Personal Finance

Create a company that offers short selling homes?

  • Last Updated:
  • Dec 13th, 2013 10:18 pm
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[OP]
Penalty Box
Apr 16, 2012
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Greely

Create a company that offers short selling homes?

So many real estate bears that are predicting a housing crash. I might as well try to profit from them.


Here is what my company will do:

Allow homeowners to put up their house to be "borrowed". The "borrower" will proceed to sell the house to a buyer. Of course, there will be an interest rate for borrowing this house.

The short seller is in debt of the house. He waits until a housing crash and rebuys it back.

If housing prices crash 50%, he rebuys it back for 50% of the value and he takes the remaining profits.

My company takes a small cut.

Discuss.

Let's use some real world values:

$500K house in Toronto is up for borrowing to short sell.

Short seller borrows it and sells it immediately in Dec 2013 for $500K.

Let's assume that there is a housing crash in 3 years and prices crash 50%.

Short seller pays 3% interest rate each year for 500k, 400k, and 250k for the declining asset: $34K

Short seller rebuys it back for 250K and pays his debt back to the original homeowner.


Short seller profit: 250-34=216K

My company takes a small cut of 1K.
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techcrium wrote:
Dec 13th, 2013 1:22 pm
So
Allow homeowners to put up their house to be "borrowed". The "borrower" will proceed to sell the house to a buyer. Of course, there will be an interest rate for borrowing this house.
Except that a buyer will want to generally live in the house. So how do you propose to deal with that?

Why not do what the Canadian banks do, and simply invest one's money, with leverage, in fully government-guaranteed securities that have a spread that is a function of housing prices (ie: CMHC insured subprime mortgages). And wait for the spreads to expand as deflation in the underlying asset takes hold?
TodayHello wrote:
Oct 16th, 2012 9:06 pm
...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
[OP]
Penalty Box
Apr 16, 2012
3565 posts
683 upvotes
Greely
Mark77 wrote:
Dec 13th, 2013 1:27 pm
Except that a buyer will want to generally live in the house. So how do you propose to deal with that?

Why not do what the Canadian banks do, and simply invest one's money, with leverage, in fully government-guaranteed securities that have a spread that is a function of housing prices (ie: CMHC insured subprime mortgages). And wait for the spreads to expand as deflation in the underlying asset takes hold?
If a buyer wants to live in the house, then they don't put up their house for being borrowed...obviously...


That is such a common sense question....
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techcrium wrote:
Dec 13th, 2013 1:31 pm
If a buyer wants to live in the house, then they don't put up their house for being borrowed...obviously...
Okay, I'll play along. Take tenants out of the equation totally, and presume this just applies to landlords.

First off, you do know that when one lends a stock, or bond for short selling, they typically receive collateral, usually cash or T-bills, for 103-105% of the value, right?

Secondly, why would landlords, who usually own property to profit not only from the property itself, but also from the management of such property, lend their property out and lose control of it?

Personally I think you'd be better off facilitating a market where, based on a rigorously and well defined house price index, people could buy or sell cash-settled futures. Some will be bullish on housing at a given price, and some will be bearish. Young people may want to buy some futures contracts on housing as a method to hedge future increases in housing costs. Old people may want to sell housing futures contracts to lock in a house price without making a big one-time sale. Housing suppliers would use the futures contracts to hedge their costs of production. I think futures are the better mechanism here than trying to concoct a 'short sale' (not to be confused with 'short sales' in the context of mortgage finance which refers to selling with an equity deficiency) with houses directly.
TodayHello wrote:
Oct 16th, 2012 9:06 pm
...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
Sr. Member
Jul 19, 2007
826 posts
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Already done.

Canada is being sold as we speak.

Dollar should be under .90 in not too long.

Real estate will take longer but eventually....

