Category Archives: Section 8

How can FARJHO help you?

Introducing FARJHO services at PeoplesAlly Foundation.

0304 2013 FARJHO offers a unique ability to curb wealth distribution inequality through home co-ownership

Although FARJHO was not created specifically with the egalitarian motive for helping the poor but rather a creative win-win free market based solution for both the aspiring home owners with less financial means and the well-to-do property investors to build wealth to co-prosper together, the equity sharing nature of FARJHO does offer a timely help to prevent further inequality in the wealth distribution among our country’s citizens under our current economic situation.

I refer back to the proposal we had submitted to FHFA back in September, 2011 in response to their public RFI, https://www.box.com/s/hpfqqajd1aremco716lr . The proposal was primarily for the GSEs to consider selling the single family homes in their foreclosure portfolios to both retail aspiring home owners and the Wall Street hedge funds or DC private equity firms together as fellow FARJHO LLC members for each single family home, one home at a time, rather than selling these single family homes in bulk, at heavily discounted prices, only to those well-connected hedge funds and private equity firms as profiteering middlemen.

Rather than treating the ex-middle class American families as the new serfdom renters to those new noble PE and hedge fund landlords via selling our national assets (these foreclosed homes are owned by the government sponsored Fannie and Freddie via our tax money), the GSEs could use FARJHO directly to sell equity stake in each single family home directly to both the PE firms, hedge funds or crowdfunding investors and aspiring homeowners who could not obtain a mortgage, at the same price, on the same terms and at the same time so that no rich fund operators need to become the new landlords and no property speculators who have access to easy credit need to buy at deep discount in bulk from the GSEs in order to flip the properties before these single family homes get to be rightfully sold to the home seeking end users.

Somehow the built-in democratic wealth distribution inequality correction features of FARJHO have not been properly understood and adequately communicated to the public over the years so far since its creation in 2009. As a result, hedge funds and private equity firms continue their feasts on buying up the single family homes left and right to become the new landlords in our economic society. The ex-middle class (and now homeless or propertyless) Americans continue to be told that the Fed’s low interest rate policy and the Administration’s housing policy have worked magic in bringing about a great economic recovery in American housing sector and they actually need a pat on their backs for the good jobs they have done for our country.

Meanwhile, the fleecing of the GSE’s foreclosed single family home portfolios continues. Isn’t it the greatest heist of the American wealth by the concentrated privileged few, while aided by the government’s misguided economic policies, right in front of our eyes? I think we do urgently need some politicians who could understand what FARJHO is and what the new FARJHO related home ownership solutions could provide in order to help curb these serious problems of furthering inequality in wealth distribution among our citizens caused by the current abusive government housing and interest rate policies in a timely manner.

For more introductory information on FARJHO and how it works please click on the following link to my draft paper on FARJHO, https://www.box.com/s/n4sg1odf8su6fmfhrv21 or visit http://InvestorsAlly.com and the home equity crowdfunding portal site http://FARJHO.com .

1202 2012 Conference speech – FARJHO as a solution to the scaling problem for property investors

I spoke last week as a panel speaker on the scaling issues for investors at a conference for institutional investors to treat single family residences as a new asset class for institutional investment. The conference is dubbed “Single Family Aggregation : REO to Rental Forum – A Forum for Private Equity, REITs, Institutional Investors and Bank Rent-to-Own Programs” organized by IMN on November 29 to 30 at Scottsdale, AZ, http://www.imn.org/Conference/Single-Family-Aggregation-Strategies/Short_Agenda.html. The following link is a copy of my presentation slides “Introduction to FARJHO and SwapRent”,
https://www.box.com/s/wmyjnwhzm8yagrf9gjkx.

Until today, institutional investors such as corporate pension funds, insurance companies, university endowments and non-profit foundations have not been able to treat the single family homes as a separate investment asset class. What is the main reason?

Single family homes, unlike a multi-family residence apartment building, are usually spread out in many different sub division development projects in the suburbs. The management of the entire operations that include the maintaining each individual property with its own landscaping and the dealing with the tenants are usually much more demanding and difficult to handle. As a result, the annual yield derived from the rental income for institutional investors would be reduced for the increased cost to manage these diverse groups of properties spread out in a larger number of geographical locations.

In addition, the turn-over of the renters for single family homes would be much higher since over the past decades, with the easier credit and low interest rates, eager mortgage brokers have found tenants of single family homes as easy preys to sell a mortgage to. “Why rent when you could own at a cheaper cost?” Owners of single family homes hoping to rent would have suffered from much lower annual rental income yield due to the high renter turn-over and higher operational cost for the property maintenance. That by the way also seems to be one of the major reasons why our country has had the sub-prime mortgage induced economic problems at the moment.

