The Legality of Transfer Fees in Texas

Imagine owning a property, then selling it, but retaining the right to collect a percentage of the sales price each time the property is sold in the future. Sound too good to be true? It isn't. The concept -- formally called a "fee for future conveyance of property," but commonly referred to as charging a "transfer fee" -- is becoming increasingly popular in Texas real estate.

Transfer fees are essentially deed restrictions placed upon a property by an owner (who is later a seller), which make a percentage of the sales pice payable back to the original seller EVERY TIME the property is sold in the future. That is, the person who places the restriction on the property earns a fee (some percentage of the sales price) each time ownership of the property is transferred, no matter who owns the property at the time of the subsequent sale, or when it is sold. This is the case because restrictions are covenants that "run with the land," irrespective of ownership at any given time.

Transfer Fees were addressed by the Texas Legislature, when it added Section 5.017 to the Texas Property Code in 2007. Contrary to popular belief, however, this statute -- which became effective on September 1, 2008 -- does not bar transfer fees, but only prohibits restrictions which would require the BUYER ("transferee") to pay the such fees. There is no prohibition against restrictions which would require the SELLER (transferor) to pay a transfer fee. Additionally, this prohibition applies only to residential property, and there are no limitations on transfer fees which might be charged upon the sale of commercial or rural properties.

There also exist exceptions to the "buyer can't pay" Rule, including in those instances where the restricted residential property is situated within a platted subdivision, and the fee is payable to a Property Owners Association, a 501(c)(3) charity, or a governmental entity.

Moreover, in those instances where transfer fees are permissible, the statute does not limit the number of such fees (multiple restrictions) which can be placed on any particular tract, or the amount of the fees (as a percentage of the sales price) that can be assessed. For this reason, and many others which are beyond the scope of this post, transfer fees are controversial.

However, transfer fees are a valuable tool, and could provide an enterprising property owner with a passive income stream, or serve as a pitfall to an un-suspecting owner/purchaser of land to which such fees are attached.

When considering placing any restrictions on property, or determining the legal effect of existing restrictions, Texans would be wise to contact an experienced real estate lawyer.