Sharps already shorting Canada and everything to do with it. Already used it up like a cheap slut, will be time to move on soon completely.
Deal Addict
Jan 5, 2006
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They have asset backed residential housing indices, which you can trade off, but not in Canada. I've thought about setting one up in Canada, but never got around to it.

Techrium's idea doesn't work as outlined.
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KingKuba wrote:
Dec 13th, 2013 2:00 pm
Already done.

Canada is being sold as we speak.
By whom?
Dollar should be under .90 in not too long.
Ummm a weaker RE market should mean a stronger CAD$, as a reflection of a credit slowdown/contraction. Not a weaker one. The current dollar weakness is more a story of the USD$ being strong than the CAD$ being weak.

If you believe in a weaker RE market, then buying the CAD$ is something a person would want to do. And, of course, getting the heck out of anything that relies on a lot of consumer spending.
TodayHello wrote:
Oct 16th, 2012 9:06 pm
...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
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Jan 28, 2012
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I'd love to do this but you are going about it the wrong way.

Make a company that will buy my home from me for market value and will agree to rent it back to me at a reasonable market rate for a set amount of time (5-10 years?).

At the end of that term I get priority if I want to buy it back at market rates, Or I can move on and you can sell it on the open market or continue renting it out.


That's the real way to short housing. If you are so sure prices will go up and I'm sure they will go down, let me cash out and start paying you rent. If you are right you got an income property that goes up in value, with a stable tenant. if I'm right I got out at the top and saved myself the losses, and still got to live in my house for a while.
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The reason why someone would want this, as opposed to simply not owning a house, or selling their existing house and renting, is leverage.

The inherent problem with such is that houses are individually unique, and it would be impossible to adjust for improvements or maintenance items on individual houses. With homogenous instruments like stocks, bonds, precious metals -- a lender of a bar of gold (for instance) doesn't care if he doesn't receive back literally the same bar of gold. As long as he is eventually re-paid a bar of gold, in accordance with the LME or COMEX rules. However, with houses, obviously people aren't generally willing to lend something out, to receive something else in return.
TodayHello wrote:
Oct 16th, 2012 9:06 pm
...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
[OP]
Penalty Box
Apr 16, 2012
3565 posts
683 upvotes
Greely
Rhaegar wrote:
Dec 13th, 2013 2:37 pm
I'd love to do this but you are going about it the wrong way.

Make a company that will buy my home from me for market value and will agree to rent it back to me at a reasonable market rate for a set amount of time (5-10 years?).

At the end of that term I get priority if I want to buy it back at market rates, Or I can move on and you can sell it on the open market or continue renting it out.


That's the real way to short housing. If you are so sure prices will go up and I'm sure they will go down, let me cash out and start paying you rent. If you are right you got an income property that goes up in value, with a stable tenant. if I'm right I got out at the top and saved myself the losses, and still got to live in my house for a while.
Dude, that is no different than a regular sale....Sell your house. Rent instead and buy it back after the crash.

You are not SHORT by selling your house and renting.

The goal of short selling is to PROFIT from declining housing prices...not staying flat.


That is basic 101 logic...
[OP]
Penalty Box
Apr 16, 2012
3565 posts
683 upvotes
Greely
Mark77 wrote:
Dec 13th, 2013 1:41 pm
Okay, I'll play along. Take tenants out of the equation totally, and presume this just applies to landlords.

First off, you do know that when one lends a stock, or bond for short selling, they typically receive collateral, usually cash or T-bills, for 103-105% of the value, right?

Secondly, why would landlords, who usually own property to profit not only from the property itself, but also from the management of such property, lend their property out and lose control of it?

Personally I think you'd be better off facilitating a market where, based on a rigorously and well defined house price index, people could buy or sell cash-settled futures. Some will be bullish on housing at a given price, and some will be bearish. Young people may want to buy some futures contracts on housing as a method to hedge future increases in housing costs. Old people may want to sell housing futures contracts to lock in a house price without making a big one-time sale. Housing suppliers would use the futures contracts to hedge their costs of production. I think futures are the better mechanism here than trying to concoct a 'short sale' (not to be confused with 'short sales' in the context of mortgage finance which refers to selling with an equity deficiency) with houses directly.

