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Point – rethinking owner-occupied residential real estate (a16z.com)
50 points by z0a on Sept 14, 2016 | hide | past | web | favorite | 59 comments

"Please also note that Point will share in any increase in property value due to remodeling changes you might make."

And they don't contribute to any property maintenance costs.

Nice. So they get to take part in full asset appreciation without having to pay to maintain the asset.

And you're eating a chunk is the risk since you're the first one to lose money!

So if prices go up, you lose and if prices go down you also lose!

20% of appreciation for 10% of assets [0]. Seems like decent leverage on your risk.

From the point of view of a prospective homebuyer, at first this seems attractive as an avenue toward mortgage reduction. However, as you point out, it's hard to identify where this service adds any value to the asset. I fear that it ultimately results in another large pool of money pumping up the demand side at the expense of new buyers.

[0] https://point.com/calculator

If this catches on, the biggest risk I see is that Point (and others appropriating this model) will artificially inflate home values while tremendously negating potential upside for any buyers who buy with Point.

A home which might ordinarily sell for 400 might now sell for 480 because sellers can expect homebuyers to Point their way into affording more home, so might as well charge more for that home.

I don't see this ending well for anybody long-term except for buyers and investors who buy into markets before Point et al. catch on.

What's the expression? "It's expensive to be poor," I think? This seems like a perfect example. Buyers, especially buyers with less capital to risk, trade some immediate cost for a decent loss of upside and a decent gain of downside. Except because quite a few of these less-advantaged buyers could probably have afforded to eat the cost they sold to Point, sellers realize they can charge more to still make that money back from the buyers who otherwise could've put that money to better use.

Good lord, the more this stews in my head, the more this entire pattern seems like a massive disaster waiting to happen.

Indeed. That description mirrors what seems to happen with subsidized drug costs due to everyone having health insurance (speaking of the US solely).

Heh, I knew this pattern had emerged elsewhere but I was struggling to place my finger on it. Subsidized drugs are perfect analogs here purely because of profit potential. Subsidized food I don't think is as directly comparable for a variety of market reasons, but subsidized drugs are a harbinger of what's to come with Point.

That's what mortgages and, really, all loans do. It's why wealth trickles up. The pattern you've recognized is a popular criticism of usury and capitalism in general.

This is great. So Point can identify up and coming areas of the country, make a few investments and then have a lobbying arm to do everything they can to ensure the property values increase. So instead of NIMBY we'll also have NIMIBY, Not In My Investments Back Yard.

We already have too much of it. People buy houses close to municipal airports because the noise floor makes them cheap, then they lobby to have the airport closed because it's too noisy (you bloody well knew about that!), and enjoy a massive ROI when the houses are suddenly worth much more once the airport is gone.

You wouldn't happen to live in Santa Monica, would you? That's exactly what we're seeing around here. I drive by the airport on my way home and see all the signs complaining about the noise and all I can think is, "then why did you buy there? It's not like it's a secret!"

I've dealt with that in Düsseldorf and Graz, mainly.

It's an international problem.

I actually have a lot of trouble finding cheap houses near annoyances. Sellers just don't seem to care.

I looked at a house 20 feet from a busy train track and no discount from identical houses a block away.

Another one by some kind of firehouse air raid siren and again no discount.

Agreed. Like everybody else obsessed with making housing even more expensive, they're going to be doing pretty much the exact opposite of helping.

Not to mention that you have another avenue on being strong-armed out of making a successful purchase as an owner-occupied. Trying to beat developers in an up-and-coming neighborhood is already a nightmare.

Aren't people already doing this with REITs?

Sort of. REITs typically buy tranches of real estate. They might own entire blocks or office developments or they might own parts of those properties. These deals are typically at least seven figures.

More recently REITs have begun buying up multi families in cities that have historically been owner occupied (typically by immigrant and other marginalized people).

You can see the direction they are moving. Point has done the math and concluded buying single family houses and condos is too risky as a landlord but buying a share of one with generous terms isn't.

Ultimately these shares themselves will be tranched and packaged as CDOs that the big REITs can buy, Point being the facilitator.

I've yet to find a reit that simply holds property (or holds and rents)

They all seem to have leveraged loans that make them sensitive to interest rates.

>There are few asset classes that have outperformed super-prime real estate in the last 60 years. Consider that the median home in Palo Alto sold for less than $20,000 in 1956, versus $2.5 million today — an appreciation rate of 12,500%. Compare that to an approximate 5000% return for the S&P 500 over the same period (much higher with dividend reinvestment, but you’d need to pay taxes on said dividends, making this calculation challenging).

