0202 2013 Two simple FARJHO application case scenarios

Here below are two case scenarios taken from the http://FARJHO.com site. It illustrates the value propositions of FARJHO fairly well I think.

1. Example Case for Aspiring Home Owners (AHO)

Jennifer is looking to purchase a house in Houston, Texas. She has identified a property in a nice neighborhood of her choice. The listing price of the property is $360,000.

Jennifer has $72,000 in cash as the 20% down payment for a conventional home mortgage. However, for whatever reasons, no lender is interested in lending to her at the moment. She does not want to lose the opportunity to purchase the house as a dream home and she no longer wants to continue to rent an apartment or even a single family house without benefiting from the potential rise of house prices since everyone on TV news seems to be talking about a housing market recovery these days.

She understands the new business method of FARJHO using the old property equity sharing concept could be something suitable for her situation. After doing her own research she realizes that by being a partial owner to own a home through equity sharing she would no longer be able to get the entire leveraged returns as she could have by using a conventional mortgage to own a home. She would only be able to get the percentage of the potential price appreciation of the percentage of ownership that she has in the home property.

On the other hand, she would also lose only the portion of the potential property value depreciation of her percentage ownership when prices do not turn out to go up as most people would expect. She thought that these basic shared equity financial arrangements was fair and she knows she could always buy more units of investment in home equity either in her own home property or in other people’s home equity in the future when she has accumulated more savings or gets an big bonus from her job. Whether she will actually do that will become a pure investment decision at that time.

Meanwhile, as a tenant and partial owner of the home property that she will occupy, she would enjoy much more security and stability under the FARJHO LLC that she would negotiate with the potential joint property investors on a pure free market basis. She does not need any charitable preferential treatments, guarantees or any handout assistance from the government.

Jennifer signs up at FARJHO.com and launches a FARJHO funding campaign project for one month. Since she already has the $72,000, She would only need to raise $288,000. She decides to raise the fund through a handful of crowd investors. Upon securing the investment commitments from the potential investors, she gets assistance from the company to form a FARJHO LLC to acquire the property that she had identified. After the purchase is complete, she starts to move in and pays rent to the FARJHO LLC that she partially owns with the other joint property investors.

2. Example Case for Existing Home Owners (EHO)

Robert, Amy and their children have lived in a beautiful house in a nice neighborhood in Souther California for the last 20 years. Their house is currently worth about $500,000 as determined in a BPO analysis conducted by a real estate agent’s office that they know well.

Robert and Amy have a mortgage on the house with an outstanding balance of $300,000. That means they have about $200,000 in home equity in their house which equates to 40% of the house value.

Robert and Amy’s oldest son David was going to attend college after the summer. They would need to prepare about $100,000 for him to attend college for the next four years. They decided to tap into the home equity of their house.

They looked into the possibility of obtaining a home equity line of credit. However, they do not have sufficient income to support a credit line of $100,000. Even if they do, Robert and Amy do not feel comfortable to add another monthly debt service commitment to their current monthly expense budget and bear the risk of a potential foreclosure in case Robert loses his job.

They do not want to sell the house in order to tap into the home equity that they have in the home property and they definitely would not want to move away from the family house which has a lot of sentimental value to them.

Robert and Amy went on-line and discovered the homeowners social networking portal WeHomeowners.com and its sister crowdfunding portal FARJHO.com which became operational in 2013. They opened a free member account and uploaded some nice photos of their home property to initiate a crowdfunding project to raise $400,000.

Of the total amount raised, $300,000 was meant to pay off the outstanding balance of their existing home mortgage. They did it through forming a FARJHO LLC structure where they would keep $100,000 as the 20% home equity in the house together with other joint property investors which contributed the remaining 80% of $400,000.

After the FARJHO LLC has acquired the title of the home property from Robert and Amy, they started to pay a pre-agreed market rent to the FARJHO LLC of which they are a 20% co-owner with the other investors who had contributed the $400,000.

