So you’ve watched your home equity holdings grow steadily since the end of the recession and now you want to tap into that wealth to fund a remodeling, college tuition or some other worthy but cash-consuming project?
Join the crowd. Home equity lines of credit, by far the most popular way to turn equity into cash, are booming again — up by 36 percent in the past 12 months alone, according to the Consumer Bankers Association. And no wonder: The Federal Reserve estimates that Americans’ home equity holdings have nearly doubled in the past five years and now exceed $11 trillion.
But here’s a question that growing numbers of owners might encounter in the coming months, especially in markets where growth rates in home values historically have been strong: Would you prefer loading more debt onto your house with a credit line or might you be open to trying something different — sharing part of your future appreciation with private investors? Would you consider taking a lump sum of cash now and make no payments for years, only settling up with investors when you sell or otherwise terminate the agreement?
There are now companies operating in a small but expanding number of markets doing precisely this. If you cut them into some percentage of your home’s growth in value during the coming years — anywhere from 30 percent to 50 percent or higher — they will write you a check for tens of thousands of dollars.
It won’t be a mortgage. It won’t carry an interest rate. And if there is minimal growth in value of your house, or the property declines in value, investors will end up earning relatively little. On the other hand, if home values soar in your area, they could end up with significant profits.
Sharing unpredictable future appreciation streams may sound odd — even risky — but it’s a trend that’s gaining momentum. 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 percent 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 percent, 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 up front 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 — $47,500 or $51,750 — plus its appreciation share at 40 percent $48,000 ($120,000 x 0.4 $48,000) or 45 percent ($54,000). EquityKey’s cut after 10 years: $95,500 or $105,750 depending on the share you agreed on.
EquityKey currently is writing agreements in California and Florida, but expects to expand in the near future into metropolitan Washington, Boston, Oregon, Washington, Colorado and Illinois, according to co-founder and Managing Director Jeff Nash. FirstREX is active in California, Oregon, the District of Columbia, Maryland and Virginia, according to James Riccitelli, co-CEO of the firm.
Could appreciation-sharing deals like these make sense for you? Possibly. But beware: You need to take a hard look at the details of the contracts, including what you might owe if you terminate the agreement in the first six or seven years, before investors have had a chance to earn much of a return.
In the end, you might conclude that the cost of a traditional equity credit line would be cheaper for you — and much more predictable. Or you just might conclude that interest-free money in your pocket, with no payments for many years is worth the appreciation-share gamble. Either way, run the choice past your financial counselor, accountant or investment adviser.
Kenneth Harney is executive director of the National Real Estate Development Center.