Note: Descriptions are shown in the official language in which they were submitted.
CA 02578451 2007-02-13
A SYSTEM AND METHOD FOR INSURING REAL ESTATE TRANSACTIONS
FIELD OF THE INVENTION
The present invention relates to an insurance-type product and methodology,
and more
particularly relates to an insurance-type product and methodology in relation
to one or more real
estate transactions.
BACKGROUND OF THE INVENTION
It is a common practice for individuals to rely on the proceeds from the sale
of one house or real
estate property (hereinafter a "First House") as a major source of funding
toward the purchase of
another house or real estate property (hereinafter a "Second House"), and, to
affect this strategy,
make an offer on the Second House which is conditional on the sale of the
First House. In a
typical real estate transaction, this type of offer may be open for a fixed
period of time, such as,
for example, 90 days, or less, it being understood that a wide variety of
different arrangements
can be devised. In such a case, in the event that the First House is not sold
within the fixed
period of time, the vendor of the First House can either remove the condition
and proceed with
the purchase of the Second House despite not having sold the First House, or
alternatively, not
remove the condition and permit the offer to purchase the Second House expire.
Although a conditional offer may be better than no offer all, nevertheless,
there are drawbacks
presented by such a conditional offer. For example, as the vendor of the
Second House does not
know, with certainty, that the First House will sell, and there is no
assurance that the vendor of
the First House will have the funds necessary to proceed with the purchase of
the Second House,
in the event that the conditional offer expires (the condition having not been
removed by the
vendor of the First House), the vendor of the Second House cannot proceed with
the sale of the
Second House, and must start the cycle again of seeking out another
opportunity to sell the
Second House.
Furthermore, the purchaser of the Second House does not know with certainty
whether or not the
Page 1 of 10
CA 02578451 2007-02-13
Second House can be purchased, or whether or not the condition can be removed,
in the event
that the First House is not sold during the fixed period of time in which the
conditional offer is
open. While the purchaser of the Second House can, of course, remove the
condition at any time,
and possibly, with the aid of bridge financing, proceed with the purchase of
the Second House, if
the purchaser's First House does not sell quickly, the purchaser of the Second
House faces the
risk of potentially owning two properties (which typically would require the
individual to make
two sets of mortgage payments, insurance payments, taxes, maintenance and
other expenses on
both houses), and may have great difficulty or be unable to carry both houses,
putting the
purchaser at risk of having to sell one of the properties at a loss or
otherwise making alternative
arrangements for financing.
It is desirable to have access to protection against the uncertainties of the
marketplace,
particularly as it relates to relatively expensive items such as homes and
real estate and the length
of time that may be necessary to affect the sale of a particular property, and
to be able to deal
with some of the risks associated with a single or multiple real estate
transactions in a
convenient, cost effective and simple manner.
SUMMARY OF THE INVENTION
Accordingly, one object of the present invention is to provide a method for
reducing, mitigating
or substantially eliminating some of the financial risks associated with the
possibility of not
being able to sell a house or real estate at or near fair market value within
a predefined period of
time.
It is another object of the present invention to provide a method for paying
or providing for the
payment of certain expenses relating to a house or real estate which is for
sale and which has not
yet been sold.
According to one aspect of the present invention, there is provided a method
of reducing the risk
to a Vendor of a First House that the Vendor of the First House' will have to
pay the Monthly
Carrying Costs associated with the First House in the event that the First
House is not sold within
Page 2 of 10
CA 02578451 2007-02-13
an acceptable period of time, comprising the steps of, calculating the Monthly
Carrying Costs
associated with the First House, establishing a Minimum Acceptable Price for
the sale of the
First House, calculating the likelihood that the First House will not be sold
at or above the
Minimum Acceptable Price during the acceptable period of time and calculating
the likely length
of time required to sell the First House at or above the Minimum Acceptable
Price, calculating
the potential claim exposure of having to pay the Monthly Carrying Costs after
the acceptable
period of time until the First House is sold at or above the Minimum
Acceptable Price,
calculating a premium to be charged to the Vendor, the Vendor entering into an
agreement with a
Third Party, wherein the Vendor agrees to pay the premium, and the Third Party
agrees to pay the
Monthly Carrying Costs associated with the First House in the event that First
House is not sold
within the acceptable period of time and until such time as the First House is
sold at or above the
Minimum Acceptable Price.
