I’m far far from being a financial genius. i try to get partners who run the numbers and deal with details. My business strength is in understanding where technology is going (in the areas I pay attention to), what the business applications of that technology are and most importantly, how to sell them.
Thats a polite way of saying that I’m not a details guy.
I mention this because as they say, “The Devil is in the Details”, and I have no idea how to make happen what I’m about to propose. Nor do I know if there are specific laws or common sense “rules of the marketplace” that make this idea just plain stupid. Who knows. What I do know is that I’m curious about whether this would work and there is no better way to open an idea to criticism or support than by posting it on my blog. So here goes.
In the residential real estate world, the concept of buying a house is simple. You pick the house, negotiate a price, then agree to a payment arrangement.
The payment arrangement options are pretty straightforward.
You can pay for it with cash.
You can borrow money to pay for whatever amount that you cant or choose not to pay on the house. The payment terms are then set between you and the lender
This has worked well for a long time. A successful purchase of the house can be quickly defined as being able to make the payments you have committed to make, under the terms you have agreed to, until the house is paid off, all while gaining the utility of living in the house.
The problem with this approach is that when things go wrong and you can’t make the payments the “solutions” are very binary.
1. You find a way to make your lender happy.
2. Your house is sold in an effort to satisfy your debt to the lender.
The binary nature of residential real estate financing also lends itself to being an attractive market for “sharks”. We dont call the houses we live in “assets”, we call them homes. They are very personal and important to us. Which in turn clouds our judgement. People who are at risk of losing their homes get desperate and take measures that aren’t necessarily in their best interests just to save their homes and their families from grief.
There has to be a better way to protect homebuyers on the downside.
Lets contrast the financing process of individual homebuyers with funding in the business world. Businesses have any number of ways of raising capital for corporate purposes but they basically can be boiled down to two:
They can raise money via debt.
They can raise money via equity sale.
Debt resolution in the business world is just as binary as it is in residential real estate. If you can’t pay the debt, you get foreclosed on and everyone probably goes home unhappy.
Which is exactly why , rather than borrowing money, most startups and growing businesses turn to the equity sale of some percentage of their company to raise capital. Need confirmation of this ? Look at the number of bonds available on national exchanges vs the number of stocks for sale on exchanges . The number of stocks is far greater than bonds and thats on the listed exchanges. Throw in the OTC and Pink Sheet markets and the numbers dwarf debt offerings even more dramatically.
Which leads to the question of…
Why can’t home owners sell some percentage of equity in their homes on a listed exchange ? Why can’t I
“Take My House Public ?”
Why not create a market or exchange where homeowners can sell equity in their homes ?
The rules could be very eimple
1. The house is appraised by a company approved by the exchange that lists the houses.
2. “Shares” are set with a Par Value of 10pct of the appraised value. For a 100k dollar house, there are 10 shares potentially available. However at no point in time can more than 40pct of the “shares” in a home be sold. We dont want the opportunity for “hostile takeovers”
3. The price of the shares will of course be set by the market. In a hot market it will be set above par, in a tough market like today, it will sell below Par.
4. All Proceeds from the sale of shares MUST be used to pay down any debt on the home.
This is the key element of this approach. By selling equity in a home, the buyer gets an asset based security that will move up and down with the market. If this market is big enough, there should be enough liquidity to move in and out of positions.
The seller receives cash that can be used to pay down the debt and thereby reduce his/her monthly payments. The seller loses a part of the upside if the market for the home improves and prices go up, but thats a small price to pay for not going into foreclosure.
Beyond creating liquidity options for individuals in the housing market, which i think is a good thing, I think this will also reduce the volatility in the market. Despite the best efforts of the residential Real Estate industry, no one ever really knows what their house is worth until you try to sell it. This exchange listing approach will certainly make for better information available for the market, which in turn will also reduce the volatility.
It will also increase the options of homeowners who have paid off their homes to acquire capital for personal uses. If a homeowner has completely paid off his/her home and wants to raise money for whatever purpose, a vacation, a car, education, whatever, rather than taking on debt , they could get their home appraised, have the
option of selling equity in my home that I would not be obligated to pay back. An option that would create a significant flow of capital back into the hands of consumers
How can this actually come together ?
It wouldn’t be easy. It would probably take the country’s biggest banks working together to create an exchange that develops the public market for home equity one city or region at a time. They would have to identify a means to safely set values so that Post IPO price the share pricing was stable. There would have to be provisions set for what happened when a home was sold. Shareholders would have to be paid their share of the salesprice upon closing.
There are thousands of things that i haven’t thought of that would make or break this idea, but I think at its most basic, the concept is sound. However one thing I am sure of, this approach would reduce the Boom Bust cycles of residential real estate and the dramatic impact they have on our economy
Pingback: Stadardized Contracts in Stupid Places « Willowbend
Hi Mark,
As noted by some of the other respondents, my new startup is doing something similar to what you describe. Please see it at http://www.HomeEquityShare.com This is the next big thing in real estate and we\’d be proud to have you join us as a ground floor investor. Please be in touch soon, as we\’re on a very fast track.
Jeff
Comment by Jeff Langholz -
That is certainly quite an interesting concept I would consider entertaining. Homeowners could free up the cash flow from a liability and invest it into true assets — speculators would have an easier way of liquidating from making bad decisions.
Comment by Paul Francis -
Be careful what your real estate agent tells you. You can read my blog to find out the situation in the city of Gatineau Quebec …
Comment by Joe Gatineau -
Mark – You\’re basically describing a different implementation of the securitization scheme that led to the current credit meltdown, only yours is missing the gatekeeper ensuring the initial valuation is reasonable.
Comment by TP -
i hate to spoil your idea, but the bond market dwarfs the stock market….try again.
