Real estate abstract
The present invention relates to a method of creating, purchasing
and selling the real estate brokerage commissions typically collected
upon the sale of real property. A property owner sells, for a certain
consideration, the assignable option to be the owner's broker when
the owner decides to resell the property. The compensation paid
may be in the form of cash or an equivalent incentive. The option
has an expected return associated with it that will vary depending
upon a number of factors including, but not limited to, the value
of the property and the predicted amount of brokerage commission
to be earned upon resale of the property. The option can be sold
through securitization or some other method. The option can also
become a traded commodity and form the basis for a real estate options
and futures market.
Real estate claims
What is claimed is:
1. A method of doing business comprising the steps of: purchasing
from an owner of a real property, in exchange for a consideration,
an assignable entitlement to act as the owner's real estate agent
when the owner sells the property, wherein said entitlement confers
the right to a commission on the sale of the property; creating
a pool consisting of the entitlement and at least one other entitlement
to represent at least one other owner of at least one other real
property; and determining a current value of the pool of entitlements
from at least one of the current values of the individual entitlements;
wherein at least part of one of said steps utilizes a computer.
2. The method of claim 1 further comprising the step of executing
a legally binding document that places an encumbrance on the title
of the real property requiring satisfaction of the entitlement.
3. The method of claim 1 further comprising the step of determining
a current value of the entitlement from at least one of (a) the
current value of the real property, (b) an estimated rate of appreciation
in the value of the real property, and (c) an expected date of resale.
4. The method of claim 1 further comprising the step of selling
the entitlement.
5. The method of claim 1 further comprising the step of selling
at least a portion of the pool of entitlements.
6. The method of claim 1 wherein the consideration comprises money.
7. The method of claim 1 wherein the consideration is related to
a credit card.
8. The method of claim 1 wherein the consideration comprises credit
redeemable for designated goods or services.
9. The method of claim 1 wherein the consideration comprises at
least one of a discount on a mortgage loan rate, a discount on mortgage
loan fees, a credit applicable towards mortgage payments, and a
grace period for paying mortgage payments.
10. The method of claim 1 wherein the real property is a residential
property.
11. The method of claim 1 wherein the real property is a commercial
property.
12. The method of claim 1 wherein the brokerage commission is approximately
equal to 6 percent of the sale price of the real property.
13. The method of claim 3 wherein the current value of the real
property is determined from at least one of: tax records, actual
sale price records, local sale price records, local property valuations,
average local sale price, median local sale price, and actual local
brokerage commissions earned.
14. The method of claim 3 wherein the current value of the real
property is determined from at least one of: (a) an average time
between property sales, (b) an average time that a property spends
on the market, (c) an average rate of appreciation in property value,
and (d) an average rate of inflation.
15. The method of claim 3 wherein said step of determining a current
value of the entitlement further comprises estimating the costs
associated with providing brokerage services.
16. The method of claim 3 further comprising the step of estimating
a risk associated with the entitlement from at least one of: (a)
the estimated value of the entitlement, (b) the likelihood that
the entitlement will be realized, (c) the estimated time until the
entitlement will be realized, (d) the predicted rate of appreciation
in the value of the property, and (e) the possibility that the property
will suffer catastrophic damage.
17. The method of claim 1 wherein the current value of the pool
of entitlements is determined from at least one of: tax records,
actual sale price records, average sale price records, average property
valuations, median sale price records, median property valuations,
and average brokerage commissions earned.
18. The method of claim 1 wherein the current value of the pool
of entitlements is determined from at least one of: (a) an average
time between property sales, (b) an average time that a property
spends on the market, (c) an average rate of appreciation in property
value, and (d) an average rate of inflation.
19. The method of claim 1 wherein the risk associated with the
pool of entitlements is estimated from at least one of: (a) the
estimated value of the pool of entitlements, (b) the likelihood
that the entitlements will be realized, (c) the expected number
of entitlements within the pool that will be realized, (d) an estimated
time until the entitlements will be realized, and (e) the predicted
rate of appreciation in the values of the entitlements.
20. The method of claim 1 further comprising the step of creating
a financial instrument, wherein the value of the instrument varies
depending upon the value of the entitlement.
21. The method of claim 1 further comprising the step of creating
a financial instrument, wherein the value of the instrument varies
depending upon the value of at least a portion of the pool.
22. The method of claim 1 wherein the owner of the real property
is a buyer of the real property and said step of purchasing the
entitlement occurs at the time of closing of the purchase.
23. The method of claim 1 wherein at least a portion of said method
is performed using an internet.
24. A method of doing business comprising the steps of: purchasing
from an owner of a real property, in exchange for a consideration,
an assignable entitlement to act as the owner's real estate agent
when the owner sells the property, wherein said entitlement confers
the right to a commission on the sale of the property; determining
a cent value of the entitlement from at least one of: (a) the current
value of the real proper, (b) an estimated rate of appreciation
in the value of the real property, and (c) an expected date of resale;
and assessing a risk associated with the entitlement wherein at
least part of one of said steps utilizes a computer.
25. The method of claim 24 further comprising the step of executing
a legally binding document that places an encumbrance on the title
of the real property requiring satisfaction of the entitlement.
