We’ve been talking about the re-emergence of creative financing – the first was crowdfunding, now this from the latimes.com – an excerpt:
One company based in San Diego, EquityKey, says it has completed or has in process appreciation-sharing agreements on homes with an aggregate value of $200 million already this year, and expects to hit $1 billion by the end of the year. Another, FirstREX in San Francisco, says it has completed hundreds of “equity financing” deals tied to future appreciation.
Though the contractual details and payout amounts differ from company to company, here’s the basic concept: Say you have a house that’s valued at $500,000. If you agree to share 45% of future appreciation on the property and you otherwise qualify in terms of your financial ability to handle property taxes and upkeep, EquityKey might give you $51,750 today to help pay for kids’ tuitions. If you wanted to share 40%, it would give you $47,500. When you end the agreement, you’d have to give EquityKey its portion of the appreciation on the house plus its initial investment.
EquityKey ties its appreciation calculations to the Standard & Poor’s Case-Shiller Home Price Index, which measures home prices in markets across the country. FirstREX uses appraisals upfront and at the end.
Say the house appreciated over the next 10 years by $120,000 and you needed to sell. You’d owe EquityKey the original payout amount ā $47,500 or $51,750 ā plus its appreciation share at 40% ($48,000) or 45% ($54,000). EquityKey’s cut after 10 years: $95,500 or $105,750 depending on the share you agreed on.
Read full article here:
http://www.latimes.com/business/realestate/la-fi-harney-20150405-story.html
These guys will not be able to help themselves from trying to screw people in the fine print, it’s just too easy to do when dealing with the average person that doesn’t bother to read or understand what they are getting into. I smell a batch of consumer lawsuits in a decade or so… and a lot of unhappy folks spinning a tale of woe how they were forced into taking the $50,000 to buy the jet skis and new truck.
The lawsuits will be filed against a dead company — that business model won’t survive the next downturn.
So they’re only doing it in California and… FLORIDA.
I wonder what is unique in those two states that would motivate this company into choosing them as the fertile testing grounds for their unique financial instruments?
Some may say they’re a “payday loans” shop one might find on Crenshaw Blvd, except this is throwing up your house for usurious suckling instead of your next McDonald’s paycheck. Others might say this is a quasi-derivatives scheme preying on minorities, that cuts out some middlemen, but then some are the cynical kind. After all, this could help junior with his college education, and responsible things like that.
Well, the company will just be holding a whole bunch of 2nd deeds of trust worth loan amount + % of appreciation. I guess they could get foreclosed out, but I suspect they aren’t doing high LTVs on these things. It is just a bet — collect interest as you go vs. collect interest at the end.
Silliest thing I’ve heard! And only in California and Florida. What could possibly go wrong??? *Faceplant*
I honestly don’t understand how these guys are going to cash flow their business model. It’s going to takes years maybe decades before you possibly reap big appreciation windfalls. How do you pay for your staff and overhead until that day arrives.
Make it up in volume? š
Put 200 million on the street. Stop. Cut it up into 20,000 units and sell them off through brokers for a profit. Run. Fast. Same old game.
livingincali:
“I honestly donāt understand how these guys are going to cash flow their business model.”
Dilute the “risk” with derivative instruments. Many of these home loans are guaranteed by the federal government. Didn’t you pay attention last time?
Homeownership is a civil right. With their rights, come your responsibilities. It’s kind of like what the ground soldier’s said about “old blood and guts” Patton.
I’ll clip coupons, drive that clunker and send jr. to community college before employing them.