
Fractionalizing Home Equity - simonebrunozzi
https://avc.com/2019/09/fractionalizing-home-equity/
======
simonebrunozzi
My feeling about this is that there's a significant risk of predatory
behavior, hard for individual homeowners to protect themselves from an
aggressive company.

I don't personally know the Patch Homes guys, and I hope they'll behave
ethically.

------
ThrustVectoring
This is a pretty terrible deal for the homeowner. They're selling a call
option that is $X in-the-money. This is worth that $X, plus a premium for the
optionality involved. Then there's the counterparty risk, where you're
obligated to a variable lump-sum expense in ten years at a valuation under the
control of the entity you've contracted with (and based on the initial
valuation, also under that control).

------
segmondy
So who gets to hold the title? The home owner or does it change hand when they
extract some equity? If not the owner, how do they ensure the get their cut?
liens? How do they make sure the home owner doesn't extract equity multiple
times from different groups? What if a life changing event happens that
changes the plan of the owner from wanting to sell on the agreed date and they
want to stay for a few more years? Will they be forced to sell? What if the
market tanks and the house is underwater? Too many ways this can go kaput.
IMO, keep things simply stupid. Don't mess with your home equity. It's not an
ATM.

~~~
zelly
Apparently it's a call option on x% of the equity of your house expiring in 10
years. You are short 1 call contract but receive the premium upfront. If you
sell your house before 10 years, you have to buy back the call option from
Patch the company (more or less than you received depending on how the value
changed).

Say you use Patch for your 1MM house, then sell it for 1.5MM 8 years later.
You will be on the hook for 23%[1] or $345k.

As a homeowner, you're not really selling any equity, just a derivative based
on your house's equity. If you don't sell by 10 years, I assume Patch the
company can foreclose on your house if you can't deliver in cash 23% of your
house's appraised value (how else would this be investable otherwise?).

The only way to be short is to own a house. But once these contracts are
securitized, it's one derivative away from becoming shortable without owning
the underlying (house). I'm sure investors taking the other side of these
contracts will want insurance. Then you're back to synthetic CDOs.

I really hope this doesn't take off.

[1] [https://www.patchhomes.com/how-patch-
works](https://www.patchhomes.com/how-patch-works)

------
Havoc
I like the concept...but think I'd rather have a 1:1 title than financial
engineering shenanigans tbh.

------
Ancalagon
Interesting concept. I'm curious if it would happen for other assets in the
long run (cars, boats, etc.) Financing has seeped its way into everything.

------
zelly
wasn't converting Americans' homes into spooky financial instruments one of
the big reasons for the collapse?

~~~
spurdoman77
This doesnt sound spooky to me, you have to own the housw before you can sell
the upside option. Meaning you already have paid your house loan. Very niche
product, mainly for old people.

~~~
joezydeco
FTA: _" Patch even covered three months of an owner’s mortgage during a
liquidity crunch for his small business_"

That doesn't sound paid-off to me.

------
m463
How does this compare to a home equity loan?

~~~
zelly
A traditional home equity loan only allows the lender to receive at maximum
the principal + interest.

This thing allows the "lender" to receive an unlimited profit because the
lender receives a percentage of the house's value regardless of how high it
goes.

------
033803throwaway
> What Patch offers instead is to take a piece of your home equity (currently
> limited to $250k maximum) and sell the upside on it to a investment fund.

Sometimes I can't help but feel that we deserve what's coming.

~~~
spurdoman77
What's wrong with something like that? Ok, selling the upside might be stupid,
but it also might make sense in some situations. I dont think this product
will be wildly succesful and change a lot of things, just a niche thing.