The new FARJHO invention which basically turns renters to become co-owners with the property investors at the same time, seems to have solved these problems by killing the two birds in one single stone for property investors. Since the renter would have a vested interest as a co-owner with the other joint property investors in the FARJHO LLC that owns and holds the title of the home property – vacancy will most likely be near zero and the cost to hire a third party property manager is totally eliminated. The renter who is also a co-owner of the property could become the best property manger, care taker, house sitter, business partner for the rest of the joint property investors than a pure renter without an equity interest in the property would ever be. To understand this better, simply ask yourself when was the last time you ever washed a rental car? This seems simply to be another way that the invisible hand of Capitalism is at work again.

As result, both retail investors and institutional investment funds would no longer have to worry much about either potential vacancy or incurring the expense of hiring a third party property manager any more since renters would have a skin in the game with the other investors, and hence, much secured higher yields derived from rental income for all the property investors.

What we plan to do is to use our technology platform at http://FARJHO.com to act as a service provider to institutional funds, accredited investors and/or retail investors from the crowd, i.e. crowdfunding, to find like-minded aspiring and existing homeowners who are interested in the all cash based FARJHO transactions to co-own homes across the country without involving anything related to the conventional home loans or mortgages. The timing will be subject to the successful publication by SEC of the Crowdfunding Rules under the JOBS Act which has been scheduled at the beginning of January of 2013.

In parallel, a currently work-in-progress project of a homeowner’s social networking portal http://WeHomeowners.com or http://WeHomeowners.org will also be set up under our 501(c)(3) non-profit PeoplesAlly Foundation (http://PeoplesAlly.org) for existing homeowners who may consider switching to FARJHO home ownership structure some time in the future. This may even allow the Section-8 tenants to own a small piece of the home equity of a single family home anywhere of their own choice via a Section 8’ed FARJHO that I had blogged about before, instead of having to rent only in a multi-family apartment located at a run-down neighborhood.

0910 2011 Our response to FHFA’s RFI – FARJHO and SwapRent from PeoplesAlly Foundation and InvestorsAlly, Inc. – A letter to the Fed, the Administration, GSEs, HUD, SEC, CFTC, other Agencies and the State Governments

Here below is a recent update letter to many of my academic friends who possess well established expertise in economics, economic history, finance, derivatives, laws, mathematics, housing, housing finance, urban planning, real estate, business studies, public policy and political science in various leading universities around the US and in selected foreign countries. I thank them for the various feedbacks and support through the years.

Transparency in our federal government’s policy making process is always a good thing for our country and for our democratic society. As one public figure recently said, the best way to keep a secret is to do the right thing.

============
Dear AcademicAlly,

How are you?

Here below is the latest development regarding our efforts to help solve our nation’s housing-led economic crisis. As you know I have been in touch with many of the government folks regarding FARJHO and SwapRent on an academic basis within the past few years since 2007. Please feel free to let me know if you would like review some of their earlier feedbacks. Yours and your colleagues’ academic input and critiques on our proposal would be highly appreciated.

We have provided our FARJHO and SwapRent solutions to the FHFA and submitted our response to their August 10th RFI project (see below) from both PeoplesAlly Foundation ( http://www.PeoplesAlly.org ) and InvestorsAlly, Inc. ( http://www.InvestorsAlly.com ). The non-profit will provide the educational services and the counseling of home owners which we have spent tremendous time to build and to create a political voice within the past year. InvestorsAlly will focus on providing the technology platform for the FARJHO matching services at http://www.farjho.com as what it was always set up to do since the inception on a pure free market basis.

For a thorough understanding of the new FARJHO methodology to own homes one home at a time, here is the link to my draft paper on FARJHO ( http://www.box.net/shared/yfhkjbqre4idf1kgrtc4 ) which is to be published by the housing finance journal HFI in their upcoming September or December issue as a sequel to my earlier article on SwapRent ( http://www.box.net/shared/v24qtqip4hlgff5l1646 ) published in the December 2009 issue.

Please note again the link to a copy of our response is at http://www.box.net/shared/hpfqqajd1aremco716lr . There could be many area that you and your colleagues could help improve this project. Your active participation to further fine tune our proposed methods, the deployment channels and delivery procedures would be very welcome. It is all for saving our country’s economic future. Let’s work as a team.

Let’s hope that these unwise policy decisions made or to be made by our federal government, intentionally or not, will not turn our country into an oligarch state without a middle class soon. Your active participation may help change the course of history. Please feel free to let me know if you have any questions. Thanks.

===============
Date: Sat, 10 Sep 2011 11:54:07 -0700
To: Email addresses suppressed
From: Ralph Liu <ralph.liu@investorsally.com>
Subject: Our response to FHFA’s RFI – FARJHO and SwapRent from PeoplesAlly Foundation and InvestorsAlly, Inc.