Comment by joe -
Check out Home Equity Share, http://www.homeequityshare.com/.
Comment by Omar Javaid -
the daytona beach area is stuck at about 7,000 plus listings on the market. a few years ago there would have only been about 1300 homes for sale. today, there are many sellers that would consider this option if available, especially when they get notice of their tax, insurance, and rate increases.
Comment by port orange real estate -
Halfway in I see this problem: Selling equity in the home and paying down debt to lower payments doesnt work. The payments will not be lowered based on amount of debt, the payoff date would simply come sooner. So selling equity to make your payoff date come sooner may work, but it would not reduce payments without refinancing which would be very complicated due to the fact that some other guy owns part of the equity.
Comment by Alan Eads -
Go Mavs … your time will come!
Comment by Mr. Testosterone -
yeah nice idea mark,shame it\’s already been thought of check rismarck international they came up with an equity finance home loan instrument and patented it…frankly the only reason i knew about it is because the dude who came up with it lectured at my uni…
Comment by william nhongo -
A quickly growing sector of Commercial Real Estate involves ownership holdings known as TIC (Tenant In Common). These transactions are in a grey area at the moment between securities and real estate interest but essentially involve breaking a large property into interests which are sold individually to investors who want a return on their money and to enjoy the potential appreciation of a property.
As many comments have already suggested the time and cost involved in such a structure has so far limited the typical building to commercial properties valued in the millions, but the same could easily be extended to residential properties of any vale.
Comment by Colin -
Internet became today a working tool impossible to circumvent for an agency or a real management. The simplicity and the speed of use made of it the tool more used by the future purchasers of real goods …..
It is accessible perhaps with more difficulty, but it is not the situation of the real crisis in the United States which is the cause. The average wages did not follow the inflation of the price of the houses and the increase in the cost of living (gasoline, food, electricity, etc) the five last years.
What it is necessary to retain ,it is that it is necessary there to go according to its means and not according to its ambitions if one does not want to find oneself in a delicate situation. A budgetary preparation is necessary when a house is bought and one must unceasingly maintain it up to date. It is necessary to allow madnesses in the life, say simply that some are perhaps a little heavy of consequences on the wallet.
…
Because the market is in health and that it is always time to buy with less than one radical fall of the market. You do not precipitate therefore, take time that it is necessary for a considered decision and a storing in rule.
If you intend to buy in the next months, are alert with the temporary fall of the mortage rates which should take place soon. Benefit from this moment to make you pre-authorize your loan and guarantee this rate.
………thanks
Comment by engineering -
I see problems with liquidity and the tax laws. A huge major overhaul, but one they maybe looked at seriously with the current financing problems.
Comment by Chris Dowell -
very interesting idea you have there, nt prepare for a myraid of headaches on the way.Go for it and be that Trail blazer.
Comment by leonel lopez avalos -
I think this idea has already been more completely thought out:
http://money.cnn.com/2006/03/22/real_estate/playing_the_home_price_market/
Comment by jody -
The continual series of booms and busts in real estate is mainly due to the federal reserve\’s lending practices. If they did not artificially set interest rates too low people would be less likely to end up upside down on their mortgages. Of course this practice benefits those who have the resources to snatch up these bargains, but for the average american it does no good whatsoever. We would not have to fight these unpredictable highs and lows if we had an honest monetary system in this country. There\’s only one man I know willing to work for change in this area, and that is congressman Ron Paul of Texas. Let\’s help him get elected as President in 08. All of us will benefit from his honesty and integrity. We don\’t need a private bank controlling all of our nation\’s currency, interest rates, and purchasing power any longer.
Comment by chris k -
Pigs get fat! Hogs get slaughtered! http://www.myeclinic.com
Comment by madison -
MC: I wanted to share this with you and your readers. The real victims and many of them in your state.
http://money.cnn.com/2007/08/17/magazines/fortune/benner_aegis.fortune/index.htm?postversion=2007081716
Comment by Mary Clemente -
I like the thought. I have always thought I would like to buy shares of a college student\’s future income. Or of an upcoming bands future revenue. Or maybe an unknown actor…
All these sources need money early on and the amount of people willing to buy shares is probably a good indicator of the future success of the individual or group you purchased shares in.
Comment by bill ross -
No chance on the compliance side. In order for the securities to trade even OTCBB would require initial registration with the SEC as they would presumably be bought/sold across one\’s state borders. Registration also means quarterly/annual/etc sec reporting. Don\’t forget Sarbox too! Our current legal structure cannot support such \”small\” securities.
It sounds like your goal is to provide another home-owner liquidity option, am I right? If so, I believe a more cogent concept would be simply offering mortgage payment insurance that the home-owner could purchase. This could be scaled up, marketed and sold. How deep are your pockets, insurance companies have to have capital sitting on the books!
DRM – Chicago
Comment by DRM -
Very interesting (and apropos, I might add) idea!
And as proof of my support of the idea, I\’m willing to be the first to take my home public-seriously; right now! It\’s brilliant, and a way to allow the PRIVATE SECTOR to step in, and smooth out the \”ripples\” that are now turning into \”waves\” in the real estate market.
Comment by PJ -
This is a brilliant idea.
Anything a human mind can conceive can be created and implemented.
There is a similar idea that somebody already conceived and created.
The idea of creating an online exchange for internet marketing gurus and it is working fine.
In a software driven world, almost any idea one can conceive can be implemented.
Ofcourse attorneys will always tell you that it cannot be done because the more they complicate business the more money they make.
2 years ago, I conceived the idea for creating an exchange for a particular industry but I never went to discuss it with any attorney because I know they would discourage me and the moment I leave their office, they would rush to create and profit from my idea.
I will have to study how the Exchange houses work and single handedly create it myself.