26. The method of claim 24 further comprising the step of selling
the entitlement.
27. The method of claim 24 further comprising the step of creating
a pool consisting of the entitlement and at least one other entitlement
to represent at least one other owner of at least one other real
property.
28. The method of claim 27 further comprising the step of determining
a current value of the pool of entitlements from at least one of
the current values of the individual entitlements, and the risk
associated with the entitlements.
29. The method of claim 27 further comprising the step of selling
at least a portion of the pool of entitlements.
30. The method of claim 24 wherein the consideration comprises
money.
31. The method of claim 24 wherein the consideration is related
to a credit card.
32. The method of claim 24 wherein the consideration comprises
credit redeemable for designated goods or services.
33. The method of claim 24 wherein the consideration comprises
at least one of a discount on a mortgage loan rate, a discount on
mortgage loan fees, a credit applicable towards mortgage payments,
and a grace period for paying mortgage payments.
34. The method of claim 24 wherein the real property is a residential
property.
35. The method of claim 24 wherein the real property is a commercial
property.
36. The method of claim 24 wherein the brokerage commission is
approximately equal to 6 percent of the sale price of the real property.
37. The method of claim 24 wherein the current value of the real
property is determined from at least one of: tax records, actual
sale price records, local sale price records, local property valuations,
average local sale price, median local sale price, and actual local
brokerage commissions earned.
38. The method of claim 24 wherein the current value of the real
property is determined from at least one of: (a) an average time
between property sales, (b) an average time that a property spends
on the market, (c) an average rate of appreciation in property value,
and (d) an average rate of inflation.
39. The method of claim 24 wherein said step of determining a current
value of the entitlement further comprises estimating the costs
associated with providing brokerage services.
40. The method of claim 24 wherein the risk associated with the
entitlement is estimated from at least one of: (a) the estimated
value of the entitlement, (b) the likelihood that the entitlement
will be realized, (c) the estimated time until the entitlement will
be realized, (d) the predicted rate of appreciation in the value
of the property, and (e) the possibility that the property will
suffer catastrophic damage.
41. The method of claim 24 further comprising the step of creating
a financial instrument, wherein the value of the instrument varies
depending upon the value of the entitlement.
42. The method of claim 24 wherein the owner of the real property
is a buyer of the real property and said step of purchasing the
entitlement occurs at the time of closing of the purchase.
43. The method of claim 24 wherein at least a portion of said method
is performed using an internet.
44. A method of doing business comprising the steps of: purchasing
from an owner of a real property, in exchange for a consideration,
an assignable entitlement to act as the owner's real estate agent
when the owner sells the property, wherein said entitlement confers
the right to a commission on the sale of the property; creating
a pool consisting of the entitlement and at least one other entitlement
to represent at least one other owner of at least one other real
property; and determining a current value of the pool of entitlements
from at least one of the current values of the individual entitlements,
and a risk associated with the entitlements wherein at least part
of one of said steps utilizes a computer.
45. The method of claim 44 further comprising the step of executing
a legally binding document that places an encumbrance on the title
of the real property requiring satisfaction of the entitlement.
46. The method of claim 44 further comprising the step of determining
a current value of the entitlement from at least one of: (a) the
current value of the real property, (b) an estimated rate of appreciation
in the value of the real property, and (c) an expected date of resale.
47. The method of claim 44 further comprising the step of selling
the pool of entitlements.
48. The method of claim 44 wherein the consideration comprises
money.
49. The method of claim 44 wherein the consideration is related
to a credit card.
50. The method of claim 44 wherein the consideration comprises
credit redeemable for designated goods or services.
51. The method of claim 44 wherein the consideration comprises
at least one of a discount on a mortgage loan rate, a discount on
mortgage loan fees, a credit applicable towards mortgage payments,
and a grace period for paying mortgage payments.
52. The method of claim 44 wherein the real property is a residential
property.
53. The method of claim 44 wherein the real property is a commercial
property.
54. The method of claim 44 wherein the brokerage commission is
approximately equal to 6 percent of the sale price of the real property.
55. The method of claim 44 wherein the current value of the pool
of entitlements is determined from at least one of: tax records,
actual sale price records, average sale price records, average property
valuations, median sale price records, median property valuations,
and average brokerage commissions earned.
56. The method of claim 44 wherein the current value of the pool
of entitlements is determined from at least one of: (a) an average
time between property sales, (b) an average time that a property
spends on the market, (c) an average rate of appreciation in property
value, and (d) an average rate of inflation.
57. The method of claim 44 wherein said step of determining a current
value of the pool of entitlements further comprises estimating the
costs associated with providing brokerage services.
58. The method of claim 44 wherein the risk associated with the
pool of entitlements is estimated from at least one of: (a) the
estimated value of the pool of entitlements, (b) the likelihood
that the entitlements will be realized, (c) the expected number
of entitlements within the pool that will be realized, (d) an estimated
time until the entitlements will be realized, and (e) the predicted
rate of appreciation in the values of the entitlements.
59. The method of claim 44 further comprising the step of creating
a financial instrument, wherein the value of the instrument varies
depending upon the value of at least a portion of the pool.
