More on REX for real estate equity exchange

A couple of months ago we pointed out a firm called REX & Co who are offering a unique approach for refinancing your home.

For anyone considering this kind of equity investment financing, here's a marvelous analysis posted in the comments to that post.

The bottom line is that the fees and deal terms are significantly high enough to make the option profitable as a hedge against declining home values. Akin to selling a call option on your home, you get the cash immediately and if the property value declines, you get to keep the cash (minus fees.) Of course, if just want access to cash but aren't hedging against a downturn, take a HELOC. The interest payments will be significantly lower than the fees and cut that you give to Rex.

After reading about REX here, I was curious about the terms so I contacted them and asked for more details. REX has two similar products: one is for purchasing a new home, and the other is for taking equity out of a home you already own. The home must be your primary residence. I mostly asked about the second product. Here's an abbreviated version of what I learned:

REX will pay you up to 13% of your property's current appraised value in exchange for you signing a contract that gives them their money back when you sell the property plus a 3.5% interest in the change in value (up or down) for every 1% that they paid you. There is also a fee of 18% (!!!) of REX's money due when you sell the property. The up-front costs include you paying for an appraisal, and I think some other small fees, probably comparable to a normal refi, but I didn't get specific numbers. Apparently you have to use third-party appraiser selected by REX.

Here's an example: say your home is worth $1 million today and you want to use REX to take out 10% ($100,000) of the equity. At some later date you sell the house for $1.5 million. The appreciation since the REX transaction is $500,000. At closing, REX will receive 35% (10% x 3.5) of the appreciation, $175,000 plus their original $100,000, plus the 18% fee (18% x $100,000 = $18,000) for a total of $293,000.

If the property went down in value, and you were only able to sell for $900,000, I believe REX would receive their original $100,000 minus 35% of the depreciation ($1 million - $900,00 = $100,000 depreciation, 35% of which is $35,000), plus the 18% fee, for a total of $83,000.

If you improve your property after the REX transaction, you can ask for an appraisal when you sell the property to determine the value of the improvements, and REX will not receive a percentage of the appraised value added by those improvements. You can buy out the contract by getting a current appraisal and paying REX the same amount as they would receive if you were to sell the property for the appraised price.
The 18% fee is going to be much worse for you than just paying interest on a home equity loan unless you hold the property for at least several years after the transaction, and that is without even considering the large percentage of any increase in value that you are signing over to REX.

In the example transaction above, you end up paying REX $193,000 in addition to paying back them back the money they paid you. If you took out an interest-only home equity loan of $100,000 at 8% it would take over 24 years for the interest payments to add up to $193,000. Of course, you would have to be making those interest payments every year. And if the loan had an adjustable rate, you'd be subject to interest rate risk. If you are retired and don't have sufficient cash flow to make the interest payments, perhaps REX is an interesting alternative to a reverse mortgage. Also, if you think your home will stay flat or decrease in value, and you are going to own it for many more years, maybe this is an interesting product.