Traditionally, homeowners have converted their home equity into cash through debt-financing instruments such as home equity loans and reverse mortgages. But a new tool structured by the Real Estate and Equity Exchange and Company (REX & Co.), called the REX Agreement, enables homeowners to unlock a portion of their home equity without charging them monthly payments or interest; instead, REX & Co. acquires the option to share in a specified percentage of the future increase or decrease in the home’s value.
Although homeowners can usually receive up to 10 to 15 percent of their home’s value up front, it is important to separate the concept of a REX Agreement from that of a loan.
“A loan is secured by the property and the lender is essentially guaranteed the return of the principal and the guaranteed rate of return in the form of an interest rate or interest charges,” Jeff Cusack, managing director of Rex & Co., said. “[Whereas] we have…no guarantee of the amount that we advance, and we have no guarantee of a rate of return. I think the interesting way to look at it…would be that this is equity-financing as opposed to debt-financing.”
In order to execute a REX Agreement, homeowners must first determine the percentage of the future change in home value that they are willing to share with Rex & Co., which correlates directly with how much money they will be able to receive up front. Homeowners can elect to share up to 50 percent of the future change in their home’s value with REX & Co.
Next, homeowners and REX & Co. agree to the value of the home based on various valuation tools, including a neutral third party appraisal. REX & Co.’s option exercise price is thereby determined based on the home’s value multiplied by the percentage share being purchased. The homeowner then receives an advance payment in cash immediately upon entering into the REX Agreement, which is typically 10 to 15 percent of the home’s value.
At the end of the REX Agreement, homeowners will receive the remaining payment, or the option exercise price minus the advance payment, and Rex & Co. will receive their share in the gain or loss on the home value. A REX Agreement may last for up to 50 years in most places (40 years in Illinois and 30 years in North Carolina), but generally ends when the homeowners decide to sell their home.
For example, REX & Co. would be able to acquire a 35 percent share of a home valued at $1 million for an option exercise price of $350,000. In this case, the homeowners would typically receive an advance payment of $100,000, which can be used without any restrictions. The homeowners would receive the remaining payment of $250,000 at the end of the REX Agreement.
There are three possible outcomes at the end of the REX Agreement: the home value has appreciated, declined or remained the same. If the $1 million home mentioned in the example above had appreciated by 20 percent, REX & Co. would ultimately gain 35 percent of the $200,000 increase in value—or $70,000—and the homeowners would gain the remaining $130,000. If the home were to decline in value by 20 percent, REX & Co. would essentially lose $70,000 on its investment and the homeowner would lose $130,000.
If the home value were to remain the same at the end of the REX Agreement, then neither party would profit, but the homeowners would still have benefitted from receiving the advance payment of $100,000.
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Homeowners may also choose to end their REX Agreement without selling their home by paying REX & Co. its share of the current value of the home. Homeowners who elect to end their REX Agreement during the first five years, however, are be required to pay early exit costs.
The REX Agreement offers homeowners the advantage of being able to diversify their assets. The cash received in the advance payment could be used towards other types of investments and possibly as a hedge against declining housing markets across the country.
The REX Agreement is available to homeowners in California, Colorado, Illinois, Florida, New Jersey, North Carolina, Virginia and Washington state, and Rex & Co. expects to extend its services to more states this year, according to Cusack.
Only homes that are single family and detached primary residences qualify for the REX Agreement. Townhouses, condos, multifamily and investment properties are ineligible.
Mortgage debt may be up to 70 percent to 80 percent of the home’s value at the time that homeowners enter into a REX Agreement depending on the terms offered for their specific property.
“A typical transaction is a 56-year-old person with over 50 percent equity in their home that is approaching retirement and trying to get their house in order for when their income drops,” Cusack said. In such a case, the REX Agreement can be used towards paying off a mortgage and reducing expenses.
Other common uses include payments towards education or home improvement costs, according to Cusack.
If a homeowner makes any improvements to the home that increases its value, REX & Co. would not receive any share of that amount.
“If you follow the process set forth in your REX Agreement, you will receive full credit for the market value of any material improvements to your home. The value you are credited with will be determined by a third party appraisal and subtracted from the home’s sale price (or then-current market value) before calculating the REX & Co. share,” according to the Rex & Co. website.
In order to remain in good standing with the REX Agreement, homeowners must comply with certain terms, such as maintaining the home as their primary residence and keeping the home in good condition, according to the Rex & Co. website. Homeowners must also pay taxes, insurance and any mortgage loans on time, maintain proper insurance coverage and must not exceed the agreed-upon limit on the total principal amount of any loans that may be secured by the home.
Although the REX Agreement has previously been reported as a tool that might compete with reverse mortgages, “we don’t really position it that way,” Cusack said.
“It’s a different kind of financing…and in fact, a lot of companies that do reverse mortgages are offering [the REX Agreement] because they see it as a way that they…can help more people,” he said.
The REX Agreement can offer options to a subset of homeowners who are not part of the relatively narrow market for reverse mortgages.
“With reverse mortgage you’re very limited in how much debt you [can] have on the property,” Cusack said. “So if you have debt…you may be able to reduce your cash flow demand actually by paying off the mortgage but you may not be able to get cash in your hand out of the home.”
Reverse mortgages are available only to homeowners aged 62 or older; the REX Agreement does not have any age restrictions.
The costs of originating a REX Agreement are minimal compared to closing costs for a reverse mortgage. For example, the closing costs for the maximum proceeds with a reverse mortgage in the state of California are an estimated $17,000 from “day one,” Cusack said.
In comparison, originating the REX Agreement has “very little out-of-pocket [costs] for the homeowner,” he said.
For more information about the Rex Agreement, visit RexAndCo.com.