If I succeed in doing it, then it would revolutionize the whole world and the fortune that would be created from it will rival the oil fortune of Saudi Arabia.
Maychic
Comment by Maychic.com, On Real Estate -
Intersting thought, but where do you make money? In the hopes that the property increasees in value? maybe ina stable market, but we wont see a stable market for years…at least here in FL.
Heres a novel idea to correct the pricing in the market, eliminate a realtors 6% commission and allow the seller to offer their home for less.
When I sell my 500k home I owe 30k in commission. Does a realtor need 30k to sell my house? The answer to that is NO. but of the 500k sale price, I\’ll only see 470k. so why not just offer my home for sale @ 485k, list with a flat fee brokerage (usually they charge from 2k-5k), and pass the savings on to the buyer? I\’ve just made the house more affordable and I actually made more money in the sale than I would have with a traditional real estate crook…er…agent. This would help ease the pain of financing and add a little more equity to the home for the new owners…
Comment by DFC -
Many of the problems associated with this idea had been raised above so I forgo repeating those. However, I don\’t think anyone questioned the premise that it would moderate the boom/bust cycle (if someone did and I missed it, my apology).
Linking equity markets into the realty market would only serve to increase volatility for the following reasons:
1. It would provide more fuel to an up market because the \”stock\” price of a house would increase more than the market price as it always (ok, almost always) does for companies which are doing well. For \”hot\” areas it can create a much strong bubble then we have seen.
2. In down market the equity holders would see a greater price reduction than the house\’s price. The reason is exactly the higher liquidity EXPECTED by the equity holders. Given that they might want/need to sell their shares, and they are not tied to the house, they would take bigger losses.
3. Related to #2 is the fact that right now, prices are moderated (up and down) by the need of buyers to live in the house, that being the primary purpose for purchasing a house in most cases. Indeed, the \”I buy to invest\” element created bubbles in many areas, and underscores the fact that pure investment element in a property would increase volatility.
So even if all the problems were to be solved (and they cannot because some are inherent to house ownership) the idea, if implemented, would only create the opposite effect of the intended one. It would increase rather than decrease volatility.
Comment by Moti -
via Boston Globe August 15th:
Home Equity Share (http://www.homeequityshare.com/) \”brings together buyers who can afford monthly payments but not a 20 percent down payment, and investors who want to get into real estate but don\’t want to become landlords or make monthly payments.\” Once a buyer and investor are lined up the buyer is pre-approved. At the end of a specified term (3-7 years) the buyer can purchase the investor\’s interest in the property, or together they can sell the house and split any profits. The service is free for investors and buyers, but they have to use one of the registered Home Equity Share broker. Home Equity Share takes 20 percent of any resulting agent commissions.
Comment by Timothy Post -
Mark: A must read! It should be in your hedge Fund Thread, but it\’s closed, so here it is! The New Heggie Vocabulary.
http://www.slate.com/id/2172224/nav/tap3/
Comment by Mary Clemente -
It\’s called The Rex Agreement. http://www.rex-inc.com/index.php
Comment by Chris W -
Mark,
One aspect I didn\’t see you address in your post is that people who currently invest in real estate (albeit not in the same way you\’re describing) commonly do so in order to collect rent, not simply to wait while the property appreciates in value.
This could be resolved by selling shares in the house with a provision that the majority owner / occupant of the house doesn\’t have to pay rent to the minority owner(s), but such a provision would reduce the price of the shares. In other words, if someone wished to purchase a 10% share in a house, and they wouldn\’t collect rent, the market value of that share would be less than 10% of the market value of the house, so the occupant would still wind up paying the bulk of the house\’s cost.
Comment by Jared B -
good info
http://www.myeclinic.com
Comment by Optimized -
One problem with this is that market prices on homes are so different across the country that there are tons of supply and demand issues to be worked out, as a home is not transferable to a more robust market such as goods or a product.
The price for a piece of software or a product is pretty much the same on the west coast as the east, stock shared are always identical, companies are worth the same no matter where they are located. House are priced drastically different depending on location. A house in San Francisco could be identical to a house in Cleveland but would cost ten fold. I can go into why this would create problems but I just don\’t have time to type it all out.
These prices are not arbitrary, as they rely on track able variables but for this sort of business structure they might as well be. I am not saying that it is impossible, but there are a plethora of holes that have to be filled, I don\’t think that this is the best solution to housing troubles.
Comment by barack_obama23 -
Mark, Check out http://www.rexagreement.com
Very intersting financing built by seasoned Street Vets.
Comment by Brian Newberry -
After reading a few comments to your blog, I think one thing I could add is that, when homeowners become less than complete owners of their home, they may tend to think more like renters. Have you ever owned rentals? Even when you think you\’ve chosen a renter wisely, your investment, or asset as the case may be, is always in jepordy of being devalued by the occupants. My concern would be that, if I put my dollars into someone elses home, that asset could be devalued by the homeowner rather than by market pressures or fluctuations.
Comment by Swede Swenson -
I just bought a house and I think the idea would be kind of nice. I suppose it would put the appraisal business into chaos, they\’ve been used to ripping people off for years, and the banks and other lending institutions would have to shape up because it\’s pretty costly to sell and buy a house. The 40% limit seems fair, but how will all the \”owners\” regulate the property? Do the 60% owners call all the shots? What about home improvements like painting or fixing the shingles or the driveway. Would there be a voting process or is it just buy what you get?
Overall, I think the system would encourage people to better maintain their homes. For example, I just bought my house and we\’re putting a ton of improvements into the place. We\’re moving stairs, putting in tile and hardwood, gutting every bathroom and the basement, etc etc.. Now let\’s say that 40% was owned by others and they had to assume their share of the mortgage. Great for me. And even better for me because I can have that extra money to improve the house, which would hopefully raise the value of the shares and encourage people to sell their shares. If they sell, then it\’ll go directly to the principal of the house and I\’ll own more, correct? In the end I\’ll have a better house and more of it paid off. The 4 other 10% owners would have made a tidy profit and then paid the bank while my payments are down. The rub is obviously the banks. Where\’s their cut? Fees from running the system? And what about all the tax ramifications from the sale of property? I really like the idea though.
