There’s a new game in town for people who want to tap their home equity, and the timing couldn’t be better – at least, the timing couldn’t be better for the people pushing this new form of equity access.
It’s called a “REX Agreement” – Real Estate Equity Exchange Agreement and marketed by REX & Co in San Francisco. It’s not a home loan or an equity line of credit. Rather, it’s a purchase option for which you are paid and which gives you cash immediately (based on the value of your home) in exchange for an option to share in the future increase/decrease in your home’s value.
The concept is pretty simple. You as a home owner make two choices: (1) What percentage of your property’s value do you want to gamble with (50% is the most common choice) and (2) What length of time do you want your gamble to remain open (acceptable choices are between 5 and 50 years).
Based on this, REX & Co pays you an immediate sum of money called an “advance payment”. The amount is based upon the two factors above. As an example, if you opt to give REX a 50% stake in your property, you’ll receive somewhere between 12.5% and 15% of the current value of your property as your advance payment. Then when your home is sold in the future, you receive half of the property value plus the remainder of the option payment that REX didn’t advance to you.
Here’s an example: Your property is worth $500,000 right now and you opt to do a 50% equity sharing agreement with REX. This means that the option you have sold is effectively worth $250,000. They pay you $75,000 immediately (15% of your property value) as an “advance payment” with a remainder to be paid in the future. When your property sells in the future, REX will pay you the remainder of $175,000 (the difference between the option value of $250,000 and the advance payment of $75,000) in exchange for half of the sales price of the property.
Let’s consider an example. Ten years from now, you sell the property for $700,000. You are obligated to give REX one half of that sum, bringing your take down to $350,000.
The net effect is that you’re receiving $100,000 less than the actual sale price of the home, in exchange for receiving $75,000 ten years earlier with no payments or interest.
It works the other way, too. If your house depreciated and sold for only $400,000, then at closing you’d receive half of that amount ($200,000) plus the remainder withheld by REX ten years prior ($175,000) in addition to the $75,000 received originally. This totals $450,000 – meaning that the loss you experienced on the sale of the property is cut in half by REX, and both you and REX have effectively lost $50,000.
There’s a lot of appeal to this type of scenario for people who need some cash and don’t want to have an increased monthly payment liability. But there’s a downside too. You’ll be locked in to your residence for many years to come, and terminating the agreements prior to the natural expiration is a costly proposition.
Additionally, the primary reason to buy real estate rather than rent it is for the appreciation potential. With a REX agreement, you instantly cut your best-case gain potential in half.
In short, if you have a God-like knowledge of the future and know that you’ll be in your property for many years to come AND you know that your property will either remain stagnant or decline in value, then a REX Agreement may be a decent option for you.
But you don’t have God-like knowledge of the future, do you? I keep hoping for a day of good fortune on which I’ll wake up with such omniscience, but so far it hasn’t happened.
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