Normally when you're comparing asset classes you don't compare the average of one class to the absolute best possible case in the other. The last fifteen years have been, IMO, a bubble-fueled aberration, and places like Palo Alto are ground zero for that bubble. I'll bet the S&P 500 compares much more favorably to average real estate appreciation over the same time period. Also, why the 60 year time frame, as opposed to, say, 50 or 100?

If the idea is to put people in houses we should do what the Koreans do. They have a contract type called "jeonse", or "key money". It's kind of an intermediate between renting and owning - essentially you give the owner a large lump sum (but not enough to buy the property) for two years. You don't pay rent, and you get all your money back at the end of the contract.

You benefit by getting a place to live without paying rent. The owner benefits by having the use of your money for two years (which he may be using, along with his own money, to buy the place).

It's easier to go rent-->jeonse-->buy than rent-->buy. I'm not really sure why we don't have something like this in the US already, particularly when you can't get a decent return on your savings.

Picking Palo Alto is some extreme cherry-picking there. I assume the way an investor in 1956 would have known to buy there is the proximity of Stanford. What type of return would you get if you did the same thing in Berkeley or near USC in Los Angeles?

In the long term, I think housing should appreciate like inflation, otherwise people are quickly priced out of owning a home. Granted, this is what we are somewhat seeing in Palo Alto, but this is probably a step function due to changing conditions in the area over that time, such as the creation of Silicon Valley. Also, just because the _median_ home price increases that much does not mean an individual home's price increased that much. Again this could be changing conditions in the area.

Not sure jeonse would work in low interest times. I could rent out my $200k condo for $1,000 per month, but making $12k per year on the jeonse (assuming it is 50%, $100k) seems way too optimistic.

Presumably jeonse prices would move like bond prices--when interest rates go down, their prices go up, and vice versa.

Are jeonse-s traded somewhere ? I'm missing your point.

You can get a Home Equity Line of Credit for around 3%, so it's just not worth it to use jeonse. Compare these:

1. I get $100k jeonse for 2 years for my condo that is worth $200k. 2. I rent out my condo for $1,000/month, and take out a $100k HELOC for 3%. So every year I pay $3k interest and have $12k rental income, $9k win for me.

Clearly #2 is the superior option.

A better comparison would be REITs to the S&P500. This comparison ignores financing, maintenance, taxes, repairs, and insurance costs of owning property.

Interesting analysis. I've thought about this from a tax, interest rate, and transactional approach.

Although we often think of landlords and renters in an adversarial way, they might be able to work out a deal that is better for everyone than selling and transferring ownership to the new residents, especially in California.

Think about an an heir to a house in palo alto, a house that her parents purchased in 1970. She doesn't really want to live in it, and is deciding if she should rent it out or sell.

Let's also say that her parents were wise about refinancing and did so when rates were very low. Because prop 13 preserves the low taxes through inheritance, her taxes are extremely low, and would skyrocket if she sells. Furthermore, let's say interest rates have gone up, so whoever takes out the new mortgage will pay a higher rate. Alternatively, if rates are low, she can most likely refinance and pull some money out. If she's smart about this, she can remain cash flow positive and still have a large chunk of money without selling.

In some ways, it just doesn't make sense to sell. It might make sense, at this point, for people who own property to become permanent landlords, and for the vast majority of tenants to be renters. This might even be better for renters, since the overall cost of housing would be lower due to overall lighter taxes and interest rates.

Interestingly, that hasn't happened, so there is clearly a strong motivation to not be a landlord and/or to be an owner rather than a renter. The income tax break could be a big factor here as well - perhaps that exceeds the value of the property tax break?

> It might make sense, at this point, for people who own property to become permanent landlords, and for the vast majority of tenants to be renters.

This is exactly how prop13 distorts the market.

> This might even be better for renters, since the overall cost of housing would be lower due to overall lighter taxes and interest rates.

Until they want to buy. Or until income taxes / sales taxes are raised to counteract falling property taxes.

While I think this is a good idea and people who want to buy small homes may use it the math is pretty hilarious.

Individuals want to be levered as much as they can to the house they buy (I don't have to mark this to market daily), the main preventive cost of the 20% down, Point doesn't reduce the capital required for that, it just makes the mortgage smaller.

Why would I want a lower tax interest write off, still have to put up the same amount of initial capital, pay for all maintenance etc, but only down 66% of an asset?

Shared ownership schemes are hardly new: https://www.helptobuy.gov.uk/shared-ownership/

So I'm not sure what the magic is supposed to be. Is it that they get a larger share of the capital appreciation upside than would be implied by their ownership stake? Also note that this relies on the (normally reliable) assumption that real estate will forever increase in value.

