A lot of Americans – and me, for that matter – have substantially
all of their net worth tied up in real estate. This all-your-eggs-in-one-basket
state of affairs is not really prudent, but there’s not much we can do about
it. After all, if I borrow against my house and invest the proceeds in the stock
market, that doesn’t
reduce my real-estate exposure one iota.
Enter the Rex Agreement,
by Bob Tedeschi in today’s NYT. The idea is that you convert your home equity
into cash, but you don’t need to make any monthly repayments, and Rex &
Co will take on some of your house-price exposure. If and when you sell your
home, Rex takes some the increase in house price as its profit on the deal.
If your house has gone down in value, then Rex, too, makes a loss on the deal.
For example, let’s say your house is worth $500,000, and you’re willing to
give Rex 30% of its upside. Rex will give you $42,857 today. If you sell for
more than $500,000, then when you close you pay Rex its $42,857 back, plus 30%
of the profits you’ve made. Say you sell for $600,000. Then Rex gets back $72,857.
On the other hand, if you sell for only $400,000, then Rex receives only $12,857.
The Rex Agreement is a long-term agreement: penalties mean that it almost never
makes sense to exit within the first five years. In turn, that means that the
chances of Rex losing money are slim: while house prices can go down in any
given year, the chances of them going down, in nominal terms, over a five-year
period are low. So this is not a good way to solve short- or medium-term cashflow
It’s also not a good way to upsize your investment portfolio. Here’s Tedeschi:
Rex’s chief executive, Thomas Sponholtz, said homeowners who received
money from Rex and invested that cash in an aggressive financial instrument
would come out ahead in a stagnant housing market.
“If the housing market is flat, and you earn 10 percent a year with
the money you get from Rex, you’ve done well,” Mr. Sponholtz said.
“If the market goes up, you’ll have gained something, and in the
meantime, used the money to meet whatever life needs you’ve had.”
Well yes, if the housing market is flat, then Rex is essentially giving you
an interest-free loan, so of course you’ll have done well. But let’s say that
you earn 10% a year with the money you get from Rex, and that your house appreciates
by 4% a year, on average. Then on an annualized basis, your $42,857 will be
worth $47,143 in a year’s time. Meanwhile, your house will be worth $520,000,
of which you owe $48,857 to Rex. You’re not ahead, you’re behind – despite
the fact that your investments have done two-and-a-half times better than the
housing market. (Remember, too, that capital gains on your house are generally
tax-free, something which can’t necessarily be said for investments –
and that if you use Rex’s money for "life needs", then you’re not
going to be earning 10% on it.)
Now I’m sure that there are some people for whom a Rex agreement does make
sense. But for most people, it doesn’t. It’s uncommon for individuals to be
able to raise equity rather than debt, which is essentially what a Rex Agreement
is. But Rex’s equity, it seems to me, is a much better deal for Rex than it
is for homeowners. Anybody interested in such an agreement should certainly
consider other options instead, including an outright sale of the house with
some kind of provision which allows you to stay in it as long as you want.