
Launch HN: Lofty AI (YC S19) – Real estate investment with alternative data - loftyai
Hi Hacker News Community,<p>My name is Jerry, and I’m one co-founders for Lofty AI (<a href="https:&#x2F;&#x2F;www.lofty.ai&#x2F;" rel="nofollow">https:&#x2F;&#x2F;www.lofty.ai&#x2F;</a>). We use
machine learning to help identify homes where values are likely to
appreciate, and we help home buyers buy them. People can partner up with us to buy a recommended property. If they do, we are willing to cover any potential losses on the property. In exchange, the buyer agrees to share some of the future profit on the home with us. The agreement lasts 3 years.<p>Before starting this company, my co-founder and I had tried to invest in homes. However, we quickly got tired of realtors telling us to make offers based on very little data. We wanted to figure out a way to buy affordable homes that had the highest growth potential via a data driven approach. We realized there was a wealth of new alternative data out there, which could be used to predict both neighborhood growth and individual property growth. This alternative data we envisioned ranged from the growth in the number of postings on social media about a specific dog breed, to the number of restaurants in an area serving a specific type of trendy food, to the average wait time for ride sharing apps, and the average maximum temperature an area can experience.<p>Our tech involves running clustering to identify trends and keywords from text based data (e.g.: social media photo tags, business reviews) that are associated with different categories of neighborhoods (for example: rich&#x2F;suburban&#x2F;static, middle-class&#x2F;urban&#x2F;growing). We then take these insights and feed them into a larger model with historical home prices, house level features, and an array of other numeric features (e.g. ride sharing wait times, new businesses) that predicts future home price on both an individual property and neighborhood level. With this trained model we can then predict future home prices based on these alternative data sources (as well a few traditional data sources). As we ingest more data going forward we are constantly retraining and reoptimizing our models. Along with successful backtesting we have been tracking our predictions to validate our models in production and have found that properties we had identified 12 months ago have beaten the market in appreciation by an average of 14 points (yay!).<p>Most young working professionals want to live in or near large metropolitan cities for the lifestyle and better jobs market. This has contributed to extremely high home prices for places like the bay area and many young professionals end up paying rent that is on par with a mortgage payment. However, instead of building equity in their own future through an investment, they are simply making their landlords richer.<p>We want to change this by giving people another option. They can now invest in a home and their capital can be protected should the investment flop. The trade off is that these homes tend to be located in areas not “currently” deemed to be a desirable neighborhood. In essence, we want to help inexperienced home buyers make smarter decisions, and we are willing to risk our own capital for that.
In the event of a downturn in the market we are hedging our exposure by buying deep out of the money options that track the real estate market. These hedges are also attached to each individual contract so even if we were to go out of business before the maturation of the agreement or before a downturn in the market your downside protection would still be alive and well! As a result, anything that’s above a 20% decline across the portfolio will be covered by the hedging instruments, so we only need to be able to guarantee the range between 0 to -20% using our own capital. To make sure we can abide by the guarantee, we know exactly how many contracts we can enter into, and we will not go above that threshold until we obtain more funding.<p>Sign up with us to receive a list of recommended properties that our models think will appreciate over the next 3 years. Make an offer on the property you like the most using any method you’d like. If you don’t have an agent you work with, we can recommend you one along with helping you get a mortgage. After you make an offer on a home, you enter into a contract with us. We agree to cover losses over the next 3 years and in exchange, you share some of the future upside with us.<p>Let us know if you have any questions or insights, and I’ll be happy to respond! Feel free to directly reach out to me at jerry@lofty.ai as well. We’d love to hear your feedback and suggestions!
======
onlyrealcuzzo
I'll start by saying that I assume you know much more about the market than
me, given that you've started this company and made it into YC.

If I read your post right -- the way your insurance works is:

I'm a home buyer. I think the housing market is frothy right now, but I want
to buy a home anyway. So I can use your insurance to protect myself in the
event the value of my house decreases in the future.

Your company is directly responsible for the first 20% decline. After that,
other companies are responsible for the rest. And even if you go out of
business, I'm still covered by those other companies.

Firstly, is that correct?

Secondly, if so -- what happens if you go out of business and my house goes
down exactly 20%? I assume that means I have no coverage.

