How and When to Apply FARJHO (SM)?
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.
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 (SM) 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 (SM) 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 (SM) 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 (SM) 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.
For more detailed information on this new concept, please read the blog post on
“From the old Pool-Borrow-Buy (PBB) concept practiced in shared equity mortgage and shared appreciation mortgage to the new Borrow-Pool-Buy (BPB) proposed in the FARJHO structure – A simple new equity sharing concept that could eliminate home foreclosures all together”
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!
PeoplesAlly Foundation 
Comments
I’m trying to wrap my head around some of this. So, first the LLC holds the title and there is no mortgage on the home. The primary occupier (owner A) is paying a rent which they also get a portion of in return respective to their % of ownership, correct?
What happens when A can no longer afford the rent?
Owner B decides they want to sell their ownership stake. Do you have a secondary trading market to accomplish that?
Home was originally purchased for $700,000, but now is only worth $350K. In theory, Owner B’s stake has decreased by 50%, correct?
Sounds like some interesting concepts I am all for good, capitalistic ideas to solve problems that Gov’t handouts cant.
Hi Chris,
Yes, we have received many similar questions on the rent issue. Let me paste the answer below. I hope you don’t mind.
Thanks for the question. The legal infrastructure of adopting the LLC in the US as the legal title owner of the property is a tried and true method to own a property and rent it out to tenants. Commercial real estate properties such as offices, retail shops, hotels, industrial warehouses etc, were done in a similar way for decades already. When tenants do not pay, the landlord will have the legal right to “evict them”. Those familiar legal infrastructures of renting or leasing concepts would not change.
While there would not be any foreclosures for “homeowners” in the future, “tenants” could still be evicted under our current equitable and fair legal infrastructure. The investor group which includes the tenant himself is an arms-length legal person that owns the property. As one of the flexible FARJHO LLC terms, it could indeed be arranged for the LLC to deduct the rent payment in arrears from the equity stake of the tenant if he does not pay rents in a timely manner.
Everything that FARJHO and SwapRent were created to help is aspiring and existing “homeowners”, either partial or full ownership. Those non-free market based charitable assistance of rent payments for low income working family “tenant” programs are outside of the original design scope of the pure free market based FARJHO and SwapRent methods.
Hence a great opportunity exists to combined FARJHO with a government based Section 8 program so that FARJHO could make those tax payer’s money already committed by the government work more efficiently. This concept was explained fully in my previous post on Section 8’ed FARJHO yesterday at the CDB-L forum.
Currently our commercial affiliate InvestorsAlly, Inc. will be the market maker to develop a secondary trading market of the member interests should any FARJHO LLC members decide to sell their share in the FARJHO LLC in the future.
Yes, when the value of the property goes up and down, all FARJHO member’s shares will proportionately go up and down accordingly as well.
Thank you for the reply and pasting is fine. In the case of the section 8, you mention this as being a perfect example except the Tax Payers are paying the rent for someone that has partial ownership through an LLC. Basically, they are making money from Tax Payers. That doesn’t seem quite right. Is that what you are saying? They could be using the Tax Payers $ to continue to increase their ownership stake until they owned the house, right? (assuming other partial owners are interested in selling “shares” or they could be increasing ownership in other properties. Using Tax Payers money for the Section 8 occupier does not seem like such a good deal for the Tax Payer.
Hi Chris,
It does not seem that you have a correct understanding of either the Section 8 or the FARJHO programs.
FARJHO does not endorse or dispel the charitable tax payers paid and government sponsored programs to help the working poor. Your individual political view of unfairness, rightfully or wrongfully, could be channeled to those existing hundreds of thousands of Sectioned 8 approved multi-family apartment building owners who are the landlords that currently receive the tax payer’s rent assistance. You can keep on destructively attacking them and the government all day long but that really has noting to do with FARJHO or any other people’s diligent effort to improve our society at all.
FARJHO combined with Section 8 recipients will only make those $16 billion already committed by your local Congressmen in the Section 8 program works more efficient and more towards its original social goal, i.e. assisting the low income working families. Those Section 8 money and programs could not be easily cancelled or reversed. We live in a democratic society and we will need to respective the majority’s decisions no matter how individually you dislike them.
FARJHO as a concept, a method and a real tool, will allow free market investors to inject money to where ever they are attracted to. That is the true spirit of free market enterprise under an unfettered capitalism. To witch hunt those investors that made money from their smart choices and proactive diligent research hard work will do the society no good. If FARJHO could attract them to help the working poor then no more new tax payer’s sponsored programs will be needed in the future.
Given whatever already exists, what is wrong with letting those landlords, based on their free will, cough up a part of the ownership to let their renters co-own the property and let them benefit from the future financial appreciation of the property that they rent? The added benefit is a much nicer and safer neighborhood by turning the renters to be part owners.
