We recently had the opportunity to buy a house and the person who was recommending it to us mentioned one of the downsides to the house which is why I’m writing this article.
The downside he mentioned is that we would be the first ones buying into this residential colony at this price. The last comparable house in the area was sold over a decade ago and most the homeowners inherited the real estate from their parents. The bottom-line is that there are no comparables in the area we can use to justify the valuation.
This got me thinking, real estate is probably one of the most volatile investments, but price changes are not reflected on a daily basis. You can get an idea of return when a comparable property is sold and the real return can only be calculated at the time of sale. For stocks, bonds, and virtually any other investments, it’s possible to instantaneously calculate the rate of return.
What if there is some way to establish a marketplace for home values, where it becomes possible to for an owner to calculate the value of his home daily.
One method could be to consider homes, corporate entities, and set up an exchange where traders can trade the “stock” of individual homes. This probably doesn’t go over too well, because I’m sure people don’t like the idea of losing complete control over their homes. But what if there was a method for homeowners to raise capital on their homes, similar to how companies go public today? Blackstone Group, did an IPO for 12.5% of their common stock. What if a homeowner could do an IPO for 49% of their home, and hold 51% of it. They would still have complete control over the home, but be able to raise capital by selling a portion of their equity in the house.
Having a percentage of their home listed on a exchange allows homeowners to value their remaining stock. Homeowners can unlock their existing equity in the house and put the money to different use. Similarly, investors can invest directly into residential real estate without owning 100% of the equity and diversify their holdings over a broad number of homes in various markets. Suddenly you have stability in a market, because the majority of investors are hedged in different investments. Also, real estate is considered one of the safest investments, and investing into small portions of many homes further diversifies the risk.