Take out a hedge
During the real estate boom, many homeowners treated their houses like ATMs, tapping their ever-growing equity for quick cash. Not anymore. Rising rates have made refinancing the mortgage or taking out a home-equity loan an expensive proposition. Now a San Francisco firm called Rex & Co. (the name stands for "real estate equity exchange") is offering a new option, known as a Rex agreement, that can be used both to draw on a home's equity and to hedge against declining property values.
Rex gives homeowners, interest-free, a portion of their house's market price in cash - up to 15 percent of the appraised value of the home, topping out at $300,000. In exchange, Rex gets the right to share in up to half of the future increase in the home's value. The more homeowners are willing to let Rex cash in on future profit, the more money they get up front. If a home declines in value - and many homeowners nowadays are worried about just that - Rex shares in the loss. "It's a way to make the equity you've earned more liquid," says Rex CEO Thomas Sponholtz.
A homeowner and Rex agree on how much money the property owner is to receive, as well as the percentage of the future change in the value of the home he or she is willing to share. (The homeowner also pays back the cash advance when the property is sold.) The home's value is assessed by a third-party appraiser.
To discourage flipping, Rex charges a hefty early-exit fee of up to 25 percent of the cash advance for homes that are sold within five years. And Rex can take control of the property if the homeowner is late paying the mortgage, insurance, or property taxes. Only owner-occupied detached single-family homes qualify, and those valued in the top or bottom 10 percent of their local markets are not eligible. Rex agreements are available in California, Colorado, Florida, Illinois, New Jersey, New York, North Carolina, Virginia, and Washington.
A Rex agreement may be a good solution for homeowners who think their house will stay flat or decrease in value and who are planning to own it for many more years. Homeowners who invest their Rex cash in, say, a stock that rises in value would come out ahead in a stagnant housing market. Conversely, owners who put their Rex money into high-risk investments, and whose homes lose value, could find themselves in an even deeper hole. Rex buyer beware.
Here's what could happen with a $90,000 payout on a $600,000 house with a 50/50 split on its future value.
Scenario 1: The house sells for $720,000. Rex gets its $90,000 back and $60,000 in profit.
Scenario 2: The home's value stays flat. Rex gets only the original $90,000.
Scenario 3: The home's value falls to $480,000. The homeowner returns only $30,000 to Rex.