0301 2012 Crowdfunding – Capitalism for the 99%

We have recently started a new venture as an idea spin-off from our past venture www.reidex.com at REIDeX, Inc. and the current www.farjho.com at InvestorsAlly, Inc. The way both reidex.com and farjho.com have been trying to deliver the economic benefits of SwapRent and FARJHO to consumers are based on the power of Internet by eliminating the financial service middlemen and offer a service that is better, faster and cheaper than the conventional brick and mortar financial services businesses. This concept used to be called simply C2C e-commerce or later, peer-to-peer Internet matching service. Now, it is called crowdfunding.

Therefore it appears that we have been trying to provide the Internet-based crowdfunding services for real estate through both SwapRent and FARJHO as early as 2006 before the term of crowdfunding even emerged in the cyberspace. The reason why that InvestorsAlly has been offering crowdfunding service for home equity sharing is that FARJHO simply corporatizes single family homes and hence make it feasible to use this peer-to-peer matching concept for home owners to raise non-debt but equity based financing.

The use of C2C and peer-to-peer concepts could even be traced way back to the REIFO Exchange venture ( http://www.box.com/s/mnm7xhel0uhp9hkehad7 ) started in 2002 as chronicled in the Los Angeles Times article in 2003 ( http://www.box.com/s/qh42krrm2biiv55rkloj ). The ideas of the REIFO Exchange venture were later taken by CME (Chicago Mercantile Exchange) to let consumers trade futures and options contracts on a different real estate index. Details of this would not be released until 2014 when the 10-year NDA we had with CME expires.

The later over 10 year’s journey of transforming these sophisticated concepts to simpler new consumer-oriented products and services while keeping the similar economic benefits has not been an easy one. The new cash flow sharing concept and method of the SwapRent service through REIDeX seemed to be a bit complicated to the average consumers and the commercialization effort of SwapRent was perhaps a bit ahead of its time, no matter how powerful and useful the service could become to consumers and for our national economy.

To use an analogy again, it was almost like trying to convince people for a test drive by handing over the key of a new Hybrid SUV to people who are only used to riding horses. The shock and resistance to the new way of transportation were severe. Some people say that there is no traffic rules and if you launch it would create a lot of liability. Other people say that it is way too difficult for consumers ever to learn how to use it. Although the consumer acceptance may eventually take place but we could not wait that long to make a business venture commercially viable. So in 2010 we have pulled back the SUV and created a much simpler bicycle to offer to consumers through a new company InvestorsAlly, Inc. The bicycle analogy is the new FARJHO service. The FARJHO matching service is neither a derivative contract nor does it have anything to do with mortgages like what a SwapRent transaction would be, but rather a very simple new home ownership structure.

Through our marketing and educational effort the FARJHO idea seemed to have taken off and become viral in the Realtor community in Southern California since early 2010. Home owners and Realtors have begun to beat a path to our door for helping aspiring home owners with this new equity sharing FARJHO service to own homes since then but there is only one problem left – there have not been enough joint property investors in the current market to satisfy the demand from the aspiring home owners for the FARJHO transactions. Much more effort would be necessary to conduct more educational training under the current regulatory environment for potential investors. In the regard, I am glad to report that we have recently launched our first $20 million FARJHO Reg D private placement fund. More info is available upon request for qualified accredited investors in the US.

Nonetheless, we have yet again temporarily put aside the bicycle for more sophisticated users only and created another much simpler tricycle for the vast consumers for an even easier commercialization. Hence the Crowdfunders Choice (CFC) was born in January, 2012.

CFC simply focuses on introducing the peer-to-peer technology platform to help entrepreneurs raise equity financing. It is not a proprietary concept that we will need to sell again, which has always made launching new businesses much more difficult. It therefore seemed to be much easier to introduce these crowdfunding concept and method as there have already been many tried-and-true web sites offering similar platforms to conduct peer-to-peer micro-lending or to raise donations for creative projects or for political purposes.

The reason it is a much simpler tricycle vs. the bicycle of the equity crowdfunding business model of FARJHO is that the real estate component has been removed from the crowdfunding business model and therefore the new peer-to-peer matching services offered through CFC could be offered to a much broader audience, i.e. people would not have to have prior knowledge or experience with the real estate industry. In addition, people who would like to use the service no longer have to learn some new economic innovative concepts or methodologies any more. Sales calls would not turn into another economic lesson or a heated debate anymore!

As explained in the introduction at its web site ( http://www.CrowdfundersChoice.com ), our goal at CFC is to become the Crowdfunder’s Choice for helping entrepreneurs raise start-up equity financing with a special twist – we would like to make this new venture, crowd-sourced, crowd-funded and crowd-owned whenever permissible under securities regulation in order to act as a living proof that this new crowdsourcing business model would work under an unfettered free market capitalism.

Our target is to get the 99% of our population to have access to entrepreneurial start-up financing on Main Street in order to keep our free enterprise capitalism alive through promoting and maintaining a more democratic version of capitalism vs. the crony capitalism being practiced and abused by the privileged economic elites on Wall Street. The political image also seems to be a perfect match to the values of PeoplesAlly Foundation.

