Recently, Realtor Genius was called naive for suggesting that actual solutions be provided for the small portion of the market that we call “sub prime.” So, I’ve had my ears/eyes perked for solutions to the sub prime mess that I could share with everyone here…
Yesterday, I read on Mark Cuban’s blog (he’s the Dallas Maverick’s owner, genius business man, billiionaire of Broadcast.com, Web 2.0 savvy, worked at DQ for one day, and is NOT a Realtor) about his idea for how to break the “Boom Bust” cycle of Real Estate. I’m not a Realtor, but I really want to hear everyone’s take on this inventive idea… to me, it’s scary outside of the box!
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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.
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Photo credit: ESPN.com
——Read the article in its entirety
Steven Groves says:
Geez – this a scary enough of an idea to be interesting; it spreads risk around enough and still sustains the homeowner… is there enough of a win for the investor pool?
August 14, 2007 — 1:17 pm
Michael Cook says:
Now this is an interesting idea. The question I have is about control? Say I own 51% of someone’s house, can I then dictate what they can and cant do with it. Lots of little details to work out, but I think its a great idea.
For the record, I didnt call the “Realtor Genius’s” idea naive. I simply thought it was a bit too simplistic given the breadth and depth of the issue. Multiple parties approached the subprime market with different motives and there is no questions the risk pricing model got out of wack. When and where is debatable, but it is much more than just self fulfilling prophecy.
August 14, 2007 — 1:26 pm
Lani Anglin says:
>To say that there is no problem or that there is an easy fix to a problem that has been growing for years is a bit too simplistic.
I guess I just took it as such, but maybe you didn’t mean it that way. The point of THAT article was that the conversation of “oh no, this is such a mess” needs to turn into “let’s talk about solutions rather than predicating fear.” It was in response to an article that I think you wrote calling Realtors to action… so, a Realtor demonstrated their current actions.
But, back on task- Mark Cuban answered the call of finding solutions and I applaud him for that, regardless of how insane this idea of his is. No one ever said there is an “easy fix” to the sub prime mess (that we’ve already established is a tiny fragment of the market), but there is a need to quit PANICKING about the “oh no, this is such a mess” and move to a productive conversation about what to do next.
Does anyone think that Cuban’s idea would ever fly? Is it just a dream or do you think this could happen? If Cuban woke up in the morning in his bed of billion dollar bills, could he start this thing in forward motion?
August 14, 2007 — 1:45 pm
Jefferson Otwell says:
I often think a little during my work day of how this whole system could be better. This notion is best described as the title says: scary. Nevertheless, it truly is a different approach to the problem that addresses liquidity, equity, spreading risk, stability of home ownership, and with the 40% cap on investor equity, even control of the home.
I suspect there would not be enough of a win for the investors, although different ZIP codes might serve to grade shares like bonds are rated. Bubble cities might offer more risk but the potential for more return; the heartland might offer slow but stable growth. And what about tax deductibility?
What an admirable attempt at a solution!
August 14, 2007 — 1:50 pm
Michael Cook says:
Good point Lani, the action recommended by BR was certainly on point and I do applaud him for that.
August 14, 2007 — 2:00 pm
BR says:
No worries, I was happy to see that Ben Stein basically said the same thing the next day in the new york times. If that means I’m simplistic and somehow puts me in the same league of thinkers as Ben Stein, Neil Cavuto (which I’m not lol) then I have no issues with that at all…
Now for this idea, I think it’s an awesome idea. Small investment, longterm picture, I could see the value as a consumer having another small risk vehicle to recycle wealth, help out fellow consumers, push more pillow case cash into the economy and more.
I had given some thought to how you keep the seller in house for enough time for market upswings in pricing, would they in turn have to agree to time terms in the home? Can they use public cash for improvments the turn up the value? Being a publically traded business, I would imagine the stipulations could be somewhat open for discussion but some cap investment would need to take place to manage the value, right? So I’m with Michael on this one- control?
August 14, 2007 — 2:06 pm
Jay Thompson says:
Michael asked, “The question I have is about control? Say I own 51% of someone’s house, can I then dictate what they can and cant do with it.”
Mark Cuban covered that in point #2, “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”
Here’s a kinda sorta similar(yet different)idea where someone gives you money now in exchange for a percentage share of the future appreciation (or depreciation) of your home. More here: http://tinyurl.com/2rlpud
August 14, 2007 — 2:55 pm
BR says:
I like the safety net REX adds in but I am more cozy with the idea of the regulation the open market brings to the table.
I’d like to hear from Brian, Jeff, and some others on this one…
August 14, 2007 — 3:18 pm
matt carter says:
It’s a little late for Cuban to take credit for this idea…
http://www.rex-inc.com/
August 14, 2007 — 3:23 pm
Lani Anglin says:
Matt, in all fairness, there is no such thing as an original thought (according to Francis Bacon or Ralph Waldo Emerson depending on who you believe). Let’s say I once thought of an awesome play that the Mavericks should employ and blogged about how they could fix their weakness with this magic play… come to find out it’s actually in an old playbook retired in the 80’s. Oh well, point is there’s nothing truly original even if it was original to MY brain.
I could be wrong, but isn’t there a significant difference in the methods used between Cuban’s theoretical Public Market and REX’s program?
August 14, 2007 — 3:42 pm
Kris Berg says:
You’ve been a busy girl today, Lani. I think this makes it a hat trick, no? 🙂
August 14, 2007 — 4:10 pm
Robert Kerr says:
Why not create a market or exchange where homeowners can sell equity in their homes?
Why create a new market to do what HELOCs already do?