Thirdly, who's insuring the houses after a 20% decline? And why should I have
any reason to believe they'd still be in business if the market collapses
20%+? The last time that happened, almost every insurance company and
investment bank went out of business.

Finally, how much does this cost as a percentage of the house's current value
yearly? Roughly...

It's an interesting idea. Despite the fact that most home buyers anticipate
house price appreciation to underperform historical averages (and a lot of
buyers actually think prices will go down) -- a lot of houses are being
bought. I think a lot of those people would want an option like this.

~~~
loftyai
Thanks for your question!

I believe my main post or the responses might have been unclear. If so, my
apologies.

But your understanding isn't correct. Other companies are not insuring your
downside. We are the only counter party you have.

The problem is if a recession happens, then a lot of our properties actually
decline in value. As a result, we might not be able to pay you back. So to
make sure we can pay you back we buy financial instruments on the open market,
kind of like buying a stock of apple for example. These instruments work in a
very interesting way. Their prices go up, if the real estate market goes down.
Their prices go down, if the real estate market goes up.

So, with these instruments. We can ensure that in the event of a recession, we
can still afford to pay you back, because we can sell the instruments for
higher prices than we originally paid for. We then use that profit to cover
the losses our customers experience.

The way this works out is that events that would cause large declines in the
property values are covered by these instruments. Which means, as a company,
we just need to pay specific attention to the potential losses between 0-20%
range. Here, we deposit the 20% value of the original purchase price into the
3rd party account.

In the event that our company stops operation. These hedging instruments don't
expire or disappear. They are bought at the beginning of our agreement with
our customer. As a result, these instruments will be passed off to our lawyers
along with the 3rd party account for them to maintain. This way, your loss
coverage will still be guaranteed even if we go out of business.

Is this more clear? If not, I can always elaborate :)

~~~
Bombthecat
He was talking about a recession. Which might happen. (since people feel like
it is getting closer)

If you know a stock which actually goes up in a recession, please let me know!

~~~
tryitnow
Buy put or sell calls on an asset that's highly correlated with the overall
economy. This is honestly the least controversial claim the OP is making.

~~~
onlyrealcuzzo
Correlations change. You never know if gold might tank along with assets in
the next recession. Or if yields will tank along with assets in the next
recession. What if there's just hyper inflation?

No one knows what's going to happen...

You can go with Dalio's claim that as long as you have 10 hedges that are
sufficiently un-correlated, your risk is incredibly low. But even that might
not hold up under future unknown conditions.

~~~
loftyai
You're absolutely right about the correlation changes. However, gold's
correlation to the general market was developed organically by human behavior
over time. That does often change during crisis.

However, options contracts are a form of derivatives, meaning they are
contracts financially engineered to hold a specific correlation. So, you can
build perfect hedges using options contracts, which is what they were
originally invented for. People just started betting on the markets with them,
which created all kinds of risks in the market.

~~~
bob_theslob646
There is no such thing as a perfect hedge. Delta hedging is not perfect and
cannot be done continually.

------
whoisjuan
Do you have any type of financial insurance to backup of your claim that you
will cover losses if the property sells for less? I'm not talking about having
the money available to cover the losses, but actually being around at all to
honor that claim.

What happens if I buy today and your company goes to hell in two years? How
can I trust this transaction with a horizon of 3 years without fully knowing
how are you going to perform as a company.

Of course, if you disappear and I don't have to honor the 20% it's a win for
me, but if I buy based on your data and after 3 years the property value is
way down and you're not around to honor your loss-covering promise then I'm
fucked. I bought a house because you told me it was going to appreciate, but
it didn't. Now what? Do you have a way to pay me back even if your company is
not around anymore?

There's something about the model that doesn't make sense to me.

~~~
loftyai
Great question! So, we actually maintain a 3rd party account that is only
allowed to invest in short-term US treasury notes.

We track all the properties in our portfolio daily. Any on paper depreciation
will result in us depositing funds into the 3rd party account. Whenever a
property price moves above the original purchase price on paper, we will
withdraw any previously deposited fund. This on-going process along with the
hedging instruments are what allows us to guarantee the downside protection.

As a final layer of protection, we know exactly what our on going exposure is,
so we know the maximum amount of contracts we can underwrite. We are very
strict on this number and will never move above it. So, even if our company
ceases operations, all of the downside protection will still be available to
our customers.

Keep in mind, we also know exactly what our on going

~~~
mayank
> So, even if our company ceases operations, all of the downside protection
> will still be available to our customers.

