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Author Topic: A NEW WAY TO VIEW THE BUBBLE  (Read 2270 times)

Offline 4EEM

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A NEW WAY TO VIEW THE BUBBLE
« on: February 20, 2006, 03:55:40 pm »
In the stock market if you feel a stock is overvalued and there is going to be a correction in the near future you can "short" the stock.

Short selling is neither terribly complex nor entirely simple. In other words, it's a concept that many investors have trouble understanding. In general, people think of investing as buying an asset, holding it while it appreciates in value, and then eventually selling to make a profit. Shorting is the opposite: an investor makes money only when a shorted security/asset falls in value.

In simple terms: when you short sell a stock, your broker will lend it to you. The stock will come from the brokerage's own inventory, from another one of the firm's customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later you must "close" the short by buying back the same number of shares and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money.

YOU MAY BE SAYING TO YOURSELF, "THAT'S GREAT TO KNOW, BUT WHAT DOES IT HAVE TO DO WITH REAL ESTATE?" ???

Well, it seems that you cannot short real estate the same way you can short a stock, but I think I have found a way to short individual properties with the same outcome as a short on an individual stock.

Let's say that you are in a real estate market that has experienced 20% YOY (year-over-year) appreciation for the last 4 years running and you think it's comming to an end.  More than that you think there may be a sharp contraction in the market and in 2006 homes in certain areas will lose value for whatever reason.

Let's say that there is a property in an area, that you think is going to experience a contraction in the next year, that is currently valued at $1,000,000.  The owner holds the property free and clear and has seen the value of their home double in the last 5 years.

Let's say that you approach this homeowner with an offer: You offer the owner 5% of the properties value (in monthly instalments) for a one year option to buy.  Heres the catch, it's not the straight forward option to buy that most people are familiar with.  The sale price is variable.  Every month during the option period the property is reappraised and you can exercise your option within a 3 day window following the appraisal based on the current appraised value.

Not only is the sale price variable, but if the property depreciates you can exercise your option and demand payment from the current owner, i.e, value goes from 1mil to 800k, demand payment of 200k.
 ;)
Win, lose or draw the current property owner keeps the 50k for the option they sold you.

Potential outcomes:

PROPERTY APPRECIATES
      -The 'short-seller' can choose not to exercise option.
      -The 'short-seller' can choose to exercise their option and purchase the property at the current appraised value.

PROPERTY VALUE IS STAGNATE

     -SAME OPTIONS AS ABOVE.

PROPERTY DEPRECIATES
      -The 'short-seller' can choose not to exercise option.
      -The 'short-seller' can choose to exercise their option and purchase the property at the current appraised value.
      -The 'short-seller' can choose to exercise their option and demand payment.

OBVIOUS QUESTIONS: ::)

In the event that the property depreciates and the short seller demands payment, what payment options are available?

How does one make the agreement legal and binding?

What keeps the current property owner from "cashing out" their property during the contract period?

What if the property depreciates and the current owner refuses to honor the agreement?

BASIC ANSWER
A third party intermediary oversees the whole process after the two parties have decided to enter into an agreement.

CRUNCH THE NUMBERS AND PLEASE GIVE YOUR OPINION ON THIS IDEA ;D
Patrick S. Lawson
Highland Lending, Inc.
Phone  (407) 877-0093
Fax      (866) 476-1133

Offline rookieNYC

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Re:A NEW WAY TO VIEW THE BUBBLE
« Reply #1 on: February 21, 2006, 04:25:03 pm »
why not just short reits and home builders and home related sectors..Sounds easier to me..

Offline tedjr

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Re:A NEW WAY TO VIEW THE BUBBLE
« Reply #2 on: February 21, 2006, 06:27:04 pm »
Howdy 4EEM:

Sounds like you have put a lot of thought into this but I see no way to get the current owner to write a check to you to buy his house if it goes down in value especially if they own free and clear.  You are right, short selling stock if confusing to most and trying to teach a property owner who owns a million dollar home free and clear about the details of the option would be very complicated.

It reminds me of my ex partner who when I met him was making full price offers to banks for their REO's but it was on his contract forms that were 37 pages long and trying to get the seller to warrant the roof, slab, plumbing, electric, hvac and more for 5 years. He bought nothing and frustrated several Realtors in the process. Our first offer together was all cash as is where is and closing in a week on a standard TREC contract.
Ted P. Stokely Jr

San Antonio, Texas

 




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