What Is Equity Sharing – Rex Agreement or EquityKey

With the U.S. mortgage and housing markets in such a dramatic downturn, many homeowners are finding themselves stuck without access to their equity. Banks who have offered high loan to value home equity loans in the past have eliminated these programs as home values have plummeted across the U.S. One alternative that allows some home owners to get at their equity is with a concept called Equity Sharing.

What Is Equity Sharing?
What is equity sharing? That’s a good question. Equity sharing is the concept of getting money now from an investor in exchange for a portion of the future value of your home. In other words, equity sharing is where an investor will give you a certain amount of money for which you agree to pay them their money back plus some predetermined percentage of the home’s future appreciated value.
Example: You own a home worth $400,000 and owe $200,000 on it. An equity share investor would give you say 15% of what your home is worth which totals in this example $60,000 in cash. You do not have to make payments and you are not charged interest. What you do agree to do is when you sell your home in the future is pay the investor back their original $60,000 investment , plus 50% of what you sold the home for minus the appraised value at the time of the equity share investment. In this example let’s say that you sold the home for $500,000, then you would pay the investor $60,000 for their original investment to you as well as another $50,000 for 50% of the difference between $500K and $400K. The total payback is $110,000.

Where Can I Get an Equity Sharing Investor?
These programs are not available in all states in the U.S. You will need to check with each provider if you want to use this program to tap into your unused equity.

Rex & Co. – This a San Francisco based real estate investment company. Rex stands for Real Estate Equity Exchange. Rex has the Rex Agreement which is the legal agreement between them and a homeowner. The Rex Agreement can only be used for a primary residence.

Essentially, Rex & Co. will give you up to 10-15% of the value of your home in exchange for up to 50% of the equity in your home when you sell it in the future. The program is available to any homeowner of any age unlike EquityKey’s program (see below). To protect their investment in the home, Rex & Co. takes out a life insurance policy on the home owner. If the home owner cannot qualify for the insurance policy then the home owner does not get the money.

EquityKey, This is a San Diego based real estate investment company. Unlike Rex, EquityKey restricts its programs to senior citizens between the ages of 65-84. Equity Key banks on the fact that real estate values will continue to appreciate in spite of the down turn in the U.S. housing market. From their roots, financial planners servicing senior citizens, they focus on the senior’s market which owns 70% of their homes free and clear of mortgages (source: Center for Retirement Research at Boston College).

By offering only 10-15% of the home’s value on a home that does not have a mortgage seems like a safe investment bet. The company suggests on their fact sheet, dated July 2008, that purchasing a share of a property’s future appreciation, the EquityKey offering does not erode a homeowner’s existing equity or introduce new debt into the owner’s portfolio.”

The EquityKey program is also allowed on rental and commercial properties.

Certainly there is a market for this type of real estate investment program. It seems to be most appropriate and available to homeowners who have a fair amount of equity in their home and who do not want to take on more monthly payments. Equity sharing is different from a reverse mortgage in that it is very inexpensive to set up and the program does not erode the homeowner’s equity position in their home.

Equity Sharing – Is It Right For You?
While a seemingly good way for homeowners to safely tap into their homes’ equity, is this program as “nice” as it seems. When you look at what the investor stands to make on their investment there seems to be some lopsided returns that fall on the side of the investor. Let’s look at the earlier example.
Even though the equity share investment is not a loan, this Is perhaps the best way to look at it. In the earlier example the homeowner was given $60K. When they sold their home, they had to give back the original $60K plus an additional $50K. This is a 83% return on investment. Who wouldn’t take that deal? But on a real mortgage loan of $60K at 7% over 30 years the mortgage payment would be $399/mo. Let’s just say that the homeowner had the equity share investment for 5 years. When they sell they will owe $110K from a $60K investment. But on a mortgage of $60K they would have paid over 5 years approximately $24K plus they would owe a little less than $60K for a maximum of $84K. In this scenario, there seems to be a huge favor given to the equity share investor versus the mortgage investor.

Apples to Oranges – Equity Sharing to Mortgage
But, these are different types of investments. In the equity share, the scenario the homeowner is not burdened with additional monthly payments like they are with the mortgage. Is being burden free worth this extra payment of the home’s appreciated value worth it? Who knows, that is for you the homeowner to determine. If you are considering equity sharing as a way of tapping into your equity you will have to decide if it is right for you.