After all the dust had settled, Robert and Amy were left with the cash of $100,000 that they needed to put aside for their son to start his comfortable and secure four-year college life.

Robert and Amy know that if they end up with more cash in their hands in the future from either daily savings, Robert’s year end bonus from his job or even Amy’s diligent weekly lottery tickets buying activities, they could always become investors themselves any time to flexibly and reversibly buy some more home equity units either in their own house again and in other people’s homes through FARJHO.com but that would really become purely another investment decision at that time.

After a few years, Robert and Amy indeed have accumulated more cash. However, they did not feel a need to buy into more home equity of their own house any more since they have already had the full 100% use of the home property. Why bother?

Nobody could kick them out as long as they continue to pay the monthly rent to the FARJHO LLC that they themselves partially own. They are not obligated to have this new cash get stuck back in the house again, although that could always remain an option to them.

Furthermore in the eyes of their family and friends, they still enjoy the prestige of being a homeowner. They can’t think of a reason why to put this new money back into their own house again. In fact, there could be many other alternatives for them to consider to put these money into a much better use.

They have finally started to understand what it really means that FARJHO could separate the shelter value away from the management of the investment value of owning a home.

After their son David graduated from college, Robert and Amy decided to use that cash to help David purchase a condo in New York City where David had obtained a job.

Filed under: Crowdfunding, Economic Viewpoints, Equity Sharing, FARJHO, Housing, InvestorsAlly, Mortgage, PeoplesAlly, Equity Sharing, FARJHO, Housing finance, shared appreciation mortgage, shared equity mortgage, Shared ownership mortgage, WeHomeowners

0126 2013 Differences between FARJHO, Shared Equity Mortgage and the LLC syndication for commercial properties

This is a very commonly asked question and has been addressed many times before in the blog. Here is a short recap. In short, the main difference is in the way to use leverage under the different structures.

Although both FARJHO as a new home ownership structure and the pooling of capital to make a commercial property investment both could employ the use of a simple LLC legal entity to accomplish their respective objectives, the outcomes could not be made more different due to their respective very different objectives!

In the conventional commercial real estate investment, the use of an LLC entity is to pool enough money so that the group of investors could borrow as much as possible in order to potentially achieve higher leveraged returns (or leveraged losses, it works both ways!). The objective of the use of an LLC is to shield the individual member investors in the LLC from the potential liability to the lender in the event of a default which may be caused by insufficient income cash flows from the property in the future. This conventional way to use borrowing to make real estate investments is described by a new term that I had created a while back called Pool-Borrow-Buy (PBB).

FARJHO, on the other hand, is employing a newly created alternative method under a new thinking called Borrow-Pool-Buy (BPB) to make investments in single family homes.

The advantage is that for investors who love to use leveraging for investments could still use borrowing, but only at an individual LLC member level under a FARJHO transaction, not at the group LLC or property level as how it was always done in a conventional mortgaged home ownership. As a result, FARJHO introduces a newly created social value by increasing the home occupancy stability for the renter/co-owner in a FARJHO LLC structure. This is simply because there is no mortgage, i.e. using the property as a collateral to borrow money, under a FARJHO structure and hence the home will never face the risk of a foreclosure by any lender.

Such a simple innovation in concept and practice could help us universally eliminate the foreclosure possibility in home ownership in our modern economic society, no matter where the home owners lives in the world.

As for the conventional shared equity mortgage, shared appreciation mortgage, and shared ownership mortgage, … etc. as most popularly practiced in the UK and to a small extent in Australia, although they do not use an LLC legal entity, the objective of the share equity component is still to pool enough money so that the shared owners could use that pooled money as a down payment to borrow a mortgage using the property as a collateral again to buy the home, i.e. another Pool-Borrow-Buy (PBB) method that will be subject to property repossession risks. This PBB practice in these old style shared equity mortgages is nothing different from how commercial property investors use an LLC structure to pool money, borrow and buy properties. The evil of the potential risk of foreclosure still exists. These old shared equity mortgages only introduce more lending and ownership disposal complexity without contributing much to housing affordability due to its limited acceptance by the lenders.

