Swap Notes

I highly recommend letting the lawyers or mortgage professionals handle the details of financing a house swap. So first the disclaimer:

Note: The information contained on this site is not intended to offer legal or financial advice. Please consult a lawyer or financial planner for any legal or financial questions.

And let me state one more time, when we talk about a swap, we are talking about two simultaneous sales, recently termed a “reciprocal sale”. Swap is just a better metaphor. I though about naming this site domureciprocalsale.com, but chose not to.

With that said, I was recently posed a question about financing a specific swap. The answer turned out to be not what I expected, but ultimately enlightening.

First, the scenario. A Domuswap user writes:

I can not see on your website how you can swap a property with a mortgage. It seems to me that you would have to re-qualify for a loan on the property you are buying at full price, and the same for the person you are sapping with. I saw an article that said you only had to qualify for the difference, but I can not see how that is possible.

I then asked for the home values and equity positions involved, since we all know that is one of the most important aspects of this transaction. The user, A Realtor/investor, has several properties listed on Domuswap, and has evaluated several proposals on each. The user responds with one scenario:

One instance was a buyer who wanted to trade his $200,000 house (which he had no mortgage and extra cash) for my $243,000 house that is completely mortgaged and has virtually no equity.

Let’s look at the details. We’ll call the user asking the question Sally. We will call the other owner Bill. I’ve found this works better than calling them OwnerA and OwnerB. I guess it personalizes things and differentiates the two parties by more than one letter. Anyway.

Sally has no equity in her property. Immediate red flag. We know that having no equity almost always makes swaps unfeasible. But lets examine this situation further. Sally owes 243K on her property. Bill with buy Sally’s house with 200K of his house plus 43K in cash. Let me add now that this analysis doesn’t factor in taxes, closing costs, commission or other fees. How convenient. Simply double all the costs involved. Just kidding, but you get the picture.

To sell her property, sally must pay the mortgage holder $243K. She has 43K in cash from Bill. She therefore needs to come up with another 200K. If she has 200K in her bank account, she is in luck. But since she has no equity, this is unlikely. The other possibility for cash is from a new mortgage secured to purchase Bill’s property. Bill’s home is appraised at 200K. Using a standard 20% down payment requirement, the most she could mortgage is 160K. Normally, that 160K would go to Bill, the seller, but since Bill is using the property to purchase Sally’s, it can go directly to Sally. That gives Sally 160K + 43K in cash, which is 43K short of what she needs. She will need to come up with another 43K in cash. In some situations, this could be a loan against another property. But again, since she has no equity, this is probably not a possibility. Therefore, equity really matters, and this particular deal is not a possibility.

Let’s make things more interesting. Let’s assume Sally has 50% or so (say 125K) equity in her house. She now owes the bank 118K. 43K of that comes from Bill’s cash payment. That leaves an additional 75K. Now Sally would only need a 75K mortgage on her 200K purchase, which is much more reasonable. Remember, you are more likely to get a mortgage if you have a large equity stake in the property. In Sally’s case, she will have a 125K equity stake in the new house.

Anyone having done a bit of mathematics in the past might be thinking there must be a formula for all this. And they would be right. Here it is:

So for Sally, she would need 200*.2 or 40K in equity for make the deal work.

The interesting thing about the equation is that the value of the owners current home is not a factor, only the equity position in that property.

Let’s verify those numbers, assuming the 40K equity position.

Sally now owes the bank 203K. She receives 43K from Bill in cash. Leaving 160K remaining, which is the assumed maximum mortgage she can obtain.

There you have it.

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No it’s not what you think. Actually, I have no idea what you are thinking, with a meaningless title like that. Actually, I am getting a bit techy here, so please close your browser now or risk ultimate boredom.

Still here? Excellent!

Domuswap was originally written using a Java framework I created called the XX framework. Over time, another excellent framework emerged, called the Spring framework. Spring encompasses most (though not all) of what XX did, plus much, much more. Most importantly, Spring has a very large and active developer community, something that XX never really achieved.

Since Spring was essentially XX+++ (++ just isn’t doing it justice), I recently completed migration of the XX Framework to sit on top of the Spring core. Essentially, I took what is uniquely useful about the XX framework and enabled it to work with Spring. A large part of XX can now (thankfully) be thrown away, using features integral to Spring in its place. In the future, XX will have an even tighter integration with Spring.