Advantageously, the present invention provides a method for reducing,
mitigating or
substantially eliminating some of the financial risks associated with the
possibility of not being
able to sell a house or real estate at or near fair market value within a
predefined period of time
and provides a method for paying or providing for the payment of certain
expenses relating to a
house or real estate which is for sale and which has not yet been sold.
BRIEF DESCRIPTION OF THE DRAWINGS
A preferred embodiment of the present invention is described below with
reference to the
accompanying drawings, in which:
Figure 1 is a table in which hypothetical risk assessment data is provided for
the
Elimination Period and thereafter, in respect of houses in the Halifax Nova
Scotia
marketplace within a predetermined price range.
Figure 2 is a flow chart demonstrating the methodology of one embodiment of
the present
invention.
Page 3 of 10
CA 02578451 2007-02-13
DESCRIPTION OF THE PREFERRED EMBODIMENT
In the preferred embodiment of the present invention, an insurance-type
product and
methodology is provided which transfers some or all of the risk that a First
House will not be
sold within a particular or predetermined length of time, the risk being
transferred in whole or in
part from the Vendor (as that term is more fully described herein) of that
First House, to a Third
Party (as that term is more fully described herein).
In the preferred embodiment, where the vendor of a First House (referred to
herein as the
"Vendor") has a mortgage on the First House and wishes to proceed with the
purchase of a
Second House (this scenario being referred to herein as the "Type A"
scenario), while at the same
time reducing or mitigating the financial risk of owning and having to
financially support both
the First House and the Second House should the sale of the First House occur
subsequent to the
purchase of the Second House, a method of reducing or mitigating the financial
risk is provided
to the Vendor.
In alternative embodiments of the present invention, it is understood that the
present invention
may be utilized where the Vendor of the First House has a mortgage on the
First House and has
no intention of purchasing a Second House (this scenario being referred to
herein as the "Type
B" scenario), but nevertheless wishes to reduce, mitigate or eliminate the
risk of having the First
House remain on the market for an extended period of time.
In a further alternative embodiment of the present invention, it is understood
that the present
invention may be utilized where the Vendor has no mortgage on the First House,
but nevertheless
wishes to use the proceeds from the sale of the First House towards the
purchase of the Second
House and wishes to reduce, mitigate or eliminate the risk of having to take
on a new expense to
pay the financing and other costs of the Second House should the First House
not sell for an
extended period of time (this scenario being referred to herein as the "Type
C" scenario).
With reference generally to Figure 2 which provides a generalized description
of one
embodiment of the methodology of the present invention, where the Vendor of a
First House
Page 4 of 10
CA 02578451 2007-02-13
wishes to sell the First House and, in the case of either a Type A, Type B or
Type C scenario,
upon determining that there is a possibility that the First House will not
have been sold during a
predetermined or determinable or acceptable period of time and the Vendor
determining that it is
desirous to reduce, mitigate or eliminate the risk of having the First House
remain on the market
for an indeterminate or extended period of time, a third party (hereinafter
the "Third Party")
collects certain information as more fully described herein, and enters into a
policy agreement
with the Vendor as more fully described herein. In one embodiment, the Third
Party is an
insurance company or an entity acting on behalf of, or a direct agent of an
insurance company,
including for example (unless prohibited by law or regulation), Realtors,
brokers, and others.
In the preferred embodiment, the Vendor has listed the First House through a
real estate agent,
and preferably through one having access to a service such as the MLS
(Multiple Listing Service)
system to give broad exposure to the house in the real estate market, it being
understood that
while this is desirable, in alternative embodiments of the present invention,
the Vendor may be
selling the First House using various different techniques, including selling
it personally without
the assistance of a real estate agent, it being understood that in such a
scenario, the agreement
with the Third Party would be varied to take this into account.