Can you expound on this a bit? If you go under, who would I have to go to get
paid? What legal guarantees would I have in place assuring me the payout? How
do I know that your underwriting scheme is sufficient for covering your
exposure?

~~~
loftyai
Per the operational parts of your question, it will be our lawyers who would
be maintaining the 3rd party account and making sure the money gets sent to
people who are owed the loss coverage.

In terms of our our underwriting process works. We do have clauses in our
contract that removes our liability for act of god events, civil strife, or
war. Barring these scenarios, the only other events that can move a property's
depreciation to more than 20% is a recession scenario, which the hedging
instruments would cover.

So, in reality, our exposure for every home is between 0 to -20%. So for every
home we underwrite, we just need to mark funds equal to 20% of the property
value.

Is this clear? If not, I'm happy to expand on it further?

------
Jemaclus
For years the simplest heuristic I can find for finding up-and-coming places
has been "Where is Starbucks opening new stores?" I assume Lofty's is much
more complicated than that, but I'd be curious to see what the overlap is
between the Starbucks Strategy (TM) and Lofty AI's.

I do have a few more questions though:

\- Also, are you focusing on primary residences, homes as investments (i.e.,
rentals)? Do you consider apartments, duplexes, or commercial real state?

\- Do you have an idea of how long one would have to own these homes for the
appreciation to appreciate in a significant enough way for it to be
profitable?

\- You mention "some of the future profit". How much is that? 1%, 5%, 10%,
50%?

~~~
loftyai
Great question! The Starbucks Strategy is actually well known in the industry.
Believe or not, large real estate developers and investors will often follow
the same signals. They also look for things like Trader Joe's or Whole Foods
opening.

Our algorithm is very similar in concept to this strategy. However, by the
time Starbucks or Trader Joe's opens in an area, it's often towards the middle
or late stages of a neighborhood's growth. We can find amenities that are even
earlier indicators than Starbucks. Think your one-off local coffee shop named
"Bob's coffee" or something similar.

We are focused on the appreciation potential of residential real estate, which
has single family houses, condos, and town homes. However, we have noticed
that in areas where home prices are growing, rents typically are growing as
well. So our customers are welcome to rent out the properties for cash-flow.

We do not have data on a lot of commercial properties, but we can still
underwrite the agreement on duplexes and smaller multifamily units.

It typically takes 3-5 years on average for neighborhoods to see the
exponential portion of their growth curve, so our agreement is for 3 years by
default.

Our share of the profit is 20% of the gross profit. So, if you had bought
something for 100,000 and you sold it for 200,000 in 3 years. Then, we would
get 20% of the gross profit ($100,000), which would be $20,000.

edit: made numbers in example more clear.

~~~
bluedevilzn
Is this share of the profit based on actual profit after sale or the valuation
after 3 years?

From my limited research, property flipping every few years isn't a great idea
because of how much is lost in the actual buying and selling process e.g.
realtor fees.

~~~
loftyai
Our customers have 2 options. They can choose to sell, at which point, the 20%
is based on gross profit realized.

Or they can choose to buy us out. At which point the 20% is based on the "on
paper appreciation" calculated by using the rate of change for the median home
price in their neighborhood.

If they use the latter option, they of course, will not have to pay the fees
associated with a sale.

We are also looking into whether we can partner with listing agents, who will
share some of the commission with us, which we will then refund back to our
customer to offset their fees.

------
SimianLogic2
Why did you decide on this business model (essentially downside insurance paid
for by equity if I'm understanding it right) over something simpler like, say,
subscription access to a newsletter?

What's to stop someone from signing up for the list and just buying a property
on their own? (i.e. What perks are you offering that make it worth doing the
deal through you? Negotiations? Acting as a buyer's agent?)

