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.
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.
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.