Beware Clever New Real Estate Offers

Americans are learning a bitter lesson about the importance of building equity in their homes, instead of withdrawing it for current expenses. Now, along comes another scheme to give Americans access to their home equity -- the Rex Agreement.

Advertised as an "alternative to debt" this plan focuses on your willingness to share the upside growth in the value of your home with a new "partner" -- an investment company that will provide cash now, in exchange for an option on a big piece of the profits when you sell.

The name "Rex" stands for Real Estate Equity Exchange, and the Rex Agreement is its trademarked product.

As the company is quick to point out, this product is not a loan and does not require monthly repayments, unlike a home equity loan. It does not charge an interest rate, like a reverse mortgage.

Instead, you're granting them an "option" on a portion of the growth in value of your home. The amount of profit you're willing to share determines the amount of cash you'll get upfront -- and will have to share with them when the home is ultimately sold.

Too good to be true? It is, sort of. I have problems with both the pricing and the details.

Then, there's the larger question of whether you really want to share title to your home.

How It Works

The company Web site will walk you through the various scenarios.

Basically, at the start of the process, your home value is independently appraised. The Rex Agreement is available only to owners who still have at least 25% equity in their homes based on current appraisal.

Once the current value is established, you grant the company an option on a portion of future appreciation. They give you an upfront cash advance on the value of that option, then take their share of the profits, and give you the remainder after the house is sold.

The amount of cash you get upfront depends on the percentage of the future gain that you are willing to cede. You might agree to share 20%, or 35%, or 50% of the appreciation above the current appraised price.

Note that Rex gets a percentage of the "gross" sale price of the house, not the net price after real estate commissions and fees.

This agreement lasts for ten years and can be extended for an additional fee. But if you end the agreement early by selling the house at a profit within the first five years, there is a "penalty" that reduces the remaining option payment to you.

If the home declines in value by the time it is sold, they can walk away from the option, and you keep the cash advance you received.

In the meantime and until you decide to sell, Rex has a lien on your title -- and a lot of say in what you do with your home. For example, if you jeopardize the value of the home, perhaps by failing to keeping it well maintained, Rex can exercise its option and sell the home under a limited power of attorney that you grant as part of the agreement.

This is just an overview, and I recommend that, if you're thinking about doing this, you consult your attorney to find all the caveats. I showed the concept to both a top real estate attorney and a senior partner of a major accounting firm, who pointed out some of the fine print that I might have missed.

And -- I wasn't allowed to see the actual documentation without signing a non-disclosure agreement!

There might also be some questions about the tax treatment of that initial cash payment, although the company has an opinion from a top law firm that it is a nontaxable advance against any ultimate gains (with the exception of a $1,000 option "fee").

Pricing - Who Really Wins?

Evaluating the financial benefits is the real sticking point. Using the example on the Web site, you'll see that if your home is currently valued at $750,000, and you agree to share 50% of the upside, you'll get an "advance" payment of $107,000 (or $75,000 for sharing only 35% of the upside, or $43,000 for agreeing to share 20% of the future gains).

When you eventually sell the house, Rex will get its fixed percentage of the profits, and give you the balance, less the amount its advanced.

Now ask yourself why anyone would give you an interest-free check for $107,000 (or $75,000 or $43,000) and wait an unspecified amount of time for you to decide to sell your house, before taking a piece of the profit.

The simple fact is: You aren't getting enough out of this deal, no matter how enticing that chunk of cash is.

You're giving away as much as half the profit (above current prices) when you sell your home.

For example, let's say you could do an interest-only home equity line of credit on your $750,000 house, and take out $100,000 in cash. Assuming a 7% fixed interest rate over 10 years, you'd pay only $70,000 in interest, which is tax-deductible.

(Keep in mind that rates on home equity loans are not fixed, so your interest payment could rise. You can find current rates for home equity loans, as well as other savings and loan rates, at BankingMyWay.com.)

Remember, the company was willing to give you $107,000 and in return take 50% of the upside as part of the Rex Agreement.

If you take the home equity loan, when you sell the house you can repay the $100,000 loan, and the after-tax cost of the interest, and keep all of the upside profit on your home.

By most pricing models, this is an expensive option to grant. That is, the homeowner isn't getting enough of a payment for what they are potentially giving up, while the Rex investors are risking a relatively small current payment against a potentially huge windfall if American home prices resume their uptrend over the long run.

The "smart money" -- the Rex people -- are betting that they've found a way to share in the upside potential of $11 trillion dollars in home equity that Americans own at today's discounted prices.

Do you want to bet the house against them? I think not. And that's the Savage Truth.

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