As a data point, I used to have a ruby script that would take a bunch of MLS
IDs and go pull a ton of facts from Zillow and a few other sources. I would
have my realtor set up a high-level search (i.e. SFH in these areas under
$500k) and then take their daily emails and run them through my script to
identify potentially "undervalued" properties. I still had to hand-check them
after, but it was a pretty useful second filter (the MLS search being the
first).

~~~
loftyai
Thanks for your question! We decided to do this model, because we originally
sold our predictions and analytics to larger investment funds, but we noticed
that when our predictions came true, we left so much money on the table. The
funds were making millions of dollars on one deal and they were never going to
give us any percentage of that.

It was also really hard to convince a lot of these people who were operating
on "gut feelings". In January of this year, we made the prediction that
Compton, LA was going to see an increase in growth. We told these bigger funds
and they literally laughed at us during the meeting. Fast forward to today,
and some of the properties in the micro-neighborhood we forecasted showed an
18% growth in price in just 7 months.

So we decided that consumers might find what we are building to be more
valuable, and they would be more open to sharing the profit with us if our
predictions came true.

Our added benefit is really finding neighborhoods that people overlook, but
have high growth potential. Realistically, without our platform, I would have
never known about the growth or be interested in Compton, LA either.

Right now, there is a paywall to view the listings. It's $100/month, but you
may cancel at any point. Additionally, if you end up signing a contract with
us, we refund you all the money you've paid up to that point. If people do not
do the contract with us, then they would also not be offered the downside
protection.

I love hearing about people's own unique technical method for finding
properties! Were you able to invest in any properties using your method?

~~~
SimianLogic2
I did. We were out-of-towners at the time, so I would use that to build a
strike list of 10-20 properties. We would fly in and do as many visits as we
could schedule in a weekend.

Currently at 8 doors (that SFH, a tri, a quad), but now that we live in the
area I typically just run one or two at a time in a spreadsheet instead of
cranking through 100 in one go.

I find the list much more interesting than the insurance (I'm a big boy who
can do my own risk evaluation). I only invest in one market, though (Atlanta),
so not sure I would pay $100 for a nationwide list.

How do your internal valuations compare to the Zestimates? Zillow's data is
better than nothing, but I know a lot of folks track their net worth through
things like Mint/Personal Capital who might be interested in a more accurate
daily/weekly/monthly valuation tool. I feel like that's how Zillow got their
initial users ("You can look up the price of any house!") and if you could
figure out a way to expose that data you might be able to get good leads out
of it.

~~~
loftyai
Totally understandable that $100/month may be steep for a nationwide list when
you would only want Atlanta. We do plan to add a cheaper tier where you can
select just one or a few cities.

As far as having a Zestimate like tool - most of our models have focused on
predicting future appreciation. That being said, our instantaneous pricing
tool often gives similar estimates to Zestimate but differs from Zestimates a
decent amount of the time. I know Zestimate reports having quite a high
accuracy but anecdotally it can be way off, especially when comparing the
Zestimate for a property to what it ends up being listed and sold for. Part of
that is i think is, as you mentioned, there data is better than nothing. We
have recently begun tracking our internal instantaneous pricing estimate VS
zestimates for properties before they go on the market and comparing who was
closer to the sale price so that will be interesting to see.

Appreciate the feedback though as we are looking for the best balance between
sharing insights and data and protecting it so as to generate the strongest
leads with the highest conversion rate.

~~~
jedberg
You should track your internal estimates against Redfin instead/also. They
tend to be more accurate, at least in the Bay Area.

~~~
loftyai
That's interesting, we'll take a look. Thanks for the suggestion!

------
ttcbj
This is the first time I have ever seen an early stage company include Saint
Louis in anything, so, thanks for that ;-).

That said, you say your market is:

"Lofty AI is best for people who are: 1. Thinking of buying their first home,
but are nervous about losing money. 2. Looking for higher returns than normal
by buying properties in an appreciating neighborhood early."

1\. I wonder if people who know they have to sell in the next three years, but
don't want to sell today (e.g. a work move) are also a target market. If I
know my job is going to move me in 2 years, I might like to use your service
to retain 80% of the upside, but insure against downside when I sell.

2\. I once read a book about real-estate investing, which said that the real
way you make money is to buy rental properties with poor cash flow, 'fixup'
the tenants to improve the cash flow, and then sell, repeatedly. I wonder if
your appreciation-potential-evaluation/downside-insurance model applied to
rental properties for sale, combined with coaching/tools for aspiring
landlords, might be attractive.

It seems like right now, you are primarily using the purchaser as a source of
capital, and other comments are saying "why don't you just raise the money
yourself?", but if you were also using the purchaser as more like a
franchisee, someone who is actively working to improve the cashflow of the
property by upgrading the tenants with your (automated) advice, that might
create a more interesting relationship where you have more room to add value
(its more complex to analyze multi-tenant rentals, its more complex to choose
high-potential landlord partners, etc).

Random thoughts. It's a very interesting idea, very original.

