Increase Your Home Equity, Lower Your Debt
Bill and Elaine Nolan paid top dollar when they bought their Tiburon, Ca., house a few years ago at the height of real estate frenzy.
Now, of course, the California housing market is cooling rapidly.
So Bill Nolan, who works as a partner in an investment management firm, wanted to diversify. He turned to a startup company based on a new concept:
Let homeowners tap home equity without taking on debt.
Nolan contracted with Rex & Co. to receive $100,000 cash in exchange for a 10 percent stake of the home’s future appreciation.
When the Nolans sell their home, they’ll pay Rex $100,000 plus 10 percent of their home’s appreciation above its current value of $2 million.
For example, if the home sells for $2.5 million, the Nolans would pay Rex $150,000 - the original $100,000, plus 10 percent of the $500,000 gain in value, or $50,000. If the home were to depreciate, Rex would share in that loss as well.
The Nolan house is atypical because of its high value; more typically, a $100,000 Rex payment would be in exchange for a larger share of a house’s appreciation.
“It was an interesting opportunity to take some cash out of the house and hedge against any decline in home value,” said Bill Nolan, who plans to invest the money in his business.
“It was a way to hedge against the (real estate) market being flat or not performing as well as the equity market; to pull money and put it into something else I felt had a reasonable chance of outperforming the real estate market.”
San Francisco’s Rex & Co. - the name stands for Real Estate Equity Exchange - bills itself as the first company offering a way to make home equity liquid without debt.
It essentially buys a share of a home’s future appreciation.
Rex gives homeowners a large up-front cash payment - up to 15 percent of a home’s value, topping out at $300,000 - in exchange for a share of the home’s future change in value - up to 50 percent.
When the home is sold, the homeowner returns the original investment to Rex plus the agreed-upon share of appreciation. The homeowner does not pay interest and does not make any payments until the sale.
“People, especially Baby Boomers, are sitting on a tremendous amount of equity,” said Rex CEO Thomas Sponholtz, a former Barclay’s executive who co-founded the company with Ian Charles, formerly an investment banker at S.G. Cowen. “If you take on debt to unlock that value, you’re paying to borrow your own money.”
Sponholtz said many potential customers will want cash to meet specific needs, such as college tuition or retirement income.
He is quick to correct any reference to the Rex payment as a home loan. The company prefers the terms equity co-share or equity co-investment.
Another way homeowners can take money out of their house without making any monthly payments is via a reverse mortgage, only available to people over age 62.
Reverse mortgages, unlike the Rex system, are a form of debt. They provide either a lump-sum payment or regular monthly payments, and do not have to be repaid until the homeowner dies, sells or moves out for longer than a year.
The unconventional mortgage loans accrue interest and come with hefty fees.
Rex does not charge up-front fees, but the homeowner pays for standard real estate services. In originating a Rex deal, the homeowner would pay for an appraisal, an escrow fee to a title company and title insurance.
The latter two are because the home’s title would be amended to show Rex as having a lien against it. Rex offers some rebates on those fees.
Homeowners referred to Rex through financial advisers or mortgage brokers might be charged fees by those individuals, the company said.
To discourage flipping, the unique home equity loan provider charges an early exit fee for properties that are sold within five years.
Continue reading in the San Francisco Chronicle …