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New Pennsylvania real estate law bans private transfer fees

7/13/2011 | Real Estate Blog

Recently, legislative developments have changed an important aspect of real estate law in Pennsylvania. Last month, Governor Corbett signed a bill that prohibits many private transfer fees in real estate transactions.

About 10 years ago, private transfer fees first appeared in Northeastern Pennsylvania and quickly spread across the state. The brainchild of Wall Street investment firms, these fees resulted in clauses that were tacked on to contracts for the sale of a new home.

These clauses in the sales agreement imposed a restrictive covenant on the property. In practice, these restrictive covenants lasted 99 years and forced homeowners to pay the original developer 1 percent of whatever the home was later resold for. If a home was resold five times over that 99-year span, the original developer would be entitled to a 1 percent fee each of the five times the home was resold.

Many developers became convinced to attach these restrictive covenants to the new homes they sold when investment firms promised them money for the rights to the future transfer fees. In turn, the investment firms bundled the rights to the transfer fees into securities that were in turn sold to investors.

If the restrictive covenant was recorded, a title search would be able to find it. However, if the restrictive covenant was not recorded at the county level, a search could miss it. As a result, many homebuyers were not aware of the private transfer fees.

The new legislation prohibits the transfer fees and creates a process for homeowners to get the fees removed from the title to their homes. In addition, all existing fees in sales agreements are now required to be flagged so that buyers can be better informed.

Source: Reading Eagle, “Pennsylvania latest state to ban private transfer fees in real estate sales,” Dan Kelly, 7/11/2011