~~~
loftyai
Thanks for the feedback, you bring up some really interesting points.

1\. I think what you're saying (and please correct me if i'm wrong) is that we
could go after people who aren't about to buy a home but who already own a
home and may want to sell it in 2-3 years. That is actually something we
already have done and are open to doing more! We could certainly make it more
explicit on our website that this is an option.

2\. This is a really cool concept. As you have noted we aren't so much in the
business of encouraging people to optimize the cash flow on a home and
partnering with them on that, but this is a common way to make money of real
estate and is certainly something we could branch out into.

This would complement our goal of not having to just become a fund and help
solve real pain points people have in purchasing homes really well.

Again, really appreciate this feedback - the phrasing sparked some really cool
insight and will definitely think about this more going forward.

------
tryitnow
Do you have any customer testimonials? It would be good to link to them.

This is definitely something I would never consider doing unless I've heard
other people doing it, I would never want to be the guinea pig here.

And honestly, if I am financially clever enough to understand your value
proposition then I'm probably financially clever enough enough to buy some
downside protection on general real estate assets.

The most interesting value proposition here is the ability to predict future
home prices, but if you could really do that you would be working for one of
the massive real estate funds, for the same reason that someone who is really
good at picking stocks will work for a hedge fund (and eventually create their
own), that person isn't going to decide to give investment advice to a
gazillion pipsqueak investors or manage the accounts of a bunch of little
investors, even if they can easily automate it.

In other words, the ability to predict asset prices is something that it makes
sense to keep as private as possible, not something to share with the masses.

~~~
loftyai
Customer testimonials is a great idea! Will add those to our site when we get
a minute to do so.

As you said, they would probably go along way towards providing some
additional comfort to any one who has some interest but is cautious about
moving forward.

The questions you raise regarding our business model are good ones. As
mentioned elsewhere in the comments, a fund is something that would be
interesting but that we just don't have the capital for at the moment.
Furthermore, our initial motivation for creating Lofty was to address the pain
point of people wanting to buy a home but being cautious about the risk. As
such a pivot to a fund, while similar in nature (and perhaps simpler in some
ways), would be a pivot from addressing a real pain point we see in the market
to just becoming another real estate fund and is in part why we are hesitant
to do so, on top of the higher capital requirements.

Appreciate the feedback!

------
eaenki
Since your model consistently beats the market and you can hedge at city
level, Wouldn’t you be better off just raising money for an hedge fund that
goes long and short with some leverage?

It’s a cool idea anyway, good luck

~~~
loftyai
It's certainly something we have considered.

One issue is the capital raise. On top of that we really wanted to address the
specific pain point of people wanting to buy a home but who cannot afford
making a bad purchase. As such a pivot to a fund model would be a pivot from
our initial motivation in starting Lofty. Nonetheless, it's an interesting
idea.

Appreciate the feedback!

------
kevinguh
You mention that you hedge your exposure to market downturns through deep OOTM
options -- would it be safe to interpret this as your company taking out OOTM
puts on various REITs/ETFs? If so, I'm wondering about a couple things:

1\. Do you hedge on REITs/ETFs with a local presence in the areas your
properties are located in? If so, is there any liquidation risk of the
REIT/ETF in the event of a major downturn that could force an early exit from
your hedge position and leave you exposed to further decline? Also, how would
you handle rebalancing/constructing new hedges when you add investment
properties in a new area?