60. The method of claim 44 wherein the owner of the real property
is a buyer of the real property and said step of purchasing the
entitlement occurs at the time of closing of the purchase.
61. The method of claim 44 wherein at least a portion of said method
is performed using an internet.
Real estate description
FIELD OF THE INVENTION
The present invention relates to a process for monetizing an aspect
of the real estate sale transaction and a method of speculating
on real estate values. Particularly, the invention relates to a
method of securitizing the brokerage fees typically collected upon
the sale of commercial and residential real estate, and trading
these brokerage fees by creating a futures and options market based
on the value of these brokerage fees.
BACKGROUND OF THE INVENTION
Millions of new and existing homes are sold each year in the United
States. The residential mortgage market in itself is a trillion
dollar industry. However, one of the largest obstacles to purchasing
a home is amassing the relatively large amount of cash needed for
up-front closing costs. Large downpayments and closing costs prevent
many potential homeowners from being able to buy a home, even at
attractive mortgage rates. Therefore, the need exists to develop
a financial vehicle and method of selling real estate that can alleviate
some of the burden faced by potential home purchasers.
The most common and critical function which facilitates the sale
of real estate so that, for example, home buyers can purchase homes
and home sellers can, in turn, also buy homes, is the brokerage
function. The brokerage function is the process whereby real estate
agents represent and assist buyers and sellers of real estate in
their searches and transactions associated with finding a suitable
property and effecting a transfer of ownership. While property prices,
characteristics, and other functions can vary widely from one real
estate transaction to another, the brokerage function and the commission
earned by the broker for that service (typically 6% of the sale
price in the United States) remain constant. However, despite its
importance and constancy, the brokerage function remains one of
the least efficient, underutilized, and improperly valued aspects
of the real estate market. Therefore, a need exists for a method
of using the real estate brokerage function and, more specifically,
broker commissions as a tracker of real estate values, an investment
opportunity, a method of easing the closing cost burden on purchasers,
and for various other purposes.
During the 1970s, Wall Street developed and popularized new techniques
for financing home purchases by providing capital to fund the purchase
of residential mortgages. Banks and Savings & Loans were no
longer required to fund and hold the hundreds of billions of dollars
of mortgages being originated each year. Instead, the securities
industry perfected techniques to pool millions of mortgages and
sell them in pools to financial investors. Liquidity was injected
into the mortgage system, economies of scale were achieved, rates
to borrowers decreased as pools spread out risk and made capital
more readily available, and a trillion dollar industry emerged.
The securities industry acted as the conduit for buying, pooling,
and re-selling mortgages.
The benefits of financing mortgages through the pooling of originated
loans and selling them in tranches (prioritized, individually priced,
and credit-rated segments) to sophisticated investors are now well
proven. The real estate market has seen hundreds of billions of
dollars in capital become available through securitizing mortgages.
The real estate market has been infused with new capital and increased
liquidity. As a result, more Americans have been enabled to buy
real estate at better interest rates.
In the past 30 years, securitization--the technique of financing
cash flows generated from individual or pooled assets such as residential
mortgages--has also been used to finance numerous other statistically-predictable
cash flows. Examples of such statistically-predictable cash flows
include commercial real estate mortgages; oil, power, and telecommunications
accounts receivables; cross-border earning remittances; credit card
payments; and retail accounts receivables. Securitization enables
investors to invest in securities with a calculated risk/reward
profile commensurate with their goals and objectives. Rating agencies
assess the relative risk profile of each transaction and rate the
different tranches of securities, providing various levels of returns
for investors. Securitization, as a financing and investor vehicle,
has become a trillion dollar business in this country and is gaining
popularity overseas. It is the perfect investment tool when historical
information is available. Statistical analysis can be used to gauge
risk and return, and large volumes of securities can be amassed
to achieve economies of scale and lower costs while increasing returns.
Pools of future cash flows can be securitized so long as the cash
flows have been engineered to conform to pre-established standards,
and investors can statistically determine the payment characteristics
of the cash flows so that the various tranches can be sold at rates
commensurate with the investment's risk. The aggregation of large
pools of cash flows enables statistical analysis by rating agencies
and sophisticated investors leading to standardized ratings and
buying levels. Commercial properties are also financed using this
technique. Even construction and interim loans can be financed using
securitization. In today's economy, securitization can be used to
finance any cash flow that can be statistically measured by investors
who will be able to assign a risk level to the timing and probability
of receiving such cash flow.
Since the brokerage function is a necessity in most real estate
transactions, and since the associated brokerage commissions are
predictable, they lend themselves perfectly to the securitization
process. Information on factors such as average time to sell a property,
time on the market, median and average property prices, and commissions
earned are all readily available and can be used by rating agencies,
investment bankers, and investors to structure such transactions.
As such, the timing of the sales commission, the amount of the commission,
the value of the income stream, and the likelihood of income realization
can all be statistically projected using the plethora of historical
information available from government institutions and other recognized
sources. As a result, a new process may be developed to serve real
estate buyers and sellers whereby the right to future real estate
brokerage commissions (hereinafter referred to as the "Real
Estate Brokerage Option" or "REBO") can be purchased,
assigned, sold, and traded.
