In private real estate, many homeowners have large equity positions in their homes. At the same time, homeowners are exposed to the risk of declines in home values. Change in home prices represents a significant risk to homeowner’s wealth, which some homeowners want to insure against. In addition, some homeowners want to leverage their equity position without taking more debt. Typical homeowners invest about 48% of their net worth into their homes with no diversification in real estate portfolio and very limited liquidity.
To date, there is no straight way to insure property value declines and leverage equity debt-free. But one can construct a position, which allows homeowners and investors to benefit from changes in the value of the underlying asset, a real estate property.
The value of the property will change over time. Option pricing provides a system where a positive change in asset price can be shared between an investor and a property owner. At the same time, the risk of price decline can be transferred from the property owner to investors for a price.
There is a market void which we explore. Real estate is a large asset class. Most assets on the market today have options. IRESE developed a system by which one can apply options contracts to individual real estate properties. The real estate options contract we propose are not equity sharing agreements and do not imply any partial real estate ownership. Instead, our product is constructed based on observed changes in real estate prices, has a strike price and expiration date like a typical options contract.
IRESE has developed a system that provides immediate benefits to the property owner and the investor based on option contracts.