We just released the latest version of Domuswap, running as you read this, using the Spring core. It is certainly possible, almost likely, that some issues will come up over the next few days. Please let tech support know if anything seems unusual.

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I’ve said in recent news interviews that I think the severity of the housing downturn is hurting even swapping. This may seem counterintuitive, since swapping would seem to work best when owners are having trouble selling outright. However, for a swap to occur there needs to be balance. What do I mean? Simply, for a swap to take place we need an even transaction (same price houses) or one owner must trade up while the other must trade down. The problem in today’s market is finding the owner looking to trade up. At least that is my conclusion. I may be wrong.

Swapping works best when there is an even mix of owner motivations. To this extent, I’ve created a poll in the user forum area. Please let us know why you are looking to swap. Any other comments regarding your experience are also welcome.

See the poll at:

www.domuswap.com/swaptalk/viewtopic.php?f=5&t=146

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Want to find a swap?

Well, here is the secret…

Trade Up In Price!

It is as simple as that.

There is currently a very large percentage of users on Domuswap looking to trade down. You’ve probably encountered this in some of the inquiries you may have made. “Sorry, we are only looking to trade down”.

In this respect, the current severity of the housing bust is making it harder to find a swap. Many think that swapping is geared mainly (or only) towards a down market.  To that I say “not this down”.

To facilitate a swap, you either have houses of equal value, or one party must trade up while the other trades down. In this market, where it seems no one is looking to trade up, we have a fundamental problem.

The whole point of swapping is to get you into a better position than you are now. That might mean a comparable house closer to the location you want, even if it is not your “Ideal” match.

So the second secret to finding a swap is: “lower you standards”. I don’t really like the sound of that, but I just mean, don’t only look for your ideal swap. Anything that improves your position is a positive.

So, in summary, if you simply trade up in price to a much worse property, you will have no problem. I am not entirely serious on that point, though it is essentially true. But if you are in a position to trade up in price, you will find many serious offers out there.

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We just completed migration to new new, more powerful web server. This server should provide better performance and handle greater user load.

Domuswap also just past the one year mark, having debuted 5/31/2007. So a new server makes an appropriate birthday gift.

Please let us know if you encounter any issues with the new server. Thanks for supporting us over the past year.

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This article originally appear in Wall Street Profit News on February 2, 2008

Can’t Sell Your House? Swap It!
By David Moskowitz, creator of Domuswap.com

I don’t need to remind the readers of this site about the current housing crisis.

Housing is considered a basic human need, along with food and clothing. By the way the housing market has shut down you would think we were talking about tulips.

You might not say the market has crashed, since prices haven’t come down all that much, about 7% since last year. This would not even be considered a bear market in stocks at those prices. Even the 20% or so decline in prices from their highs a few years ago would seem like a minor bear market if applied to the stock market. But in the stock market analogy, even in a down market, sales can still remain high. This is not the case in the housing market. Sales have all but stopped, or so it seems from my vantage point here in Florida.

New home sales dropped 26% last year. The previous record was 23% in 1980. (AP)

A recent article in the Wall Street Journal quotes a Phoenix Realtor who says “For now, people trying to sell homes ‘done have a prayer’ in competing with lenders offering foreclosed homes and builders dumping excess inventory. (WSJ)

So the problem is a lack of buyers, to state the obvious. Since housing does have some intrinsic value, most sellers are still holding somewhat firm on their prices and not liquidating at fire sale levels.

So the problem I’d like to address is the fact that no one is buying. I’d also like to propose a solution.

What is a homeowner to do? How can someone compete with foreclosures, short sales, and builders unloading inventory. Don’t forget about auctions. Every buyer today seems to have the expectation of buying for next to nothing.

What if you absolutely need to sell your house for good reason, such as job relocation or a change in life status causing the need to upsize or downsize. I am not talking about investors whose latest flip was a bust. I am speaking about Joe average homeowner.

For this group, I propose that a solution lies in swapping your house. I see swapping as perhaps the only solution to save the average homeowner who needs to sell their property.

