We use the Financial System to transfer assets from one owner to another. We do this by transferring money to the seller. The approach works well when the time over which we transfer the asset is short. It costs extra money when the time to transfer the asset is longer because the financial intermediaries charge interest on the money during the time the money is transferred. For assets that hold their value like a house, it typically doubles the cost of the asset and this cost is distributed between the buyer and the seller. The financial intermediary justifies this cost by saying they take on the risk of transfer. For most infrastructure, they take only a little risk and either the buyer or the seller takes most of the risk.
Instead of renting money from the financial system and paying interest to cover the risk the buyer and seller can come to an arrangement to share the risks by sharing the profits derived from use of the asset. Instead of the buyer taking all the profits from the use of the asset the buyer can share some of the profits with the seller in return for paying for the asset over a longer time period. Doing this removes the cost of interest from the transfer, and the buyer and the seller share the savings.
Property of value $100,000. The property earns a rent of 5% a year. The buyer goes to a bank and borrows money at 4% a year to buy the property and repays it over twenty years. The interest paid over twenty years is $60,485 or $3024 per year.
In this case the buyer has paid $160,485 for the property and the seller has received $100,000 that they now invest. If they invested it in a property they will get a return on the $100,000 which would be 5% minus the cost of owning the property.
If instead of this the buyer and the seller come to an agreement. The seller says they want an investment that returns $200,000 inflation-adjusted annuity over 25 years and the buyer says they are willing to pay the annuity.
In this case, the seller gets a fair return on their funds. The buyer appears to pay an extra $39,515 but they do not pay it until the asset has made a profit.
For a given property, it is difficult to find a match between a buyer and seller that can come to an agreement. If many buyers and sellers work together in a Co-operative the rules for buyers and the rules for sellers can be established independently of each other so the total of all the transfers balance. A system to do this is called a Complex Adaptive System.
A Pre Paid Rent Scheme for Co-operatives
The model of sharing the risk between buyers and sellers takes many forms. The following is one flexible example.
For the buyer they pay rent at 30% of their disposable income or 5% of the Capital Value of the property whichever is the lower. For each dollar of rent they pay 50% is a transfer of the asset value of the house in which they live.
Sellers sell their house to a not for profit Co-op and instead of single cash payment they receive rental prepayments. They receive double the value of their House but they receive it in equal amounts over 25 years. Each time they receive their rent then 50% of the amount they receive is a transfer of asset value while 50% is a capital gain. If they do not receive any rent then the money they would have received is reinvested automatically into the Co-op.
The Co-op takes a 20% fee of the money transferred to operate the Co-op. If it makes a profit the profit is shared between the buyers and sellers by reducing the amount of rent for the buyers and by reducing the amount of the asset transferred for the sellers when they receive a payment. If no value is transferred the Co-op still charges the 1% of the Capital Value of the home to cover the operating costs of the Co-op. The 1% covers many common operations that renters of houses have to do such as collect rent, pay annuities, pay some insurance, keep track of assets, and handle real estate transfers and costs.
The person who has paid for the home can now leave the Co-op if they wish and transfer the title of the house from the Co-op to themselves.
Assume a household has a disposable income of $24,000 then 30% is $8,000 per year. This would rent a place of value $160,000 if the home was purchased in 25 years. The same amount per year would rent a place of value $320,000 if the home was purchased over 50 years.
Buyers can put down a deposit on a house by pre-purchasing rental payments. They can use them immediately at their face value or use them over time and get twice the value for them because buyers become investors in other Coop homes.
Sellers can get their money in one lump sum or they may wish to get their money as PrePayments and use the Prepayments to pay to rent the property in which they live (like a reverse mortgage) or receive payments as an annuity over 25 years.
Investors may be accumulating assets or they may have lump sums. What they purchase are Rental PrePayments and they get twice as many PrePayments back over 25 years. Investors can sell their Prepayments for their face value to another member.
An investor looking for a secure income stream for their retirement
An investor has $1,000,000 and wants an investment that returns $80,000 each year for 25 years. They achieve that if they join a Rent to Buy not for profit Co-op and purchase $1,000,000 Rent Pre Payments. Each year $40,000 is a return of capital and $40,000 is returned as a Capital Gain.
Home Buyer with a deposit
A person has a deposit of $200,000 and wishes to buy a home for $1,000,000. They put in $200,000 as prepayments on rent and purchase $200,000 of their home. They can then pay rent on $800,000. The rent is the maximum of 30% of their disposable income or 5% of $800,000 or $40,000.
Home Buyer with a partially paid off mortgage.
The Home Buyer sells their home to the Co-op and the Co-op pays off the mortgage. The home is valued at the price of the mortgage. The Home Buyer pays rent at a maximum of 5% of the home value or 30% of their disposable income.
A Renter who wishes to get equity
An owner of a rental property can sell their dwelling to the Cooperative and collect an annuity instead of rent. The owner can contract with the Cooperative to operate the property and get paid for their services. Fifty per cent of each dollar a renter pays becomes a pre-payment credit that the renter can use for future rent payments or as a deposit on a home.
Down Sizer moves to a new home
Home Buyer sells their home to the Co-op for $1,000,000 and receives that value in rent prepayments. They move into a home owned by the Co-op of value $600,000 and they receive $400,000 in prepayments which gives an inflation-adjusted annuity of $32,000.
Home Owner Sells Part of their Equity in their Home
Sometimes people need extra income but they want to remain living in their home. They can become a member of the Co-op and obtain prepayments for part of the value of their home and sell those prepayments. They then have to pay rent on the equity they do not have or pay 30% of their disposable income in rent.