Condos With Embedded Puts

People say that given the non-recourse nature of mortgages in states like California, homeowners don't normally buy their houses so much as buy a call option to buy the house at the purchase price, along with a put option to put it to the bank at the face value of the mortgage. So if that's the de facto situation, why not make it de jure?

In a move that speaks volumes about the glut in the condominium market, Lehman Brothers Holdings Inc. (LEH) is promising some luxury-condo buyers their money back after three years of ownership.

The offer applies to some 200 condo units, priced between $480,000 and $2 million, in West Bay Club, a Lehman-owned resort community in Estero, Fla., near Naples on the Gulf of Mexico.

In an effort to jump-start sales in a skittish market, Lehman says that for every buyer until June 1, it will guarantee that the resort will either sell or buy back the residence at the "full cost of the purchase price three years after closing."

The gamble is that prices will recover during that time, and buyers will hold on to their condos.

I would love to know how this gets accounted for chez Lehman.

Comments

[drmalaka]

I believe that LEH will book this as a $4.5 billion write up against another $5 billion of write downs they will take next quarter that they said they would not have becuase all the bad news was behind them. They will also book another $.5 billion in profits on their outstanding debt which has gone down in value. Pretty funny, since your company sucks and people think there is a greater chance that you will default then your debt is worth less, which is a profit for a bank.

[icandoitdon]

it's laughable that lehman is in the condo selling business. i assume this is an investment on their books that they financed and couldn't unload after the credit freeze.

i've been out of the accounting biz for some time now so i'm not up on current account rules, but i'd guess this is an asset sale with a material contingency. they'd remove the asset from their books and preseumably pay off the related debt but gains or losses would be deferred until the contingency is removed. the contingency would be disclosed in their financial statements.

if anyone has another take i'd be curious.

it's a travesty that accounting for crap like this isn't fully disclosed at the time transactions take place rather than a year down the road in their annual report. shakespeare should have included accountants along with his take on lawyers.

[punk_ash]

Put it on the exchange traded options and people might buy, what if LEH goes under, blah...

[ponchovilla]

If this happens it will show "The Greater Fool Theory" has been proven with scientific precision. I will guess the contract starts with
"This ain't no lie, but..."

[vrspace]

So if the unthinkable happens and a Bear Stearns scenario occurrs with LEH, I wonder if the purchasers will be covered in the bailout. What a disaster – the developer is trying to offload 200 units while there are at least 100 listings of re-sales at the West Bay Club plus the shadow market inventory, properties that the builders are stuck with etc. -- all in a development that when fully built out in 2010 was to have had just a 1,000 units.

The link below is to just some of the MLS re-sales at West Bay:

www.swfhomes.com/West-Bay-Club-Community...

[Emerald]

This might be a deal if each "sale" is backed by an irrevocable letter of credit. But then, from what lender?

[Bill D.]

What lender ? - why the same one BSC has.
Look in the mirror