08/13/2011 Weekly round-up of FARJHO discussions from various Linkedin Groups

On Section 8’ed FARJHO to let Section 8 recipients have a partial ownership of the property that they rent:
Ralph this sounds like a great idea, and many belong to some kind of neighborhood beautification program as well.

Reply:
Yes, let free market capitalism to create the motivation for the renters to beautify the properties and neighborhoods on their own, at their own cost, by simply turning them into partial owners of the properties. Let them share a little bit potential financial value appreciation helps but injecting pride and self prestige of being one of the owners would really be the main driving force.

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On PeoplesAlly’s role to educate the working class families to let them join their fair share of the benefits of capitalism:
Interesting conflict. The point of the PeoplesAlly is to support the working class. I am not sure the description above or on the blog comes close to being understandable by anyone without a serious financial background.

Reply:
Right on target, a mission no one else has tried or been willing to do before. That is why Wall Street has been holding intellectual hostage of Main Street, getting the better part of capitalism. I hope you can see why we have created our foundation slogan as – The Intellectual Ally behind the People and the Capitalist for the Working Class!

PeoplesAlly’s main tools are education of and counseling to both aspiring home owners and joint property investors for putting together fair and equitable FARJHO structures based on free market principles to own homes and hence increasing housing affordability and social stability.

So far we have had long line of applications from aspiring home owners and not enough joint property investors. It appears that we need to beef up our efforts on the more intelligent investors, rather than the working class home owners at this stage. Thanks.

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On technical details and examples of the new Borrow-Pool-Buy (BPB) of FARJHO vs. the old Pool-Borrow-Buy (PBB) practiced by other property equity sharing schemes:

Reply 2:
That is still different from the proposed new FARJHO method to co-own homes. In a FARJHO transaction, each individual member co-owner can decide whether to borrow for their portion or not. Cash rich investors do not have to borrow. No group decisions or actions to borrow together. If some of the co-owner members want to borrow individually for themselves, then the borrowing leverage (LTV) is up to each of the members individually and their individual lenders.

So let’s say a home which is worth $100,000 is being bought by a FARJHO LLC. Three members, A (20%), B (40%) and C (40%) pooled the capital to form the LLC to begin with so that the LLC had the money to buy the home. LLC did not and will not borrow any money or use the property as collateral to borrow any money. Since neither the FARJHO LLC nor the home property owes money, therefore there is no possibility of a foreclosure of the home property, ever.

Member A was supposed to be the home occupier (AHO), so he pays the LLC a market based rent every month for 3 years say in a 3-year lease as an example.

In terms of borrowing, Member A did not borrow to come up with the $20,000 since he would not want to pay a loan payment in addition to the rent payment very month. Member B does not like to be burdened by the debt service so he did not borrow to come up with the $40,000 cash either. Member C likes to punt and strongly believes in using leverage to achieve high returns. On the other hand, he does not have enough money for the required $40,000. Say he only has $10,000 in savings so he borrowed $30,000 from a lender using his 40% share or member interests in the LLC as the collateral for the lender. The leverage that Member C uses is 75% LTV of his member interest in the LLC and his down payment is 25%.

So in the example above, cash was used to purchase the property and no borrowing using the property as the collateral. Borrowing activity, if any, will be conducted only at the member level at each member’s discretion only. That is exactly the spirit of the newly created FARJHO concept and method to own homes, irrespective which country the homes or the home owners are located.

Reply 1:
Oh no. What you described is still the old conventional way. The newly created concept is for people to pool money and use a legal entity to buy one property only as a home using cash. One of the co-investors will rent it from the legal entity. After that there is no more borrowing using the property as collateral. Therefore, no banks or any lender will ever get to foreclose this property.

The borrowing, if any, will only be done by each individual member of the legal entity before they come to the table to form the legal entity to buy the property using the pooled cash. The liability is for each individual only. They can each use their fractional interests in the legal entity as the collateral. Nobody use the entire legal entity or the property per se as the collateral.

All co-investors and lenders, if any, are done based on a pure free market basis. No society, self-help and any other charity groups or concepts will be involved in this unique new free market solution to home ownership.

In the US we have decided to use the convenient LLC structure as the legal entity since real estate investors are already familiar and comfortable with it.

Filed under: Economic Viewpoints, Equity Sharing, FARJHO, Housing, InvestorsAlly, PeoplesAlly, Section 8, Affordable housing, Borrow-pool-buy, BPB, FARJHO, FARJHO LLC, Foreclosure avoidance, Foreclosure elimination, Housing, housing affordability, LLC member interests, PBB, Pool-borrow-buy, Section 8, Section 8'ed FARJHO

02/27/2011 FARJHO and the “corporatization” of American homes – yes, but only one home at a time and no “corporate debt financing” necessary

Although these issues have been discussed before, I would like take a moment to clarify these concepts about FARJHO a bit further on this quiet Sunday morning.

