Innovative companies offer ways to squeeze cash from homes

Programs allow 'house rich' investors to generate an income

By Janet Morrissey

July 11, 2008 12:00 pm ET

When Thomas Terrill was diagnosed with a deadly lung disease, in June 2001, and was told he had less than five years to live, he was stunned.

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"I had been in wonderful health," he said. So, the Kenilworth, Ill., resident quit his job, stopped thinking about finances, packed his bags and set off with his wife, Grace, to see the world while his health held up.

But in July 2005, a miracle happened: A lung donor was found and the transplant gave Mr. Terrill a new lease on life.

However, it also gave him a new problem — "I had given up my business, and my expenses per year were about twice what my income was," Mr. Terrill said.

So, Mr. Terrill, now 76, started looking at ways to tap into the equity in his $3 million home. "I was house rich, but cash poor," he said.

Not wanting to take on any new debt or pay hefty upfront mortgage fees, he quickly dismissed a reverse mortgage.

Instead, Mr. Terrill signed up for a Rex agreement. Under the program, he received 13% of his home's value in tax-free cash.

In addition, Mr. Terrill agreed to repay this amount and to share 50-50 in any future appreciation when the house is eventually sold. No interest is accumulated on the cash advance along the way, and if the value of the home falls, the lender will share 50-50 in the loss.

"This is allowing me to stay in my home and pay my bills," Mr. Terrill said.

ACCESS TO EQUITY

He is among a growing number of homeowners, especially seniors, who are seeking ways to access equity in their homes amid the weak economy and credit crunch.

The days of skyrocketing home prices, falling mortgage rates and easy credit are long gone. Homeowners can no longer treat their homes like an ATM machine, refinancing a mortgage to pull out cash on a whim.

Some homeowners have turned to reverse mortgages, which allow people who are 62 and older to convert equity in their home into cash without selling their property or taking on new monthly mortgage payments. Basically, the loans don't have to be paid back until the person moves or dies.

But many seniors are reluctant to sign up for reverse mortgages, largely due to the hefty upfront fees, which often exceed $15,000, and the high interest rate charges that are slapped on monthly.

The Rex agreement and similar "purchase option" programs offer an alternative.

Rex & Co. of San Francisco launched its Rex agreement in late 2005 as a way to make home equity liquid without debt.

"We looked at the demographics and noticed that 401(k)s and IRAs have not had the returns people had expected and people hadn't saved enough," said Jeff Cusack, managing director of sales at Rex.

Because home equity represents about 80% of a homeowner's net worth, with individual retirement accounts and other financial assets making up the remainder, Rex saw an opportunity, he said.

Under the Rex agreement, a homeowner can receive up to 13% of the home's appraised value as cash as long as the owner agrees to pay the money back and to share 50% of the home's appreciation with Rex when the home is sold. The program differs from reverse mortgages because there is no age restriction, no monthly interest charges and the home can carry up to 75% debt.

If the value of the home declines, Rex will share 50-50 in the loss up to the amount of money it advanced.

Another company, EquityKey, based in San Diego, launched a similar initiative in March 2007, but with a twist. It too requires the homeowner to share 50-50 in the appreciation of the house when it is sold.

However, its program differs in that the homeowner must be between 65 and 85 and isn't required to pay a closing fee or even pay back the cash advance.

Instead, EquityKey takes out life insurance on the homeowner and uses proceeds from the policy to cover the cash advance when the homeowner dies.

"That's how we hedge our investment," said Janis Jarosz, the company's vice president of marketing. "If, God forbid, something happens to the client before the house has had time to appreciate, then we've actually protected our investment with this life insurance policy."

As a result, the homeowner has to be "in reasonably good health to qualify," said Jeffrey Nash, co-founder of EquityKey.

"If they don't qualify for the life insurance, then we can't take them on as a client," Ms. Jarosz said.

The lending programs offer an alternative to reverse mortgages for clients who want to tap into their home equity.

Geoffrey VanderPal, a certified financial planner at Elite Financial Planning Group of America Inc. in Las Vegas, which manages $100 million in assets, sees the programs as a viable alternative to reverse mortgages. However, he said it is important that the homeowner's heirs are familiar with the program and penalties involved.

"I would recommend bringing in the children with that senior client to discuss these programs to make sure the family understands, especially the ones that would be inheriting the home," Mr. VanderPal said.

"It sounds very interesting and I would certainly recommend it over a reverse mortgage," said David Lesnick, a certified financial planner at Sound Advice Financial Planning in Goodyear, Ariz., who hadn't seen the programs before. He discourages clients from taking out reverse mortgages as he feels "they give away too much equity and there is a lot of abuse going on in that market."

These programs sound "like a viable alternative" and "fairer than a reverse mortgage," Mr. Lesnick said.

Last month, another company, Grander Financial Inc. in Irvine, Calif., introduced the My Equity Freedom program, which mirrors the Rex program, and the My Equity Insured program, which works similarly to the EquityKey program, except that it applies to second homes and commercial properties.

Plans are even in the works for Grander to expand the concept to stocks.

"Let's say you have a $10 stock that's being actively traded, we'll give you $8 for it, and then if it goes to $12, we share in the upside of that $12," said Jason Jepson, director of public relations. He cautioned that the stock program is in the early development stage and likely won't be ready to roll out for six to nine months.

Jorge Saucedo, a 65-year-old Oakland, Calif., resident, signed up with EquityKey after running into money troubles in his construction business in the spring of 2006. "We had hired a new architectural firm in 2002 and it was a complete disaster," in which his business chalked up $1 million in losses over three years, he said.

At the same time, Mr. Saucedo was facing a huge rate reset on home equity loans on his three residential properties. He used EquityKey to tap into the equity in his three properties. "This was a gift from heaven," Mr. Saucedo said. "It gave us operating capital to continue with the business and now we're doing fine."

Demand for the programs is surging.

Mr. Cusack estimates Rex has completed more transactions so far in 2008 than it did in all of 2007. The same applies at EquityKey, where applications are up 112% in the first six months of 2008 from the same period a year ago. And this trend is expected to continue.

"You've got this looming tidal wave of boomers that are about to retire and are probably ill-suited to do so: Social Security is not going to cover it; Maybe their pensions aren't going to cover it," Mr. Nash said. "You have the whole boomer generation coming toward retirement and they haven't saved enough."

For instance, Ron Der, a 50-year-old resident of Daly City, Calif., signed up for a Rex agreement last year after seeing interest rates "skyrocket" on a home equity loan that was tied to his three-bedroom house. After signing on, he has been able to pay off the home equity loan, contribute to a college tuition fund for his 12-year-old son Nicholas, and still have extra cash for home improvements.

However, the programs aren't without risk. Homeowners need to carefully scrutinize the appraisal value of their homes when they sign on since it sets the marker where the lender's profit-sharing begins.

CHALLENGE THE APPRAISAL

Mr. Terrill challenged the appraisal on his home and got Rex to add $100,000 to the number. "I've lived in this village for over 50 years, and so I had a pretty good familiarity with it," he said.

If a homeowner wants to sell their home before than the minimum five-year holding period for the Rex and My Equity Freedom programs and 10-year holding period for the EquityKey product, they'll face stiff penalties as high as 25% of the cash advance.

E-mail Janet Morrissey at jmorrissey@investmentnews.com.

"WE LOOKED at the demographics and noticed that 401(k)s and [individual retirement accounts] have not had the returns people had expected and people hadn't saved enough."

Jeff Cusack

Managing director of sales

Rex