While we\’re at it, couldn\’t we apply it to people and public buildings/works? The people would be great. Let\’s take a graduate with school loans, put his profile on the market and then track his/her results. What kind of job, salary, upward mobility and people can buy shares early that connect net assets and liability. Hell, do it with athletes too. I think we\’re onto something here.
Comment by phil -
Mark – boom/bust cycles are what Wall Street traders need to make money off the masses. If you don\’t realize this, then your missing the bigger picture. Almost all banks are in the back pocket of Wall Street and their shenanigans. For a good read on all of this check out the marketwatch article below by Paul Farrell. Until the masses come up with a way to start trading goods and services online and offline for something other than money, we\’ll be at the mercy of the bankers and Wall Street.
http://www.marketwatch.com/news/story/seven-rules-keeping-wall-streets/story.aspx?guid=%7BFD6E8E92%2D1066%2D48E1%2DBD24%2D49D6B2362AB9%7D&dist=TNMostMailed
Comment by Shake -
Mark,
You just reinvented the Real Estate Investment Trust (REIT).
JP
Comment by JP -
Dude, come on, this plan openly invites corruption into an already unstable market. Insurance companies will have a tough time writing policies on houses that could be manipulatedly bid up on the equity then have a policy cover the inflated prices. Companies work raising money even though they are heterogeneous, but for a housing exchange you would need homogeneality in order to commoditize and liquify the exchange. I could promise you this market could be heavily manipulated in the current model you are proposing, Disagree? Think about it.
Comment by jpg -
Hi Alex,
Homeowners do not need to have any existing home equity left. They are only giving up the future appreciation \”potential\” which may or may not even be realized within the maturity term of the contract. No sharing of the real home equity by the conventional legal title transfer is ever necessary.
Let me first use the derivatives analogy from a professional\’s perspective to explain between us only. For consumers, we do not want to make things complicated and hence no references to derivatives are ever required. All the economic benefits of derivatives are simply built into the new mortgage products (HELM and FVCM) the homeowners can simply convert to with their existing lenders or start afresh by refinancing.
First, owning a house is equivalent to long property risk (better through an index such as the OFHEO MSA HPI).
From the property owners\’ perspective,
Generic SwapRent (SM) provieds a short forward position.
AG (Appreciation Give-up) SwapRent (SM) provides a short covered call position.
DP (Depreciation Protection) SwapRent (SM) provides a long put position.
The three simple consumer finance transactions and their combinations (strategies) constitute the main instruments that will be built in and make these simple consumer mortgage products of HELM and FVCM possible.
The SwapRent (SM) embedded mortgage product HELM or FVCM is a wrap-around package of a contingent 2nd mortgage (not exactly a HELOC as the pricing method should be totally different from traditional HELOC) and the original 1st mortgage which could have already been sold or securitized. The only situation there would be a pay-down of the principal of the original 1st mortgage is when the property value declines as measured by the index used at the end of a SwapRent (SM) contract. There is no restriction what-so-ever currently in any of the mortgages which had been sold and securitized to receive the pay-down of principal. If the property values goes up at the end of the SwapRent (SM) contract then there is nothing needs to be done with the original 1st mortgage.
This is where the implementation of SwapRent (SM) and its embedded new mortgage products with the original existing lenders could save the RMBS investors around the world and stop the subprime or Alt A contagion from spreading further into the entire global credit markets.
This may sound complicated simply because I explained them to you from a financial institutions\’ risk management perspective. Homeowners do not need to know any of these in order to benefit from simly using it through these new mortgage products.
Again please email us or call us from more details. Thanks.
Comment by Ralph Liu -
I am all for increasing efficiency and liquidity in markets, however I am not sure your idea works to solve the current residential crisis. The people that are in trouble dont have any equity in their homes, typically they bought more home/homes than they could afford at the top of the bubble and are now underwater (and losing more ground as prices move down and interest accrues)
The investment community securitized the loans backed by the properties, and those investments have been a disaster. Your thoughts?
Comment by Alex G -
Hi Mark,
Have you heard of SwapRent (SM) and its derivative consumer finance products – property index linked structured notes or deposits called PILN/REILD and property index derivatives based mortgages called HELM/FVCM? SwapRent(SM)(Generic, AG and DP) itself will be the instrument to be traded on the OTC market or an exchange through REIDeX.com.
To be put in one simple sentence from the consumers\’ perspective, SwapRent (SM)is basically the synthetic version of the traditional \”sale and lease back\” concept where it will only transfer the econommic interests without changing the legal ownership, hence no triggering of any tax events and avoiding high brokerage transctaional cost. It is reversible in the secondary market and offers term flexibility from 1 year to 20 years.
They could also be the timely solution to the current default/foreclosure problems of the 2/28, 3/27 and Option ARM borrowers in subprime or Alt A sectors since we offer these solutions through licensing to the existing lending banks so that the borrowers could avoid default/foreclosure by temporarily giving up partial upside appreciation potential for a short period of time in return for lower monthly mortgage payments (i.e. through AG SwapRent (SM)). We have been marketing the licensing of these new pending patent protected IPR to banks and mortgage lenders around the world for over a year, primarliy in the UK, France, Germany, the Netherland, Australia, Hong Kong and the US.
