Equity Finance of Residential Real Estate: A Potential Market Transformation Program

Jamie Woods, quantec, LLC

Keywords

Abstract

Purchasing a home is one of the worst investments that can be made. Real estate is usually too large a fraction of wealth to justify on portfolio grounds and too complex for the average consumer to make informed judgments about value, durability and operating expenses. Energy efficiency market transformation programs, to date, have focused on educating the consumers so that they can make more informed decisions. This has not met with much success.

Equity finance, through a partnership with a non-resident investor, adds both reliable information, through the property specification in the partnership agreement, and an expert consumer, the non-resident investor, whose incentives are perfectly aligned with the resident homebuyer. These perfectly aligned incentives come from the form of the partnership, prearranged shares of both the purchase and sales price with additional contract terms about improvements and expenses.

Equity partnerships are much more effective than consumer education, since the equity partners are involved in many transactions and their incentives are so perfectly aligned. Real estate becomes more like a restaurant meal, frequently purchased, frequently criticized, and very responsive to sophisticated customer demands.

This potential energy efficiency market transformation program can have changes on the energy efficiency and quality residential real estate through many different mechanisms. This paper explores: the benefits to the financial community; how equity finance will work under several behavioral assumptions about homebuyers; changes in training and incentives of builder and their employees; and the minimum requirements that will ensure a vibrant secondary market in home equity.