Is there a way to buy a house for the average price over some future period of time?

Question

Suppose I thought the current housing market was inflated, and I expected prices to go down in the future. However, I still want to buy a house. So I'm thinking, does there exist a contract where

The buyer agrees to pay 10% of the market value of the house on each Jan 1 of the next 10 years in exchange for the house?

Of course the seller needs some money up-front, so I can see this packaged as an up-front purchase for the current going rate, plus the sale of a swap. In the swap, the home-seller pays the home-buyer some amount for the right to receive from the buyer the market value difference of the house (or vice versa). Of course then there are complications like, what if the buyer intentionally trashes the house, etc., but those don't seem like fundamental obstacles.

My question is: Do schemes like this exist? If not, would it be hard to set one up when buying a house? Are there any legal impediments?

Answer 1

You ask about legal impediments but you don't specify a jurisdiction. I'm hard-pressed to imagine that a country would outlaw such an arrangement but there are an awful lot of countries in the world. You'd certainly be free to negotiate such a contract in the US.

On the other hand, it is highly unlikely that such an arrangement would be practical.

1. You'd almost certainly need to be in a position where you were paying cash for the property and where the current homeowner was paying cash for their next property. No mortgage bank is going to be eager to try to underwrite a mortgage where both buyer and seller are incurring potentially unlimited financial obligations to each other. That's well outside anything that their processes are geared to deal with. And it's pretty unlikely that the mortgage bank could find anyone to buy such a mortgage if they lent the money. If you're both very wealthy people with private bank relationships, you might be able to convince them to do a completely one-off underwrite of such a loan but that would be pretty unlikely.
2. Both you and the person you're buying the home from would need to have a pretty hefty amount of liquid assets to be able to make those annual payments every year. The median home price last year in my state of Colorado was $343,000. If the home appreciated or depreciated 10% year over year, that would mean that one of you would be writing a $34,300 check to the other. Most people aren't in a position to write that kind of check year over year. Particularly when if they're writing a check to you they likely just saw the price of their most valuable asset decline.
3. There are plenty of practical issues with such an arrangement. You could agree to pay to have the home appraised every year but appraisals aren't an exact science. Different appraisers can and do use different comparable properties which can lead to pretty significant variance. You could agree to get three appraisals and average them or have some sort of appeals process if one party disputes the first appraisal but at $500/ appraisal, that starts to get somewhat expensive. And what happens if the home appreciates because the homeowner did some remodeling or depreciates because of some issue that might (or might not) have been mitigated had the homeowner done more preventative maintenance? Trying to deal with those sorts of contingencies in your contract is certainly possible but is not going to be easy. Let alone figuring out what happens when one party goes insolvent...
4. It is very unlikely that you'd find a home that you want to buy where the homeowner would be interested in this sort of arrangement. If home prices are inflated, that implies there is surplus demand and that sellers are getting plenty of offers. In that case, it is pretty easy for them to simply reject any that have a bunch of extra conditions. Even if they expect home prices to continue appreciating, the current homeowner is probably going to get plenty of exposure there when they buy their next home. Doubling down on their exposure to home price fluctuations is not something most people are interested in.

Realistically, this idea is a non-starter. If you want to protect yourself in case home prices decline, though, you can probably come up with a reasonable hedging strategy privately. You could, for example, short sell some REITs or mortgage-backed securities or use options to create a synthetic short position. You could bet on interest rates and inflation (home prices generally increase with inflation and decrease with increases in interest rates). Of course, standard caveats-- markets can generally stay crazy a lot longer than you can stay solvent so betting against the market, even if you're eventually proven right, is a very risky thing to do.

Answer 2

What you propose is a variant of rent-to-own, so you may find something useful in that space.

With rent-to-own, you can somewhat hedge a future decline in the home's value (as you seek), by acquiring an option to buy the house (and renting it in the meantime) rather than buying it up front. If the value declines, you can walk away and instead buy a house at the new lower market price.

Also, in principle, the agreed price you pay if you buy (the option strike price) could be tied to a future appraisal rather than fixed. Rent-to-own may credit a portion of rent as equity, so there is even the possibility of adjusting the price at which you acquire that equity based on recurring appraisals.

Overall, rent-to-own avoids some of the potential problems of your proposal by having you not actually own the house until you've fully paid for it (potentially using borrowed funds from an ordinary mortgage). In the meantime, you are accountable as a tenant for damage to the property, while the seller/landlord has the ability and incentive to maintain it.

Answer 3

I have never seen such an arrangement in practice, but there's nothing stopping someone from making one up.

The main problem with such a scheme is that it needs to be reasonably priced. If you exchange a home worth X for some financial arrangement, that financial arrangement also needs to be worth X. If you (and presumably the seller) expect the housing market to go down over the next 10 years, then you'll need to pay more than 10% of the value each year to make the current value more than X. The only way that someone would rationally take 10% each year for 10 years is if they expected the value of the house to go up over that time.

You'd also have to compensate for counterparty risk (what happens if you go bankrupt?) which would increase the fair value as well.

So in a declining market, you'd need to actually pay more than 10% each year for it to be a fair deal for the seller.