1. Why does collateral matter to you? The lender will receive a stipend each year for lending their home, guaranteed by my company, and they will be happy.

You should be happy that you will be able to participate in a short...because after all, real estate will eventually crash right?

2. I am not talking about hedging...I am talking about short selling. Real estate bears are confident that real estate will eventually crash.

How confident are you that real estate will eventually crash?
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techcrium wrote:
Dec 13th, 2013 3:30 pm
1. Why does collateral matter to you? The lender will receive a stipend each year for lending their home, guaranteed by my company, and they will be happy.
Collateral matters in the short selling process because lenders don't have the time to supervise the solvency of your company. Why would someone lend a house to your company in exchange for the 'guarantee' of your company? That's why collateral is required.
You should be happy that you will be able to participate in a short...because after all, real estate will eventually crash right?
I have other ways of participating, ie: by owning Canadian bank shares that benefit from RE prices going down. ie: the value of their money-good securities relative to houses increases, as do spreads.
2. I am not talking about hedging...I am talking about short selling.
:lol: , same thing dude.
Real estate bears are confident that real estate will eventually crash.
How confident are you that real estate will eventually crash?
Very confident, as the data is pretty clear that prices are now in decline after reaching an apex. But your concoction, as others have pointed out, isn't exactly very practical. Investing based on spread expansion, the likelihood of lower interest rates and QE being required, and a higher CAD$ as a result of the deflation, is very practical. As would be short-selling the companies that are heavily tied to house prices and subprime mortgage insurance in Canada.
TodayHello wrote:
Oct 16th, 2012 9:06 pm
...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
[OP]
Penalty Box
Apr 16, 2012
3565 posts
683 upvotes
Greely
Mark77 wrote:
Dec 13th, 2013 3:35 pm
Collateral matters in the short selling process because lenders don't have the time to supervise the solvency of your company. Why would someone lend a house to your company in exchange for the 'guarantee' of your company? That's why collateral is required.

I have other ways of participating, ie: by owning Canadian bank shares that benefit from RE prices going down. ie: the value of their money-good securities relative to houses increases, as do spreads.

:lol: , same thing dude.

Very confident, as the data is pretty clear that prices are now in decline after reaching an apex. But your concoction, as others have pointed out, isn't exactly very practical. Investing based on spread expansion, the likelihood of lower interest rates and QE being required, and a higher CAD$ as a result of the deflation, is very practical.

I am saying to you, collateral doesn't matter because you are not the homeowner. You are the short seller, right?

Why does it matter to you if the homeowner wants collateral or not?

And if you are very confident, you will participating in what my company offers right? You will definitely profit from declining housing prices.


Plus, I am sure we can work out an agreement for 30% collateral of the value of the house. Just like many marginable accounts.
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techcrium wrote:
Dec 13th, 2013 3:37 pm
I am saying to you, collateral doesn't matter because you are not the homeowner. You are the short seller, right?
It matters to the owner of the house that's going to lend it out. The short seller has to put the collateral up in exchange for borrowing the house.
Why does it matter to you if the homeowner wants collateral or not?
Because I'd have to cough up the collateral if they want it. That could get expensive. The net effect of the whole thing is that a significant amount of money ends up being parked in risk-free collateral. Contrast this with futures where the performance bonds can be quite minimal, 5-10% of the notional value. Instead of 103%.
And if you are very confident, you will participating in what my company offers right? You will definitely profit from declining housing prices.
If you could actually create it then I might participate in it. As I, and other participants have pointed out, creating such is quite problematic in the form you suggest. The fact it is has been one (of many) contributing factors to keeping house prices high.
TodayHello wrote:
Oct 16th, 2012 9:06 pm
...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...

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