The REBO would be purchased from the natural holder of that right,
namely the existing property owner. Moreover, that right can be
purchased in exchange for compensation at the time when the owner
needs it most, namely when he or she is purchasing the property
or soon thereafter (although the right may be purchased at any time
during the owner's ownership of the property). Moreover, the compensation
may take any of a wide variety of forms acceptable to the owner.
Given the predictability of the future value of brokerage commissions
and their utility as a valid real-time measure of property value,
the process of securitization can be used to "monetize"
the value of future brokerage fees in the present. In other words,
brokerage commissions to be earned in the future can be converted
to securities with a present-day cash value. The amount of the actual
compensation necessary to acquire a particular REBO will vary depending
upon factors such as the value of the property at the time the REBO
is purchased, the statistically predictable time to resale, and
the statistically predictable future value of the acquired REBO,
among others; but is ultimately a future cash flow that can be estimated
within an acceptable degree of statistical certainty. As such, the
REBO lends itself well to the asset-backed securitization process
and provides a financial vehicle capable of many benefits including
assisting real estate property buyers in funding their new purchases
and providing new investment opportunities for investors to diversify
their portfolios.
SUMMARY OF THE INVENTION
The present invention relates to a process involving the buying
and selling of real estate. Particularly, the invention relates
to both a method of securitizing the real estate brokerage commissions
typically collected upon the sale of real property, and a method
for trading securities derived from these commissions through the
creation of a related futures and options market.
In one aspect of the present invention, an investor purchases from
a real estate property owner, for a fixed sum, the assignable right
to be the owner's sales broker when the owner decides to sell the
property. The compensation paid may be in the form of cash or an
equivalent non-cash incentive. The amount of the option premium
paid to the owner will vary depending upon a number of factors including,
but not limited to, the value of the property and the predicted
amount of brokerage commission to be earned upon resale of the property.
To ensure that the owner fulfills his obligation to pay the eventual
brokerage fee to the REBO owner in the event the property owner
sells the property, a notarized document may be signed and recorded
in public records (e.g., by attachment to the deed of the property)
so that no sale of the property could be consummated without the
REBO owner being notified and compensated as required by the agreement.
Of course, the property owner has the right to decide whether he
will sell the property and when he will do so. There need not be
an obligation on the property owner to sell the property. However,
once the property owner decides to sell the property, the REBO owner
will be informed, for example, by the property seller or by the
new mortgage lender that the property has been sold and that the
parties wish to satisfy their obligation to the REBO owner to remove
the encumbrance on the property. The owner of the REBO ultimately
receives the brokerage commission once the contracted-for brokerage
services have been supplied, either by the REBO owner or by a third
party on behalf of the REBO owner.
In another aspect of the invention, the REBO may be assembled into
a pool with other REBOs for purposes of risk allocation and investment
diversification. A pool of REBOs may contain REBOs from a specific
area such as a particular city, county, state, or region; or the
pool may contain REBOs diversified by geographic location, estimated
selling price, estimated date of sale, or other factors alone or
in combination. Then, pursuant to the principles of securitization
as detailed above, pools of REBOs may be assessed, valued, and sold
in tranches to various investors. The tranches will each have to
be valued and rated before being issued. Accordingly, the process
and advantages of securitization can be applied to the brokerage
commission function to provide property purchasers with money today
for a service to be rendered in the future. Consequently, property
purchasers are served by having some of their burdensome transaction
costs defrayed, while the pooling of REBOs along with well-known
securitization techniques allows investors to diversify by investing
in a new type of security with a predictable risk/reward calculation.
Yet another aspect of the invention involves the creation of a
real estate futures and options market. Derivative instruments are
created whose value preferably approximates the real estate values
underlying the REBOs. The values of these instruments will rise
and fall with the values of the associated real estate assets, thereby
providing investors with a cost-effective way to invest in the real
estate market, real estate owners with the ability to protect their
investments, and speculators with the ability to make directional
speculations on the value of real estate.
The proposed invention satisfies the needs of a variety of parties.
First, new home purchasers are benefited by the creation of a financial
vehicle that alleviates some of the financial burden associated
with purchasing a new home. In addition, the proposed invention
benefits homeowners and other property purchasers since it will
likely lead to the commoditization of the brokerage function and,
inevitably, to lower brokerage fees.
Mortgage loan originators, including commercial banks, finance
companies, and thrifts, are also benefited in a number of ways.
By purchasing, investing in, and trading brokerage fee options,
a mortgage lender could, for example, offer existing clients various
methods to turn their REBOs into cash at the time of loan origination
(for example, a lender could offer a borrower a cash rebate at the
time of loan origination in exchange for selling the REBO), thus
creating future profit opportunity for the lender. Mortgage lenders
could also broaden internal cross-marketing opportunities by offering
the product through existing internal programs (such as credit card
clients, depositor clients, etc.), and capture new external market
share by purchasing REBOs from mortgage clients of competitors.
This would provide the ancillary benefit of establishing a new lending/banking
relationship with new clients. Finally, a mortgage lender could
resell acquired REBOs at a profit to others, such as the existing
brokerage community, speculators, insurance companies, and competitor
institutions.