I was in this position myself, wanting to relocate from our current house to a smaller condo within the same market. Taking the typical route of listing with a Realtor, while looking for a new property, eventually got wearisome. There was no point looking for a new property, since I could not purchase one until I sold my current house. And nobody was buying.

The solution that came to mind was to see if any of the properties I was interested in would consider an exchange. Out of the few properties we inquired on, there were no takers. But what if we expanded that small handful to include all properties listed in the county. Or the country. By creating a large database of home sellers, we could likely facilitate matches. One need not find with their “ideal” match, only one “good enough“ , one that’s puts them in a better position than they are now in.

While not previously done for housing, this should sound an awful lot like a dating service. And it is essentially the same.

Since then, I‘ve created Domuswap.com. We currently have about 1800 listings and have facilitated successful trades.

The focus of Domuswap is on automated computerized matching. Once we know what the owner has to sell, and what they are looking to swap for, we match them with other sellers who want their property. We provide users with three lists of Matches (what they want), Seekers (who want them), and Connections (they want each other). Since this is all computerized, we can also calculate multi way swap, such as three way trades. These reports are emailed daily to our users.

Currently, most of the properties on Domuswap are listed by individual owners. However, I promote Domuswap as just another method (but more relevant today than ever) to sell houses. As such, Realtors should definitely consider Domuswap as a supplement to their other marketing efforts, since it opens up a new market of buyers who can’t buy before they sell their existing property first.

Another trend I see is home builders accepted trade-ins, similar to a car dealer. Builders can unload a more expensive property, and may have the experience to manage as a rental or redevelop and existing property. Just like a car trade in.

I invite all readers of this web site to visit Domuswap.com. It is a free service. I’d also love to get your feedback on our approach to house selling.

David Moskowitz is the creator of Domuswap.com, an online matchmaking service for real estate swaps, and president of Infoblazer LLC, a computer software development and consulting firm.

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Earlier this month, we rolled out an enhancement to our three-way swapping feature. Our home page describes this as “one of our most exciting features yet”.

Domuswap has always calculated three-way match possibilities; we call them “extended” matches. Three-way swapping greatly expands the number of potential matches for any property.

In a nutshell, in a three-way swap:

• Owner A wants Owner B’s House
• Owner B Wants Owner C’s House
• Owner C wants Owner A’s House

With only two of these owners, there is no potential match. But throw in a third property, and a three-way swap can occur, yielding three actual sales.

The description of how to use the new feature is listed on our Help Wiki, but I will elaborate a bit here.

All owners are presented with lists of matches , including extended matches. Those properties shown in the extended list are those that match your swap criteria, but can only be achieved through a three-way swap.

To initiate the swap, submit a property inquiry in the normal manner; click on the owner contact link on the property you are interested in and submit the inquiry and message to that owner.

The magic happens when that owner receives the inquiry. While he is not interested in your property, he will be informed that a potential three-way swap exists, and be presented with the list of potential third properties, property C in the example above.

Based on the list of potential three ways swaps, he can choose to accept the inquiry. If he accepts, the list of 3 ways swaps will then include check boxes next to each property. The owner can select among the potential 3 way swaps, and then submit an inquiry to all of these at once.

When Owner C receives the inquiry, he will be able to see all the properties of Owner A, the one he is ultimately interested in. Owner C can then accept or decline the inquiry. If he accepts, contact information for all three owners will be available.

This process can be seen as a simple extension of the normal two way inquiry process. While a bit more complicated, I don’t feel it is unmanageable.

Please give three-way swapping a try. There is probably more potential for three-way swaps within a local region, especially in markets with many listings, like Phoenix or parts of Florida.

And as always, please make your swap criteria(s) as exact as possible. The results of the matching engine are solely based on the quality of the input data.

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We recently sent out a brief survey to many of our users, specifically those users that have used the Domuswap inquiry system and have been in contact with other owners. We wanted to find out how successful the contacts have been, what were the results, and what roadblocks were encountered in the process.

We received (and are still receiving) lots of good feedback. My sincere thanks goes out to everyone who participated.

The responses we received range from “your site stinks” to “your site is the greatest ever” and everything in between. But we received lots of specific recommendations for new and improved functionality. I will be addressing the survey results in future blog postings.