In FARJHO’s case, this lender’s dictatorship and the ownership complexity do not exist. Flexible and reversible shared home ownership under FARJHO could eventually be done as easily as buying and selling of a stock in a private or a publicly listed company on an exchange.

Lenders pretty soon would discover that they could easily develop a new profitable business by embracing this new “security-lending” business opportunity using LLC member interests as collateral at the member level instead to FARJHO LLC members.

For those old school mortgage lenders who would like to hang on to the old way of doing home mortgage business would also soon find out, to their pleasant surprise, the credit quality of their mortgage borrowers would be much better than before since the lesser credit borrowers may have all gone through the new equity sharing route and absorbed by using the new FARJHO structure. There seems to be no need for the lending banks to make more ill-conceived inventions such as a teaser rate or an Option-ARM to subprime borrowers any more.

It would indeed be a win-win situation for everybody.

Filed under: Economic Viewpoints, Equity Sharing, FARJHO, Housing, InvestorsAlly, Mortgage, PeoplesAlly, Borrow-Pool-Buy (BPB), Commercial property investments, FARJHO, Foreclosures, Housing finance, Pool-Borrow-Buy (PBB), Property repossessions, shared appreciation mortgage, shared equity mortgage, Shared ownership mortgage, Using LLC for real estate investment

0503 2012 Application Example of An Arbitrage Investment Opportunity Using the New FARJHO Home Ownership Structure

This example appears in the 2nd page of InvestorsAlly’s FARJHO marketing flyer. https://www.box.com/s/1f2e57e6f0ac5b6738f0

Application Example of An Arbitrage Investment Opportunity Using the New FARJHO Home Ownership Structure

Do you want to put your idle home equity to work so that you could earn more appreciation potential? Would you be interested in helping other less affluent residents to partially co-own homes in California?

You could use your excess home equity to co-own homes with a tenant/partial home co-owner in a new home ownership structure called FARJHO – Flexible And Reversible Joint Home Ownership. Here is a short analysis for a home of an appraised value of $2,000,000. The amount of cash out re-finance is assumed to be $1,000,000 for illustration simplicity purpose as an example.
Before                       After

Current Home Fair Market Value

$ 2,000,000           $ 2,000,000
Re-Investments in Other FARJHO Transactions

__________        $ 1,000,000
Equivalent Home Equity for Potential Appreciation

$ 2,000,000           $ 3,000,000

What about the carry, i.e. netted monthly cash flows between expense and income under the FARJHO transaction?

*         A financial arbitrage currently exists as the mortgage rates are still being artificially kept very low.
*         Between the current long term fixed rate borrowing cost (e.g. 3% – 4% for a 15-year or 30-year fixed rate mortgage) and the current market rental yield (e.g. 7% – 12%) there exists a net positive carry of 1% – 5% annually after deducting all taxes, fees and insurance cost in favor of the arbitrageurs under a typical FARJHO transaction.
*         The cost of the monthly mortgage payments will remain the same for the next 15 or 30 years but the income from monthly rental receipts will adjust every two or three years and would most likely to go even higher in the current trend.
*         The arbitrageurs who take out the cash-out re-finance now could enjoy not only the potential long-term price appreciation from much expanded home equity, they will also receive a check as additional current income every month.
*         The current low fixed mortgage rates may not last forever. A change will be coming and it would be wise to lock it in now.

The free enterprise capitalism based new home ownership structure FARJHOSM could let pure profit-driven real estate investors help other aspiring home owners partially co-own homes through the equity sharing concept without the imprudent use of any debt. FARJHOSM was created back in 2009 as a fair and equitable business method to address the free market needs of both joint property investors and aspiring home owners. Through FARJHOSM, foreclosure will no longer be a possibility going forward. It will help restore our national economic prosperity, foster the steady growth of our country’s housing industry as well as promote the on-going neighborhood stability and social harmony in local communities throughout our country!

