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Proponent Of New Real Estate Fee Exempts His Own House

This article is more than 10 years old.

What does it mean when the most energetic proponent of a controversial new type of real estate financing gimmick decides to remove it from the deed of his own home?

The gimmick in question is called a "reconveyance fee." Its energetic promoter--the fellow has even filed a patent on his methods--is a Texas real estate investor named Joseph B. Alderman. Forbes has learned that Alderman took steps last year to exempt his own home near Austin, Texas, from the fee before he put it up for sale.

The question of why Alderman, the Johnny Appleseed of reconveyance fees, would exempt his own house may be of interest to lawmakers across the country as they debate whether such fees should be banned. A dozen states are now considering whether to follow the lead of North Carolina, Louisiana and 13 other states that have banned reconveyance fees outright. For now, they're still apparently legal in most places, including New York, Massachusetts and Virginia.

35 States Where Housing 'Reconveyance' Fees Are Still Legal

What's a reconveyance fee, anyway? (Alderman, by the way, prefers to call them "capital recovery fees.") Here's how it works: A homeowner--frequently a builder of houses--allows Alderman's New York-based firm, Freehold Capital Partners, to append to the title of a home a special rider, or covenant. It requires anyone who buys the home to agree to convey 1% of the sales price to the beneficiary of the fee when they later sell the house.

The beneficiary, in the deals promoted by Alderman, is his company, Freehold Capital. Freehold splits the cash with the original builder or homeowner who added the fee to the deed.

Alderman argues that the arrangement is a boon for all, especially homebuilders desperate to defray the upfront cost of building sewers, streets and other infrastructure when they develop new neighborhoods. Supporters claim that the fees also allow individuals selling a home to accept a lower price, knowing they'll receive an additional payment later. In California, which opted to make these schemes legal as long as they were properly disclosed to homebuyers, a portion of the fees are paid to environmental groups.

But the fees have many critics, ranging from Realtors to academics. Vanderbilt Law School Professor Kelly Lise Murray argues the fees raise serious questions of fairness. "Say the new owner gives a big boost to the value of a home by upgrading the bathrooms and doing a big addition," says Murray. "They'd be obliged to share that appreciation, via the reconveyance, with people who didn't contribute at all."

Realtors and title insurance companies complain that the fees make it impossible for a homeowner to get free and clear title to a home. If a homebuyer doesn't carefully review the title for a property in the scheme, he may not notice the fee. Even if he does, he may not appreciate exactly how expensive that 1% fee will someday be--it's a cut of the gross value of the home, no matter the direction that value has taken since the previous purchase.

Then there's the question of whether the fees are legal or enforceable in the 33 states which haven't explicitly permitted or explicitly banned them. Lawyers who deal with commercial real estate sales say that they have seen occasional reconveyance fees for many years on commercial properties. They consider them a nuisance, but enforceable.

Yet it's not absolutely clear that reconveyance fees in residential housing sales are enforceable in the vast majority of states, where they're not expressly banned but haven't been explicitly allowed. The authors of a 2007 American Bar Association analysis observed that the fees were vulnerable to legal challenge on at least four fronts. For one, courts in some states "may find the agreement unenforceable because it does not ‘touch and concern' the land," which is an important technical matter in some states' laws regarding property titles. A homeowner who proved the future fee wasn't fully disclosed when he bought his property might be able to wriggle out of paying it when he sells, citing federal standards for fee disclosures.

The fees are opposed by housing industry interest groups representing realty agents and title insurance companies; they have formed a group that is lobbying state and federal lawmakers to ban them. On August 12 the Federal Housing Finance Agency said it would seek to prevent Fannie Mae, Freddie Mac and the Federal Home Loan Banks from making loans to any property encumbered by a reconveyance fee. They "run counter to the important mission of the housing GSEs to increase liquidity, affordability and stability in the nation's housing finance system," said FHFA Acting Director Edward J. DeMarco.

In an e-mail to Forbes, Alderman says the reconveyance arrangement "really is beneficial to the homeowners, the developers and to the community." He and his company, Freehold Capital Partners, have been promoting the idea of using the fees widely in sales to ordinary residential homebuyers, especially those purchasing homes from developers who are looking for new ways to defray the cost of building infrastructure--new streets, sewage and the like.

Alderman sometimes argues that the arrangements are appropriate for homes that aren't newly developed. He told Ohio legislators this year that, given the choice, buyers would be happy to forgo 1% of the sale price on their home later if by doing so they're able to acquire a new home for less now. When Texas lawmakers considered a ban on the arrangements, however, Alderman insisted that Freehold didn't put reconveyance fees on homes that aren't part of new developments.

But Alderman's own home wasn't part of a new development. According to documents filed in Williamson County, Texas, he originally set up the fee scheme on his opulent nine-bedroom home in Round Rock, a suburb of Austin, in 2005, the year that it was built. The covenant Alderman affixed to his title in November that year was pretty typical. It stated that any buyer of the home in the future would have to agree to shell out to Alderman and his company, Freehold Capital, "a Transfer Fee equal to one percent (1%) of the ‘Gross Sales Price'" of the home. The fee would be due when the home was resold.


Alderman removed the arrangement last year. In a notarized document titled "Release and Termination of Declaration of Covenants, Conditions and Restrictions" and submitted to the Williamson County clerk on May 19, 2009, Alderman sought to "terminate and forever discharge the Declaration of Covenants" he'd filed in November 2005 on his house. Shortly thereafter, he and Tara Alderman put the nine-bedroom property up for sale at Owners.com, a for-sale-by-owner website. It's now listed at $1.395 million.

So was Alderman insincere when he said Freehold didn't put reconveyance fee arrangements in place on homes that aren't part of new developments? The confusion over that question, says Alderman, is exactly what led him to cancel the reconveyance fee on his own home. He says during the legislative fight in Texas the lobbyists for the National Association of Realtors "suggested that I was a liar" because, after all, his home was built in 2005 but it wasn't part of a new development and hadn't required the construction of significant new infrastructure.

"I pulled the document off my home, and the NAR then came back and said that I didn't like the product enough to have it on my own home," says Alderman. "Damned if I do and damned if I don't."

Texas ultimately opted not to ban reconveyance fees. And Freehold says it's been signing up plenty of new homebuilders interested in the fee arrangements. Freehold announced last week that it had "partnered with a major developer on a real estate project in Washington" state--the name of the developer wasn't disclosed--to put reconveyance fees on houses in a $47 million project. Freehold said last month that it had an agreement with a developer (again unnamed) of "a real estate project in South Carolina" worth $42 million. A scheme on a $78 million project in Alabama was announced in May.

Alderman says he's even decided to put the arrangement back into place on his Texas home: "I have decided to put it back on my house, because it seems the lesser of two evils, and because some of our large developers have in fact put it on their own homes as well." Besides, he adds, "It showed my faith in the instrument, and I liked owning the asset."

Here's a tip if you're a shopping for a home in Round Rock, Texas. If the gorgeous digs at 3214 Bay Hill Lane capture your fancy, read the title closely before you make an offer.

35 States Where Housing 'Reconveyance' Fees Are Still Legal