Dear Federal Reserve Board Chairman, Regional Presidents, Administration, Treasury, FDIC, HUD, GSEs, SEC, CFTC, Congressional Staff and Other Relevant Agency Officials,

cc. State Governments, State Housing Authorities

How are you? I would like to give you guys an update on the latest developments of our FARJHO and SwapRent efforts.

On August 10th FHFA, the regulator of GSEs issued a RFI asking for ideas from the public on how to deal with their REOs portfolios. Here is the link to their original request. http://www.fhfa.gov/webfiles/22366/RFIFinal081011.pdfrding

We have submitted our public response to FHFA from PeoplesAlly Foundation and InvestorsAlly, Inc. in early September. Here is the link to a copy of our response for your kind review and comments. http://www.box.net/shared/hpfqqajd1aremco716lr

The advantages of our FARJHO based proposal are:

1. It eliminates the need to let privileged private parties have access to and engage in quick short term buy-low-sell-high flipping activities at preferential bulk sale discount prices to profit from the potential privatization of our national assets owned by the GSEs and FHA.

2. It helps avoid the federal government, the elite private equity firms in DC or hedge funds on Wall Street from becoming new long term serfdom landlords to low income working families on Main Street by allowing renters to become partial co-owners of the home properties through FARJHO LLCs.

3. Potential wealth created from a future recovery of the US housing market will be able to be channelled through FARJHO back to small town investors, mom’n’pop’s self-directed IRAs, state, county and local pension funds, church groups, non-profit endowments etc. on Main Street to fix the local government’s pension liabilities and budget deficits by investing on a more level playing field with other elite institutional investors on Wall Street who already have exclusive access to the use of leveraged low cost of funds as a result of the Fed’s loose monetary policies to profit from the potential price appreciation.

4. Through the new Borrow-Pool-Buy (BPB) member level borrowing concept that replaces the old Pool-Borrow-Buy (PBB) property level financing practice in other conventional equity sharing schemes, future foreclosure possibilities could be totally eliminated once and for all in this new FARJHO home ownership structure.

In addition, I would like to take the opportunity to invite your attention again to the applications of SwapRent as a new economic policy management tool that goes beyond its initial objective of creating housing affordability. A successful implementation could provide the governments with a new way of economic stimulus method similar to how governments have been managing the countries’ economic activities by adjusting the interest rate levels at the moment.

Since 30’s and 40’s Keynesian economy and 50’s and 60’s Monetarism could not function well in a technologically very different modern world in 2011 where hot money flows freely and instantaneously across borders, a new economic policy management tool has to be created so that the stimulus money could have “the stickiness effect” and stay in local communities to have the desired economic stimulus objectives of creating local jobs for the domestic economy. That is exactly what a new SwapRent market could deliver.

For an introductory description of how this could work please kindly review Chapter 6 of the SwapRent article published at the December 2009 issue of the Journal of Housing Finance International published by International Union of Housing Finance (IUHF) at http://www.box.net/shared/v24qtqip4hlgff5l1646 . The following two blog posts also explain how this could be done in local communities through championing by local politicians on a free market basis without relying on any handouts from the federal government.

https://peoplesally.wordpress.com/2011/02/19/02202011-it-is-not-keynesian-it-is-not-monetarist-perhaps-we-could-call-it-swaprentism-any-better-suggestions/

https://peoplesally.wordpress.com/2011/08/02/0802-2011-implementation-strategies-of-farjho-and-swaprent-good-economic-stimulus-public-policy-or-cornering-the-real-estate-market-by-investors-for-profits/

All information contained in our proposal to FHFA are non-confidential in nature and therefore are free for public distribution. Please feel free to share with us your thoughts and comments. Thanks.

Ralph Y. Liu
Managing Director
PeoplesAlly Foundation
23 Corporate Plaza Drive, Suite 133
Newport Beach, CA 92660
Tel: 1-888-456-8881 x 888
Fax: 1-888-315-3831
Direct: 1-949-371-9139
peoplesally@gmail.com
http://www.PeoplesAlly.org
http://www.twitter.com/SwapRent
http://SwapRent.com
http://www.linkedin.com/in/ralphyliu

 

0910 2011 Weekly Round-Ups from Various Social Networking Sites on FARJHO, Sec 8’ed FARJHO and SwapRent

There have been increasingly more feedbacks and comments which has made it more and more difficult to keep track them all and summarize in the blog. Here are a few representative recent posts.

========== On not to let Wall Street and Washington DC elites turn our country into an oligarch state without a middle class:
Comments:
Great ideas! You are right, qualified and educated investors are needed. There’s a lot out there who can produce the 20% as the occupying partner because they can not get a straight conventional loan because of foreclosures and short sales. I will follow your company and learn more about it.  You are brilliant!

Response:
Thanks. We need people who could share the visions with us to actively participate and make this a reality together, especially from the grassroots level in local communities on Main Street without the reliance on the federal government or big banks on Wall Street.