The LLC legal entity structure is merely a convenient way for implementing the FARJHO concept and method for applications in the US. LLC is only a means to an end, not an end itself. In many other countries or autonomous economies the FARJHO method could be implemented through a variety of other local legal structures, most notably, a “trust” structure of some sort.

Two of the most important unique features of FARJHO should always remain the same in order to be called a FARJHO, i.e. first, FARJHO owns one house or condo at a time, and second, no more borrowing at FARJHO legal entity level.

The first feature requires that the legal structure we could use to implement the FARJHO concept and method under whatever legal jurisdictions should not hold more than one home.

The second feature advises that, there should better be no more borrowing once the FARJHO legal entity that holds the property is formed. The potential participants of a FARJHO, i.e. the JPIs, or even the AHO, could borrow to their hearts’ content before they come to the table to form the FARJHO structure but once the FARJHO is formed there should better be no more borrowing at the legal entity level to use the property itself a collateral in order to ensure that the possibility of foreclosure of the property to endanger the homeowners’ occupancy rights and neighborhood’s stability would no longer exist.

Any leverage-loving speculative investors who tried to achieve high leveraged returns as they were often used to do in real estate investments in the past could drop off individually if and when they ever lose their monthly income capability to service their own individual debts. They could go away quietly by liquidating their own member interests in the FARJHO legal structures without affecting the stability of the home occupier/partial owner of the FARJHO structure.

Therefore, many of the conventional reasons why people normally would incorporate a business activity do not necessarily apply to the FARJHO concept to own homes. By those standards, the LLC application of the FARJHO method in the US would therefore also vary drastically from the reasons why many people in various countries have been using something similar to LLCs or a TIC (tenancy-in-common) structure to own a commercial property or a group of properties in the past. The reasons of the conventional use of LLCs or TICs by the commercial property investors have usually been to facilitate borrowing and to shield the individual members from personal liability of the debt. If the real estate market goes sour, the idea for them is to get the lenders to hold the bag and the property investors could simply walk away and have the property foreclosed.

The purpose of using LLC to implement FARJHO on residential properties one home at a time can’t be farther way from those punting purposes. The main purpose of FARJHO is to use the legal structure to implement the equity sharing purpose only. The corporate level financing would be turned off in order to kill the possibility of foreclosures to ensure neighborhood stability and social harmony.

From this angle, it is also the very reason why that FARJHO is drastically different from all kinds of residential applications of the “equity sharing” concept, such as SAM (Shared Appreciation Mortgage) or SEM (Shared Equity Mortgage) that have been practiced in the UK and a few other countries for over past 30 years already. It is pathetic to see how the press allow some old school economists to have an eureka moment to discover the old “equity sharing” concept and promote those old and obsolete methods that have already been proven not working for over 30 years.

In any case, in order to appreciate the beauty of FARJHO, one may want to focus on the bottom-line economic benefits inherent in this innovative concept and methodology. The legal structure and/or the tax advantages are only secondary or tertiary considerations and should never be the driving force or motivation of why people would embrace the new FARJHO method. The economic advantages such as those built-in incentives to upkeep the property derived from the partial ownership by the renter of the same property that he/she occupies, the detachment of the sheltering functions from the management of the investment functions of a property ownership as well as the elimination of foreclosure possibility etc. are truly universal, no matter what prevalent legal structures and/or tax rules a country may happen to have.

I have expressed before my disdain about those financial innovations aimed at or designed only to circumvent the legal structures or to dodge any particular potential tax liabilities by those hacker financial engineers and/or bonus driven investment bankers. Their intelligence and hard work should better be re-directed to creating something truly original that could provide some real economic benefits to our human society. Otherwise, those genius efforts wasted on designing tax advantaged products could at most out smart some of those incompetent law makers or crony politicians. No respect from me on that. The effort may probably be better spent on simply voting those cronies and the ruthlessly taxing government officials out of their offices directly.

Therefore, tax rules in many countries would indeed evolve to direct the societies towards more economic equalization and social harmony by future proposals made by more intelligent and responsive public servants in the future, given the more and more people power provided by the modern transportation and telecommunication innovations. Unintelligent, bureaucratic governments and autocratic policy establishments would no longer be able to hang on for long since there is no way for them to stop the vast consumers to be educated and learn what is best for them in this modern era. They’d better learn to accept new economic concepts and methods way before their electorates do.

We have fortunately received very good interests from many senior foreign central bankers and high-level foreign government officials regarding the academic concepts and models of SwapRent(SM) and FARJHO(SM) over the past few years. Academically, there have also been many graduate level researchers doing their research thesis on the feasibility study of locally implementing the housing finance innovations of SwapRent(SM) and FARJHO(SM) in a few countries at the moment.

We can’t wait to focus our resources on the potential implementations in those foreign countries as well after we have successfully launched these innovative housing finance and home ownership structures in the US. Many FARJHO(SM) projects overseas would be conducted on a not-for-profit basis through PeoplesAlly.org.

Filed under: Economic Viewpoints, Equity Sharing, FARJHO, Housing, InvestorsAlly, PeoplesAlly, Equity Sharing, FARJHO, FARJHO LLC