Personal Finance

Create a company that offers short selling homes?

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  • Dec 13th, 2013 10:18 pm
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[OP]
Penalty Box
Apr 16, 2012
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Mark77 wrote:
Dec 13th, 2013 3:41 pm
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.

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%.

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.

I just illustrated to you. Most brokerages require 50% collateral for short selling. I would presume real estate is more or less the same.

So on a 500K home, you would have to put up 250K collateral.

If you are right and real estate crash 50% in 3 years,

Well you would net 216K minus fees...lets say an even $150K (just to be safe)

250K investment turned you $400K

60% return in 3 years.

How is that a bad investment?
[OP]
Penalty Box
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noNuser wrote:
Dec 13th, 2013 3:46 pm
capital gain?
Of course capital gain would be taxed...just like any other investment.
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:low content thread:
Andre Oliveira - Mortgage Agent
Mortgage Intelligence - FSCO# 10428
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techcrium wrote:
Dec 13th, 2013 3:46 pm
I just illustrated to you. Most brokerages require 50% collateral for short selling. I would presume real estate is more or less the same.
Actually its 103-105%, and retail brokerages additionally require additional collateral ontop of that.

How is that a bad investment?
The theory of shorting is great, but the ability to actually implement it in the manner you suggest is highly problematic for the practical reasons.

Much better to do it, IMHO, by looking towards things that would go up if RE goes down, and to take a leveraged long position. Than trying to use your Frankenstein of a concocted RE short, if such is even possible and you find anyone to go along with your scheme. JMHO, though.
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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This is quite baffling to me, if I'm understanding your proposal correctly (which I'm not sure that I am).

So the original property owner is signing away the title for the property in exchange for a loan which is paying 3% from someone who is speculating on a market crash? Why would the homeowner put it up to be borrowed, if they can get the same amount from another buyer, who is not involved in this practice, pocket the cash, and then attempt to make that 3% in a less risky venture? Who would risk a multi hundred thousand dollar property for a 3% per year gain (presumably they'd have to be free of any financing company on title to be able to do this as well).

Who is going to be cool with undertaking such a financial engagement with a startup company with no history in this field?

Are you really suggesting that you would facilitate all of this for only $1,000? Seems like you might be shortchanging the business a little with such a small return.
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noNuser wrote:
Dec 13th, 2013 3:46 pm
capital gain?
Actually the proceeds of short sales are usually taxed on the income account.
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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techcrium wrote:
Dec 13th, 2013 3:24 pm
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...
You can't short houses like you can stock because there is no legal mechanism to "borrow" a house. Timeframes are also a lot longer than for stock short sales, like a few years.

The next best thing is selling and hoping to buy it back later at a lower price. That's exactly what short selling is. Just in this case you can't do it with borrowed assets, only the assets you own. It can still be profitable as most houses are worth far more than the piddly amounts of stock the average person on RFD probably trades in.

Yes I could just sell and rent but a common complaint is that people don't want the instability of moving and whatnot. My solution solves that by letting you stay in your home, but still cashout if you feel it is overvalued.

If I sell you my house for $300k and I get to buy it back in a few years, I might get to buy it back for $200k. That's a profit of $100k and no different than If I had short sold a $300 stock and closed at $200.

In fact we can even make it an outright requirement that I buy it back from you after X years, whether it has gone up or down. That way you are long and I am short. As the short, my loss potential is technically unlimited if it were to go to 1 million or more, as is the nature of short selling.


As for the rent consider that my payment to you for letting me stay in the place during the arrangement. Even tack on a fee or something. Details about term and conditions of renting and selling would need to be worked out.
[OP]
Penalty Box
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mattieuk wrote:
Dec 13th, 2013 3:50 pm
This is quite baffling to me, if I'm understanding your proposal correctly (which I'm not sure that I am).

So the original property owner is signing away the title for the property in exchange for a loan which is paying 3% from someone who is speculating on a market crash? Why would the homeowner put it up to be borrowed, if they can get the same amount from another buyer, who is not involved in this practice, pocket the cash, and then attempt to make that 3% in a less risky venture? Who would risk a multi hundred thousand dollar property for a 3% per year gain (presumably they'd have to be free of any financing company on title to be able to do this as well).

Who is going to be cool with undertaking such a financial engagement with a startup company with no history in this field?

Are you really suggesting that you would facilitate all of this for only $1,000? Seems like you might be shortchanging the business a little with such a small return.

Because if you want a rental house but don't want to hassle of dealing with tenants, you would consider this.

