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.

===========
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.

============
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

0228 2011 FARJHO – Opportunity for gaining political credit for politicians and the innovation role for banks, credit unions or other mortgage lenders

So FARJHO is great. What is in it for the banks and the politicians?

Further to my 0227 2011 blog post below on the key features of FARJHO, one of most important new innovative concepts for real estate property investing going forward is to do away with the concept of using the property as the collateral for borrowing when it comes to “home ownership”. This way, foreclosure will no longer be a possibility, ever!

People may choose to continue to use the property as the collateral for all other types of real estate investments but when it comes to owning homes, it should be avoided at all cost for the homeowner’s, joint property investors’ and the entire society’s greater good.

For most commercial real estate investors who often use the same LLC structure to co-own some office buildings, hotels, industrial warehouses or retail shopping complexes, it is usually an intentional goal to use the LLC structure to shield the liability of mortgage loans for each of the LLC’s members so that they could borrow as much as they could to achieve the highest leveraged returns. That is indeed the way the property investors have tried to outsmart the banks so that they could walk away when the property market collapse and let the lenders hold the bags of under water depreciated properties. This has been a main pit fault in our current banking system since it always creates financial crises and the taxpayers would always eventually have to bail them out upon the maneuvering by the bankers and the crony politicians, most often or not, under the ridiculous excuse of being “too big to fail”.

Why can’t the lenders smarten up to lend to each individual LLC members and use their LLC member interests as the collaterals, the same way banks lend to stock market investors by using their common share securities in the listed companies as collaterals?

As mentioned before, in the main design of the basic FARJHO structures the aspiring home owners (AHO) and the joint property investors (JPI) usually use all cash to purchase the homes. How they individually have obtained the cash is not necessarily an issue as long as they are the legitimate owners of the cash, i.e. whether they have borrowed or not to end up with the necessary cash is not an issue on individual basis.

Therefore for the LLC version of the FARJHO structure to be introduced in the US, since we could not do away with the borrowing concept all together due to the borrowing culture deeply embedded in many property investors’ minds in their desire to use leverage as much as possible to achieve higher returns if and when the outcome is good. As a result, the borrowing/lending provision has been created for the US version of FARJHO but recommended to be conducted only at the LLC member level, i.e. only at the shareholder level if the home is to become the one property corporation co-owned by the aspiring home owners and other joint property investors.

It would indeed be a pioneering innovative effort for the proactive banks, credit unions or any other mortgage lenders to consider to start lending to the FARJHO LLC members using their individual member interests in the FARJHO LLC as the collaterals.

As explained before, if and when any of the LLC members ever loses his/her monthly income capability, he/she could either sell their member interests to other free market based investors or let it be foreclosed by the lenders individually. Therefore either a new free market based investor or the lending bank would replace the defaulting co-owner and become the new co-owner with the current home occupier/co-owner (AHO) and all other joint property co-owners (JPIs).

Again, this is exactly the way how the new FARJHO structure could introduce and ensure a new safety piece of mind in home ownership, neighborhood stability and social harmony to the society with no more deserted, un-cared for foreclosed homes scattered around the local communities. We have been speaking with many banks, credit unions and lenders within the past few years but the real innovative bank hero has yet to stand up to make it happen in order to claim the credit.

Congress could certainly get their act together to pass a law to request all home lending to be conducted under this FARJHO concept through a transitional implementation period. Therefore it seems there could be many political credits to be claimed for if any politicians who could champion these new ideas and make the necessary effort to make it happen.

In addition, there could be another great opportunity for any aspiring statesman to champion to waive the annual LLC franchise fee for low income working families so that it would be possible for them to use the LLC structure to corporatize their homes under the FARJHO concept and method.

Using the $800 annual franchise fee required in the state of California as an example, it may not be a major cost factor percentage-wise for $2 or $3 million coastal mansions in Orange County but it would easily become a heavy burden for the partial homeowners in a $100,000 or $200,000 homes in the Inland Empire area in Southern California.

Let’s hope some smart budding politicians could indeed take advantage of all these new opportunities to change the home lending practices by the banks and campaign for the waiving of the annual LLC franchise fees for local residents in many states during the next election. We will vote for them!

Filed under: Economic Viewpoints, Equity Sharing, FARJHO, Housing, InvestorsAlly, PeoplesAlly, Banks, Collateralized lending, Corporate taxes, corporatization, Credit unions, FARJHO, Franchise Tax Board, FTB, Lending policy, LLC, LLC member interests, Mortgage lenders, Mortgages