Hopefully through our new alternative funding services some of these entrepreneurs may get to rise up to become a member of the 1% one day. If not, even the top 10% or even top 30% will do, in the true spirit of capitalism. That indeed is our intention – wealth creation for the 99%. It is quite all right to take risk and work hard to become a member of the 1%, as long as they do not transform into a 1%’er or a member of the 10%’ers at the expense of the rest of the 99% or the 90%.

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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!

0806 2011 From the old Pool-Borrow-Buy (PBB) equity sharing concept as in a SEM or SAM to the new Borrow-Pool-Buy (BPB) concept as in a FARJHO – A simple innovation in housing finance that could eliminate home foreclosures all together

This is one of my most popular blog topics being repeated many times but with a different way to explain this new concept each time. Many new way of explanations were in fact inspired by many questions raised by my blog viewers.

In the current practices of our Western banking industry and our real estate investment industry until today, people always use the property directly as a collateral to borrow money to purchase and own a real estate property. Tax codes were also often designed by the lawmakers to give preferential treatments to investors who have borrowed using the property as a collateral to invest.

As far as the equity sharing or shared equity concept goes, it is usually a common practice in commercial property investments rather than residential real estate investments such as home purchases. This is due to the fact that commercial investment projects are either of a larger investment amount or they are usually made for investment purposes only. Unlike commercial properties, many purchase decisions of homes are made more for sheltering reasons. Home owners could also afford to own the home directly without other investors’ help since the investment amounts are usually smaller when compared with commercial property investments. In addition, home owners usually have a natural desire to have a full control of the property.

The problem with using the property as the collateral to borrow in the old shared equity property financing method of Pool-Borrow-Buy (PBB) is that if the property value declines, it may automatically trigger a massive selling either voluntarily or involuntarily, which will feed on itself and create a market collapse. It makes no difference whether there are any equity sharing in the down payments or not. Foreclosures will happen either way and hell will break loose either way. The equity sharing concept as practiced in those old methods were therefore naturally deemed useless.

For commercial real estate market, foreclosures usually immediately create a economic problem. For home ownership or residential real estate market, it will present not only an economic problem, but also a severe social problem as well. These problems have been clearly illustrated in many of the financial crisis events within the past few years.

Therefore, sharing equity to qualify for borrowing or to borrow even more will not help much economically and contribute almost nothing socially to home ownership for our economic society. Unfortunately these SEM (Shared Equity Mortgage or Modification), SAM (Shared Appreciation Mortgage or Modification) or factional interest home equity investment schemes are exactly what have been touted by many other practitioners, governments and academics alike until today. Those structures will not solve our country’s home financing and home ownership problems socially or economically.

Governments who set up policies using those ill-advised methods (e.g. the original HAMP proposal in 2008) have only destroyed people’s confidence in the equity sharing concept to solve the problems and let the mortgage foreclosure problems deteriorate further day by day.

Why is FARJHO different? The differentiating concepts created by the new FARJHO (Flexible And Reversible Joint Home Ownership) structure are explained here below again.

First, it corporatizes home ownership one home at a time so that it will create a familiar and convenient legal vehicle for other investors to share the equity of the home property with the home occupier who is also a co-owner of the property.

Second, it offers the real estate investors a chance to use leveraging to enhance investment returns through a new Borrow-Pool-Buy (BPB) concept over the conventional Pool-Borrow-Buy (PBP) concept used in equity sharing methods which has been practiced until today for both commercial property investments and most of the other equity sharing schemes or some other proposed factional interest home equity investment and financing schemes.

By using this new BPB method, it means that the factional or partial owners in a home, either the Joint Property Investors (JPIs) or the Aspiring Home Owners (AHOs) could all have a choice to borrow against their individual member interests in the FARJHO LLC structure so that they could pool the money to purchase and own the home property in cash together. The AHO who will be the sole home occupier will simply pay the legal entity property owner FARJHO LLC a market based monthly rent as a usual tenant of the property.

When home ownership and housing finance practice have been transformed to this FARJHO way, pretty soon there would not be home foreclosures any more. It is really as simple as that! For more details on how this new BPB home financing method under FARJHO could be done, please see some of the earlier blog posts on this issue below. Thanks.

https://peoplesally.wordpress.com/2011/07/04/0704-2011-confusion-on-various-equity-sharing-schemes-why-farjho-and-swaprent-are-more-social-innovations-than-simply-financial-innovations/

https://peoplesally.wordpress.com/2011/02/28/0228-2011-farjho-opportunity-for-gaining-political-credit-for-politicians-and-the-innovation-role-for-banks-credit-unions-or-other-mortgage-lenders/

https://peoplesally.wordpress.com/2011/02/27/02272011-farjho-and-the-corporatization-of-american-homes-yes-but-only-one-home-at-a-time-and-no-corporate-financing-necessary/