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New cash idea for homeowners
They can tap into home equity but avoid loans in a new plan from REX & Co.
By Ben Arnoldy | Staff writer of The Christian Science Monitorfrom the July 12, 2007 edition
Page 1 of 2
San Francisco - Despite the counsel to "diversify, diversify, diversify," many Americans have most of their financial eggs in one basket: their homes. Juggling eggs just got easier for some of them, thanks to the San Francisco-based company REX & Co.
REX allows homeowners to convert home equity to cash, much like a home-equity loan. But this is no loan; REX charges no monthly payment, nor any interest. Instead, when the home is sold, REX takes a portion of the home's appreciation.
For a house valued at $500,000, REX might offer a lump sum of $70,000 in exchange for half the home's change in value. If the house eventually sells for $600,000, REX gets $120,000, the original 70K plus half the price gain. If the home sells for only $400,000, REX shares in the loss, getting just $20,000 back.
Real estate analysts say the idea shows promise as a way for homeowners to hedge against real estate volatility. But they also warn that it's a potentially more difficult financial tool for consumers to gauge, especially given its newness on the market.
"This is not a bad idea. This is a kind of instrument that helps complete the market," says Susan Wachter, a professor at the University of Pennsylvania's Wharton School. A large problem in the housing market, she says, is that many homeowners have most of their money tied up in that one investment. Rex and Co.'s agreement allows them to take some of that money and invest it elsewhere.
REX agreements aren't available to everyone. The company operates in only nine states (see rexandco.com). Homes in the top or bottom tenths of their local market won't be considered. Homeowners need credit scores of 680 or higher, and cannot have more than 75 percent of their home mortgaged.
To decide between a REX or a home-equity line of credit, homeowners might want to call on some expert help unless they are prepared to dig out some No. 2 pencils, fire up their Casios, and do some research on historic housing price trends at ofheo.gov.
It would be reasonable for a homeowner to pay slightly more for a REX agreement than a home-equity loan because REX offers some protection against a dip in prices, says Thomas Davidoff, professor at the Haas School of Business at the University of California, Berkeley.
But caveat emptor, warned several analysts, when it comes to the "neutrality" of third-party appraisers as well as fees charged by REX if the homeowner sells in less than five years.
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