And please remember, we always welcome your feedback and take it very seriously. Please email me any thoughts or suggestions you might have.

Thanks
Dave

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The title of this post may be misleading. I am not referring to home warranty coverage or homeowners insurance coverage. I am referring to insuring buyers against the financial down side of purchasing your home. In financial terms, this is called hedging.

I am beginning to see creative home sellers, mainly builders so far, offering some sort of hedge to prospective buyers. The first I saw of this was in a new condo development in Sarasota that simply offered to pay interest on the down payment. No big deal you might say, but this removes one of the barriers to prospective purchasers of that development: the loss of interest on their down payment. Since it is no longer likely that new developments will appreciate prior to completion, any down payment is essentially throwing your money away, or at least that is the impression. And it is the impression that matters. Offering interest also hedges against the (likely) chance that the new project will never be completed (or even started). In that case, instead of simply getting the deposit back, we are hedging against the loss of several years of potential interest on a sizable down payment.

Another approach I came across, again by a builder, is to offer reimbursement if the price of the unit decreases prior to completion. They are also offering to pay your mortgage for a fixed period of time in the event that you lose your job.

I am sure there is a large amount of fine print in these agreements, but the point is that creative steps are being taken to eliminate objections and obstacles to the buyer.

The same situation can be applied to individuals selling their home. The reason buyers are not committing is the fear that prices will be much lower next year. If they thought prices would be higher next year, they would be buying. So, as a hedge, the homeowner needs to take on some of the risk of falling prices. The alternative is to lower your home’s asking price to levels that are seen to be compatible with perceived future drops in prices. So if the market thinks prices will fall 20% next year, you need to drop your price by 20% today. The better approach would be to keep your current asking price, but agree that if prices to drop by 20%, you will reimburse the buyer. This may only work with owners with enough equity to escrow the hedge amount, but the mechanics are not what’s important. In the first approach (Cut price approach) the owner is immediately out the 20% he reduced his asking price. In the second (Hedge) approach, the owner MAY be out 20% if the market performs as expected, but maybe not if the market improves.

Remember, if the home seller does nothing, simply leaves the asking price as is, he will likely not sell the property, and will be taking the downside market risks upon himself, and still have an unsold house.

So the bottom line; let’s get creative. Just as Domuswap applies techniques used in online dating, home sellers can apply common financial techniques to remove downsize risk. I think this is a trend worth watching.

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I often get asked by prospective users “how to you make money”. Rather than being concerned for my welfare (thanks if I am wrong) they want to make sure they won’t be hit with hidden fees at some point in the future. Rest assured that Domuswap is absolutely free. We do make some money on the advertisements you see. We are now adding upgraded property listing features. This approach, also called the “Freemium “approach, is very common on the internet. In conjunction with advertising, it is probably the most common approach web sites use to raise funds.

We have always strived to make Domuswap completely free. In addition, we want the free version to have all the available and necessary features, and not be a crippled, teaser of a service. So we have been thinking for some time how to marry the two requirements; making some money (which is needed for expanded development, marketing, etc) while keeping the core product absolutely free. The “Freemium” approach, to offer additional paid services, is the most obvious. But we want to do this in an interesting, useful, and non obtrusive manner.

We will offer two upgrades: Enhanced Listings and Home Page Featured Listings.

The enhanced listings will function similarly to how some search engines sell better positioning. You will have the option of paying to upgrade the listing. The amount you pay will affect your positioning on searches. So the more you upgrade, the higher your property will appear in search results. You may upgrade as often as you like and the upgrades will be cumulative. The searching will still conform to any filtering selected, so we won’t be displaying higher paid properties even when they don’t match what you are searching for.

The second upgrade available, home page featured properties is something you are probably already familiar with. Previously, these were properties that I found interesting and chose to feature (with the owner’s permission of course). We will now let everyone get into the action and get on the home page. This service will be priced at $4 per day. You will be able to customize your ad and text somewhat and put in a larger photo.

You can sign up for any of the upgraded features clicking on the property details link on your profile page. From there, you will see a shiny new ‘upgrade this listing” button.

In addition, paid advertising, geared towards businesses serving the Real Estate industry, is also available. Please contact us for details on that service.

Please let me know your opinions of this or any ideas for new premium services.

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