The latest news regarding Lehman and Merrill are not surprising. Still, expecting an impending disaster and enduring a disaster are not the same thing. For some, a pessimistic leaning may take hold and for you… I have great news.
In a recent article in the San Diego Union Tribune by syndicated writer Lew Sichelman, we learn about a growing business in refinance lending: the cash out, no interest, no payment, no loan… loan. That’s right. There are investment companies out there right now loaning cash against the equity in your home. There is no interest rate and no payments because it is not a loan. The company simply gets to share in any equity gain you experience between the time you receive the money and when you sell the home.
There are restrictions, including a kind of pre-pay penalty. You can not sell the home for an agreed to time period (usually at least five years). But there is also freedom: no restrictions on how you use the money. The investment company shares in your appreciation and your depreciation. Of course, if your home goes up substantially, the cost of the money you received can be exorbitant. But you get use of frozen assets right now, which can be pretty handy.
Here’s the marketing gem in all of this: There are plenty of clients and prospects on the sideline right now, desperately wishing they could get in the game. This is one of the best buying cycles I have personally ever seen. The problem: they are house rich and cash poor. Here is a solution and it does not add to their monthly budget or future debt-to-income calculations. Show them how to get that “dead” money out their home and into an income producing property.
HIGHLIGHT: If you think housing is in trouble and things are not going to get better for some time, you can take your equity out now at a cost of: nothing. When you do eventually sell you will still have to pay back the original amount but you will have gained no equity and so the “loan” will have been at no cost to you.
One last thought. This is good news for everyone, optimist or pessimist. Where there is need and the potential for profit, there is innovation. As dire as the credit crunch appears, new innovation and twists on old innovation will continue… as will the real estate industry.
Dave says:
The problem: they are house rich and cash poor.
This has not been my experience at all. I am seeing a whole lot of people that are house poor and cash poor.
Do you really know lots of people with a bunch of true equity in their homes that cannot tap in?
Really?
September 15, 2008 — 9:55 am
Sean Purcell says:
Dave,
I do not have the report handy, but statistically speaking, the average American has over 50% equity in their home. Something close to 1/3 own their homes free and clear.
This is another example of how the press can report on a specific issue (e.g. the housing crisis is wiping out equity for those who purchased within the last 3-5 years and put little or no money down) and confuse a universal truth (e.g. the majority of homeowners are fiscally sound and enjoy equity in their homes).
It is misunderstandings and misleading healines of this nature that can lead to policy nightmares on a federal level.
September 15, 2008 — 10:20 am
Michael Cook says:
I agree with you Sean, most people tend to live in their homes a very long time and have lots of equity. Is there a time at which you have to sell your home or pay the money back at some fixed rate? I cant imagine them allowing you to just keep the house and the money?
September 15, 2008 — 10:48 am
Sean Purcell says:
Michael,
As I understand it, you do not have to sell within any time period. The only rule is if you sell too soon there will be a penalty. The longer you wait, the greater will be your cost of borrowing though, assuming we have appreciation. I suppose (I am guessing now) that if you never pay it back it becomes a lien to the heirs.
September 15, 2008 — 1:47 pm
Bob in San Diego says:
Any other way to get out of it? Can you buy it out or refi later?
September 15, 2008 — 2:14 pm
Sean Purcell says:
Hi Bob,
Yes, you can refi out (or buy out) same as selling: within five years and you will incur a penalty.
I was just reading the specifics on the program and I was mistaken before. The agreement on these deals lasts, generally speaking, up to 50 years. If you haven’t sold by them you have to refi and repay the advance plus the fees.
September 15, 2008 — 2:27 pm
Thomas says:
Sean, I initially had attempted to post an entirely too argumentative and fallacious post but Greg invited me to phrase/frame it differently. Unfortunately, my position is elitist in nature. I believe that the home is a forced savings account for most people and enables them to retire. Products that allow/convince people that aren’t sophisticated investors (read smart enough) to extract this equity has contributed to our current crisis in my thesis. Do you believe brokers or realtors have an obligation to protect people from themselves with respect to a product like this one?