I was in London in late June last year (2006) speaking at the Property Derivatives World conference in which I unveiled our SwapRent (SM) and its related series of new mortgage products. I spoke again at the Real Estate Derivatives World conference in NYC held in late April this year (2007) to introduce these new innovative products and services to the American market place. http://www.terrapinn.com/2007/redusa/SpeakerList.stm
The recent subprime and Alt A related crisis has creatd a new urgency for the US market. So far many major banks, Wall Street firms, hedge funds, regulators, GSEs and academics have been made fully aware of the details of these solutions already. We are on the verge of launching these solutions with a few banks or mortgage lenders in the US soon.
Our Corona (Los Angeles metropolitan area) based company AeFT ( http://www.InvestorsAlly.com ) has been primarily involved in the innovative development in the area of residential and commercial real estate index derivatives since 2001.
http://www.SwapRent.com
http://www.REIDeX.com
Please feel free to write to us at ralph.liu.wg87@wharton.upenn.edu for more detailed information if anyone is serious about the licensing of these solutions or for further academic research purposes. Thanks.
Comment by Ralph Liu -
ha! i am still cracked up over \”i can\’t write.\” i have this feeling where i feel literally stupid when writing. i just had to take some notes at an accountant\’s office a few weeks back and it was atrocious. the need for spell check, is actually up there with food, shelter and clothing. to boot, my accountant already thinks i am a blaze of genius! however, i will ease up on my son now about writing like he does.
p.s. i am homeless, so i don\’t need much more than a cool corner where i can feel safe, but people want to own stuff (100%). our culture is a culture of pride and a large percentage of people establish their pride in owning a home and a vehicle. its a pride thing. this is a great idea in theory. however, the theory of successful mortages is in the risk that the the balance of the economy is good.
and to close…would everyone search out the movie \”Once\” and go check it out? It is a brilliant, Irish movie about the music business playing in selected theaters across America. I promise that it didn\’t get a grade of \”A\” from movies.com because the studio bribed a great review. There was no studio and the film cost $150,000.00 to make. It is grassroots brilliant! The film has already collected $7 million and doesn\’t get released in Europe until August 24. This return on investment is like a blockbuster in terms of spending a hundred mill on a film, but more importantly it is an inspiring film.
Comment by jimmy -
Great post. I really enjoy your writing. By the way, I run a Real Estate Article Directory and if you have some articles for distribution, I would be happy to see them on my site.
Regards,
Alex
http://www.pointforyou.com
Comment by Alex -
You raise an interesting point but I don\’t think it\’ll get off the ground for a number of reasons.
Home Improvements; The homeowner has less incentive to do major renovations if they won\’t recoup the money in a sale, they\’ll recoup some but not all. Also, shouldn\’t the investors get some say in the matter? There would have to be some kind of person in charge in this situation and my guess is you\’d want it to be the homeowner…but why are they qualified?
Liquidity; If I buy mortgage debt, it\’s a simple process to offload the bonds. If I buy a piece of someone\’s house I\’m going to have to wait to find a buyer of that particular house.
If I buy bonds my money is covered by spreading the investment over many thousands of properties, if I buy an stake I\’m at the mercy of regional buying trends.
There\’s plenty of other reasons but I think the bond market is far superior to this idea.
Comment by Adam -
Hi Mark,
I think this is a great idea, but I see one problem. I don\’t know if its a showstopper or not:
Say I get funding for my home to help me make up the difference where I am short on my mortgage payment. Once I have that money secured then I sell the house for less than it is worth but enough that it pays off my mortgage. This means that the person\’s that have invested lose profits. How do you prove I have done something unethical? Although a house can be valued at a certain price this is kind of a guess. The true value of a house is what people are willing to pay for it at the time of sale. If the market is bouyant then I can ask more and if it is not then I have to accept less.
If I have a house that an estate agent tells me is worth $100k but the highest offer I get is $80k then the house is worth $80k.
So I do the following:
a. I owe $100k on a house.
b. I can only afford to pay off $60k.
c. I get a $40k cash injection in terms of an investment or IPO.
d. The house is now worth $170k as I bought in the right area at the right time and the house prices have spiked dramatically.
e. I sell the house for $150k as I want a quick sale for whatever reason.
f. I make a profit of $6k, which is fine by me.
g. The investors lose a potential profit of $8k, not including the $4k profit they did actually make.
calculation: ((170k-140k) * 40% ownership) – 4k profit already made.
$8k profit loss does not seem that much but for big properties you could easily be looking at an $8 million profit loss.
Unfortunately this opens the door to a lot of abuse. Of course this type of abuse is also possible in the corporate world with stocks but there are a lot of rules and regulations to protect the investors. Of course these rules and regulations can also be put in place for a real estate market but there is one difference:
In a stock market you are dealing with companies, this is a much smaller set of entities than all or many home owners i.e. easier to track and control, for a very large volume of entities there could be scalability issues. Also corporates are easier to hold accountable for this type of abuse as they are incorporated as a legal entity under a set of laws. If there is large scale abuse within the real estate market you are proposing then the market will collapse and not recover. The system works because corporates can hire lawyers so they know exactly under what terms they operate and what they can and can\’t do. How easy will it be for all the \”home owner participants\” in this scheme to know how to operate and under what laws and conditions they are allowed to sell their property. How much legal advice will they need to stay within the bounds of the law? Will that make it unaffordable? If someone does something wrong can they plead ignorance? Can they prove that you did not do enough to make sure they are informed and can they then state that you are taking advantage of them because you put everything in legalese and they\’re just common folk?
The only question is: is it easier to abuse the system in this scenario than in the stock market? As long as the answer remains yes your proposed system will not be feasible. As we have seen the stock market is a feasible construct. If your risk management and safety margins can match the stock market then you\’re in business.
I don\’t know if this problem could be worked around or not. I think it would be very interesting.