2\. If you hedge on broader diversified REITs/ETFs, is it a plausible concern
that your investment properties can be hit by a localized recession that
leaves other parts of the broader real estate market unaffected, thus leaving
your hedge unable to recoup the losses?

~~~
loftyai
Yes, your interpretation is correct!

1\. we hedge on both broader market REITs/ETFs as well as localized ones,
depending on how many contracts we have in the local market.

2\. Because we hedge on both, the probability of this is very low. Since a
more granular hedge is an imperfect hedge due to the nature of these
REITs/ETFs, it might not cover 100% of the localized recession. However, it
should cover a large portion of it. So, our company will be on the hook for
that remainder percentage.

We can cover it in 2 ways. Number 1, just use our own capital. Number 2, the
profitable contracts in other areas not hit by recessions should be able to
offset the ones hit by the localized recession.

------
josephpmay
Against my better judgment, I'm gonna comment that I hate this.

This is certainly a good business/investment opportunity. If your algorithms
are any good you'll make a lot of money, and you'll help your customers make
money.

My problem with Lofty is that it is bad for society.

Fundamentally, this is gentrification-as-a-service. You're driving additional
demand to neighborhoods at inflection points, and if it works well it's
definitely going to accelerate displacement. It is true that Blackrock et al
already do this and likely have similar in-house algorithms, but this will
widen the market and make things worse. I'm not completely against
gentrification, especially when there's development that increases market
supply- and when done right that can actually decrease displacement. (an
example you're probably familiar with is the USC Village. Despite the
criticism it gets, it removed thousands of student renters from the South
Central LA market which likely resulted in downward pressure on prices) But
housing speculation like this drives up prices and only hurts poor and
minority communities.

To Jerry and Max: did you consider the ethical implications when deciding to
start this? I completely see the angle that you're democratizing access to an
investment asset that currently mainly benefits wealthy institutional
investors. I imagine, though, that a lot of people are going to see your team
of young almost-all-white males and paint you as everything that's wrong with
tech, and you should consider to what degree that assumption represents the
truth.

~~~
loftyai
You're absolutely right about this, and it is something we have and are
considering everyday. I will be honest and say, at the moment, we do not have
a perfect solution yet.

One of the things we looked into before starting the company was a paper that
mentioned the Portland project, which showed that gentrification and
displacement are not always synonymous. There, the neighborhood was completely
gentrified, but the locals benefited greatly, because many of their home
prices increased in value, and many owned local businesses that benefited from
the influx with affluent people.

One of our goals is to see how we can use our data and business to make
gentrification more like the Portland project. One idea has been to provide
our data and analytics to city governments for free, so they can act faster in
regards to setting up affordable housing.

In the meantime, our customers will be buying the homes, so someone has to act
as the seller. If a local resident was the owner of the property, then
hopefully, they benefit from the sale (we recommend our customers offer the
"listing price" and not negotiate at all). If they are the renter, then
current California laws should provide them a lot of protection.

It's not perfect of course, but we are looking for better alternatives.

~~~
erichurkman
> There, the neighborhood was completely gentrified, but the locals benefited
> greatly, because many of their home prices increased in value

But they lose mobility as their family needs change. New kids and need a
larger home? You can sell yours, but the differential between a 2br and 4br is
now outside your price range due to gentrified prices.

Also, it depends heavily on tax laws. Long time California home owners are
protected from tax increases under Proposition 13, but many localities lack
these protections, so ultimately higher taxes price you out.

~~~
loftyai
You have a very valid point here. Our hope is that we can help them find new
homes as well. Most of the homes selected by our algorithm tend to be very
affordable, so a larger segment of the market can take advantage of
appreciating home price. The goal is to make sure that not only existing
wealthy people can benefit from rising home values.

------
syntaxing
This is a super interesting idea, and I have been wondering if there was a
service like this. Is there something similar to this that recommends the
house based on your stage of life? For instance, if you have a kid and your
income is X amount, this is probably your best area or even if I wanted to
retire with a set standard of living and maybe environment. This paired with
home value appreciation that you provide would be awesome!

~~~
loftyai
Love this suggestion! We have been toying with the best way to personalize the
properties shown to each individual user. Right now it's just by city, max
price and property type.

We also have added things like "near nightlife", "near trendy coffee spots",
"near schools" in an attempt to capture what you have suggested here - albeit
in a less efficient manner.

A "stage of life" questionnaire would be a great way to encapsulate all those
above and more in an easy to interface with UI for the user. Thank you!!

