The Rex Agreement... Is It Worth It?
A: I want to discuss the article in yesterdays NY Times titled, "A New Way To Tap Home Equity". Right away I thought, "perfect...another abusive lending tactic targeted for the uneducated that will result in tons of money lost before the product's truly understood." But then I wondered and thought more deeply about it; here is a loan product that claims to take on 50% of either the gain or LOSS on the property (based on the time of the transaction) as a term of giving you a loan right now? Is it worth it? The short answer is YES if you are bearish on housing and disciplined with investing and represents a sort of hedge against falling home values.
First lets understand the REX AGREEMENT and that it is only acceptable for single-family detached houses & average-higher credit scores. So, right now this is not an option for most Manhattan real estate owners; but it could be some day if the public sees a benefit in the product.
REX AGREEMENT -
The REX Agreement is not a loan, but a real estate investment agreement in the form of a purchase option. It gives homeowners a portion of their home’s equity in cash today -- in exchange for the right of REX & Co. to share in a specified percentage of the future increase or decrease in the home’s value.Confusing enough. The key is in this statement, "...If the home declines in value, REX & Co. shares in the loss."! Of course it applies to the gain side as well. So, if your property falls in value by $50,000 from the time the agreement is entered into, and you take out a $100,000 line, you'll only have to repay $75,000 when you sell since the Rex lender splits the $50,000 depreciation with you! In meantime, you could invest that $100,000 and earn X%!
For the right to share in an agreed upon percentage of the future change in value of the home, REX & Co. pays the homeowner what is called an Option Exercise Price -- equal to the current value of the home multiplied by the percentage of the future change in value granted to REX & Co. If the home increases in value, REX & Co. shares in the gain. If the home declines in value, REX & Co. shares in the loss.
Lets move onto the math and see if this loan may work for you. Your probably thinking, "OK, take the loan, go on a vacation, pay off some credit card debt, and buy that car I always wanted...." aren't you!
I'm thinking, "...what if you take that loan amount and invest it at 7-8% and then sell your house at a LOSS?" (interest earned on rex loan not compounding since I cant do that math yet in excel and I have a spreadsheet below to analyze this loan and whether it works). Hmmmm. Now that certainly is interesting. If you borrow $100,000 and then sell the house at a loss of $75,000 five years later, would you make more money at the end of the day if you did the loan & invested the money or not?
Lets run some numbers and make some assumptions. If you are going to do this agreement, you should understand what you are getting involved in. This spreadsheet should simplify the decision by taking into account your personal situation and your expectations. Use only as a guide.
DOWNLOAD REX LOAN TEST NOW (fill in yellow boxes - the rest will automatically compute)
Fact is, this product seems beneficial for anyone who thinks the property of their home will fall or remain flat from the time the Rex Agreement is entered into and ultimate sale. The reason is you are earning investment income on the money provided to you. Rex lenders take a 50% gain or loss with you, making the loan product very attractive if there is a loss! The only situation I see this agreement not being beneficial is if the property value JUMPS from the time the agreement is entered into and ultimate resale.
When there is a gain, the Rex lender comes out the winner and you get LESS MONEY than if you didn't do the loan! But what about the earnings you made with the money you got from the Rex lender? Remember, you pay NO interest or monthly payments on that money.
The actual COST of the loan product varies so be sure to go directly to REX & CO. to save any transaction fees if you are interested. The fine print:
"Homeowners who arrange for their Rex Agreements directly from the company pay no fees, but financial advisers, mortgage brokers, and real estate agents licensed by Rex to sell the product can charge fees up to $2,000."I urge you to talk to your financial adviser about a play like this before doing it. While it seems a very interesting product, I did not read the terms and conditions of this type of agreement and therefore I don't know what other payments or penalties there might be associated with this product. I already found this via RealEstateJournal.com:
People who sell the home in less than five years face an "early exit" fee ranging from 5% to 25% of Rex's initial payment.The Pitfall - Using the Rex agreement money for luxury items. This entire analysis is based on the assumption that you are investing the money provided to you via this agreement. The argument for using this type of product strengthens if you are disciplined to invest the money wisely and at the same time feel the housing market is heading lower. If you will not use the money wisely OR feel the housing market has tremendous upside potential, this is not the loan product for you.
Also, using the money for renovations on the property means you will get more money at eventual resale that is not 100% yours! You split that gain with the Rex lender 50/50 now remember! So, money used for major contracting won't return as much profit to you as you may think.
The Appraisal - The Rex agreement's benefits will stem greatly depending upon the appraisal of your property at the time the agreement is entered into. It will be to the Rex Lender's advantage to be very conservative with this appraisal of your property! No doubt the homeowner will think their property is worth more. But because the Rex lender shares in the profits and/or loss on the property at ultimate re-sale, it is to the lender's advantage to appraise the property as low as possible so as to ensure a 50% cut of the profit down the road. If you do decide to take on a product like this, only do it if the current property valuation is acceptable to you given current market conditions.