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 –

08/06/2009 What does switching between owning and renting a real estate property really mean?

Some time going back to basics again may help people have a new, refreshed understanding of things. Let’s do it with SwapRent, HELM and FARM so that we could get to examine their fundamental economic value propositions again.

The various new advantages of using SwapRent contracts to introduce the new economic owning and renting concepts could add a whole new dimension to the conventional legal structures of owning a real estate property, hence the “flexible” and “reversible” features for the homeowners in the new FARM product. It will also offer much better risk management capabilities for the provider banks than the conventional mortgage products by the lending banks.

A SwapRent transaction will allow property owners to efficiently and effectively switch between owning and renting at any time at a very low cost. Therefore all the “shared appreciation” or “downside hedging” objectives could be automatically realized when they simply do the switch between owning and renting of the property in question. There would be no need to resort to other conventional complicated financial derivatives of puts, calls and swaps or to struggle with the very inefficient SAM and SEM anymore.

As a new concept and methodology the SwapRent transaction will only function as a tool to help property owners realize their investment views and face their monthly income reality. It will not alter the original reasons why people may want to switch or may be forced to switch between owning and renting. It will only facilitate it and make it more possible since the transaction cost is drastically lower as compared to buying and selling the conventional legal ownership in a real estate property.

On the investment views of the real estate market, SwapRent is again, just an financial instrument that allows people to efficiently and effectively express a view in a low cost way. From a historical perspective, it would be much easier to think of the invention of a SwapRent contract to a property as the invention of a stock certificate to a company. A Generic SwapRent contract allows other investors to own the economic exposures expressed in future financial gains and losses of a portion of the real estate property that a homeowner occupies and uses, in a similar way that a share or a stock certificate entitles an investor to a portion of the future gains and losses of a corporation’s equity that is managed and owned by many other people. When those other existing owners of the company’s shares let you buy a few shares of the company, they are indeed similarly letting you share part of the future appreciation of the company with them, in exactly the same way that homeowners could let other people to share a part of the future appreciation of the property they occupy through the use of the SwapRent contracts.

REIDeX, the marketplace to efficiently trade SwapRent contracts could therefore be considered similar to a stock exchange where people can go to trade shares of companies. It does not matter what the homeowners or the investors may think of on whether the future directions of the real estate market is going up or down. Everybody may have his/her own unique views. Few people would actually agree. That is why and how REIDeX could offer its economic value by allowing people to expressed their own views of the property’s financial future through buying and selling SwapRent contracts, just like how a stock exchange would function to allow people to express a view on a company’s financial future.

Since the existence of a secondary marketplace is vitally important to realize all these new economic benefits, many more dedicated research efforts had specifically gone into creating a standardized and systematic way for trading the three basic SwapRent contracts (i.e. Generic, AG and DP) at in order to offer price discovery, risk transference, capital regeneration functions, … etc. for the potential users of the SwapRent contracts.

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