Home Buyers Beware: Master Fees = Master Screw Job!

Corporate developers have adopted an audacious money making scam called "Master Fees" or "Master Development Fees".

Home buyers are of course usually inexperienced. How would any individual become a professional, experienced home buyer? Developers are exploiting their customer's inexperience by tacking the Master Development Fees onto the price of new homes and pretending that it is normal and reasonable. Buyers who raise any questions are give a well rehearsed theatrical presentation designed to make it clear that the buyer is a hopelessly inexperienced simpleton for even asking such a silly question.

Here is how the scam works:

A developed buys some undeveloped land and pays acre prices. If the land is located close to a developed area and does not have any serious faults, it may cost from $5000 - $20,000 per acre. For this example we will use a midpoint of $10,000 for the cost of the undeveloped land. So our theoretical developer buys 100 acres for $1 million dollars.

The developer completes all of the improvements needed to prepare the land and divide it into building lots for construction of individual residences. They file a development plan and obtain approvals from the municipal authorities. They clear the land and perform any necessary grading and filling to ensure proper drainage. The install the streets, drainage system, curbs, utilities, and all amenities for the new neighborhood like street lights, green areas, recreational areas, and possibly a clubhouse and pool. All of these improvements take time and money. Upon completion the developer has invested $5 million dollars and produced 250 building lots. Total investment is $6 million, or $24,000 per building lot.

The developer could sell the lots for a profit and move on to another project. Corporate developers complete the neighborhood by building the residences to conform to an overall aesthetic theme. They then sell the home and the lot to the retail buyer. For this example we will assume the developer constructs single family residential homes of about 2500 square feet with attached double garage, and sells them for an average retail price of $300,000, which is $50,000 for the building lot and $250,000 for the home. The builder is making a profit on the lot and another profit on the sale of the home.

However, the developer tacks a Master Development Fee encumbrance on each home sold to recover all the money they invested in the land. So on the one hand they are profiting on the markup of the home and the lot. Then they get the home buyer to sign what is essentially a second mortgage that obligates the buyer to pay the developer a monthly fee for about 15 years which will reimburse the developer for all of the land development costs. Its like a car dealer tacking on an extra $100 a month for five years for an "assembly fee".

Experienced Realtors know that this is a screw job. That is why the sales agents you will encounter when touring the developers model homes will usually be employees or captive agents of the developer.

What can a buyer do? The best advice is to refuse to buy a new home that is encumbered by a Master Development fee.You need to consider that you when you sell the home someday you will be unable to find a buyer willing to repay you for the Master Fees that you paid. You might feel like the last and greatest sucker in the deal.