A way for investors to invest in real estate while _lowering_ the overall home ownership rate? A way for short-sighted home buyers to trade a portion of their equity for an extra bedroom and a pool? A way for corporations to reap the main benefit of owning real property while ducking almost all of the responsibility?

This seems both horrifying and inexorable.

Inexorable is absolutely the right word here. Give people a way to live beyond their means and they will take it pretty much every time.

I'm not an expert in finance, but isn't this simply a CDO (collateralized debt obligation) of real estate assets?? In other words Point is simply a CDO fund? The minor differences are that the home owner ("partial home owner"?) assumes the upfront "risk" with the initial down payment, and the homeowner happens to be a few degrees closer to the "owner" of the CDO??? The only innovation that I see - and really its not much at all - is that there are fewer degrees/layers between homeowner and CDO-owner (holder of the fund).

Agreed. Can anyone see how this is a technology play? I get that a16z is looking for returns but is this really the space for them to "add value"? We haven't seen any good ideas lately and we can park a lot of cash here?

I'm seeing a lot of commentary here that doesn't seem to reflect what this is: preferred equity for infrastructure, sometimes called mezz (mezzanine), applied to the residential real estate market.

I think this is super interesting! This type of financing is really common in larger real estate & project financing deals: one speaks of the "capital stack", which can include senior debt, junior debt, preferred equity, and common equity.

I think that the reason this hasn't been done before is because of the complications of finding, diligencing and funding individual homeowners. I definitely agree with the OP that this will be an attractive investment for institutional investors, but getting dealflow from the mortgage industry will be extremely capital intensive... I would expect both a lot of direct retail marketing expenses, as well as pretty rich commissions to real estate agent networks and mortgage brokers to kick home buyers their way. Really cool idea though!!

As other commenters have mentioned, this can only exacerbate any housing bubble, which is true but kind of beside the point. Yes, any reduction in cost of capital will eventually inflate asset prices, but is that a reason to stop offering mortgages, car loans, etc?

> Yes, any reduction in cost of capital will eventually inflate asset prices, but is that a reason to stop offering mortgages, car loans, etc?

Dear god, definitely yes in the case of Point. Are we trying to price out a massive population of disadvantaged people? Mortgages made homes attainable, but there's a reason we enforce minimum down payments etc.: aside from mitigating risks to lenders, it's also to mitigate price inflation.

This is an entirely new product designed to help people with the capability to invest to do so on the backs of those who don't. If we're readily acknowledging the potential, ney, inevitability of price inflation for these assets, we're also acknowledging that there is absolutely zero benefit for people who might consider using Point to aid in lowering their upfront homebuying costs. The net result of this is that not only do disadvantaged homebuyers pay as much as they would pay before Point but for less home, they substantially lose out on upside as a result. All of this is an inevitability if the model proposed by Point catches on.

This has exactly zero long-term upside for tons of people who don't make substantial discretionary income.

The distinction you draw is flawed. The difference between equity and debt financing for any investment - whether it's buying a car, a house, or starting a startup - is really a qualitative one, and neither good nor bad.

Residential mortgages made houses affordable, but they also directly led to the historic inflation in housing prices that has happened over the last half-century. The vast quantities of capital that were unlocked into the residential mortgage market by mortgage-backed securities had exactly the same dualistic effect: they made it easier for middle- and low-income families to buy homes, and eventually inflated the market to dangerous degrees.

Providing senior equity, or junior debt, to finance these transactions will do exactly the same thing. It will make it easier in the short term to buy a house. It will mean that you can finance your house purchase without locking yourself into excessively high monthly payments. And, if successful, it will eventually mean that so many more people can afford houses that the prices will rise in the future.

This is just like how a judicious combination of venture capital and venture debt helps you finance your startup for a minimum of dilution, without excessively high monthly debt payments, but the availability of capital means that rent in SF is inflated.

Yes, Point and its financiers will get rich on this, as did the first mortgage-backed securities dealers and the institutional investors that backed them. But so did the people who bought houses in the 90s with suddenly flush access to mortgage financing.

You say my position is flawed, but I don't exactly see how your explanation differs from my understanding.

As far as I can tell, we both see the same outcome, whereas you don't see how the loss of upside to disadvantaged (read: the vast majority of) buyers shifts wealth upstream while endangering the economy in the event of a downturn when homeowners will find themselves unable to fall back on appreciated equity in their homes.

There are already legal structures in place in every state in the US that define in excruciating detail the modalities of multi-owner real property. Many of these are used as vehicles to pass wealth on to heirs tax free and engage in a variety of other living arrangements (condominiums).

