Okay, I’m open to opinions on this crazy idea.

A Hedge in Harlem?

WHAT if there were a different way to buy real estate? One that helped ease anxiety for buyers by helping to protect them against the risk of buying into a softening market? And one that provided potential benefits to the seller as well?

Suppose the buyer and seller agree on two prices for a property: a maximum, and a minimum perhaps 5 or 10 percent lower. The buyer pays the minimum price at the closing, and the balance is put in escrow.

Next, they wait about six months and then consult the most recent quarterly sales figures for the local housing market. If the average sales price of a home in the area has risen by an agreed upon amount, measured on an annualized basis, then the seller gets the money in escrow. If prices haven’t risen that much, then the buyer gets the escrow money back.

In this way, the buyer creates a hedge, a kind of insurance policy against the market’s softening after the purchase. And if prices continue to rise, the seller presumably achieves a higher price than he otherwise might for his property, in effect benefiting from the overall market appreciation after the sale.

Well, I’m kind of for that.

I think the reporter has it backwards, though. The seller thinks the property is worth $500,000, today, but the buyer doesn’t think so, because of a slowing market. He thinks it’s only worth $450,000. So, they put $50,000 in escrow, at closing. Then, they watch to see what homes sell for over the next six months. If the average or median price of similar properties goes down, the buyer gets a certain amount back. If the average or median price stays the same, then the seller keeps the proceeds.

Of course, each property is unique and distinct. To try to do this, is kind of silly.

Source: Dumbo Is Humble No More (second item) – By William Neuman, The New York Times

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Updated: December 2017   1st Quarter 2018

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