Filed under: Equity Sharing, FARJHO, Housing, InvestorsAlly, Mortgage, Arbitrage, Equity Sharing, FARJHO, Housing finance, SAM, SEM, shared appreciation mortgage, shared equity mortgage, Shared ownership mortgage, SOM

0402 2012 The distinguishing features of FARJHO as a new business method to implement the equity sharing concept are three-fold

This text appears on the 1st page of InvestorsAlly’s FARJHO marketing flyer. https://www.box.com/s/1f2e57e6f0ac5b6738f0

Do you have trouble in obtaining a conventional mortgage to buy a home or any trouble in selling your existing home when potential buyers could not qualify for a mortgage to buy your home?

InvestorsAlly could help you buy a home using the new equity sharing method and/or help you sell your house much quicker because InvestorsAlly could help other potential buyers obtain both conventional mortgages at low mortgage rates when they have good credit, and if not, help them try the new alternative equity sharing method of FARJHO.

The distinguishing features of FARJHO as a new business method to implement the equity sharing concept are three-fold:

First, FARJHO allows renter/home occupier and joint property investors to own only one home at a time in order to maintain the sanctity and the freedom of the single family residence ownership. This is in sharp contrast to many community oriented equity sharing methods of Co-ops, Land Trusts, Kibbutz or Commune types of older equity sharing methods.

Second, as a brand new concept, FARJHO only allows member level debt financing, to eliminate the foreclosure possibility which exists with conventional property level debt financing as commonly used by a Shared Equity Mortgage (SEM), a Shared Appreciation Mortgage (SAM), a Shared Ownership Mortgage (SOM) or any other existing equity sharing schemes to date. In all those older business methods, the home occupiers could still get foreclosed whenever they lose their monthly income capability under those old property level financing arrangements.

Third, FARJHO provides a natural built-in buffer to conventional renting to avoid potential eviction when the tenants temporarily lose their monthly income capability. The equity stake of the renter/co-owner of the FARJHO structure could act as an optional voluntary collateral against missed monthly rent payments and therefore provides property investors with enhanced investment security through less credit risks and at the same time provides the tenants/co-owners with more home occupying stability during the rainy days in their working lives.

Filed under: Economic Viewpoints, FARJHO, Housing, InvestorsAlly, Mortgage, Arbitrage, Equity Sharing, FARJHO, Housing finance, SAM, SEM, shared appreciation mortgage, shared equity mortgage, Shared ownership mortgage, SOM

0303 2012 What is the difference between the cash flow sharing SwapRent solution and a Shared Appreciation Mortgage? – SwapRent is similar to a separate flexible employment contract substitute to hold on to the house

When I said before SwapRent was a bit ahead of its time since its birth in 2006, I meant that most people were unfamiliar with what economic value it could bring. After the financial crisis, most economic policy makers were still learning what property equity sharing concept is and what methods are out there that could be used to solve our current housing led economic crisis. Sadly after more than 5 years, it still appears that the law makers, financial regulators, economic policy makers of the federal governments are only starting to realize the value of the concept and making recommendations for the private sector banks as well as the GSEs, housing agencies to learn how to apply these concepts through the only term in this equity sharing field that they know of, i.e. shared appreciation mortgage.

 
As one of the most superior and advanced methods to deliver the economic benefits of property equity sharing, ownership sharing or appreciation sharing, the SwapRent related methodologies have been made available to private sector banks, housing finance agencies of the federal, state and local governments through various direct communications and educational campaigns since 2007. It seems that all those efforts were in vain. Now that these supposedly wise men at the government are being called upon by the politicians to study the application of shared appreciation mortgage again to solve the housing finance led economic problems of our country. So let’s take another try to see whether they could comprehend it now or are willing to think outside the box to learn something new.

 
The new creation of a SwapRent transaction is to allow a free market exchange, between an arms length investor and a property owner, a series of cash flow payment responsibility for a period of time vs. a portion of the upside appreciation right and the downside depreciation risk obligation of the property in question at the maturity date of that cash flow paying commitment time period.