In each case, the entity that creates or purchases REBOs accesses
a future stream of predictable revenue and profits. That entity
is further able to cross-sell existing products to both existing
clients and new clients, creating a substantially larger potential
client pool. Additionally, to the extent such an entity may become
inclined to enter the brokerage business (whether through acquisition
of a brokerage service provider or otherwise), it can vertically
integrate the organizations, thus moving itself to a position closer
to its customer base. Finally, as a potential ancillary benefit,
such an entity could generate substantial predictable mergers and
acquisitions fees by advising existing brokerage firms and potential
acquirers who will either choose or be forced to merge as a means
of increasing their capital base in order to compete once this new
capital markets product is introduced.
Real estate brokerage companies could also benefit from the present
invention since the REBO would allow them to gain access to a new
source of brokerage assignments and fees. Finally, investors will
inevitably benefit by creation of the REBO and the resulting trading
of REBOs because investors are always seeking new investment vehicles
to diversify their portfolios. Furthermore, securitization of brokerage
fees and the creation of a brokerage fee futures and options market
will provide investors with more opportunities and alternatives.
Other features and advantages of the present invention will become
apparent in the following detailed description.
DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENTS
Reference will now be made in detail to the preferred embodiments
of the invention, examples of which are also provided in the following
description. Exemplary embodiments of this invention are described
in some detail, although it will be apparent to those skilled in
the relevant art that some features which are not particularly relevant
to the invention may not be shown for the sake of clarity. Although
the present invention contemplates a wide variety of applications
involving transactions that are facilitated by brokers in exchange
for a commission, the preferred embodiments involve real estate
transactions, and more particularly, residential real estate transactions
such as home sales. Therefore, the examples provided below are primarily
given in the context of residential home sales. Nevertheless, it
should be obvious that the invention also contemplates commercial
real estate transaction and non-real estate applications.
Real estate brokers offer their services for assisting would-be
home owners in finding an acceptable new home and structuring an
acceptable transaction for transfer of ownership of the new home.
In exchange for that service, brokers in the United States typically
charge a brokerage commission on the order of 6 percent of the final
sale price. The brokerage commission is negotiable between the parties
at the time they contract for the service, and the standard rate
may vary in other countries. The full commission is usually paid
by the seller to his or her broker ("the seller's agent"),
although the commission may be calculated into the agreed-upon sale
price of the home. If the home buyer is also represented by a broker
("the buyer's agent"), the seller's agent usually splits
the commission with the buyer's agent, resulting in each agent receiving
a 3 percent commission. Sellers of real property are not required
to enlist an agent to represent them; however, many do.
In the preferred embodiment, an investor purchases from an owner
of a real property the right to be the owner's selling agent when
the owner decides to sell the property. For the purposes of this
disclosure, this option is referred to herein as the "Real
Estate Brokerage Option," or "REBO." Preferably,
the real property at issue is a residential home. However, the present
invention is not necessarily so limited. Rather, the property may
comprise land and or structures, residential and/or commercial properties.
Furthermore, the property need not necessarily be a real property.
For example, the principles of the present invention apply equally
as well to, for example, business and intellectual property transactions.
However, for the purposes of this disclosure, the details of the
invention are presented in the context of new home purchases.
The REBO may be purchased at any time during the owner's ownership
of the property, but preferably occurs at the time the owner first
purchases the property or soon thereafter. In the example of a new
home purchase, it may be particularly advantageous to a new home
purchaser to receive, for example, cash at the time of closing,
when cash is most needed. The property owner is the only true holder
of the option because only the true owner may sell the property.
Therefore, the REBO must be purchased from the true owner. The REBO,
however, may be purchased at the time the true owner attains ownership
(i.e., at closing of the original purchase), as well as at any time
during ownership. Accordingly, various state real property laws
and regulations may need to be satisfied. For example, it may need
to be determined whether a given property is owned by multiple owners
as joint tenants or tenants-in-common. It may also be necessary
to determine whether there is a mortgage holder with an interest
that must be satisfied.
The REBO may be purchased as an assignable right. Once again, state
property, contract, and other laws and regulations may need to be
satisfied. However, purchasing the REBO as an assignable right provides
the REBO purchaser the opportunity to convey the right to another
party, if he so desires. Moreover, the REBO should be assignable
if it is to become a traded commodity, as will be discussed below.
Methods for securitizing and trading a REBO will also be discussed
in detail below.
The REBO transaction may also occur, at least partially, via the
internet. Recent years have seen the internet become an increasingly
useful facilitator of transactions such as in investing, banking,
and mortgage lending. Prospective home buyers, for example, can
"go online" to apply for mortgages via the internet through
a bank's website. Therefore, the internet can be used to facilitate
the REBO process by, for example, informing property owners and
prospective owners of its existence and benefits, providing property
owners with the opportunity to sell a REBO to an investor over the
internet, and providing a forum for investors to buy and sell REBOs.
The consideration paid to the property owner in exchange for the
right is preferably cash. As stated above, most new home purchasers
are particularly in need of cash at the time of closing and soon
thereafter. However, the consideration may take a wide variety of
forms. For example, the property owner may be offered compensation
related to a credit card, such as a rebate, account credit, or "bonus
points" which entitle the account holder to various benefits.
