes into creating additional amenities or infrastructure in and around the development, ostensibly providing for additional benefit to the homeowner. As a matter of fact, some builders who use funds collected in this way argue that it allows them to make major investments in a community when it is built, and then defray those costs over time. This allows, they say, for the initial buyer to not be saddled with all of these costs (it is shared with future buyers, they say). Fees are also used, in many cases, to fund a lot of the conditions that are placed on builders by government (environmental mitigations, etc.). That said, on the other end of the spectrum are some builders who simply pocket these fees as additional revenue for their business (though I have been told that there is no known situation of this happening in California… yet).
Builders argue that if these imbedded costs (which they call "re-conveyance fees") are prohibited, it will lead to a significant increase in home costs, as these costs will instead be placed on the sales price of homes. This argument makes sense to me. They argue that the primary motivation of realtors in supporting Correa’s bill is a concern that home buyers will ask realtors to ‘offset’ this fee by lowering their commissions.
I spoke to a good friend of mine the other day about this — someone who actually lives in a development where this ‘transfer cost’ was built into his deed. He was quite chagrined about it. Mainly because he had no idea that he was going to get hit with this cost until he was at the very final stages of his escrow — way to late to really consider this cost when determining whether to make an offer on his new home.
Opponents of this ‘transfer cost’ have taken to calling it a "hidden tax" on home purchases. I agree on the "hidden" part — my friend’s story is a great example of how this cost is not obvious or clear to a buyer from the outset. That said, I absolutely disagree that this is a tax. A tax is when the government coercively takes money from you, without your permission. In this instance, not only is the government not involved with this transfer cost, nor is the government requiring that anyone purchase a specific home. In other words, the purchase of a home is a private transaction between two private parties.
Because of this, were I a State Legislator, I would vote against the Correa bill. Not because I approve of the practice of imbedding these transfer fees into deeds, but because to ban such fees would be to introduce new government regulation into private transactions.
To be frank, I’m not really high on these transfer fees. I would be hard-pressed to consider buying a home that includes them.
I think that the introduction for Senate Bill 670 has brought some needed sunshine to the existence of this growing controversial business practice by some developers. That said, it is my belief that SB 670 goes too far. There is a piece of legislation, AB 1574, that has been introduced by Assemblyman Guy Houston (R-Pleasanton) that I believe is good public policy. Rather than banning the transfer fees, Houston’s bill requires full disclosure of the existence of this fee to a potential buyer. While even this is a government intervention of sorts into a private transaction, it is minimal one that really imposes a reasonable burden on a seller. This disclosure should include a separate acknowledgement from a buyer that they understand that they will have to similarly disclose this fee if they attempt to sell their home in the future.
I would suspect that those who do not like the existence of these re-conveyance fees will be quite pleased with the result of passing Houston’s bill — because I think that very clear disclosures would actually start to really cut back on the frequency of builders imbedding fees into deeds — and when they do, you can be sure they will really be motivated to document the specific benefit to the potential home buyer for paying that fee.
As a final aside on this matter, it is interesting that realtors and home builders typically are allied together on matters before the legislature — as both have a lot to gain by seeking to reduce state regulations and fees that increase to costs of constructing and selling homes. Right now, it will be liberals in Sacramento that might be chuckling. For them, this whole argument over SB 670 is a win-win for them, as you can imagine that no matter how this turns out, it will take some time for realtors and builders to get back on the same page.
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