 
This new SwapRent contract could be flexibly offered separately, super-imposed on and be artificially attached to a conventional mortgage, be combined as a package and/or be detached at any time so that the SwapRent contract could be traded by itself independently, like a free market based derivative financial contract, in an open exchange to allow price discovery and capital regeneration. It is therefore much more flexible, effective, efficient and useful than the old, obsolete, flaw-ridden and rigid shared appreciation mortgage, the shared equity mortgage that have been around for more than 30 years as well as their most recent reincarnation of shared ownership mortgage.

 
The unfortunate thing is that these academics and economic policy makers whose task is to study, research and come up with a better mouse trap than the old shared appreciation mortgage simply went straight back into those old, obsolete, flaw-ridden and rigid shared appreciation mortgage concepts and methods again. They do not seem to be able to jump out of that old mortgage box to start thinking outside the box. The longer these incompetent policy makers continue to squat on their jobs the more our country’s economy will continue to hemorrhage. It appears a competency issue that only history will prove on hindsight.

 
Anyway, since the information of the SwapRent based solutions have been made widely available in many written articles at this blog, at SwapRent home page, in many published newspapers and academic journals already, there may not be a need to repeat all those info here again. Let’s take a quick look at what SwapRent concept can do on more than helping cure distressed non-performing mortgages and assisting home owners to hang on to their homes instead.

 
The way to think of this swap between receiving a series of monthly cash flows vs. giving up a part of the future upside potential could be interpreted and applied to many other events in our daily economic lives.

 
For example, use you yourself, the body and mind owner, as a case in point. You, like all of us, have a need to receive a series of monthly cash flows to buy groceries to feed your family and pay rent or mortgage payments for your home as a shelter. After you have applied for a job and been hired by your employer, you have effectively entered into a SwapRent transaction. Your boss has simply agreed to provide you with a series of monthly cash flows (your salary) for a period of time (your employment contract period) in exchange for your upside productive potential. Whatever you could produce for the company during the contract period will simply become the company’s material or intellectual properties and become exclusively the company’s financial rewards. Even if you have a great money making idea and developed a patent on it, that would become the company’s property and the company will make all the upside financial rewards out of that patent and all your other future economic productivity to make the patent financially valuable.

 

On the other hand, if you are an entrepreneur or a small business owner, you receive no fixed monthly cash flows from anybody else since you have no boss but you get to control your own destiny and get to enjoy the entire upside potential rewards of your own talents.

 
Similarly, what the SwapRent related concepts and methods were originally designed to do for you, the real estate property owner, as a comparison case in point, is quite similar. You may have a need to receive a series of monthly cash flows to pay for a part, or in whole, your monthly mortgage payments which may become delinquent when you have lost your job, either completely or got a lesser paying job instead. So you could, out of free will, decide to give up a part, or in whole, the future financial price appreciation potential of your home property in exchange for receiving the series of monthly cash flows that you need now to continue to keep the legal ownership of your house. If you do not receive any cash flows from any body else, you would of course get to enjoy the entire potential upside appreciation, i.e. assuming you have some other non-free market based magical way that you would not get foreclosed.

 

 

In this example above, the new concept and method of the cash flow sharing SwapRent contract simply provides another way for you to obtain a series of monthly cash flows to meet your daily responsibilities in your economic life. Taking a job was the only choice in our capitalism society before. Now with the invention of SwapRent, you the consumer, have been given another free market based choice, if you happen to own a real estate property already.

 
From an employer’s or an investor’s perspective, the way for them to derive more upside financial returns and grow economic potential for their capital and resources, they could either hire a person by giving him/her a series of monthly cash flows to enjoy the whole upside of his/her talents through a job or an employment contract, or they could simply provide a series of cash flows to a property owner in exchange of either a part, or in whole, of the upside financial appreciation potential of his/her property for a period of time.

 
I hope the analogy provides a better way to understand what the new SwapRent transaction is about and what kind of power it could provide as an additional consumer choice alternative to our daily economic lives on a pure free market basis.

