Are you ready to bet that the great housing recession is finally over and that values are rising again? If so, some of the nation's largest institutional investors are ready to roll the dice with you.
Pension funds, endowment portfolios and the like don't typically invest in residential real estate, which is the world's largest asset class. But given their long-term horizons, housing is considered a natural fit. And now there's a new investment vehicle that aligns their stash of cash with creditworthy homebuyers.
It's called REX HomeBuyer, and it is a form of shared appreciation. But it's not a mortgage, nor is it down payment assistance. "It's not debt of any kind," says James Riccitelli, co-CEO at firstREX in San Francisco. "It's an innovative solution that helps responsible buyers bridge the funding gap."
REX HomeBuyer is an equity investment by private real estate investors that pays off when you sell the house. If there's a profit, fine, you hand over a pre-arranged share of the gain. And if there's a loss, REX shares in the loss.
"We invest in the home at the same time the buyer does," says Riccitelli, "and we expect to make a profit or loss at the same time the buyer does."
Here's how it works: Say you want to buy a house that sells for $500,000, but you're a little short on the requisite 20 percent down payment ($100,000 in this case). FirstRex will provide up to half of the down payment, or $50,000.
In return, you typically agree to give the company 40 percent of the change in value when you sell.
So, 10 years from now, let's say the home is now worth $600,000. If you sell, firstREX gets its original investment of $50,000 plus its share of the change in value, or $40,000. You receive the rest.
But by then, you've paid your $400,000 mortgage down to $325,000, so your payoff on your original $50,000 investment is $185,000. That's $60,000 from your share of the appreciation, $75,000 you built in equity by paying down the loan and your original $50,000 down payment.
Better yet, during the time you owned the house, you made no payments to firstREX, and your 20 percent down payment prevented you from having to pay costly mortgage insurance.
Now suppose the housing gods turn angry again, and your house is worth only $400,000 when you sell in a decade. The mortgage payoff is still the same $325,000, leaving the proceeds to be split 60-40. So firstREX receives $10,000: its original $50,000 investment, less $40,000, which is its share of the $100,000 loss. You get $65,000.
Recapping: When values rise, says Riccitelli, "the buyer benefits from using our money. We make a healthy profit, but so does the buyer, typically as much or more than we do."
And when values decline? "The buyer benefits from the use of our money and actually makes a profit on us by paying us less at the end than the amount we invested," the long-time finance industry executive says. "An even better deal for the buyer."
Even when there's no change in value, he adds, "the buyer benefits from using our money at no cost. And in all three situations, we enabled the buyer to purchase the home in the first place."
"The buyer benefits no matter how the outcome plays out," says Riccitelli.
The REX program is only a few months old, and only about 20 deals have been made to date. So it's way too soon to tell whether this is the next great thing in housing finance. But Riccitelli says his group has trillions of dollars to invest in an asset class in which they now have a zero allocation.
FirstREX itself is a real estate equity investment firm founded in 2004 to focus on developing financing products based on equity instead of debt. Its shareholders include world-class institutional investment firms and financial institutions as well as senior management executives.
Riccitelli won't reveal his backers' identities. "We are bound by confidentiality provisions," he says. "But they are very, very serious people -- including myself. And they are lining up" to put their money in housing.
Together, they have spent upwards of $20 million to build and develop the REX HomeBuyer program over the last eight years. "They've done a lot of research," Riccitelli says of his anonymous investors. "They have a huge confidence in the housing market."
They are patient, too. They promise to wait until you sell, even if they have to wait 30 years. And they promise not to ever sell their share of your property to another investor.
Of course, REX isn't for everyone. Folks with shaky credit and income need not apply. You've got to be short on cash, not credit. You can even have enough for a full down payment on your own, but for one reason or another, you may be uncomfortable spending it all to buy a house. Maybe you want some left over to buy new furnishings or make some improvements.
Whatever the case, you'll still need a first mortgage. But because REX is structured in such a way that it is always subordinate to the mortgage -- and because it is in a first-loss position along with the buyer -- lenders are likely to consider a loan a safer bet with REX in the deal.
REX ends when the buyer sells or when everyone on the title passes away, whichever comes first, subject to a maximum term of 30 years. But the buyer can end the agreement at any time without selling by buying out the investor.
If that happens, the agreement calls for REX to hire an independent third-party appraiser to determine the home's value, and you pay an amount equal to the company's original investment plus any profit that would have been earned had the place sold for the newly appraised value.
One caveat, though: This is not a short-term funding solution. If you sell within the first three years, there is an additional charge.