Say you own a 500K house (or whatever amount) designed to rent to tenants and the bank offers you 3% interest ($15 000) per year if you agree to "lend" you house away...why wouldn't you do it?
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Rhaegar wrote:
Dec 13th, 2013 3:55 pm
You can't short houses like you can stock because there is no legal mechanism to "borrow" a house.
This is the least of the problems, but yes, you could borrow a house, ie: enter into a contract on a house with a lien that requires its sale in an auction to the highest bidder after a specified period of time. There is counterparty risk though, which I don't think techcrium seems to understand, including the necessity of providing collateral.

The problem is, having such a lien on the title of a house would seriously impair its value for resale purposes. So the short seller would have an awful hard time selling the house that's been borrowed, if that lien sits on the title. I don't think anyone would want to lend a house in that fashion, and I don't think anyone would buy a house with such a contract existing.
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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techcrium wrote:
Dec 13th, 2013 3:57 pm
Because if you want a rental house but don't want to hassle of dealing with tenants, you would consider this.

Say you own a 500K house (or whatever amount) designed to rent to tenants and the bank offers you 3% interest ($15 000) per year if you agree to "lend" you house away...why wouldn't you do it?
Why wouldn't you just engage a management company to rent the house for you and avoid a large portion of the risk that you are proposing.

If I owned a $500,000 property, I would not feel comfortable signing over title to someone else on the basis of a speculator owing me funds. The key difference for me is renting it out yourself (or through a management company), you are still the titled owner. If you take part in your proposition you lose title, and instead have a lawsuit waiting to happen if either of the parties renegades on their contracts.
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techcrium wrote:
Dec 13th, 2013 3:57 pm
Because if you want a rental house but don't want to hassle of dealing with tenants, you would consider this.

Say you own a 500K house (or whatever amount) designed to rent to tenants and the bank offers you 3% interest ($15 000) per year if you agree to "lend" you house away...why wouldn't you do it?
For starters, I have to trust that the bank is going to be around 5 years later so I can actually get my house back. Secondly, its an unsecured loan, so why would anyone make an unsecured loan at only 3% interest unless they're stupid? Thirdly, why not just buy a REIT if you don't want any involvement in management decisions but still want to own RE?

That's why, perhaps, futures make sense, if there was a credible contract, such as the Case-Shiller indicies, available for Canada, that properly adjusted for quality and the sales mix (the Teranet index isn't particularly useful). But the greater gains are likely to be made in leveraged long positions in the asset classes that run countercyclical to Canadian RE. Better to find something that's going to go up, than find some piece of crap that's going to go down.

BTW, when banks find stupid people (there's lots of them), there's far easier ways to take money from them than to concoct schemes like this. Plus a single piece of collateral is highly problematic -- wouldn't these short sellers take out a big short with your service techcrium, and then proceed to damage the property? Maybe burn it down?
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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Mark77 wrote:
Dec 13th, 2013 3:59 pm
This is the least of the problems, but yes, you could borrow a house, ie: enter into a contract on a house with a lien that requires its sale in an auction to the highest bidder after a specified period of time.
You can't place a lien for a non-debt or future occurence.
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Techrium, that’s not a bad ‘how to short real estate’ idea. My thoughts on such is to:

1) find a homeowner who believes the market will crash
2) the homeowner and seller will agree on an independently appraised value. (AV)
3) the homeowner will choose a rate of decrease (D) and determine a future value. (FV)=AV(1-D)
4) the homeowner will choose an evaluation date by which the decrease must happen.
5) the parties draw up an agreement. 99% of ownership is turned over in trust to the short seller who in turn, places in trust, collateral equivalent to FV. Homeowner continues to be liable for all expenses.

The agreement declares that on the evaluation date, the property is reappraised and if the new appaisal value (NAV) is less than or equal to the homeowner’s calculated future value (NAV<=FV), the short seller has to pay to the homeowner the initially appraised value and the seller signs over his 1% share. If however on evaluation day, the future value is greater than the initially appraised value plus $.99 [FV>(NAV+$.96)], the short seller pays the homeowner the initially determined future value (FV) and the seller signs over his 1%.

The question is, would it be considered gambling or trading illegally under some law or other?

Lot going on in the background so I hope I don’t have any formulas backwards.
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licenced wrote:
Dec 13th, 2013 8:44 pm
You can't place a lien for a non-debt or future occurence.
Well I'm sure that some sort of charge could be formulated on a title. Just like a owner can enter into a contract with a renter, such that, the right to rent at a given price is affixed as a charge on the title of a property (remember that Sears lease example you gave earlier???!?!). Anyways, that's the most minor of defects in the whole proposal/idea of techcrium's. If collateral is placed, as it is in a stock short selling arrangement, then no 'charge' on the title would even be required. Just as nobody puts the PPSA on stocks they lend out, for instance -- they have the collateral, so the 'charge' on the title is irrelevant.
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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