Filed under: Cash Flow Sharing, Economic Viewpoints, Federal Government, Housing, Mortgage, REIDeX, SwapRent, Equity Sharing, Principal reduction, shared appreciation, shared appreciation mortgage, shared equity mortgage, Shared ownership mortgage, SwapRent

0819 2010 How and when to apply the new FARJHO (Flexible And Reversible Joint Home Ownership) structure?

The following information is on how to apply the new economic concept of the separation of shelter value (use value) and the investment value (economic value) of a conventional ownership of a real estate property. For more details please visit our commercial site at http://www.InvestorsAlly.com or our non-profit operations at http://www.PeoplesAlly.org to assist low income working families with increased housing affordability and enhanced neighborhood stability.

Example 1 – From aspiring home owner’s perspective:

A home seeking person who currently rents identifies a property in a geographical area of his/her choice. He/She has the 10% of the property in cash from his/her own savings and would like to seek to jointly own the property with other investors as the ideal home owning structure.

The reasons could be because that he/she may not have enough monthly income to qualify for a conventional mortgage, prefers to use the discretionary monthly income for other household expenses, does not think the property value may increase in the near term, for his/her particular religious belief that rejects the lending/borrowing concepts or simply any other personal preferences.

He/She commits to pay a pre-agreed rent to the FARJHO LLC that holds the title of the property for a specific period of time. The remaining 90% property ownership could be shared among up to nine other individual, corporate institutional or even governmental entities.

Example 2 – From joint property investor’s perspective:

A group of investors have identified and bought a particular single family house at bargain price through a syndicated LLC structure either through a short sale process or from a bank’s REO portfolio.

The syndicator of the FARJHO LLC tries to find a long term renter of this single family house in order to generate stable long term rental income. Many renters do not commit to the long term and do not usually care about the houses that they rent.

The syndicator/property manager makes an offer to a qualified renter who has the ability to pay for a small percentage of the property value and invites him/her to join the LLC as a minority stake holder/member himself/herself. Once the renter becomes the minority homeowner, he/she may intend to stay for the long term and would treasure the property and take good care of it as thought it were his/her own. In fact it is indeed his/her own, albeit partially. Although he/she does not have the economic income capability normally required to own the property entirely he/she gets to enjoy the high quality home in the neighborhood of his/her choice.

Through buy/sell agreements between LLC members, the homeowners could increase his/her equity ownership through buying existing member’s interests. Alternatively, he/she could use SwapRent contracts to do so when they become available at REIDeX in the near future. In the worst case scenario, he/she could also become a LLC member in another property in the same neighborhood whenever he/she has the increased economic ability to do so and would like to have more investment exposures.

Comparing with conventional commercial property investments, FARJHO offers property investors less worries about vacancy and expenses. The investor’s SGI (Scheduled Gross Income) equals to his/her GOI (Gross Operating Income) and also to his/her NOI (Net Operating Income) since both annual vacancy loss and expenses are most likely zero in a FARJHO structure.

Example 3 – Current application opportunities in the US:

A homeowner currently has a deeply underwater house. He/She contemplates a strategic default on his/her own house but does not like the idea of becoming an apartment renter. A buy-and-bail strategy sounds more appealing to him/her. He/She could use an all equity based FARJHO (SM) structure to become the minority owner/renter of an alternative property in his/her neighborhood before he/she begins discussions with his/her current mortgage lending bank to give up his/her existing homes in either a short sale or a flat out walkaway foreclosure.

The strategic defaulters usually could not secure another mortgage to buy another comparable home before or after he/she walks away from his/her existing home. To qualify for a new mortgage on a second home, he/she has to either have 30% net equity in his/her existing home or a very large fully documented monthly income to qualify for the mortgage payments of two homes. This is often not the case with most upside down homeowners.