In another embodiment of the present invention, the owner may be
offered a mortgage-related incentive such as a reduced loan rate,
a credit in mortgage payments, a grace period without mortgage payments,
or reduced transactional fees. Alternatively, property owners may
be offered a travel-related incentive such as "frequent flier
miles," vacations, and other benefits. In another embodiment,
owners may be offered credit redeemable towards certain designated
goods and/or services. Obviously, there are many forms the consideration
may take that would be acceptable to the owner. The present invention
is not limited to any particular form, type, or amount of compensation.
It should be noted that the right purchased represents the right
to represent the owner of the property when that owner decides to
sell the property. There need not be an obligation on the property
owner to sell. An owner may sell the REBO to an investor but retain
the property forever. As such the contract between the property
owner and the REBO purchaser in the preferred embodiment is, in
the language of the law, a contract subject to a condition precedent,
wherein the condition is the owner's decision to sell the property.
The owner must decide to sell the property before any duty to perform
arises. If the owner never decides to sell the property, the REBO
owner's right does not vest and the property owner is under no obligation
to compensate the REBO owner. Consequently, there is inherent in
the REBO a risk that the benefit for the investor will never materialize.
However, such is the nature of investing and it is reasonable to
expect that all investors are keenly aware of the possibility of
losing their investment without positive return.
To ensure that the property owner fulfills his obligation to the
REBO owner when the property is sold, in the preferred embodiment,
a document is signed by the parties at the time the REBO is purchased.
The document, which may be notarized, may be recorded in public
records along with the property records such as the title. Local
laws may vary with respect to the contents and restrictions of such
a document, notarizing requirements, and recordation requirements
and procedures. Consequently, applicable local laws should be considered.
The REBO document would then appear in any title search as a cloud
on the property title requiring satisfaction before ownership of
the property may be validly transferred. As a result, the owner
would find it difficult to sell the property without satisfying
his obligation under the REBO. The REBO owner would be notified
by, for example, one of the parties to the sale or a lending institution
that the property was being conveyed. The REBO owner could then
be compensated and the title cleared.
The written agreement that forms the basis of the REBO may take
a wide variety of forms, within the parameters of applicable law,
and the present invention is not limited to any one specific form
of agreement, nor is it limited to any particular choice of language.
There are a great many provisions that may be incorporated into
the written REBO contract. Among the provisions that may optionally
be included is a provision governing whether the REBO transfers
with the property in the event the owner bequeaths the property
to his heirs instead of selling it (i.e., whether the owner's heirs
are bound by the terms of the REBO). The agreement may also contain
a provision regarding the property owner's right to decline any
brokerage services in favor of representing himself.
If the property owner decides to sell the property, the owner of
the REBO has the obligation to provide the property owner with seller's
representation in exchange for the negotiated brokerage commission.
The REBO owner may provide the brokerage service, or may have a
third party provide the service on behalf of the REBO owner. For
example, the REBO owner may have a list of affiliated brokerage
services that have contracted with the REBO owner to provide the
brokerage services in exchange for a reduced commission. Moreover,
the property owner may be given a choice of affiliated brokers to
use, thereby improving the chances that the property owner will
be satisfied with the representation he receives.
The value of the consideration paid to the property owner, no matter
what form that consideration takes, is an amount that would be determined
by the investor. The price to pay for a given REBO will depend on
a wide variety of factors including, but not limited to, the value
of the underlying property upon which the option is based, the estimated
holding period for the property, the predicted sale price of the
property when it is sold, the amount of brokerage commission to
be earned, and the REBO owner's costs associated with supplying
the actual brokerage services (either himself or through a third
party). Those factors which cannot be precisely be calculated can
be estimated within a reasonable degree of statistical certainty
using data from a wide variety of sources. The federal government
and most state and local governments collect data regarding property
values that is made publicly available. Much of this information
is available via the internet through various government internet
sites and through private and public organizations' websites. Property
value data, for example, can be located for specific properties;
local areas such as neighborhoods, cities, and counties; state and
regional information showing property values throughout a specific
region; and national data showing property values and trends throughout
the nation. Such information may also be available from tax records
and from various sources that record property sales and associated
information. Ample public information is also available regarding
average or median holding periods--that is, the time between property
sales--for properties in a given area (i.e., local, state, regional,
or nationwide), as well as for average and median times that properties
listed for sale spend on the market before actually being sold.
Many government agencies assemble relevant property-related data
including city, county, state, and federal agencies. In addition,
other sources such as insurance organizations, non-profit organizations,
real estate concerns, and the investment community assemble and
make available such data. Therefore, data of varying focus and scope
are available from a number of sources. The present invention is
not limited to a value analysis that considers only these factors
or these sources of information.
As an example, an investor could calculate the predicted return
on a REBO by taking the current market value of the underlying property,
predicting the estimated holding period based on public data, estimating
the future sale price based on property value appreciation trends,
and accounting for inflationary costs over the holding period. Mathematically
simplified, this analysis equation would be:
Where: V.sub.REBO at t =Predicted gross value of the REBO at time
t t=Holding period=estimated time until property is sold V.sub.property
at t =Predicted value of the property at time t C=Brokerage commission
rate (e.g., 6 percent) I=Rate of inflation.
