In part one I went over REAL token, a real estate investment token where investments are focused on the hospitality industry and other “value” properties. It is analogous to a legitimate crowdsale fund, for which there is an established business model and by which the advisors of the company can be judged by.
In part two we are moving onto the second in our three part series, SmartRE. Unlike REAL, they are only seeking to help home owners gain additional liquidity from their homes by exchanging a minority share of their home equity for SmartRE’s tokens on their exchange. The value of the tokens is derived from the value of the home value itself.
In the whitepaper, SmartRE make the argument that their tokens will be interesting for home owners because most Americans have a lot of debt and so by giving away their home equity they can unlock their wealth. If these homeowners use this money to reinvest and make a higher % back, it’s a great idea. However, I’m guessing a lot of homeowners don’t have the fiscal responsibility to make sound decisions like these. Hopefully SmartRE runs a decent background and credit check.
The buyers who purchase the home tokens get a fractionalized piece of the home. They don’t receive any rental income and they don’t have to pay any taxes. They only profit if the home price appreciated during the months or years between when the first and last appraisal occurs. If the price declines, they lose money, if it goes up, they profit. They have to make the correct investment choice.
The company plans to start initially in the San Francisco Bay area, as demand for houses and other living abodes have skyrocketed prices over the last two decades. Normal people can’t even afford to live there now because of the tech boom. In fact, some have even said that the city’s real estate is in a bubble and there are even signs that it could be ready to burst. This lack of diversification could hurt SMartRE in their infancy. A modest correction could seriously affect buyers interest in rapidly declining home prices in the Bay area. Once they establish themselves though, SmartRE plans to expand to “the high-demand regions of Southern California; Manhattan, New York; Austin, Texas; Seattle, Washington; and Portland, Oregon.”
For the homeowner to list their home on the SmartRE platform they must complete several actions as follows: “These include a complete property title search to make sure it is clean and clear, mandatory up-to-date homeowner’s insurance, and a good credit score.” Afterwards, they can list up to 49% of the equity value on the platform, however, they get to determine the final equity price, which could differ from the independent appraisal price. Below are the steps necessary for the homeowner to list.
Additionally, buyers must purchase home insurance through SmartRE to protect the equity value of the property in case anything happens, such as floods, fire, earthquake or anything else that could affect the asset’s value. These insurance plans are not dependent on the homeowners having insurance themselves.
Buyers then can purchase the fractionalized equity shares on SmartRE’s app using cash or tokens such as ETH, BTC, or XRP. If a minimum threshold of 5% of the equity tokens are not sold, buyers receive a full refund. Pics of the app below.
The coin is an Ethereum smart contract which records proof-of-existence and keeps all data related to the equity exchange on the blockchain. This includes “all data related to the property including the title information, signatures with official registration seals, other legal paperwork, percentage liquidated, etc.”
The following chart from their whitepaper provides all of the info concerning the token sale:
Strengths & Weaknesses
Looking past my cynical outlook of the San Francisco real estate market as mentioned above, it has been one of the fastest growing markets in the United States for a reason. The tech boom has injected billions of dollars of wealth and value into the market as more and more tech companies establish themselves there and have made San Fran the premier tech destination globally. In the gran scope of things, the market will only to continue to grow as Google, Facebook, and the multitude of other massive tech companies continue their expansion.
Home prices, therefore, will probably continue to rise, even though average people can’t afford to live there anymore. Additionally, SmartRE will be focusing their efforts on attracting buyers from China and India, where several of the founders have previous working experience. CHECK OUT TEAM
SmartRE charges the homeowner fees of 6.5% of the total equity value exchanged and the buyer a 0.5% fee. The average San Fran home price on Zillow is approximately 1.2million USD. If we assume that all property owners exchange the maximum 49% equity value, and that SmartRE services 500 homes in year 1, 2500 in year 2 and 10,000 in year three, their revenue for those three years would be 21, 105 and 420 million USD respectively. By year 4, when they plan to service 40,000 homes, they would be a multibillion dollar company.
The main problem I see for SmartRE is the rapidly growing competition in the field. The next ICO reviewed in this series, LAToken, provides the exact same service, however, they provide equity up to 75% of the asset value, plus they will accept other types of illiquid assets (precious stones, commercial buildings, etc.), rather than just residential property. Many, many more companies like this will spawn in the future and it’s too early to determine whether SmartRE will succeed.
Additionally, the buyer is solely at the whims of the market and has no rights to draw income from the house if the homeowner is renting it out. They can only benefit from an increase in the home value price and an increase in their token value. Last year SF home prices increased by 6.5%. While this is impressive, it’s well above the average for metropolitan home price increase, eventually prices momentum will decrease and the year on year returns will regress to the average.
The investor is favored in this transaction in my opinion, as they get to keep the property and enjoy the benefits of having an interest free (minus the 6.5% fee) equity exchange. The buyer doesn’t have to worry about property management, but there are many external risks which could affect valuations.
I’m sure there may be some institutional investors who will be interested in this project, however, I will probably sit this ICO out until their business can prove itself. If they can market well to Asia, it could help their platform be very successful, but with a lot of competition in the space, it’s unclear whether they will come out on top.