It is all for the good cause at http://www.PeoplesAlly.org and we’ll need to make it happen as Realtors ourselves together. Small investors could pool together their funds through IRA or other savings so that they could get to enjoy the wealth from a potential recovery of the housing market. The wealth will then be kept in Main Street America.

We can’t simply let our federal government sell their REOs owned by GSEs/FHA to a few Wall Street players to turn Main Street to become a whole bunch of renters to a few privileged landlord oligarchs in our country going forward.

Realtors’ work will then mostly be reduced to leasing jobs if that is the case. Let FARJHO help the small investors on Main Street to keep a piece of the capitalist’s pie for themselves and Realtors continue to do their main jobs to sell homes.

============ On the need to divert free market capital to the working poor:
Comments: …. Using tax payers money for the Section 8 occupier does not seem like such a good deal for the tax payers …..

Response:
…. Sec 8’ed FARJHO program does not use any of the tax payer’s money itself, it only makes the tax payer’s money already committed by your local congressmen work more efficient through turning renters to become partial home owners in order to improve local neighborhood stability and enhance social harmony …..

…. We are simply trying to educate the investors and let them know the credit risk could be considered lower than putting their money in other regular FARJHO projects so that there will be free market capital flowing into the low income housing sector to have the working class enjoy their fair shares of the economic benefits of capitalism.

In fact, after running the test market program for over a year at our commercial side at http://www.InvestorsAlly.com we have had trouble to even get investors’ interest move out of the premier coastal markets in Orange County to the less prestigious Inland Empire area.

Money seems to love the glitz, glamor and bling, bling. That seems to be how Bernanke and his cohorts at the Federal Reserve strongly believe in to make the rich even richer by flooding them with money at almost no cost to them. They are indeed similar to the elephant seals that I referred to in one of my related old blog post below:

https://peoplesally.wordpress.com/2010/11/02/11022010-from-elephant-seals-colonies-to-emperor-penguins-rookeries-a-few-thoughts-on-farjho-matching-process/

I hope you could understand that while we could do just fine to let the free market capital go chase the bling bling, our social conscience has directed us to set up a non-profit and try to convince the investors that there could be money to be made there with the low income working poor as well! That is the mission of PeoplesAlly Foundation.

The fact is when money flows into a certain area, the property appreciation and economic prosperity would become a self-fulfilling prophecy. On that concept, please see my blog post on “cornering the market or good economic stimulus policy”. Thanks.

=========== On how Keynesian economy and Monetarism no longer work properly in a technologically very different modern world
Comments:
Hi Ralph, I discussed at our last financial crisis 2009 with Representatives of our National Bank. I’am sorry, but they are not aware that their old Instruments don’t work any more. One fact is, that global capital reacts too fast to the real economy. Financial markets became independent of the real markets. A second fact is, that technology is not considered. Fast growing companies/products make some markets rapid obsolete. Complete markets die. We have no more stable competition (accounting can be made in India, with much lower costs, therefore employment is destroyed in Germany for example) This leads to critical societies, where riots occur. We need incentives for the finance market, which correlate with real economy. This is, what you are right. Let us work on stable societies.

Response:
Bingo! I am glad to hear that you had spoken out on this concept before. Very few economists seem to have focused on this crucial issue. Old “national economic policy management tools” don’t work in the modern economic societies. The world has become much more integrated in terms of easy capital flow. Hot money has no borders.

The problem is that some of these old school economists in power may continue run our Western economies to the ground by stubbornly sticking to their old knowledge and hiding in their cocoons. Somebody should step up to tell them to either wake up or step aside!

============ On how Sec 8’ed FARJHO works
Comments: Very interesting…I like it and want to hear more…out of curiosity what  would your underwriting standards be for a Section 8 recipient?

Response:
…. Basically the FARJHO part should not become such as issue since the criteria for Sec 8 assistance is based on income levels, not assets, as currently set by the sponsor. Whether the potential JPIs (joint property investors) have any special “underwriting requirements” or personal pet peeves it would be strictly between them and the AHO (aspiring home owner). This is the new peer-to-peer financial services business model to cut out the unnecessary financial middlemen in order to save money for the consumers. Look Ma, no more banks!

Our Internet portal www.FARJHO.com simply provides a matching service like match.com or eHarmoney.com would for marriages. We would simply match the boys and girls together but whether there is spark between them is purely up to them. We would not want to intervene, dictate any terms or force a relationship. If there is no chemistry between them we would simply try to match them with other potential suitors. Whenever there is a match, we will then handhold them to help them walk down the aisle together.

Please feel free to contact us directly if we could do something together. Those who can make it happen in real life in your own community and write a new chapter in the affordable housing history would be the heros to millions of low income working families and be remembered as such for years to come!

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!

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.

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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.

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