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Comment by loftyai | Hacker News Reader

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 with the hedging instruments are what allows us to guarantee the downside protection.

As a final layer of protection, we know exactly what our on going exposure is, so we know the maximum amount of contracts we can underwrite. We are very strict on this number and will never move above it. So, even if our company ceases operations, all of the downside protection will still be available to our customers.

Keep in mind, we also know exactly what our on going

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> 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 depreciation to more than 20% is a recession scenario, which the hedging instruments would cover.

So, in reality, our exposure for every home is between 0 to -20%. So for every home we underwrite, we just need to mark funds equal to 20% of the property value.

Is this clear? If not, I'm happy to expand on it further?

> 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.

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.

I understand the money part. My question is purely operational. Who is going to write me a check if Lofty AI, Inc. disappears? Do you have a contract with the 3rd party to do that?

Ah got it! Sorry for the misunderstanding. Essentially in the case of our demise, our investors are not able to claw back the money in the 3rd party account. The rights will transfer over to our law firm to maintain kind of like an estate. They will be the ones to handle the operation of writing checks and sending funds to the correct counter parties down the line.

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