September 15, 2008 — 4:09 pm
Sean Purcell says:
Thomas,
You ask an interesting question. I am heading out to a 5:30 appt so I will have to give you my short answer but we can continue later if you like.
Do you believe brokers or realtors have an obligation to protect people from themselves with respect to a product like this one?
Do I think I should be held responsible for my clients decisions? Absolutely not. Do I feel a responsibility, as a citizen of the mortgage/real estate community, to act in my client’s best interest and advice them the same? Absolutely.
I view it the same way I did when I was in securities. Is this investment/decision suitable for my client? I am very interested in that question. But I do not, repeat NOT, want such a responsibility being dictated to me by some government entity.
September 15, 2008 — 5:13 pm
J Boyer Morristown NJ says:
What a strange idea. I am still not sure how I feel about this. For markets where home prices are likely to continue to go down, or at a minimum not go up for a while, I guess it is ok. For New Jersey owners of real estate I guess this would be fairly good since they are projecting 0% to 3% price appreaciation on average for the next 4 or 5 years.
September 15, 2008 — 7:24 pm
Brian Brady says:
“Do I think I should be held responsible for my clients decisions?”
Had you answered yes, you would have all of my money (and the rest of the country’s). Why not? You’d be insuring a positive return.
September 15, 2008 — 8:21 pm
Thomas says:
Sean,
Thank you for the answer. As I told Greg, while this site is for the diverse group of people involved in real estate, it gives us outsiders a good view of the culture and thoughts of the industry. Your answer makes perfect sense but I still wrestle with “what is the balance of govt regulation versus free market?” I think the pendulum may move substantially in the other direction.
September 16, 2008 — 3:04 am
Michael Cook says:
As a holder of the series 7 & 63 license, I think suitable is used very loosely in my profession. I remember the questions on the exam were things like should you recommend a 90 year old start day trading with his retirement savings and things like that.
All you can do is be as transparent as possible, but you cant force your financial ways on others. Perhaps they are ok paying 20%+ in interest because they need money now or maybe they have an investment yielding that and more.
The problem I have found is more with the transparency. If you dont walk people through clear examples of best and worst case scenarios then you do have some accountability. Glossing over the 20%+ interest payments gets you in a lot of trouble and will most certainly cost you business down the line.
September 16, 2008 — 7:00 am
Sean Purcell says:
J Boyer,
There definitely appears to be an opportunity here for those that want to make an educated guess about the rate of appreciation their neighborhood will experience. The upside is that the max risk is 50% of your equity increase… there is no scenario where you will give up all your equity.
September 16, 2008 — 9:39 am
Sean Purcell says:
Thomas,
I appreciate your thoughtful comments. I think a lot of people wrestle with the same issues on regulation. I also fear that you are correct as to the pendulum swing. Why do I fear this? Because, as a rule, all government power is to be feared. I will be posting later today on a perfect example of why that concept is so important.
Thanks for your ideas.
September 16, 2008 — 9:54 am
Sean Purcell says:
Michael,
I do like using the word “suitability” because it was pounded in to me so much as a stock broker. (It became less of an issue when I became a trader… the only suitability then was to me!) But you are nailing it on the head when you say transparency. Being as transparent as possible requires honesty, integrity and suitability, not to mention maintaining a fiduciary obligation. Transparency solves a LOT of issues.
September 16, 2008 — 10:01 am
Tom says:
If you’re talking about Rex agreements, I would do the math before recommending this to anyone. Just because someone found a clever way to extract ‘dead money’ from someones home, does not make it innovative.
http://www.marketwatch.com/News/Story/send-home-equity-sharing-scheme-packing/story.aspx?guid=%7BE2AD2D9C%2D7B30%2D4A9D%2DB50A%2DA3425661143A%7D
September 16, 2008 — 11:22 am
Sean Purcell says:
Tom,
I would do the math before recommending this to anyone
No doubt. I would suggest doing the math before recommending any program to anyone. That is the essence of our job.
September 16, 2008 — 12:34 pm