A Guarantee Against Losing Cash on Homes?

As thoughts of today's troubled housing market conjure up images of lonely tumbleweeds blowing across streets of empty condos and "For Sale" signs, a couple of financial wizards have come up with a program they believe could breathe new life and buyer confidence into the decimated sector. It's called Sirius Value Protection — and works like a 'put option,' where buyers of new homes get the right to exercise a put that would require Sirius buy back the home at the original price after an eight-year period.

Andrew Herzberg, along with his brother Kenneth, both former investment bankers, came up with the program after seeing sales grind to a halt on thousands of newly constructed and half-built single family homes and condos in markets such as Las Vegas, Phoenix and parts of Florida. The aim is to assist developers and homebuilders clear unsold inventory, which — at least theoretically — should then help to stabilize home prices industry-wide. (See the best business deals of 2009.)

"The consumer is very, very fearful — they have no idea where the bottom of this market is and they're very concerned that if they buy a piece of real estate now, that two or three years from now they'll see further significant erosion in the value of their property," says Andrew Herzberg, co-founder of Sirius Value Protection LLC, a closely-held company based in New York.

Jittery home shoppers have watched home prices plunge 30% on average from their mid-2006 peak, according to the Standard & Poor's/Case-Shiller Home Price Index, with some markets suffering price drops as deep as 70%. Many potential buyers are further frightened by economists and analysts who predict prices could fall another 5% to 10% before the sector bottoms out — and possibly worse if the country experiences a double-dip recession.

Those fears were abundantly evident in a recent Conference Board report showing that consumer confidence took an unexpected dip, sliding 11 points in February, and the present-situation index, which measures consumers' opinions on current economic conditions, plunged to its lowest level in 27 years. "People are scared," says Herzberg. (See the worst business deals of 2009.)

Sirius Value Protection offers to calm investor jitters by guaranteeing the long-term value of the property through the put option, says Herzberg. At the same time, the program gives the developer, fund manager, bank, or homebuilder — whoever currently owns the newly-built home — a competitive edge over rivals, he says.

"In South Florida, you have literally tens of thousands of unsold units and a lot of the biggest builders see this [program] as a significant marketing tool," says Herzberg. "It gives them a huge competitive advantage in a very crowded marketplace."

Still, Herzberg's Sirius Value program is far from a slam-dunk fix for the housing slump. Under the program, which received a provisional patent from the U.S. Patent and Trademark Office last month, the developer or homebuilder must give 20% of the purchase price to Herzberg's group as a fee for the put option — a payment that many developers may be reluctant to cough up. "20% is astronomically high!," says one analyst, who did not wish to be named. "What builder would give away 20% when they're doing 5% or 10% [pretax] margins? If they gave away 20% of the house price, they'd lose money on every house." He sees a 2% or 5% charge being more reasonable.

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