And where the value of the property at time t (V.sub.property at
t) can be estimated from the following equation:
Where: A=Average or predicted rate of appreciation in property
values in the given area (e.g., local, statewide, regional, or nationwide).
Of course, this is an elementary calculation that yields an expected
gross value for the REBO for exemplary purposes. More sophisticated
models may be used to more accurately predict future earnings and
to account for expenses such as those associated with rendering
the brokerage services and transactional costs, which account for
the difference between a gross and a net REBO value. Moreover, the
accuracy of any model will depend upon the precision of the data
employed. For example, national data may not be as accurate as local
data in predicting the value of a particular REBO. Other factors
that might be considered in calculating the value of a REBO include
the REBO owners costs associated with owning the REBO and ultimately
performing the contracted-for brokerage services, home pricing patterns,
seasonal variances in property sales, new home construction levels,
and other factors. Once the future value of the REBO is calculated,
the investor, taking into account his required investment rates
of return, can calculate the value of the present-day compensation
that should be paid to the property owner to secure the option.
One factor that may also be considered in the calculation of future
REBO value and the amount of present-day compensation to be paid
is the level of risk associated with the option. As stated above,
there is an inherent risk associated with the REBO that the owner
will never opt to sell the property. There are also other risks
commonly associated with investments, such as the risk of default
by the obligor, that may be considered. Models of varying sophistication
have been developed to predict risk in different contexts, such
as with traded options, mortgage pools, and insurance, and the present
invention is not limited to any one method or type of model for
predicting risk. As with valuing data, risk data is assembled by
a number of sources and usually is made readily available through
print and/or the internet. Generally, the risk associated with a
specific REBO will be based on a variety of factors, including but
not limited to, the likelihood that the property owner will opt
not to sell, the possibility that the owner will hold on to the
property longer than the predicted holding period, the possibility
that property values in the given area will not appreciate substantially
or will depreciate, the possibility that inflation could rise substantially,
and the possibility that the property could suffer catastrophic
damage. These are some of the factors typically considered in an
investment risk analysis; however, there are a wide variety of other
factors and methods of using those factors to calculate the risk
associated with an investment. The present invention is not limited
to a risk analysis that considers only these specifically mentioned
factors.
In the preferred embodiment, the REBO may be collected with other
REBOs to produce a pool of REBOs, thereby diversifying the investment
and reducing the overall risk. Since the REBO is an option or contractual
right on the part of the REBO owner to receive a future cash flow,
it is as easily securitized as any other cash generating asset,
such as credit card accounts, home equity loans, and mortgages.
Securitizing a REBO or pool of REBOs enables the owner of the REBOs
to receive cash in the present for a predicted future cash flow.
As such, well-known methods of asset-backed securitization can be
applied to the REBO to make it a valuable investment tool.
As with individual REBOs, a pool of REBOs would be valued and analyzed
with respect to the risk associated with the investment. The value
factors and risk factors associated with individual REBOs also apply
to a pool of REBOs overall, however, the analyses may differ. For
example, the overall value of a pool of REBOs may be determined
by valuing each REBO within the pool individually, as discussed
above. However, in some cases, this approach may not be feasible
(for example, with a very large pool of REBOs). Therefore, a pool
may be valued on a broader scale. For example, an overall pool value
may be determined by considering an average, median, or estimated
time between property sales; an average, median, or estimated time
that properties spend on the market before being sold; and average,
median, or estimated rate of appreciation in property values. Furthermore,
the data may be of different scopes. For example, a pool of REBOs
may be assembled consisting solely or mostly of REBOs on properties
in the state of New York. In such a case, data regarding national
averages may be useful; however, New York averages would be particularly
useful. A pool of REBOs may also be valued by organizing the REBOs
within the pool and using data that is particularly focused on each
grouping. For example, REBOs within a pool may be sorted geographically
(such as by neighborhood, county, city, state, or region), or chronologically
(such as by the date the REBO is expected to be realized). A pool
which contains REBOs from five different states could then be segmented,
for value analysis purposes, by state, and data from each state
could be applied to the five segments individually to value the
entire pool. This approach may be especially useful if the pool
contained a large number of REBOs. Obviously, there are a wide variety
of ways to efficiently and accurately assess the value of an entire
pool of REBOs, and value models will depend on a great number of
factors such as their relative sophistication, expense, data available,
etc. Some models may also account for expenses such as the costs
of rendering brokerage services, transactional costs, and inflationary
costs, that yield a net REBO pool value, rather than a gross value.
Similarly to valuing a pool, the overall risk associated with a
pool of REBOs may be determined by assessing the risk of each REBO
within the pool individually, or by relying on broader data sets.
For example, a pool may be risk analyzed using the average or median
value of the individual REBOs and their underlying properties; the
predicted number of REBOs within the pool that will actually be
realized; the likelihood that individual REBOs, groups of REBOs
within the pool, or the entire pool will be realized; an average,
median, or estimated time until REBOs will be realized; and predicted
rates of property value appreciation. There are other factors that
may also be deemed relevant. Moreover, risk factors can also be
calculated by grouping REBOs, such as geographically or chronologically
as explained above, and using data that focuses on those particular
groupings.