I think one way of avoiding this would be to:
1. When a buyer buys a stock it is not for a specific home but he will be buying an index type stock, this would be more like a fund of some sort where he would be more protected against the vagaries of the market.
2. The sale of the house would have to be under some kind of rule. This is a very hard one to get right as the owner may be be forced to keep ownership of the house while the market recovers from a dip, or he may be stopped from selling the house at the actual value as opposed to some misguided appraisal that is just plain wrong.
3. If he sells for less than what constitutes a profit is he liable for the loss or is this the risk the investors are taking?
An additional thought: What about first time home owners? Think how awesome it would be if they wanted to buy a house and only had to pay 60% of the purchase price with the rest coming from real estate investors. For first time buyers (or maybe all buyers?) they would then have the option of repurchasing the remainder of the home when they are ready to do so. It is also quite cool that they never have to, they can buy 60% of a home and live in it without ever having to worry about paying off the rest. The asset appreciates and the investors can sell their shares at a profit all without the home owner being aware of it.
But what if the market crashes and the person can afford to pay for their 60% of the home but the fund can no longer support the 40% on their side. Does this mean the person loses their home? I don\’t know. Under what conditions would a person lose their home? This system will make it easier to buy and keep a home for many people but when will they lose their ownership stake?
I really like the idea though. It sounds feasible if all the details are done right! I hope you get the right details person on board to get this done!! 🙂
Regards, Martin.
Comment by Martin -
something similar here:
http://www.opromark.com
Comment by jamie -
The board may advise me to get my MBA, work for a certain company, take a certain job, dress a certain way…etc. and then guide me to a high paying position in corporate america and I would pay the board a percentage of my salary.
Comment by health food -
go to- http://www.rexagreement.com
– they offer to purchase equity in your home as an investment. new\”ish\” company I think. Also, I believe there is a well known economics professor working on such a concept – to create a public marketplace for residential real estate equity.
Comment by Dean -
Hey Mark,
Not sure about this post but did you see that Mark Zuckerberg (Facebook) just called you a moron? (from http://www.avenue-mag.com/michael/2007/08/13/mark-zuckerberg-facebook-impersonator-on-techcrunch-comments/)
\”The founder Mark Zuckerberg in an exclusive interview says, I did not want to be left out, sitting on the sidelines watching while so many others like Larry Page and Sergei Brin that chink Jerry Yang and that moron Mark Cuban made incredibly huge amounts of money on the Internet. People are flocking to it in droves. I knew that if I started a site and put in basic software that allows for a free flow of information that is personal and private then I would make a fortune from scratch with the speed of rabbits breeding and multiplying. I am just a little nerd. I get bored easily with hard work. I worked for a week to create Facebook. I put in basic code. I feel sorry for the dimwits in the old economy who have to work for more than 10 long years for a few grand at the end of each month.\”
Comment by Noel -
Maybe a better way to see if this is a viable idea is to look at it the other way around. Instead of asking how we can help the home owner (a financial non-starter people could give their money to home owners right now.) Ask yourself \”Under what circumstances would I invest my money in Cuban\’s home/equity arrangement?\” For me personally it would be highly unlikely that I would do such a thing. Just too much opportunity for others to use and abuse my money.
I don\’t want to be closed minded… maybe you can think of a scenario in which you would invest?
Comment by scott -
Mark:
Why not give back a Billion or two to Yahoo, since you sold Broadcom at a bubble peak.
You would feel better about yourself.
Same analogy to your \”There has to be a better way to protect homebuyers on the downside\”.
Comment by Richard Allen -
I would recommend that you check out Robert Schiller, the author of Irrational Exuberance, who developed an index of housing values based on certain metropolitan cities. He is an academic who could bring some serious credentials to your idea of taking homes public – an idea which I believe he would share.
Comment by Michael Going -
I agree with Antonis. Who would want to own part of some stranger\’s home? You\’d have to be a moron to by a house as an investment without the tenant paying rent.
Comment by carpet -
I believe this is all interesting but I think there is a simpler solution for this. I think a new home owner should always pay 20% down and if not should pay insurance for loan default based on the size of the down payment. If they can\’t afford this or just don\’t want to pay insurance then they should rent and there should be no tax disadvantage for renters. This would allow renters to better save for homes and down payments or to choose renting for ever if they choose and invest as they please elsewhere without penalty. Just to clarify I have no financial background just a homeowner who can see issues and forced to be a howeowner or give a lot of extra money to Uncle Sam.
Comment by Steve -
There are so many flaws with this. If it was a good idea, someone would have done it already. Think about, house prices on a normal good year is 4-5%. Interest rates on a typical fixed rate mortgage is 6-9%. Banks would rather have the higher percentage rate….. DO THE MATH.
Comment by yeah right -
The \”Old\” system has worked fine for decades. It only fell into stress when the tradtional safeguards were ignored.
You know, things like 1) Banks who prior to lending money made sure the borrowers could pay them back; 2) A legitimate appraisal process that actually valued the home legitiamtaely; 3) A Federal Reserve that encouraged wild asset inflation and therefore specualtion by dropping rates to 46 year lows and keeping them there for a year; 4) the government\’s traditional regulatory oversight role; 5) Ratings agencies that legitimately rate things.
There is no reason to take any of the 75 million homes in the U.S. public — there just needs to be some reasonable judgement and accountability.
The normalizing process has already begun, starting with the 100 mortgage lenders that have gone bankrupt, and the ongoing losses at big hedge funds that leveraged up, bought garbage, and are now paying for it.
As long as we do not ail out the specualtors –that includes the big ones who may go bust — the lesson will be learned for thge next generation.
Comment by Barry Ritholtz -
Who pays the property tax? We all know who ends up with the house, if that doesn\’t get paid. Next thing, the investors will want dividends paid. You might as well just rent a house, its the same thing. There are tons of public corporations that rent/lease residential and commercial properties.
