I was contacted this week by Ralph Liu, founder and chairman of California-based Advance e-Financial Technologies, Inc., whose company is described as an innovator in real estate and property derivatives since its inception in 2001. In a nutshell, Mr. Liu has formulated an economic concept, christened SwapRent (SM), a program designed to facilitate the realization of economic renting while keeping legal ownership for homeowners. In layperson’s terms, such a program would make feasible a homeowner’s ability to retain legal title on a property while reducing financial exposure in a downtrending real estate market by effectively relinquishing the financial interest in the property to an investor for a period of time, thus becoming a renter in effect. The investor, in turn, would gain from predicted market appreciation gains based on a neighborhood index model rather than the appraisal approach employed by lenders today.
Indeed, some may recognize structural similarities to either lease-to-own or reverse mortgage models. As this is new territory, beyond my area of expretise and thus not an endorsement, I leave it to readers to conduct due diligence. A good place to start is Swap Rent (SM), specifically comments by the press.
Following is a simplified, Five-bullet outline of the program and its proposed benefits to consumers provided courtesy of Mr. Liu.
“1. For those informed and educated homeowners to hedge the financial
value of the properties that they own by switching between owning and
renting economically only based on their views on what the overall real
estate market will do in the near future while keeping the legal ownership of
all their properties at all time.
2. Considering the relative cost of owning and renting, the less affluent
homeowners could decide to be economic renters or owners solely based
on how much monthly subsidy they could receive to afford legally owning
the properties while being partial or entire economic renters for a period of
time. This will increase the housing affordability for young first-time would-
be homeowners, low income working families and retired senior citizens.
3. Due to the alleviation of moral hazard associated with conventional
renting, SwapRent (SM) will improve the neighborhood quality of both the
public housing projects and the conventional apartment rental complexes. It
could thus reduce crimes and improve the overall well-being of the urban
environments anywhere in the world.
4. For both institutional and individual investors to become synthetic
“economic landlords” by simply receiving SwapRent (SM) payments and
paying out mortgage funding cost for a particular neighborhood or city.
They could establish such cross border reversible long property exposures
easily all over the world without worrying about the management of these
properties and incurring the normally high transactional cost and taxes.
5. For current apartment or house renters to establish an “anticipatory
hedge” position through receiving SwapRent (SM) payments based on a
particular city level property price index so that they can lock in today’s real
estate price levels for intended purchases of real estate properties in that
city in the future. They would not be priced out of the market if indeed real
estate prices rise sharply in the future.”