The following details are provided regarding the securitization
process, assuming that all applicable laws and regulations have
been accounted for and complied with. It should be understood that
there are many ways to securitize an asset and the following is
provided for exemplary purposes. Moreover, certain details well
known in the art that are not crucial to the methods of the present
invention may not be mentioned for the sake of clarity.
Generally, the securitization process involves accumulating a pool
of REBOs and evaluating their characteristics. The relevant characteristics
may include property value and location, type of property, and the
information discussed above, such as expected rates of appreciation
and associated risk. A pool of REBOs may be evaluated by considering
each REBO individually, or by considering the pool of REBOs as a
whole. Moreover, the pool of REBOs as assembled may be organized
in a particular way. For example, the pool may consist of REBOs
from a particular county. Therefore, the pool could be valued based
upon information such as average property values in the county,
typical property appreciation within the county, etc.
Once the pool of REBOs has been analyzed and the relevant characteristics
determined, this information is then preferably supplied to a rating
agency, such as Moody's Investor's Service or Standard and Poor's.
The rating agencies conduct their independent review and analysis,
including a risk assessment, and supply preliminary "credit
enhancement levels," which state an approximate rating for
the investment (e.g., AAA, AA, A, etc.). Based upon the preliminary
ratings from the rating agencies, the securitization profit can
be estimated.
Once the preliminary credit enhancement levels are obtained, the
party seeking securitization of the REBOs may retain one or more
rating agencies to officially rate the securitization transaction.
Upon completion of the rating agency's analysis of the transaction,
the rating agency issues a "final credit enhancement level."
As a condition to rating the securitization, the rating agency may
require from the party seeking securitization a credit enhancement
other than that provided by more senior classes within the transaction
such as a cash reserve or third-party guaranty.
Once the rating agency has been satisfied, the party seeking to
securitize the REBOs can prepare to offer the securities--the securitized
REBOs--to investors. This preparation involves structuring the offering
transactions and preparing a prospectus or offering memorandum that
details the characteristics of the security in accordance with applicable
federal and state securities laws and Securities and Exchange Commission
(SEC) regulations. If the options are to be traded on an exchange
or commodity market, there may also be rules associated with that
forum that would be addressed in the prospectus.
In the preferred embodiment, the REBOs will be sold by the owner
of the pool of REBOs to a trust or Real Estate Mortgage Investment
Conduit (REMIC) in consideration for cash once the securities are
placed with investors. A REMIC is a multiple-class mortgage cash
flow security, typically backed by residential or commercial mortgage
loans, which generally have been pooled together in a trust. The
largest issuers of REMIC securities are Fannie Mae and Freddie Mac.
The issuer of the trust or REMIC securities will issue certificates
in various classes or tranches with each class being sized according
to the final rating agency credit enhancement levels. For example,
a $1 billion pool of REBOs may be classified as 30% or $300 million
rated as AAA, 20% or 200 million rated as AA, and the remaining
50% or 500 million rated as A. The certificates are then sold to
investors, for example, through a public issuance or through a private
offering in accordance with federal and state securities laws.
Following the sale of certificates, a trust and servicing agreement,
which governs the operation of the trust and the distribution of
cash flows to investors, is finalized and the transaction is closed.
Investors receive certificates in return for cash investments and
the cash gets paid to the party who sold and securitized the REBOs.
Once issued, the certificates can be freely traded as with any asset-backed
security. The value of the certificates will fluctuate based on
the perceived value of the underlying REBO collateral and based
upon general market conditions. For example, a report that national
new home sales increased substantially last month would, presumably,
increase the value of the security in investors' eyes.
REBOs may be traded in a variety of ways. They may be traded individually
or in pools; or they may be securitized as detailed above. REBOs,
individually or in pools, may be traded such that the REBO owner
has to provide the actual brokerage service when the property owner
or owners decide to sell. Alternatively, the REBOs may be traded--much
like commodities such as oil and pork bellies--whereby the REBO
continually changes hands but the actual brokerage service is delivered
by an entity that is separate from, but perhaps affiliated with,
the actual REBO owner. REBOs can also form the basis of a real estate
futures and options market. For example, derivative instruments
and contracts whose values fluctuate based upon the value of individual
REBOs or pools of REBOs can be created. These instruments and contracts
can then be traded on a commodity exchange, much like well known
commodities such as oil and pork bellies.
Conclusion
It will be obvious to anyone skilled in the art that the present
invention can be employed in a wide variety of embodiments. The
preferred and exemplary embodiments of the invention have been described
in some detail, but it will be apparent to those skilled in the
relevant art that some features which are not relevant to the invention
may not have been described for the sake of clarity. While various
embodiments of the present invention have been described above,
it should be understood that they have been presented by way of
example only, and not limitation. Thus, the breadth and scope of
the present invention should not be limited by any of the above-described
exemplary embodiments, but should be defined only in accordance
with the following claims and their equivalents. |