I think we are getting off on the wrong foot and that is not my intention. “Witchhunt” and “attack”. Pardon me, I did neither. I asked some simple questions. And thankfully, we are a republic. We elect representatives to represent us. But that really is a topic for another day. Nor do I have a problem with section 8 in theory or even in many cases. I know and have known single parents and families that couldn’t afford rent otherwise. However, if they receive a $50K inheritance, I would expect them to need less gov’t assistance.
“FARJHO as a concept, a method and a real tool, will allow free market investors to inject money to where ever they are attracted to. That is the true spirit of free market enterprise under an unfettered capitalism” — In general investors are not receiving gov’t assistance. Free markets aren’t free when there is an injection of Tax Payer dollars and suddenly they are no longer unfettered. :O)
Do you believe you have a perfect program or are you open to constructive criticism? The goal of any gov’t assistance should be to help in the short-term, but provide tools, resources, etc to move people off of it. Our current programs don’t seem to do that very well. I would love it if that were your goal as well and if your program even tried to have controls in place to accomplish that.
“FARJHO does not endorse or dispel the charitable tax payers paid and government sponsored programs to help the working poor”
No, but you believe Section 8 to be perfectly suited and you may be right. I actually shared some of this exchange with my colleagues and one of them shared a couple of nightmare section 8 stories from the renters perspective. They were told during an annual inspection that if they kept complaining they would have to move out. The owner didn’t want to make the necessary fixes to the house. So they just keep quiet so that they aren’t forced to move. So part of your program, in that the occupier is also an owner, would seem to address of part of that.
What kind of controls are in place to make sure the other owners keep up with the maintenance of the property?
What if the program somehow mandated that the “taxpayers” also have an ownership in the house? I think you would get better buy-in if that were an aspect of what you are trying to do.
I am not against your program, nor am I trying to bash, attack, or go after anybody else. I really would love a program that protects all interested parties. I was enlightened today about what can go wrong with bad owners. I have lived next to bad renters. It seems like you are trying to create something that can make both a little better.
Hi Chris,
Sorry to have used the stronger words then necessary but a little bit of adrenaline could always bring up a lot more good thoughts and comments, right? 🙂
I do get your points but I think one confusion that still remains is that somehow you still think the investors benefit unfairly in the Section 8’ed FARJHO program. You seem to forget the rent payment assistance is only for the low income renters.
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, glamour 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 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 conscience does direct us to set up a non-profit and try our best to convince the investors that there could be money to be made there with the low income working poor as well!
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 again.
“but a little bit of adrenaline could always bring up a lot more good thoughts and comments, right?” – Yes and get us through the afternoon doldrums or morning fog :O).
“one confusion that still remains is that somehow you still think the investors benefit unfairly in the Section 8′ed FARJHO program” – In one of your examples, you noted a Section 8 recipient receiving a $50K inheritance and using that to become a part owner (Owner A). If there are three owners, A,B, & C, I agree that B & C don’t benefit any different than they would normally. However, Owner A who is the section 8 renter does. With the tax payers $ they would be able to overtime increase their ownership and eventually buy-out B&C or buy into other homes elsewhere. Or just use the monthly dividend as income. I do believe in cases where one of the owners is the Section 8 recipient, additional controls could be place.
So further into the meat & potatoes, how is maintenance handled? What happens if an owner is unable to pay their portion? Are part of the rents set aside to deal with future expenses that come with owning a home? Is there a 3rd, “uninterested” party that deals with this?
Your program actually sounds similar to others I have heard about (except for the Section 8 side, :O) ). Although the others actually do leverage and have mortgages as opposed to owning homes outright.
I will look around more on this site and your commercial site; we often deal with high net worth individuals. I wonder if a “partnership” opportunity would exist for referring some of them to you.
I am intrigued. What are your minimum investments?
Hi Chris,
I understand your concerns but let me explain to you why it may not be necessary.
The Sec 8 recipient AHO could put his money in stock markets, commercial real estates or even his neighbor’s Sec 8’ed FARJHO deal and grow their assets anyway. It is a free market and you can not be a policeman all day long to, your favorite word, “witch hunt” them.
The point is that they are entitled to make money on their investments. If a Sec 8 recipient could earn rental income on his neighbor’s Sec 8’ed FARJHO why can’t he do the same on his own house? It is the same taxpayer’s money!
Again, the goal of letting them participate is not much to make the Sec 8 recipients millionaires soon. The goal is more on improving the quality and stability of the neighborhoods by turning renters to partial owners. It is the social value that is worth pursuing.
I have answered many other people’s operational questions in the CDB forum today and I suppose you may have already seen them by now.
Please feel free to give me a call some time next week. Thanks again.