If there’s demand for a product or service, someone will eventually find a market in which to distribute that product or service. One of the issues with the financial crisis was the complicated financial products that Wall Street had invented. Today, it almost seems normal to us that loans are packaged together and sold off. But back then these products didn’t make sense to Main Street. Perhaps they still don’t. Such products could be so complicated that sometimes the people selling them didn’t even quite understand how they worked. This was all a part of “financial innovation”, which was not a term used in the same light as “technological innovation”.

Financial innovation hasn’t stopped. Companies are always looking for a new product to sell, and financial firms are no different. The new product this time allows a homeowner to sell shares in their home to investors. Not unlike selling shares in a company, the shares give the investor the right to a cut of the profits on the house.

Here’s how a transaction might work:

I own a house worth $200,000 and sell a 10% share to you for $20,000. That $20,000 is now mine. In 8 years I sell the house for $250,000. Because you bought a 10% share, you get $25,000.

Now why would anyone in their right mind do this? First let’s look at the homeowner, then the investor.

The homeowner may be stuck in a mortgage with a high interest rate and unable to get refinanced. Selling an equity investment in your home might get you enough ahead on your current mortgage to do a refinance. Alternatively, you might just not want such a huge portion of your total net worth tied up in the home. So you sell some shares and invest the proceeds in something else.

The investor is clearly looking to get in on the real estate game. They want to make money in the industry. Perhaps they don’t have the expertise to do it themselves. Or they want to target a specific neighborhood or part of a town they think will grow the fastest. These investments give the investor direct exposure to the housing market without having to worry about all the maintenance and upkeep necessary to make money in real estate.

Both sides have something to gain in the transaction. But it changes the nature of how we treat our houses. With less upside to be gained, homeowners are more likely to walk away from a home in the event of default or falling prices. Such a product might only make the market worse when there’s a decline in prices. This product is so new it’s likely not very well regulated. So there are risks the investor could buy what they think is a share of a nice home, when it’s actually a dump. There’s also the risk of the homeowner not understanding what they’re getting themselves into.

But I actually do like the idea of this product. It’s not something I would ever use myself (investor or homeowner), but I’m sure there’s a market out there for such a product. However we should be wary, especially after the last bubble, of the dangers such new financial innovation can pose.

Read: Who said you have to own 100% of your house? (Sober Look)

Image: images_of_money

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categories: banking, Housing, investing, loans