A New Way to Tap Your Home's Equity

Posted by: Peter Coy on May 17, 2007

A San Francisco-based company called REX & Co. Inc. is offering a new way to tap your home’s equity that doesn’t involve a loan. REX gives you money now in exchange for a percentage share of the future appreciation (or depreciation) of your home. rex.jpg


Example: You buy a house for $500,000 and cut a deal for REX to give you $100,000 in cash in exchange for half of the change in value of the house. Ten years later you sell the house for $700,000. You give REX back the $100,000 you initially received, plus half of the increase in value, which amounts to another $100,000.

If the house went down in value to only $400,000, you would still have to pay REX the $100,000 you got up front. But REX would absorb half the $100,000 loss in value by paying you $50,000. So your net payment to REX would be only $50,000 ($100,000 minus $50,000).

It’s not a home equity loan or a reverse mortgage because there are no interest payments. REX says it’s more like an equity co-investment. You could use a REX deal instead of a home equity loan or a cash-out refi, obviously. But there are other possibilities. For example, you could pay down your mortgage. Or you could use REX money to make a bigger down payment when you buy a house. You could also raise cash for long-term life insurance, estate planning techniques, or charity.

Aside from one article in the Wall Street Journal earlier this month, it hasn’t gotten much attention, but I think this could be big. Certainly some smart investors are intrigued. Minority partners include AIG, RBS Greenwich Capital, and Susquehanna Partners.

Caveats? I’d say the biggest one is that you, the Clueless Homeowner, are making a complicated financial deal with a bunch of very smart financial types. What’s a fair percentage of the upside in your house to fork over in exchange for, say, $100,000? That’s a calculation that even most MBAs would have trouble with. And since REX doesn’t have any competition at this stage, you can’t exactly comparison-shop.

Still, it’s an intriguing product that fills a gap and is bound to attract a lot of interest.

Reader Comments

GINI AUGER

October 19, 2007 10:46 PM

What if you don't sell your house? What is the maximum amount you can be awarded? How long is the arrangement in effect? What if you die? More information please!

John Pesterfield

July 23, 2008 10:20 PM

How long can you stay in your home?

Are you required to sell within a certain time frame?

I really like the concept.. would like a few more details.

David

February 23, 2009 4:03 AM

REX makes its profit or takes its loss when the house is sold or the agreement otherwise ends. At that point, the owner repays the cash he was advanced. If values remain flat, the homeowner repays that amount, without interest, out of the sales proceeds. If values go down, REX takes a loss equal to the percentage of the value change it shared in the agreement, thus reducing but not eliminating the homeowner's loss.


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David

Home Loans

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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