A private transfer fee obligation is a covenant recorded against a property’s title that forces every future seller to pay a fee, usually around one percent of the sale price, to a named private third party each time the home changes hands. The obligation runs with the land, often for 99 years or in perpetuity, and binds owners who had nothing to do with creating it. Federal rules block most conventional mortgage financing on properties carrying these covenants, and a majority of states have voided new ones outright.
What the Obligation Is and How the Fee Works
The original developer or property owner creates the obligation by recording a covenant in the county land records. That covenant entitles a named third party, typically the developer, an investment fund, or a successor company that bought the collection right, to receive a fee every time the property is sold or transferred. Because the covenant runs with the land, each new owner inherits it automatically.
Most covenants set the fee as a percentage of the gross sale price. One percent is common. On a $400,000 home, that’s $4,000 deducted from the seller’s proceeds at closing. Some covenants use a flat dollar amount, but percentage structures dominate because they capture rising property values over the decades the covenant stays in force.
The seller is typically the one who pays, and the charge shows up as a line item on the settlement statement. The trigger is any transfer, conveyance, or sale of an ownership interest, though the exact drafting controls what counts. Some covenants exclude transfers between spouses, transfers into a trust for estate planning, or transfers by inheritance. Read the covenant itself to see which exclusions apply.
These fees are a different animal from the other charges a homeowner sees at closing. Property taxes fund government. HOA transfer fees fund community maintenance like roads, pools, and landscaping. A private transfer fee moves money to a party that often provides no ongoing benefit to the property or its owner, which is the heart of the objection to them.
Excepted and Non-Excepted Covenants
Federal rules draw a sharp line between covenants that benefit the property’s own community and those that don’t. That line decides whether a property can be financed through the conventional mortgage market.
An excepted transfer fee covenant pays the fee to a “covered association” and uses the money exclusively for the direct benefit of the encumbered property. A covered association is a nonprofit mandatory-membership organization of property owners, such as a homeowners association, a condominium association, or a cooperative, or an organization described under Section 501(c)(3) or 501(c)(4) of the Internal Revenue Code.1GovInfo. 12 CFR 1228.1 – Definitions Fees charged under qualifying shared equity homeownership programs also fall within the exception.2eCFR. 12 CFR 1228.1 – Definitions
In plain terms, an HOA fee that funds community improvements is fine. A covenant directing one percent of every future sale to a private investment fund is not. Fees that cycle back to the property are permitted; fees that enrich a disconnected third party are the ones regulators went after.
Federal Financing Restrictions
The Federal Housing Finance Agency’s regulation, codified at 12 CFR Part 1228, prohibits Fannie Mae, Freddie Mac, and the Federal Home Loan Banks from purchasing, investing in, or otherwise dealing in mortgages on properties encumbered by non-excepted private transfer fee covenants. The Federal Home Loan Banks also cannot accept these mortgages as collateral.3eCFR. 12 CFR 1228.2 – Restrictions
The rule applies to covenants created on or after February 8, 2011. Covenants recorded before that date are grandfathered unless they were created later under a pre-existing agreement that was part of a litigation settlement or approved by a government body. The rule also covers securities backed by mortgages on affected properties and securities backed by revenue from private transfer fees, regardless of when the underlying covenants were created.4eCFR. 12 CFR Part 1228 – Restrictions on the Acquisition of, or Taking Security Interests in, Mortgages on Properties Encumbered by Certain Private Transfer Fee Covenants and Related Securities
The practical effect is severe. Fannie Mae and Freddie Mac back the majority of conventional mortgages in the United States. When a property carries a non-excepted private transfer fee covenant, lenders cannot sell the loan to either entity, so most lenders will not originate it. Buyers struggle to get financing. Sellers find the buyer pool shrunk to cash purchasers and portfolio lenders. That financing barrier is what effectively ended the market for new private transfer fee covenants, even in states that have not banned them.
State Bans and Disclosure Rules
Alongside the federal rule, most states have passed their own laws restricting or voiding private transfer fee obligations. The approaches vary, but the common move is to void any new non-excepted covenant created after the law’s effective date. The policy rationale is that these fees are an unreasonable restraint on the free transfer of property.
For covenants that existed before a state’s ban took effect, most statutes grandfather them, but only if the covenant holder meets strict recording and disclosure requirements imposed by the new law. A holder who fails those requirements can see the obligation declared void even though it predates the statute. Several states require a separate disclosure document in the real property records, distinct from the covenant itself, identifying the existence and terms of any private transfer fee obligation.
Many state statutes also require the seller or developer to give the buyer conspicuous written notice of the obligation before or at the time the sales contract is signed. That notice typically has to spell out the fee amount or calculation method, the duration, and the name and contact information of the party entitled to collect. A failure to disclose can make the contract voidable at the buyer’s option or extinguish the fee obligation entirely, depending on the state. Because the rules differ, the enforceability of any particular covenant depends on when it was created and whether it satisfies the applicable state law.
How To Find Out If a Property Has One
These covenants tend to surface late. The FHFA observed during its rulemaking that private transfer fees “are not normally discoverable until well after the sale contract is executed, when a title search is performed prior to closing.”5Federal Register. Private Transfer Fees By then a buyer has usually paid for inspections, an appraisal, and other due diligence.
A title search or title commitment is the main way to catch one. The title company reviews recorded documents against the property, and any covenant that runs with the land should appear as an exception on the title report. Title insurance policies typically list the obligation as a specific exception, meaning the insurer will not cover any loss tied to it.
If you are buying, especially in a planned development or subdivision, read the title commitment carefully and ask the title company directly whether any private transfer fee covenants are recorded against the property. If one exists, find out whether it qualifies as an excepted covenant under 12 CFR Part 1228 before you commit. That classification determines whether you can get conventional financing and whether the next buyer will hit the same wall when you try to sell.
What Happens If the Fee Isn’t Paid
Enforcement turns on how the covenant is drafted and the law of the state where the property sits. In states that have voided non-excepted covenants, enforcement may be a dead letter. For grandfathered obligations and covenants in states without bans, the fee holder can usually pursue collection as a breach of the recorded covenant.
The covenant itself may grant the holder the right to place a lien on the property for unpaid amounts. Where a lien right exists, non-payment could theoretically lead to foreclosure, though that step is uncommon given how small the fees are relative to the property. More often, the holder sends demand letters, pursues collection, or asserts a claim that clouds the title. A cloud on title is nearly as effective as a lien in practice because it makes the property hard to sell or refinance until the fee is resolved.
Sellers should not plan to skip the fee at closing. The settlement agent will usually flag the obligation and deduct it from proceeds if the covenant is properly recorded. Trying to close without paying creates a title defect the buyer’s title insurer will refuse to overlook, which stalls or kills the deal.