Comment by boom, bust, whatever -
One way to avoid some of the problems mentioned is to scale it back and make it less universal. Hearthstone Homes is a builder in Omaha that buys up an entire neighborhood. There are no other builders in this neighborhood and all the houses look very similar. There\’s at least one builder like this in every city in America.
The builder establishes an LLC that owns the deeds to every house in the neighborhood. Not more than 40% of the shares of the LLC will be sold publicly. The other 60% is sold to the \’homeowner\’ who never gets his name on a deed, but rather gets his name on an LLC membership certificate and gets the right to occupy a certain piece of real property. There are restrictions that he can\’t sell his ownership except to vacate the real property and sell it whomever occupies it. Or maybe he can only sell it to the LLC who would essentially broker the sale to the next occupant.
The bank will happily lend him 100% of his purchase price, because the LLC will put up 100% of the deed against what will essentially be a 60% loan. Perhaps the LLC will require 10% cash. In that case, the homeowner puts up $10k to live in a $170k house, the bank funds $90k, and the LLC funds $70k. This gives average homebuyer $70k more house than he *should* otherwise buy.
Buying shares in an LLC that owns 200 houses of consistent quality, all in the same neighborhood, and all under similar covenants will mitigate some the risk associates with the \’uniqueness\’ of residential real estate.
Buyers get more house than they could otherwise afford. Bankers get an outstanding 60% loan-to-value ratio on an assets that almost never depreciates. Hearthstone Homes just increased their customer base from all the people in the $150-$200k range to all the people in the $50-$200k range. The only loser in the deal is the 40% shareholder who\’s getting residential-real-estate level returns when he could have put his money into an index fund and made more.
We might need some tweaks to the tax law for this to work. What other holes are there?
Comment by Dick Kusleika -
The present system of liens and subordinate liens will pose a problem. Sounds good on paper though.I am not the one to say never, to this I\’d say tricky.
Comment by omodudu -
Does a simple house fire cause your price/share dropping to nothing?
Isn\’t this what home equity loans are? Just instead of selling shares of stock, the banks are 1, selling the loans, and 2 the banks are buying other assets with the future money?
Is another way of looking at this, instead of buying debt, you are selling ownership of your house? That implies that upon your debt being paid, you are not the full owner.
Would be good as an alternative to reverse mortgages. Except you are getting the full value of the % of ownership you sell.
A company that could facilitate this is Clear Capital. http://www.clearcapital.com
Comment by Total Sports Direct -
Interesting idea, but it is missing a mechanism for the equity holder to realize the value of their investment. In other words, let\’s say the value of the house rises, how does the equity holder capture the value of that rise? There are no dividends in this model so capital gains is the only mechanism but if you allow the shareholder to force a sale, then you defeat the social objectives of this idea.
Stockholders (at least in majority public companies) have the right to and, in theory, can change the board, force a dividend or force a sale. Even if they don\’t go through with these actions, the fact that they can gives the shares value in the secondary market because if they drop below liquidation value, someone will swoop in and do these things.
Antonis
Comment by Antonis Polemitis -
Isn\’t zillow setting itself up to be at the center of such a marketplace?
Comment by Mike Alfred -
Great idea, but there is too much built in risk for the non-occupant shareholders. Why not just buy a 30yr bond? The return will be higher and the risk will be significantly lower. If this is some kind of charitable or non-profit investment (see Kiva.org non-profit microloans), then I can understand doing it, but it is not a worthy investment vehicle.
Just my two cents,
Todd
Comment by Todd Thompson -
Solid Idea. That is why I just bought the domain: http://www.takemyhousepublic.com
Comment by Joe McMackin -
I thought about the ability to essentially take yourself public. People could invest in me (buy a portion of my salary) and I would have a board that would help guide my choices. The board may advise me to get my MBA, work for a certain company, take a certain job, dress a certain way…etc. and then guide me to a high paying position in corporate america and I would pay the board a percentage of my salary. I can buy back shares my shares except they will get more expensive the more my value increases. Is it possible, I don\’t know. I would love to try it for a year or two to see what the possiblities would be. How about it Mark? Want to buy some shares?
Comment by Brandon -
Mark,
This is a good idea and it does already exist, albeit, I know of only one company that does it (You can read more about it at http://www.therobboreport.com/article/?q=rex+agreement). Also, another form of equity sharing that is becoming more common, especially as first time home ownership is becoming more difficult these days is essentailly sharing a mortgage (http://www.therobboreport.com/article/?q=mixing+a+mortgage).
Granted I am more of a fan of the Equity Sharing agreement with a company than with friens but both are options.
I scour the real estate news everyday for my user community and have been directly and indirectly involved with mortgage industry for 10 years, and I will have to say that I was very impressed by the paradigm shift that the equity sharing partnership agreement. It does offer a lot of optioins. I was also a bit surprised that a company had such faith in the appreciating asset values in this market where real estate is considered to have fallen into the burning ring of fire as an investment class.
Finally, another version of your proposal could be construed as similar to a Reverse Mortgage which will we will be hearing a lot about in the next 20 years as they grow in understanding and popularity for baby boomers as a way to access their equity.
Please take a look at the articles and I hope you and your readers find them useful.
Also,here is to the hope that the MLB Old Boys Club gives you a fair shake at becoming the new owner of my summer office…Section 528, Row 1, Seats 108 & 109 at Wrigley Field…Go Cubs!!!!!
Rob \”Robbo\” Burke
http://www.TheRobboReport.com
Comment by Rob \"Robbo\" Burke -
The idea is intriguing, but I have a question/problem:
1) To what extent of say would shareholder have? If the person living in the house is a bum, and he/she does not maintain the house at all and lets it deteriorate over timeto the point that the house is worth far less than comparable housesat what point can shareholder step in? When someone invests in public companies and is a minority shareholder, usually there is nothing they can do if the front office is clearly running the company into the ground right in front of the public eye. But, if they were 40% shareholders, wouldnt they have votes/right?
