In the 1890s, the head of the U.S. Patent office suggested that, since all the really valuable ideas had already been conceived, the U.S. Patent Office be shut down. After that time, the airplane, nuclear power, radio and television, computer, internet, etc. were all invented. In the world of real estate and finance, new concepts are being used all the time; and old concepts are now being revisited.
For example, look at all the websites now used for marketing real estate complete with virtual tours of properties; yet how relatively few people are using them to fill up rentals and sell properties. With seller-financing coming back, all those Golden Oldie financing formulas such as single-payment notes, zero-interest, discount-buy/back, stutter payments, and exotic lease/Option techniques etc. are re-emerging to replace conventional financing that has dried up.
Rex & Co. of San Francisco (www.rexagreement.com)has come up with what they call an Equity Option to helping out those who can’t make their payments, whether because loans are indexed or because of loss of income. They pair financially capable parties such as Roth IRAs, Corporate Pension Plans, or private investors with homeowners (except those in the top or bottom 10% of the market) who need financial assistance bringing back payments current or to help them make future payments. In Florida and eight other States, the investor gives between 12 – 17% of the house value in buys a 10-year Option to share half of all future appreciation when he house is sold. The homeowner remains in the house with lower payments. The homeowner doesn’t lose his home and the investor has a totally passive highly leveraged investment for the future.
As the New York Times explains it, suppose the house is worth $600,000 and the homeowner signs a Rex Agreement for $100,000. If the house is sold 10 years later for $720,000, the investor gets the return of his $100,000 plus $60,000. If the value is flat, Rex gets $100,000 back. If the house decreases by $120,000, the homeowner and Rex share the loss equally, and Rex gets $40,000 back.
When a distressed owner in a falling market signs this agreement, the house appraisal may be at a much lower price today than last year so, over ten years, the equity could appreciate much more, and the risk of loss is small in most markets. This will protect large equities that might be lost to higher payments, and/or it can unlock a lot of equity for those who just want some extra money without having to make extra payments for it.
That may not seem like much of a return to those in the house business, but it provides a pretty attractive way for those who have money to invest to diversify their portfolios while bringing more money into the real estate market.