All this seems to me to be is a sophisticated company attempting to pass off as new and innovative to the unsophisticated public something that already exists.

This might be a cool concept for somebody who knows they will stay and want to rent out one place for at least 3 - 5 years.

Even then, I'm not so sure. Because when renting, yes, you pay a premium, but if the house needs repairs, it's not on you. If something happens, you walk away free and clear, etc. For a "lower monthly payment", you are taking on a much larger amount of risk that is Home Ownership and giving away the upside of that risk to someone else who has no obligations for maintenance/home improvements.

This isn't "Reinventing Home Financing", it's buying a home with somebody else who isn't responsible for most of the costs of home ownership yet gets all the benefit. If you can only put 10% down on a home and are that desperate to have a 80% LTV mortgage, sure, this would do it. But there are MANY lenders who do a conventional home mortgage with 5% down. Using Point isn't worth the savings on the Mortgage Insurance. Maybe if you bought new construction, maybe. I'd still say on new construction you're better off taking the chance and not selling the equity in your home.

> If you can only put 10% down on a home and are that desperate to have a 80% LTV mortgage, sure, this would do it.

They don't even help with down payments. Minimum buyer down is 20%. Better to go with a conventional lender.

Do you feel that home ownership should be a money-making investment?

I believe in ownership of assets that appreciate in value. I would not buy a home, as an occupant in that home, to make money (buying an investment property is completely different). In a way, a home is a savings account. You always need a place to live. When you sell your home, typically you will put that money into your next home.

However, today, do you really ever own your home? Even if you owned it outright, you're still paying easily 1.5-3% of its value a year in taxes. This is a completely different argument of course.

It is if you don't live in it and rent it out instead at a rate higher than the expenses.

Or we could eliminate the mortgage deduction, adopt Vancouver's foreign investment restrictions and abolish California's prop13 and its equivalent in other states.

But of course those acts actually would reduce housing prices.

Before you go through Point's laborious quote process, check this list of requirements (which should be front and center, IMO, but whatever):


(They want minimum 20% down, for example.)

Suggestion to Point: Allow potential customers to fiddle with quote parameters without redoing the entire form. And make it clear when a parameter will immediately disqualify them.

Shared ownership is common in the UK, especially in London. This looks like a way to get in via refinance. what would be interesting is a startup that provides down payment assistance.

"There’s no such thing as a free lunch, and in this case Point’s lunch comes in the form of capital appreciation..."

I am fascinated by the rhetorical device being deployed here. In the beginning of the sentence, the "lunch" is the money that you save through lower mortgage payments. By the end, the "lunch" is Point's profits, and the tidy transition suggests that everyone wins.

What I don't like about this is the requirement to buy back their share after a fixed term (it looks like their longest term is 10 years).

That makes the contract behave like a short position. If the price of my house starts to rise rapidly, I need to "cover" or risk not having the cash when the term expires.

It's like being long and short in my house at the same time.

> There are few asset classes that have outperformed super-prime real estate in the last 60 years. Consider that the median home in Palo Alto sold for less than $20,000 in 1956

That is where I stopped reading. Palo Alto 60 years ago is such a rigged example, why should I believe anything the author says?

This is a new type of financial instrument marketed to the middle class, which is just complicated enough that most buyers won't fully understand it.

Which means it's almost certainly trap. Fifteen years from now, we as a society may regret having allowed this.

I'd love to be able to buy call options on houses in area you're planning on moving to in the future. Maybe someday their mode could support that too?

I don't currently know of any way to lock in current prices for a future purchase.

Sounds like a good way to hedge against declines in your overvalued property without having to move.

"If you don't sell, you can buy back Point’s stake at any time during the term at the then current appraised property value."

The calculator won't let you enter an Estimated Ending Price lower than the Current Home Price.

> It’s rethinking the fundamentals of residential real estate ownership — making single-family residential real estate a liquid, tradeable asset class.

So it's like a REIT but the income generation is on the appreciation of the asset?

I had this business plan written up back in 2007, and am sort of pleased and disappointed to see someone making something of it

Do you need to pay rent to Point for that 10%?

No. But play around with their calculator and some realistic numbers. You can easily end up paying a huge effective APR for the cash you gain today.

Assuming Point is smart about the homeowners they choose to fund, this ends up being a bad deal for anyone creditworthy enough to qualify in the first place.

If you've got equity and decent credit, most banks right now will give you a HELOC at pretty low interest rates. Which makes you wonder if this is going to be more for the subprime market.

This sounds great would love a way to own part of a home and have reduced mortgage costs without exposing a huge portion of my asset portfolio to just being the home

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