Comment by Colin -
Mark: Now you got may you know what in a major knot! The fact that the feds went into bail out the hedge fund billionaires at the cost of the americans who are losing their homes. Look at the tax rate these criminals pay? Its LTCM all over again, How many people that work for you are losing homes? You\’d be surprised! Its the lenders,yes, but who turned their profits and paper into derivitives? Is bad enough we are in a war costing us billions and lives and we still have to pay $4.00 for gas. Should we not get it for free? Having a very bad Day!
Comment by Mary Clemente -
\”A successful purchase of the house can be quickly defined as being able to make the payments you have committed to make, under the terms you have agreed to…\”
The sales of many houses with subprime loans cannot be called successful. I think the buyers and sellers of homes that are in trouble knew at the time of sale that the payments could not be made.
The issuer of the loan figured they could sell the debt before it went bad, and the buyer figured that they could refinance before the payments became impossible to make.
How do you fix seller and loan issuer both trying to get something for nothing?
Comment by Bruce McL -
Interesting concept, I\’ve had a few thoughts on this myself over the years. Three basic problems to start with, however.
1) Liquidity. The most basic problem is liquidity, manifested as the \”uniqueness\” of each individual property. Publicly traded companies are large enough to create a critical mass of shares against value that attracts investors in identical shares of the company (each share of stock in a one-class company is identical). In residential real estate, each house isn\’t large enough to create a critical mass of shares against value, so you\’re left trying to either group similar properties or have an illiquid security that doesn\’t really help the basic problem you\’re trying to solve. Groups of houses are necessarily subject to various unique features that change the value of each house and things get messy from there.
2) Moral Hazard. A homeowner who doesn\’t own a home has much less incentive to keep it repaired, maintained or improved over time. The limitation of only 40% of asset being owned by non-primary shareholders would reduce this issue, but it certainly exists regardless. If you consider for a minute the issue of repairs, maintenance and insurance costs, it leads to the next issue…
3) Separation of occupancy benefit from asset ownership. The occupier of the property has a separate benefit from the equity holders in an asset, namely they get to live in the house. Some split of these two must therefore be made in order to equitably account for responsibility for repairs, maintenance, improvement, etc. Expense choices in this area certainly affect the value of both occupier and asset owners, but in many cases in significantly different respects (polarity and magnitude). For example, a principal owner who also resides in the home could desire a pool that increases his benefit of occupancy but reduces the market value of the house.
All that being said, I agree with you that there has to be a way through the thicket into a better option for home ownership and all its associated issues.
Comment by John K. Lunde -
If corporations are the legal equivalent of people (can own assets), a shell corporation could own the house, and one could sell shares of the corporation.
This is what Real Estate Investment Trusts are, no?
The cost of the legal process probably makes this impractical for a single piece of real estate, though.
Comment by Andrew GJ Fung -
Bloody brilliant! If you want to fund it, I will help build it 🙂
You need an exchange, an set of standard contracts, and probably a way to package similar \”home equities\” into REITs so you can get some economy of scale.
Another way of looking at this is that you don\’t need to get the homeowner involved at all – the banks could do this directly, since via the debt, they could be considered owners of much of the equity. I dunno – just a thought.
Comment by Aaron Erickson -
This is a GREAT idea that I think would be a revolution in an industry that is in need of a revolution. One issue that I see would be when it comes time to sell the property, who gets to determine when it\’s ready to sell. Think of it this way: if TLC and HGTV have taught us anything, its that a fresh coat of paint and drapes can add thousands to the value of a home. If a homeowner sells a house for X amount, when one of his investors says he should have painted more and sold it for Y amount, you have a lawsuit waiting to happen. Unfortunately, the real estate industry is full of lawsuits, so something would need to be put in place to prevent this type of thing from happening.
Comment by Jarrod -
Fairly similar to this idea, but with shares + real money:
http://www.zillowblog.com/virtual-housing-stock-market-zillow-api-idea-1/2007/03/
Comment by Jeff Lewis -
We can make it happen. Solid idea, outside the box thinking, but resolving a pressing issue in a simple way. That\’s the roots of a successful business plan and it takes an open mind to give it away to the public. The means to entry are high, but the market might be willing to take something like this in if the situation is right. Email me if you\’d like to move on it.
-steve
Comment by Steve -
Novel idea, but the main problem I forsee is the liquidity aspect of equities; to create such an exchange would take too much unwarranted funds.
Comment by Ed -
Interesting. I actually thought of doing this when the Interstate was move 40 yards closer to my home. Now I have >200,000 cars traveling 40 feet from me every day. I thought, \”I\’ll never be able to sell this house to another homeowner now, but maybe I can turn it commercial\”.
Freeway access on and off, high visibility, large lot (1 acre).
The problem is it takes thousands of dollars in legal fees, and a number of years to get the zoning changed. Time and money I didn\’t have. So I looked into selling \”shares\” of my house. It\’s 250K worth of property with less than 70K owed. Commercial value is about 800K.
Should be easy to get people to invest, right? Nope – I couldn\’t even find an attorney willing to consider putting together the required legal documentation – they just said, \”It can\’t be one\”, or, \”it can be done, but you home cannot be \”split\” into seperate ownerships – so he investors would have no recourse to take \”my\” property back if I falted on my side of the deal\”
In the end I decided to go it alone, and have slowly been working the system. At this rate it\’ll take six years to get the property re-zoned.
The problem isn\’t with the courts – and not even the lender. The problem is with the lawyers. Imagine that 🙂
Comment by Rob La Gesse -