[caslon]

Obvious warning to all reading: The catch is "net profit."

This is used to harm actors all of the time. Basically, the company is heavily incentivized to get really creative with their accounting, so even on lucrative projects they don't have to pay you much of the value reaped from you. One of the oldest scams in the book, and the incentives are such that the company (Homestead in this case) would be acting irrationally if they didn't practice it. It's a no-win situation. Either they're acting irrationally, in which case why trust them? Or they're acting rationally, which means that you lose if you trust them.

https://en.wikipedia.org/wiki/Hollywood_accounting

https://en.wikipedia.org/wiki/Creative_accounting

[sam_schneider]

We pass through building costs, there is perfect alignment in our incentives, which is to maximize sales price.

[alephnan]

There is no such thing as perfect alignment of incentives.

If this were the case, real estate brokers wouldn’t on average have their property on the market longer, and sell for a higher price, then their clients. The classic Freakonomics example.

80/20% profit split is a nice round number, it’s unlikely that this is where perfect alignment is found. If the split was 100/0 or 0/100, we definitely know incentives are not aligned, and so reductio as absurdem there are split points at which the incentives aren’t aligned. In fact, there is likely at most 1 equilibrium of perfect alignment, and the rest aren’t. Furthermore, if 80/20% is fixed as your company changes and administrative costs, production/resource cost changes, then the incentives for each party is constantly changing.

[iso1631]

In theory you could choose a building firm you own that charges 500k instead of a different one that charges 400k (and even subcontract it to the 400k firm).

If you sell for 1M that means you keep the extra 100k from the building firm and 100k from the land.

If you go with the cheaper builder you only get 120k

[sam_schneider]

I mean, in theory me, who has spent their whole life working on solving problems in the physical world at scale—-for the last 4 years working on housing—- could run a scam that was horrible for homeowners and then get sued for price gouging, and expose myself to personal lawsuits, legal persecution (imagine how unsympathetic the jury would be).

This is true with any product that is new and requires mutual trust.

Or we could just deliver a product people want, and make much more money at scale than trying to optimize for a short term scam!

[treis]

How do you account for the reduction in value of the existing home?

Also, how do you deal with existing lein holders? I.e. the current mortgage.

[sam_schneider]

Great Q! As of now, the homeowner has to refinance on the smaller lot. We have a partner that will do it at the time of application, and underwrite it in consideration of the future income.It hasn't been a problem to date, though it may hold up some projects.

In theory banks could approve the transfer—certainly they could split the lot, but the current lien would be spread between the two lots, and we couldn't finance the property today.

A crazy insight: Many of the customers we work with don't have mortgages.

They intrinsically don't trust debt, because of either low income, job insecurity, and/or their long tenure of homeownership (often intergenerational). They do like the ideal of selling their yard for money, and don't have the risk appetite/ability to go it alone!

We're working on a solution that will allow the existing lien-holders to stay on title until sale--making a refinance less burdensome for the current homeowner.

Down the road, we'd like to provide the owner to keep some ownership interest in the property with homestead, if they'd prefer long term income. In this arrangement, we likely wouldn't

[sam_schneider]

For home value: It's about 5-12% decrease depending on the setup--in extreme cases as bad as 15%. We haven't had a pre-assessment come in lower than 15% (the homeowner still going to make a lot——it's a large property). Most are around 7-8%. Usually there is 50%+ return, so that previously illiquid/non-existing capital has a much higher value, but there is real depreciation.

Lower value homes depreciate less, higher value more--but are offset by larger returns!

It will likely re-appreciate in a few years, and so the loss is temporary/the other capital could be deployed to quickly outpace any depreciation.