Trading future home value for down payment cash

While driving around a favorite mountain lake I hadn't visited in several years, I was stunned not only by the number of cabins that had been leveled for mansions but also by the price tag of the mansions for sale.

How do so many people afford an upscale second home, especially given that their primary residence is most likely of equal or greater value? I've learned that some of the owners use creative strategies to supplement the cash down payment.

For example, a couple had been saving for a second home in the Lake Tahoe area for the past couple of years. They toured several homes and found one that they truly wanted but had not saved enough for the required down payment. According to Mike Lyon, director of sales for FirstRex, the couple executed a Rex Agreement for 50 percent of the down payment on their Tahoe home in exchange for 50 percent of the future change in value of their primary residence.

"Not only did we solve their problem," Lyon said, "but we did it without affecting their debt service. The REX Agreement has no monthly payments or interest."

The REX Agreement (www.rexhomebuyer.com) is not a reverse mortgage, nor is it a loan. It is a financial agreement whereby the homeowner trades a portion of future value for a cash payment today. It is a downpayment tool for owners, especially those who simply want to use a home for decades with little concern of the future sale price. It is also intriguing option for savvy investors who believe they can realize a greater return on investments than on home appreciation.

FirstRex is betting that it can make money by investing in a geographically diverse portfolio of single-family homes and the subsequent financial benefits of future appreciation. The company simply is executing on a program based on what most economists have been preaching for years – that real estate is usually an excellent long-term investment.

In most cases, homeowners can draw 10-15 percent of the home's value, depending upon the terms and percentage of the future value – get more cash now, yet be prepared to give up more of the home's appreciation down the road. If the home's value goes down, the homeowner and Rex share the loss equally.

The worst-case scenario would be an owner who uses the advance payment for high-risk investments. If those investments fail, and the home loses value, the owner would face a precarious position.

For homebuyers, the concept can increase the amount of the down payment and reduce monthly payments brought by a lower loan amount.

The typical customer is a baby boomer, aged 50-62 with above average-priced homes, significant equity and the need to increase wealth for retirement. While there is not one common target for a customer securing Rex funding, most clients have consolidated outstanding debt, purchased other real estate including second homes or paid college tuitions.

Here's how the Rex Agreement works in a typical situation. Let's assume a home is valued at $500,000 and the owner signs with Rex for a $50,000 advance.  If the house sells seven years later for $600,000, Rex gets $100,000 - $50,000 in repayment and half of the $100,000, the home's appreciation since the deal was signed. If the value is flat after seven years, Rex gets its initial investment of $50,000.

If the house's value decreases by $100,000, Rex and the homeowner would share the loss equally - $50,000 each.  Rex would receive no money upon the sale while the home owner would be liable for the remaining $50,000 of loss.

Homeowners can terminate the Rex Agreement at any time, but there is a stiff early exit cost if the owner opts out within the first five years of the deal. Rex charges a fee equal to 25 percent of the advance payment if the agreement is cashed out in the first year, 20 percent in year two, 15 percent in year three, 10 percent in year four and 5 percent in year five. There is no penalty after five years.

The costs of obtaining a Rex Agreement will vary, yet a homeowner's out-of-pocket expenses are usually offset by the "option fee" paid by Rex. The appraisal, preliminary title report, title insurance, credit report, natural hazard disclosure, tax service, flood certification, notary, wire, messenger, recording, escrow/closing and any other fees often are eliminated by the option fee.

Owners must continue to maintain the property, keep taxes, insurance and any mortgage payments current and not exceed the agreed upon limit on the total principal amount of any loans that may be secured by the home.

FirstRex is a big believer in future appreciation. If you take its deal, make sure you know what you will be surrendering.

As author, nationally syndicated newspaper columnist and talk-show host, Tom Kelly has carved a niche as one of the leading real estate and finance journalists. His book “Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border” was written with Mitch Creekmore, senior vice president of Stewart International, and is available in retail stores and on Amazon.com. He and his wife, Jodi, Dean of the Humanities College at Seattle University live on Bainbridge Island, WA. Their four grown children are spread out around the world and their first grandchild, Myles Thomas, makes them goofy with joy. You can connect with Tom on his Facebook page at https://www.facebook.com/tom.kelly.37604303, or check out his website at http://tomkelly.com.

Tom Kelly’s novel “Cold Crossover” is now available in print at bookstores everywhere and in both print and Ebook form from a variety of digital outlets. Follow real estate agent and former basketball coach Ernie Creekmore as investigates the disappearance of his star player on a late-night boat. Check out the national reviews and put “Cold Crossover” on your list.