Innovation Trio: SwapRent, FARJHO & TARELV

Shared Appreciation through Shared Cash Flows – the New Economic Owning, Renting and Own-Rent Switching Concepts as well as Business Methods for Managing Real Estate Properties –

03/07/2009 The learning process to adopt new innovations

Over the last three years’ campaigning efforts, one important thing to note is that since there are so many different potential applications of the new economic ownership structure of real estate properties set up through the SwapRent methodology, we may need to explain to people not only what SwapRent is but also what SwapRent is not. The SwapRent methodology is a free market mechanism for anyone who are interested to participate so that pricing is purely decided by free market forces. SwapRent is absolutely not specifically created for bailing out distressed homeowners. To clarify this point is very important for a potential implementation in the US market at the moment because the bailout concept will never work. What we need is free market-based solutions. The SwapRent methodology was initially conceived in 2001 and systematically created in early 2006 as a direct descendant of many other earlier variations near the peak of the real estate market, not another one of those a dime a dozen snake oil solutions created over night only to fix the current housing crisis in 2009.

In fact, since the American property and financial markets are way too politicized at the moment from the various damaging interventions by the Federal Government, we’d rather stay put for a while until the political situation changes and further develop these new innovative methodologies elsewhere in the world for the time being. Here in the US, no one would want to honor any financial contracts since another taxpayer money bailout or some crony political connections could easily get losers in a financial contract out of their troubles. Everybody would be expecting “heads I win, tails you lose” type of outcomes in any business deals. Losers in any financial contract will always seem to have Obama Mama to go to as a last resort. With the Obama Administration at helm, why bother with introducing more free market based innovations? You’d be much better off joining ACORN …

Another interesting thing that I have noticed is that it seems there are three aspects of understanding that people would need to learn to understand what the SwapRent methodology is about – the why, the what and the how. As for the where, the when and the who, they may be quite obvious, with the exception of the who. SwapRent was not intended as a bailout for or restricted to distressed homeowners, it is for everybody. Any one who wants to switch from owning to renting economically at a very low cost, flexible and reversible way or vice versa, as long as he is willing to pay or receive the fair price for it. Contrary to those bailout school of thoughts, speculators are indeed very welcome in order to make this free market SwapRent mechanism and marketplace work better so that our property market could enjoy a steady growth back to prosperity.

The first aspect of the why is the new economic understanding of a need for a shared economic ownership structure in order to more efficiently realize the shared appreciation concept to solve the housing problems for many countries. The second aspect of the what is the need of a new instrument (SwapRent), a secondary trading market (REIDeX) and the actual methodology itself such as switching between economic renting and owning in a low transactional cost, flexible and reversible way in order to take related concepts into executable actions. The third aspect is how to effectively use it from the consumers’ perspectives to maximize its potential benefits and how to run the business from the provider banks to efficiently deliver the economic benefits to consumers and protect the banks from incurring unnecessary risks at the same time. Education and advice to future would-be regulators on how to design safe and equitable rules of the game will also come next in due course.

The third aspect would be where most of the intelligent questions typically come from and where most optional operational parameters (consumer choices) reside. However, people will have to understand the first two well before they could get to the last one with many more meaningful questions. The education of the first level of understanding is the role of good economists (i.e. through blogs and econ papers), the second level that of the inventor (done through years of dedicated research and hard work already) and the third level those of many vision-sharing seasoned bankers and housing finance professionals around the world (our mission together going forward).

One other important thing to note is that most of these operational parameters were purposely left open as optional choices just like a brand new car with an option for consumers to choose between a stick vs. an auto transmission, between a fabric or leather upholstery, between left hand steering wheel or right hand steering wheel or whether to have sunroof or not. These operational choices will all be part of the overall implementation at different jurisdictions for different people but they do not define or restrict what the core SwapRent methodology is. This is to prevent those less intelligent people from incorrectly labeling an undesirable optional choice he happens to dislike into his incorrect understanding of the SwapRent methodology itself and use that as an excuse to conclude that SwapRent will not work! (Even some established old school academics and economists fall into this category).

For example, SwapRent contracts could be valued and settled by three different methods, using house price index, using appraisal or using simply actual transaction price of the underlying property (the real price when sold). Each method will have its own merits and compromises and these operational choices were purposely left as options for homeowners and investors under different jurisdictions and situations. Therefore we would not leave space for people to brand SwapRent with house price index only and deem it inoperable in places where there are no house price index or simply they personally do not like the potential basis risk (price mismatch) in using an index.

Try to imagine if someone dismisses buying a new Lexus simply because somebody else had bought one with a sunroof as an option. It would be quite ridiculous to say Lexus is not a good car simply because his incorrect conclusion is that Lexus needs a sunroof to operate!

As Professor Stephen Malpezzi of the University of Wisconsin jokingly commented to me as we walked down the escalator after observing my presentation on SwapRent and the heated debates and questions by many well-known economists during the Q&A session afterwards in the Housing Price and Risk Think Tank II Conference held in Melbourne, Australia in February 2009, “We economists are not as good as practitioners in coming up with new innovations but we are very eager at telling why other people’s new innovative ideas may not work!”

Although to be fair, I have to admit that, over the years, there were indeed many other senior economists and academics who do behave otherwise. Numerous supporting correspondences from respected intellectuals, seasoned practitioners and even government officials from around the world to date have easily proved that point. One such respected economist approached me in the very same conference and told me that he was really happy to know that there is somebody like me in this world who would devote himself and spend time to create these genuinely new innovative ideas that may potentially change our world. A simple heart-felt compliment like that always seems to make all my dedicated hard work over the preceding years suddenly even more worthwhile again on an intellectual basis, irrespective where these new innovations might eventually lead us to in the future …

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