On behalf of the Third Party, in the preferred embodiment, details of the
First House and the
transaction relating to the First House are determined and recorded, such as,
but not limited to:
1. the Vendor's name,
2. the address of the property for sale,
3. the appraised value of the First House (on behalf of the Third Party, the
First House is or
has been recently appraised, in the preferred embodiment, by a professional
appraiser, to
determine an accurate estimate of the current value of the First House),
4. the initial listing price (in the preferred embodiment, as to be agreed
between the Vendor
and the Third Party, the asking or initial listing price of the First House
will not exceed a
fixed percentage over the appraised value of the First House, which in a
preferred
embodiment, is no greater than 105%, it being understood that a range of
percentages
may be considered, depending upon such factors as the local marketplace for
houses, the
Page 5 of 10
CA 02578451 2007-02-13
willingness of prospective purchasers to purchase houses in the marketplace
at, near or
above the asking or listing price, and other factors known to a person skilled
in the art),
5. the initial listing date and the duration of the listing,
6. the current Monthly Carrying Costs, including, for example, in the case of
the Type A and
Type B scenarios, the monthly mortgage costs, plus in the case of Type A, Type
B and
Type C scenarios, the taxes, insurance, utilities payments, maintenance
payments and any
other payments which may be the subject of an agreement with the Third Party;
7. the start and end dates which define the term for which the Third Party is
agreeable to
paying the agreed to Monthly Carrying Costs (or in an alternative embodiment,
the
agreed-to percentage thereof which is referred to herein as the Agreed-to
Percentage of
the Monthly Carrying Costs), it being understood that in alternative
embodiments, various
different selected payments could be the subject of such an arrangement with
the Third
Party). In an alternative embodiment, the end date is not fixed, but is rather
determined by
the date on which another event occurs, such as, for example, the date on
which the
Vendor purchases another house. In a further alternative embodiment, an
intermediate
date is selected between the start date and the end date (the length of time
between the
start date and this intermediate date being referred to as the "Full Coverage
Duration"),
which intermediate date will serves as the date after which claim payments
payable to the
Vendor will be reduced. For example, in this embodiment, for each month after
Full
Coverage Duration and prior to the end date, the payment payable to the Vendor
is
reduced by 5% (or some other agreed to amount) from the amount payable in the
previous
month. In this embodiment, the monthly payments to the Vendor will continue on
a
reduced basis until the end date, or until some other pre-determined event has
occurred,
such as, for example, if the monthly payment payable falls below a pre-
determined
amount such as $50.00 per month or some other agreed to amount,
8. the name of the real estate agent, if any (it being understood, that in the
preferred
embodiment a real estate agent, particularly one with access to the MLS system
is desired
as to reduce the risk that the First House is on the market for a lengthy
period time and to
maximize the likelihood of an early sale of the First House, at or above the
previously
agreed to minimum acceptable price as referred to below),
9. identifying whether the Vendor is willing to accept risk coverage for an
amount less than
Page 6 of 10
CA 02578451 2007-02-13
the Monthly Carrying Costs, for example by reducing the coverage to 90% or
some other
percentage of the Monthly Carrying Costs to thereby reduce the Vendor's
premium
payments payable to the Third Party to accept this reduced risk;
10. any "Elimination Period" (that is, a period of time, typically, although
not necessarily, in
the weeks or months immediately following the date of the listing of the First
House, in
which the Vendor is prepared and agreeable to carry the risk of not being able
to sell the
First House), the Elimination Period generally being derived from the history
of other
recent sales in the target market area as recorded and reported by realtors in
that market
area. A typical Elimination Period for a particular market and price range may
be that
length of time in that particular market for 85% of sales of houses in that
price range to be
affected. For example, in one embodiment of the present invention, if in a
marketplace,
85% of all properties in a price range sold within 90 days of being listed, in
that example,
90 days would be the Elimination Period for that marketplace and price range.
