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Launch HN: Lofty AI (YC S19) – Real estate investment with alternative data

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Re: Launch HN: Lofty AI (YC S19) – Real estate investment with alternative data

#41

Post by erichurkman »

loftyai wrote: post #34
josephpmay wrote: post #33

Against my better judgment, I'm gonna comment that I hate this. This is certainly a good business/investment opportunity. If your algorithms are any good you'll make a lot of money, and you'll help your customers make money. My problem with Lofty is that it is bad for society. Fundamentally, this is gentrification-as-a-service. You're driving additional demand to neighborhoods at inflection points, and if it works we…

You're absolutely right about this, and it is something we have and are considering everyday. I will be honest and say, at the moment, we do not have a perfect solution yet. One of the things we looked into before starting the company was a paper that mentioned the Portland project, which showed that gentrification and displacement are not always synonymous. There, the neighborhood was completely gentrified, but the…

> There, the neighborhood was completely gentrified, but the locals benefited greatly, because many of their home prices increased in value

But they lose mobility as their family needs change. New kids and need a larger home? You can sell yours, but the differential between a 2br and 4br is now outside your price range due to gentrified prices.

Also, it depends heavily on tax laws. Long time California home owners are protected from tax increases under Proposition 13, but many localities lack these protections, so ultimately higher taxes price you out.

Re: Launch HN: Lofty AI (YC S19) – Real estate investment with alternative data

#42

Post by onlyrealcuzzo »

I'll start by saying that I assume you know much more about the market than me, given that you've started this company and made it into YC.

If I read your post right -- the way your insurance works is:

I'm a home buyer. I think the housing market is frothy right now, but I want to buy a home anyway. So I can use your insurance to protect myself in the event the value of my house decreases in the future.

Your company is directly responsible for the first 20% decline. After that, other companies are responsible for the rest. And even if you go out of business, I'm still covered by those other companies.

Firstly, is that correct?

Secondly, if so -- what happens if you go out of business and my house goes down exactly 20%? I assume that means I have no coverage.

Thirdly, who's insuring the houses after a 20% decline? And why should I have any reason to believe they'd still be in business if the market collapses 20%+? The last time that happened, almost every insurance company and investment bank went out of business.

Finally, how much does this cost as a percentage of the house's current value yearly? Roughly...

It's an interesting idea. Despite the fact that most home buyers anticipate house price appreciation to underperform historical averages (and a lot of buyers actually think prices will go down) -- a lot of houses are being bought. I think a lot of those people would want an option like this.

Re: Launch HN: Lofty AI (YC S19) – Real estate investment with alternative data

#43

Post by ac29 »

loftyai wrote: post #19
whoisjuan wrote: post #11

Do you have any type of financial insurance to backup of your claim that you will cover losses if the property sells for less? I'm not talking about having the money available to cover the losses, but actually being around at all to honor that claim. What happens if I buy today and your company goes to hell in two years? How can I trust this transaction with a horizon of 3 years without fully knowing how are you goin…

Great question! So, we actually maintain a 3rd party account that is only allowed to invest in short-term US treasury notes. We track all the properties in our portfolio daily. Any on paper depreciation will result in us depositing funds into the 3rd party account. Whenever a property price moves above the original purchase price on paper, we will withdraw any previously deposited fund. This on-going process along wi…

> We track all the properties in our portfolio daily. Any on paper depreciation will result in us depositing funds into the 3rd party account. Whenever a property price moves above the original purchase price on paper, we will withdraw any previously deposited fund. This on-going process along with the hedging instruments are what allows us to guarantee the downside protection.

So how does it work if your system values a property above what it's actually able to sell for? It sounds like so long as you value the property at or above the initial purchase price, there is $0 set aside to pay out any loss of value claims. If the owner sells into a falling market, and needs to sell for less than the initial price how can you pay out? Why wouldnt they just take any price they can get if they have 100% downside protection?

Moreso - if the overall housing market is falling, how does the business survive if all of your customers sell at a loss? I can't think why someone wouldn't sell if they have 100% downside protection and can then move into a cheaper home.

Re: Launch HN: Lofty AI (YC S19) – Real estate investment with alternative data

#45

Post by [deleted] »

loftyai wrote: post #29
mayank wrote: post #25

Earlier quoted context omitted.

> So, even if our company ceases operations, all of the downside protection will still be available to our customers. Can you expound on this a bit? If you go under, who would I have to go to get paid? What legal guarantees would I have in place assuring me the payout? How do I know that your underwriting scheme is sufficient for covering your exposure?

Per the operational parts of your question, it will be our lawyers who would be maintaining the 3rd party account and making sure the money gets sent to people who are owed the loss coverage. In terms of our our underwriting process works. We do have clauses in our contract that removes our liability for act of god events, civil strife, or war. Barring these scenarios, the only other events that can move a property's…

[deleted]

Re: Launch HN: Lofty AI (YC S19) – Real estate investment with alternative data

#46

Post by loftyai »

onlyrealcuzzo wrote: post #42

I'll start by saying that I assume you know much more about the market than me, given that you've started this company and made it into YC. If I read your post right -- the way your insurance works is: I'm a home buyer. I think the housing market is frothy right now, but I want to buy a home anyway. So I can use your insurance to protect myself in the event the value of my house decreases in the future. Your company…

Thanks for your question!

