REX Agreement - Buyers Beware!!!

Cash in now on your home profit?

REX AGREEMENT: You get paid for giving up share of gain from future sale

March 17, 2008
BY TERRY SAVAGE Sun-Times Columnist

Americans are learning a bitter lesson about the importance of building equity in their homes, instead of withdrawing it for current expenses. Now, along comes another scheme to give Americans access to their home equity -- the Rex Agreement.

Advertised as an "alternative to debt," this plan focuses on your willingness to share the upside growth in the value of your home with a new "partner" -- an investment company that will provide cash now, in exchange for an option on a big piece of the profits when you sell.

The name "Rex" stands for Real Estate Equity Exchange, and the Rex Agreement is their trademarked product. As the company is quick to point out, this product is not a loan and does not require monthly repayments, unlike a home equity loan. And it does not charge an interest rate, like a reverse mortgage.

Instead, you're granting them an "option" on a portion of the growth in value of your home. The amount of profit you're willing to share determines the amount of cash you'll get upfront -- and will have to share with them when the home is ultimately sold.

Too good to be true? It is, sort of. While this is a legitimate company, with an enticing promo and Web site, the real problem lies in the pricing and the details, not to mention the larger question of whether you really want to share title to your home.

How it works:

The company Web site, www.RexAgreement.com, will walk you through the various scenarios.

Basically, at the start of the process, your home value is independently appraised. The Rex Agreement is only available to owners who have at least 25 percent equity in their homes (based on current appraisal).

Once the current value is established, you grant the company an option on a portion of future appreciation. They give you a cash, upfront "advance" on the value of that option and take the rest of their share out of the profits when the house is sold. If the home declines in value by the time it is sold, they can walk away from the option, and you keep the cash advance you received.

The amount of cash you get upfront as an "advance" on the option you've granted is dependent on the percentage of the future gain that you are willing to share with them. You might agree to share 20 percent, or 35 percent, or 50 percent of the eventual sale price that is above the current appraised price.

(By the way, they get their percentage of the "gross" sale price of the house, not the net price after real estate commissions and fees.)

This agreement lasts for 10 years, and can be extended for an additional fee. But if you end the agreement early by selling the house at a profit within the first five years, there is a "penalty," which reduces the remaining option payment to you.

In the meantime, and until you decide to sell, they have a lien on your title -- and a lot of say in what you do with your home. For example, if you jeopardize the value of the home, perhaps by not keeping it well-maintained, Rex & Co. can exercise their option and sell the home under a limited power of attorney that you grant them as part of the paperwork.

This is just an overview, and I recommend that you consult your attorney to find all of the caveats. I showed the concept to both a top real estate attorney and to the partner of a major accounting firm, who pointed out some of the fine print that I might have missed. And I wasn't allowed to see the actual documentation without signing a non-disclosure agreement!

There might also be some questions about the tax treatment of that initial cash payment, although they have an opinion from a top law firm that it is a non-taxable advance against any ultimate gains (with the exception of a $1,000 option "fee").

Pricing -- who really wins?

Evaluating the financial benefits is the real sticking point. Using the example on their Web site, you'll see that if your home is currently valued at $750,000, and you agree to share 50 percent of the upside, you'll get an "advance" payment of $107,000 (or $75,000 for sharing only 35 percent of the upside, or only $43,000 for agreeing to share 20 percent of the future gains).

When you eventually sell the house, they'll get their fixed percentage of the profits and give you the balance, less the amount they advanced.

Now ask yourself: Why would anyone give me an interest-free check for $107,000 (or $75,000 or $43,000) and wait an unspecified amount of time for me to decide to sell my house, and then take their piece of the profit?

The simple fact is that you aren't getting enough out of this deal, even though that chunk of cash is enticing. (See box.) And you're giving away as much as half of the profit (above current prices) when you sell your home!

The "smart money"-- the Rex guys -- are betting that they've found a way to share in the upside potential of $11 trillion dollars in home equity that Americans own at today's discount prices. Do you want to bet the house against them? I think not. And that's the Savage Truth.

Terry Savage is a registered investment adviser.
Distributed by Creators Syndicate.