~~~
syntaxing
Do you have a way to subscribe to updates? Would love to try out your service
when you implement this!

------
jpn
Are you hedging with REIT options? Or home builders?

Are you able to hedge specific city risk?

~~~
loftyai
Yes, we actually hedge with both depending on the area the property is located
in. I hope you don't mind me not mentioning the specific products, since we
don't want people in the market to bid up our hedging instruments and make
them more expensive for us to buy.

We can look into the portfolio for a lot of the REITs as well as the exposure
certain builders have. Based on that, we can hedge specific states and cities
very well. It's not a perfect hedge, but it will definitely reflect the local
real estate market.

------
jedberg
Pretty cool concept! You're basically letting people buy into your real estate
hedge fund. :)

Something I didn't see addressed in the FAQ: Do I get to include closing costs
and agent fees in my cost basis before determining your 20% cut?

If not I can see a case where appreciation was minimal and I actually lose
money one you get your cut because those fees eat up all the appreciation.

~~~
loftyai
Thanks for the comment, but at the moment we do not cover closing costs or
agent fees.

In the event that there is appreciation, but is minimal. We recommend that our
client buys us out instead of selling the property. This way, they won't have
to deal with the transactional costs, and with the low appreciation, the 20%
cut will be very low, so it shouldn't be hard to come out of pocket for that.

As I've mentioned in some of the other replies, we'd love to keep innovating
in this space and help reduce these fees, so our clients no longer have to
deal with them.

Open Door is one of the companies doing a lot of cool stuff in this space, but
we think there can be a lot of room for improvement. Statistically, a home is
roughly 64% of the average American's total lifetime net worth, and we don't
think people should have to pay so much fees on top of handling their life's
most valuable physical asset.

------
rajacombinator
It’s an odd business model. I think if you had any faith in your predictive
ability you would just raise and run the fund yourself so as not to leave
money on the table. This sounds like all the “crypto trading as a service”
scams that have come up over the past few years. YC should avoid getting
involved in trading businesses they don’t understand. Just my 2c.

~~~
loftyai
This is totally understandable reaction to the business model. We do put our
money where out mouth is but nonetheless it does beg the question of why we
don't just do the investments ourselves.

One major issue is capital. But beyond that we also see a saw a market need
for a product like this when trying to make home purchase decisions in
personal life prior to creating Lofty. And that was the market and problem we
wanted to address with this company - not just to be a big fund that buys real
estate en masse and profits from it - but to help people who can't afford to
make a bad home investment do so more comfortably.

------
deepnotderp
Have you considered measuring RF activity in areas to approximate the number
of people? I'd also imagine that a higher ratio of telecom bands as compared
to wifi bands would indicate more bias visitors and therefore potentially more
future growth.

~~~
loftyai
This is a great idea! We do not currently do this, but we do take into
consideration the availability of gigabit internet as well as overall
connection speeds for different neighborhoods.

This has actually proven to be statistically significant for a large number of
locations across the united states.

~~~
deepnotderp
Huh interesting, that does make sense

------
Fluent_Startup
Very cool. I just forwarded to a friend looking to buy. As a real estate
investor, I can see why this would benefit a lot of people. I personally buy
from a handful of turnkey operators (Midsouth Homebuyers has a 3 month vacancy
guarantee), but may consider this in the future.

------
alephnan
> Before starting this company, my co-founder and I had tried to invest in
> homes.

Were you guys successful?

~~~
loftyai
Haha not at all, since we never ended up investing. We were inexperienced and
didn't really know what to look for. Homes that required extensive rehab
seemed too daunting and a turnkey property in a nice neighborhood was too
expensive.

(This will sound like we are very lazy...) We essentially wanted to buy an
affordable home that would just grow in price over the next few years without
us doing anything. At the time, there were no tools to help us find homes like
this, which ultimately led us to starting this company.

~~~
cestep
This makes total sense. I've had 2 rental properties, and it sounds like you
guys were looking for the same thing I was. Very interesting, I'm glad to see
somebody tackling this! Why is the deal for 3 years? I would anticipate that
your time horizon for a good return is much longer, given that the markets you
are looking at are more up and coming.