It is
understood that the Elimination Period may vary over time as the market
conditions in the
marketplace vary, based on, for example, market demand, market supply, time of
year,
local economic conditions and other factors known to a person skilled in the
art;
11. the Minimum Acceptable Price that the Vendor is willing to accept for the
sale of the
First House (this information not being provided to the realtor involved in
the transaction,
to avoid a conflict of interest). In one embodiment of the present invention,
where the
Vendor is prepared to accept a price below the appraised value of the First
House, a
premium reduction may be made available from the Third Party.
In alternative embodiments of the present invention, additional information
may be collected as
would be apparent to a person skilled in the art.
In the preferred embodiment, the Third Party has collected or has access to
current and up-to-date
"Experience Data" of the following nature (it being understood that in the
preferred embodiment,
the Experience Data is continuously being updated), namely on a market by
market basis,
historical data relating to the actual amount of elapsed time taken to sell
comparable properties at
fair market value, and in the absence of, or supplemental to, such data, the
estimated amount of
time that will be required to sell the specific property at fair market value
in the specific subject
Page7of 10
CA 02578451 2007-02-13
market (in the preferred embodiment, fair market value being determined by a
recent appraisal
from a certified appraiser) and statistical data or analysis or information
relating to the variances
of such estimate.
In the preferred embodiment, using the Experience Data such as that provided
in Figure 1(in the
example of Figure 1, the house is located in Halifax, Nova Scotia, and within
the $200,000-
$225,000 price range), and the relevant data provided about the First House
and the transaction in
relation thereto referred to above, in a manner known to a person skilled in
the art, and in one
embodiment, utilizing a computer or other suitable programmed processor, the
Third Party
assesses the risk that the First House will not be sold at or above the
previously agreed to
minimum acceptable price before the expiration of any predetermined
Elimination Period, and
assesses the risk that the First House will not sell at or above the
previously agreed to minimum
acceptable price over a range of predetermined periods subsequent to the
Elimination Period. In
an alternative embodiment of the present invention, the Third Party determines
the most likely
date of sale of the First House, and for a range of dates before and after
such date, the likelihood
on each of those days within that range that the First House will sell at or
above sell at or above
the previously agreed to minimum acceptable price on those days. Using the
results of this
analysis and the Monthly Carrying Costs (and depending upon which optional or
alternative
features were the subject of the proposed agreement between the Vendor and the
Third Party,
such as a the scope of the Monthly Carrying Costs, any Agreed-to Percentage of
the Monthly
Carrying Costs or any reductions in the Monthly Carrying Costs, the selection
of Full Coverage
Duration which expires before the end date, any Elimination Period, the
Minimum Acceptable
Price that the Vendor is willing to accept and such other factors as are to be
the subject of an
agreement between the Vendor and the Third Party), the Third Party will
calculate the potential
claims exposure in respect of the sale of the First House, and calculate and
quote a premium to
be paid by the Vendor (which premium will also take into account the Third
Party's overhead,
cost of sale, profit and such other amounts as would be understood by a person
skilled in the art).
If the Vendor is agreeable to the premium and to such other terms as may be
agreed to between
the Vendor and the Third Party, an agreement, preferably in writing, may then
be entered into
between the Vendor and the Third Party, to have the Third Party accept all or
some portion of the
risk of carrying the agreed to costs associated with the First House past any
agreed to point in
Page 8 of 10
CA 02578451 2007-02-13
time on such terms and conditions as are agreeable to the Vendor and Third
Party, and any
premium due to the Third Party is paid by the Vendor.
In the event that the First House is not sold prior to the agreed upon date
with the Third Party, the
Third Party will pay to the Vendor on a monthly basis or on such other terms
as agreed to by the
Vendor and Third Party, upon providing to the Third Party satisfactory proof
of all offers on the
First House and proof that the First House is unsold, payments of the agreed
to Monthly Carrying
Costs or any agreed to reduction thereof on the basis of the agreed to terms,
it being understood
that the Vendor is under no obligation to sell the First House for an amount
less than the
Minimum Acceptable Price.
The present invention has been described herein with regard to preferred
embodiments. However,
it will be obvious to persons skilled in the art that a number of variations
and modifications can
be made without departing from the scope of the invention as described herein.
Page 9 of 10