I believe my main post or the responses might have been unclear. If so, my apologies.

But your understanding isn't correct. Other companies are not insuring your downside. We are the only counter party you have.

The problem is if a recession happens, then a lot of our properties actually decline in value. As a result, we might not be able to pay you back. So to make sure we can pay you back we buy financial instruments on the open market, kind of like buying a stock of apple for example. These instruments work in a very interesting way. Their prices go up, if the real estate market goes down. Their prices go down, if the real estate market goes up.

So, with these instruments. We can ensure that in the event of a recession, we can still afford to pay you back, because we can sell the instruments for higher prices than we originally paid for. We then use that profit to cover the losses our customers experience.

The way this works out is that events that would cause large declines in the property values are covered by these instruments. Which means, as a company, we just need to pay specific attention to the potential losses between 0-20% range. Here, we deposit the 20% value of the original purchase price into the 3rd party account.

In the event that our company stops operation. These hedging instruments don't expire or disappear. They are bought at the beginning of our agreement with our customer. As a result, these instruments will be passed off to our lawyers along with the 3rd party account for them to maintain. This way, your loss coverage will still be guaranteed even if we go out of business.

Is this more clear? If not, I can always elaborate :)

Re: Launch HN: Lofty AI (YC S19) – Real estate investment with alternative data

#47

Post by Bombthecat »

loftyai wrote: post #46
onlyrealcuzzo wrote: post #42

I'll start by saying that I assume you know much more about the market than me, given that you've started this company and made it into YC. If I read your post right -- the way your insurance works is: I'm a home buyer. I think the housing market is frothy right now, but I want to buy a home anyway. So I can use your insurance to protect myself in the event the value of my house decreases in the future. Your company…

Thanks for your question! I believe my main post or the responses might have been unclear. If so, my apologies. But your understanding isn't correct. Other companies are not insuring your downside. We are the only counter party you have. The problem is if a recession happens, then a lot of our properties actually decline in value. As a result, we might not be able to pay you back. So to make sure we can pay you back…

He was talking about a recession. Which might happen. (since people feel like it is getting closer)

If you know a stock which actually goes up in a recession, please let me know!

Re: Launch HN: Lofty AI (YC S19) – Real estate investment with alternative data

#48

Post by loftyai »

ac29 wrote: post #43
loftyai wrote: post #19

Earlier quoted context omitted.

Great question! So, we actually maintain a 3rd party account that is only allowed to invest in short-term US treasury notes. We track all the properties in our portfolio daily. Any on paper depreciation will result in us depositing funds into the 3rd party account. Whenever a property price moves above the original purchase price on paper, we will withdraw any previously deposited fund. This on-going process along wi…

> We track all the properties in our portfolio daily. Any on paper depreciation will result in us depositing funds into the 3rd party account. Whenever a property price moves above the original purchase price on paper, we will withdraw any previously deposited fund. This on-going process along with the hedging instruments are what allows us to guarantee the downside protection. So how does it work if your system valu…

Great question! In our agreement, we set the initial sales price for the customer. However, for every 30 days it does not sell on the open market, they can lower the price by up to 5% until it sells. So, if it ultimately sells for a loss as a result, we would still provide the loss protection.

In the event that a customer wants to buy us out after 3 years. The rate used to calculate change in on paper value is derived from the median home price rate of change from that neighborhood. The value comes from the MLS and it's a rate that neither we as a company nor our customer can artificially manipulate. So, we think it's the best representation of the market change.

If the overall house market is falling, our hedging instruments will provide us enough revenue to offset our customer's losses. If it's not a market wide recession, the gains from some contracts should very easily offset some of the losses along with our own capital we use to guarantee the loss.

These methods combined should allow us to guarantee the losses in all different market scenarios.

Re: Launch HN: Lofty AI (YC S19) – Real estate investment with alternative data

#49

Post by loftyai »

Bombthecat wrote: post #47
loftyai wrote: post #46

Earlier quoted context omitted.

Thanks for your question! I believe my main post or the responses might have been unclear. If so, my apologies. But your understanding isn't correct. Other companies are not insuring your downside. We are the only counter party you have. The problem is if a recession happens, then a lot of our properties actually decline in value. As a result, we might not be able to pay you back. So to make sure we can pay you back…

He was talking about a recession. Which might happen. (since people feel like it is getting closer) If you know a stock which actually goes up in a recession, please let me know!

Haha it's not really about the stock itself. It's about how you bet in the market. If you truly believe that the market will fall, you can short sell and index fund or purchase some put options on that index. If the market does fall, you will make money as a result.

You just need to make sure the instrument you are betting against is representative of the overall market.

Re: Launch HN: Lofty AI (YC S19) – Real estate investment with alternative data

#50

Post by omarchowdhury »

loftyai wrote: post #37
meerab wrote: post #32

What is role of Real estate agent in your business model? Why would a buyer be willing to shell another 3% for a Buyers Agent?

This might not be the case everywhere in the country, but typically, the seller is responsible for the agent fees. This means that if we recommend an agent for our customer, who is the buyer, that agent is actually paid for by the seller. We have the relationship, because we do have customers who are very inexperienced and this would be their first purchase. So, a lot of them still want to have to ability to talk to…

Is it possible to recommend a real estate agent to you?
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