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Comment by Jemaclus | Hacker News Reader

For years the simplest heuristic I can find for finding up-and-coming places has been "Where is Starbucks opening new stores?" I assume Lofty's is much more complicated than that, but I'd be curious to see what the overlap is between the Starbucks Strategy (TM) and Lofty AI's.

I do have a few more questions though:

- Also, are you focusing on primary residences, homes as investments (i.e., rentals)? Do you consider apartments, duplexes, or commercial real state?

- Do you have an idea of how long one would have to own these homes for the appreciation to appreciate in a significant enough way for it to be profitable?

- You mention "some of the future profit". How much is that? 1%, 5%, 10%, 50%?

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Great question! The Starbucks Strategy is actually well known in the industry. Believe or not, large real estate developers and investors will often follow the same signals. They also look for things like Trader Joe's or Whole Foods opening.

Our algorithm is very similar in concept to this strategy. However, by the time Starbucks or Trader Joe's opens in an area, it's often towards the middle or late stages of a neighborhood's growth. We can find amenities that are even earlier indicators than Starbucks. Think your one-off local coffee shop named "Bob's coffee" or something similar.

We are focused on the appreciation potential of residential real estate, which has single family houses, condos, and town homes. However, we have noticed that in areas where home prices are growing, rents typically are growing as well. So our customers are welcome to rent out the properties for cash-flow.

We do not have data on a lot of commercial properties, but we can still underwrite the agreement on duplexes and smaller multifamily units.

It typically takes 3-5 years on average for neighborhoods to see the exponential portion of their growth curve, so our agreement is for 3 years by default.

Our share of the profit is 20% of the gross profit. So, if you had bought something for 100,000 and you sold it for 200,000 in 3 years. Then, we would get 20% of the gross profit ($100,000), which would be $20,000.

edit: made numbers in example more clear.

Is this share of the profit based on actual profit after sale or the valuation after 3 years?

From my limited research, property flipping every few years isn't a great idea because of how much is lost in the actual buying and selling process e.g. realtor fees.

Our customers have 2 options. They can choose to sell, at which point, the 20% is based on gross profit realized.

Or they can choose to buy us out. At which point the 20% is based on the "on paper appreciation" calculated by using the rate of change for the median home price in their neighborhood.

If they use the latter option, they of course, will not have to pay the fees associated with a sale.

We are also looking into whether we can partner with listing agents, who will share some of the commission with us, which we will then refund back to our customer to offset their fees.

Excellent answers. Thanks!

according to the site, you keep 80% of the profit, so their cut is 20%.

You keep 80% of the GROSS profit, so if there were $10k in closing costs, and $5-10k/year in taxes/HOA/condo fees, and the furnace and AC need replacing, etc...

Lofty makes this sound risk-free but it certainly sounds possible that your obligation to them would cancel out your entire NET profit. Buyer beware, as always.

Your point is very valid. Closing costs and other fees related to real estate transactions are something we do not cover at the moment.

Our belief is that there shouldn't even be all these fees for home buyers and sellers, because most of the process can be automated to a degree. At a minimal the fees can be reduced. It's early now, but we really do intend on becoming the most honest and transparent ibuyer model on the market.

As such, we are looking for ways where we could build on top of our service to help people reduce their transaction fees either through partnerships or some new service that we would provide. Partnering with listing agents, where they give us a portion of the commission, and we refund it back to the customer is one way of doing this.

But the goal is always to align our interests with our clients'. The more money you make, the more money we make. If you make no money, we not only make no money, but we might lose money.

This is a good point. What if one spends $20,000 fixing up a property, and that contributes to what is ultimately a $50,000 increase in appraisal value?

EDIT: There is an existing response from another comment thread:

>That's a great point! This is why we deduct any home improvement costs from the gross profit calculation. So, if you spent 10,000 fixing the pipes and the gross profit was originally 100,000, we would actually deduct that from the gross profit. So our 20% share would be on top of 90,000 and not 100,000.

Haha thanks, you beat me to it! :)

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