~~~
loftyai
Thanks for your interest! The ideal timeline is actually 5 years if we want to
see the majority of the growth. However, since we won't be making any revenue
from the agreement until at the end of the term, 5 years is too long for a
startup to go without seeing revenue. So, it's mostly a way where we can see
returns sooner, which is more attractive for investors.

On the plus side, our customers can choose to buy us out after 3 years, and
see 2 more years of growth after, and they wouldn't have to share that profit
with anyone.

------
rog211
Do you use all public data like census, BLS etc. or do you have paid data as
well?

~~~
loftyai
We do not use census data, because they are extremely outdated. It's part of
the reason we can make accurate predictions before other companies can, since
they do look at census data.

We use alternative data, which has recently become popular in the finance
industry. For example, if you ask executives at a big company what their
profit outlook is, they will always be optimistic, otherwise, their stock
might decline and they may panic the market.

If you waited until the quarterly announcement, then you would be finding out
at the same time as everyone else, and it's delayed information.

However, some people have found that you can more accurately predict a
company's outlook on their quarterly performance by monitoring job boards and
see how many open positions the company is hiring for. This allows people to
gain insight and act before the rest of the market catches on.

We use the same approach but for real estate. For example, if you monitor the
number of french bull dogs in a neighborhood, you can accurate predict median
income values for that neighborhood before any official statistics. This is
because those dogs are very expensive, so someone willing and able to spend a
few thousand dollars on a pet tend to have a higher economic background.

We do use some paid sources such as satellite imagery and some data sources
require you to pay for their api like our weather data vendor.

~~~
rog211
Thx for the response. We are trying to use data to help understand price
movements in my own properties and I was trying to use ACS5 data, but when you
get into obtaining access to tax record data it can get expensive quickly. Are
you guys using any tax record data to obtain housing prices or ACS5 to get
median income?

~~~
loftyai
Yeah data is always a big headache haha, so I feel your pain.

We use MLS data to obtain housing prices historically. We don't use government
data for median income, instead, we estimate it directly by tracking social
media posts from the neighborhood that are public.

We then run image analysis on them to detect features like the types of dogs
people have, types of cars, and other stuff. It's not 100% accurate for sure,
but it's given us a pretty good understanding of the median income for
neighborhoods, and the data refreshes in real time too :)

~~~
rog211
Very cool thanks for the insights! To run you model you must have some
baseline data to be able to train against median income. How do you do that?

------
mayank
Are there any case studies you'd like to share, either here or on your site,
or any other validation of your methodology? At the moment, it looks a bit
like a "hot stock picks" newsletter.

~~~
loftyai
We do have case studies, but they are bad in the case of presentation. We are
a small team so when we decided to keep our analytics internal facing, we
didn't spend anytime producing marketing materials or prospectuses.

So, most of the case studies are loss values printed onto our engineer's
console or .png graphs showing our walk forward predictions outputted from our
engineer's notebook.

If you'd like I can dig through our slack channel to find some stuff for you.
I'll check back in later to see If I can find something more presentable as
well.

------
RosanaAnaDana
Hey, this seems pretty cool. What are your thoughts on landscaping/ outdoor
water use?

If that seems interesting to you and your team, you should hit me up.

------
meerab
What is role of Real estate agent in your business model? Why would a buyer be
willing to shell another 3% for a Buyers Agent?

~~~
loftyai
This might not be the case everywhere in the country, but typically, the
seller is responsible for the agent fees. This means that if we recommend an
agent for our customer, who is the buyer, that agent is actually paid for by
the seller.

We have the relationship, because we do have customers who are very
inexperienced and this would be their first purchase. So, a lot of them still
want to have to ability to talk to an agent and ask questions about the home
buying process.

~~~
omarchowdhury
Is it possible to recommend a real estate agent to you?

~~~
loftyai
Sure! We are always happy to add to our list of preferred agents that we
recommend to customers who are unsure of which agent to go with.