An all equity based FARJHO co-ownership structure makes it convenient for a smoother transition to a long term comparable or even nicer and often more spacious home through a partial equity ownership without having to lose the homeowner status by becoming a conventional apartment or house renter. It may turn a somewhat embarrassing, face-losing event into a move-up in prestige as a partial owner of a much bigger and nicer house!

Example 4 – How to use borrowing (through Borrow-Pool-Buy, BPB method) to achieve leveraged higher investment returns under FARJHO:

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 decision or action to borrow together is necessary. 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 using the percentage ownership in the legal entity or the corporation as the collateral.

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 more money. Since neither the FARJHO LLC nor the home property itself owes any 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. It could be any lease maturity and will be determined by all the members in the LLC.

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 partial member interest in the LLC and his down payment equals to 25% of the value of that partial member interest.

So in the example above, cash was used to purchase the property entirely and no borrowing using the property as the collateral was involved. 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 new FARJHO concept and method to own homes, irrespective which country the homes or the home owners are located.

Example 5 – Section 8’ed FARJHO – AHOs who are Section 8 rent payment assistance recipients

A current Section 8 rental assistance payment recipient inherited $50,000 from his parents. She does not want to put it in the stock market or any mutual funds which she is not familiar with and she thinks those Wall Street stuff are too risky. She wanted to use it to buy a home but the amount is not big enough to buy in an all-cash deal. She can not use it as a down payment to borrow any mortgage because no lenders would be interested in talking to her due to her low income status. The lenders do not believe that she could generate enough monthly income to service a mortgage payment.

She heard about the new Section 8’ed FARJHO program from the local housing authority from her city. She found out that she could team up with a few free market based Joint Property Investors (JPIs) to form a FARJHO LLC to buy a home together and get the new home qualified as a Section 8 property. She could then simply apply the rent payment assistance from the existing Section 8 program as the rent payments to the FARJHO LLC. In this way she would not only just be a renter but also become a partial home owner under this FARJHO arrangement.

Since she is not restricted to renting from a multi-family apartment complex in the run-down districts only, she decides to buy a REO single family house from the Fannie Mae Homepath program in a decent neighborhood as her dream home. The cost of the house is $300,000 in a city in Southern California. In this FARJHO structure she would own 1/6 of the equity ownership of the FARJHO LLC.

The remaining balance of the house price was paid by five other free market based investors. Investor A and B who put in $30,000 each are individuals using their retirement money in their respective IRA accounts. Investor C who put in $100,000 is a local public employee pension fund. Investor D is a foreign individual and he put in $40,000. The remaining $50,000 was put in from an individual property speculator who prefers to use leverage to enhance the potential investment returns. He put down $10,000 cash and borrowed $40,000 so that he could deduct the interest expense for this investment.

The Section 8 recipient gets $1500 monthly rental assistance from HUD every month. She contributes an additional $200 so her total monthly rent paid to the FARJHO LLC is $1,700. This equates to an annual rental yield of 6.8% to all members of the investor group in the FARJHO LLC which the Section 8 recipient/renter herself is also a member of. That is her annual investment income for each year she stays in as a 1/6 interest member. In addition, she will also enjoy the financial value of 1/6 of the potential appreciation of the home property.

The free market based investors are interested in teaming up with the Section 8 recipient over other regular higher income AHOs because they might think, rightfully or wrongfully, the credit risk is much lower since the bulk of the income rent payments would come from the assistance of Uncle Sam!

Filed under: Cash Flow Sharing, Economic Viewpoints, Equity Sharing, FARJHO, Housing, InvestorsAlly, PeoplesAlly, REIDeX, SwapRent, Affordable housing, CDO, Corporatize homes, Corporatizing homes, Credit default swaps, Credit Derivatives, Equity Sharing, FARJHO, Home equities, Home equity securitization, Housing, housing affordability, Housing finance, Loose credit, Mortgage derivatives, Mortgage securitization, Real estate derivatives, SAM, Securitization, Securitizing home equity, SEM, shared appreciation, shared equity, Shared Ownership, Shared ownership mortgage, SwapRent, What FARJHO is not, What SwapRent is not