August 14, 2007 — 4:25 pm
matt carter says:
Lani you’re right Cuban’s idea and Rex’s offer differ in their details — particularly Cuban’s requirement that the homeowner use the proceeds to buy down their debt, and the (theoretical) ability to trade equity shares at any time instead of just settling up when the home is sold (the way Rex does it).
But the objectives are pretty similar — let the homeowner share profit (or risk) with other investors.
August 14, 2007 — 4:30 pm
Jay Thompson says:
Oh I see, I comment about the Rex thing, and 28 minutes later the Inman guy comments about the Rex thing. And he gets all of Lani’s attention….
Oh well, at least Mr. Lani didn’t ignore me in favor of the media giant.
🙂 🙂
August 14, 2007 — 5:15 pm
Roger Hartzog says:
An interesting idea for possibly dealing with a growing problem, but as with most “why haven’t anyone thought about this before” ideas, the devil is in the details. The very concept of public offering of equity shares is the precisely the residential version of public stock offerings by private companies… and for precisely the same purpose: to raise funds needed to deal with heavily leveraged businesses.
And, for that reason, the securities industry is a pervasively regulated area extremely prone to fraud.
Not to rain on anyone’s parade, but who will oversee the sound management of the investment (the home) by the occupant? And what standards would be used for the oversight? Since appraised value is really not the “market” value at which the investment could be sold, modifications to the property or failure to maintain it could significantly alter its marketability (and, thus, return on investment) or even make it a wholly illiquid investment by not being sellable. Should the investors bear all that risk without some recourse or method of oversight?
Just a couple of thoughts.
August 14, 2007 — 5:38 pm
BR says:
Jay, she actually put your comment in the suggestion thingy up there^ and THEN had the conversation with the media giant…
August 14, 2007 — 5:46 pm
Lani says:
Jay- do you need a hug?
August 14, 2007 — 5:47 pm
Jeff Brown says:
What’s the big deal here? Though trading homes publicly can be discussed rationally, is it really needed here?
The partners would probably be holding title as tenants in common which gives them the right to sell their share at will.
Leverage problems? If I read it correctly the funds would go to paying down the debt. You’re crushing leverage, not encouraging it.
This is an idea that probably will become relatively common place sooner than you might think.
Regulation? Give me a break. As we speak, any owner can do this simply because he wakes up tomorrow morning and decides to.
What makes this idea scary to some is not that’s it’s new, it’s actually old. What makes it scary is that it hasn’t been talked about since the last time we had a great big price rise. 🙂
Back then lots of folks did this. It’s just not that big a deal. Cuban has expanded it into a potentially huge deal by suggesting it be closely organized. So what?
You want some of the home a guy bought in Denver a while back? Do it. All the infrastructure is in place. You want special terms and conditions? A competent real estate attorney will listen and get it done relatively cheaply.
This is an old idea which just might get more traction than usual this time around. Who knows?
But a scary idea? Hardly.
August 14, 2007 — 7:36 pm
Jay Thompson says:
I missed the comment suggestion thingy up there ^
And I’m just hassling you Lani. Someone’s got to do it…
Hook ’em!
August 14, 2007 — 9:20 pm
Brian Brady says:
“Why create a new market to do what HELOCs already do?”
Interesting idea. Think that through, Robert. Could a HELOC product come out that converts to an equity percentage after a number of years?
Think about the possibilities.
August 14, 2007 — 9:39 pm
Will Farnsworth says:
I really hope Cuban buys the Cubs…
August 15, 2007 — 5:52 am
Don Reedy says:
Mark Cuban is a business guy whose thinking is entirely within a box all of us should be educating ourselves about.
In 1997 a couple of economics professors from NYU and Rutgers, along with a VP at Chase Manhattan Mortgage and an economist from the Federal Reserve in New York penned a book entitled “Housing Partnerships, A New Approach to a Market at a Crossroads.” Their premise was simple enough in economic terms, that being, why not have an equity market participate in the housing market? In fact, as they somewhat dryly go on to explain, it simply is a force that should have been, and now must be factored into the housing market as our economies (worldwide versus national, and certainly local) merge.
Today this concept is alive and well, believe it or not. All the bugs worked out. All the problems associated with tenant in common “control” issues…..solved. Questions for investors and buyers about “fairness”…..solved. No, it’s not a concept that’s been screwed up by Wall Street yet, and yes, it is a concept that every single one of us can use to help delineate and solve the problems inherent in lender only financing.
The concept is called Equity Sharing. Take a buyer and a lender, add an investor, and an equity sharing arrangement has been created. The buyer gives up some potential equity, and the investor gives up potentially high ROI’s for moderate ROI’s, and both get what they want.
In this mix we create an occupancy agreement to address and solve all the problems associated with making the transaction a fair one for both the buyer, lender and investor. All assume some risk. All assume a share of potential profit, and all are intertwined for the mutual benefit of each other.
A lot of the posts take Mark Cuban’s “solution” too far. Lani’s quest for an answer to a real problem for real people involved in the quest to buy a home for themselves and their family is a quest we can all take up at a local level.
If you want to see how this concept is executed, please visit http://www.buyhalfahouse.com or http://www.homeequityshare.com Read the legal web sites of Marilyn Sullivan http://www.msullivan.com and Andrew Sirkin http://www.andysirkin.com
Lani, just 800 miles south in the Bay Area, and here in San Diego, there are innovators willing to see ideas like Mark Cuban’s as viable and timely. Call Mark, come on down, and let’s start the next revolution!
“A single raindrop seldom thinks itself to be the cause of the flood.”
August 15, 2007 — 8:57 pm
Moti says:
Many of the problems associated with this idea had been raised here or elsewhere 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.
August 16, 2007 — 7:08 am