The Rex Agreement... Is It Worth It?

great post Noah.

There has to be a number of restrictions and penalties with the Rex because in today's troubled housing market it seems too good for speculators or those who need to sell in near future and have good equity in their home.

"early exit" fee ranging from 5% to 25% of Rex's initial payment.

...that is pretty significant. So, if you take out a $100,000 loan as you mention and sell in 3 years, you can owe them $25,000 in early exits fees. If the house falls in value, that wipes out any comparable gains from your other investment.

You should calculate that into your spreadsheet and assume the worst with a 25% exit fee added in.

Thx Peter and interesting suggestion. Ill work on it.

So lets say I take out the Rex loan for $100k. Five years later, I sell to my brother in a sweetheart deal for $200k less than what the Rex appraisal was. I personally come out with $100k loss, Rex loses $100k, and my brother now has a property worth at least $200k more than what he paid for it.

Here's the question: What prevents me from enacting this scenario, selling at an artificially low price to shield gains from Rex?

great question..but I assume there are terms and conditions to prevent against this!

I dont know. Perhaps when a big loss will be realized they will step in and make sure the property sold for market value and no shady tradeoff was enacted like you suggest.

Noah, your spreadsheet is a huge help on this. Nice work.

The REX & CO Web site shows a "founded date" of 2004. That could have just been an incorporation date, though. Does anybody know of a REX agreement currently under contract?

And, not to be a nay-sayer, but according to NAR, people move every 5-7 years on average. That means that about half of all people should be very careful before entering into an agreement carrying a prepayment penalty of up to 25%.

Overall, though, the REX agreement looks like viable product for the right homeowner.

My recommendation to ALL interested parties is to seek an attorney's advice when considering the REX agreement because the contract calls for a lien to be placed on your home and that is serious busines.

Does Rex & Co have insurance against losses they may incurr? How solid is there balance sheet? Are they owned by a public company?

I would NEVER trust this unless they are backed by a major insurer or are a subsidiary of some other major financial company. If national housing turns sour and Rex's liabilities stack up, is there any doubt that they will declare bankruptcy and walk away from their obligations??

I am with REX & Co.
FYI. Just to clarify, Renovations might be an excellent use for proceeds. When the property is sold the homeowner gets 100% credit for improvements. For example if the homeowner adds a room to the house that adds $70,000 in value we reduce the sale price by $70,000 which results in the homeowner getting 100% credit for improvements.

Hmmm, interesting peice of information that would have been useful for the article.

Jeff - one question. How do you value what a renovation project ultimately is worth at resale? If you put in $50K or work, it is very possible to get that money back (in Manhattan at least) + a premium for the headache of doing the renovation.

Of course that assumes the buyer likes the work done and is willing to pay that premium.

Any formula you guys have?

Everyone must keep in mind one very important thing - The Rex Agr is a business. And businesses are in business to make money, not to be philanthropic. It should be assumed that these are seasoned real estate/financial executives that play by one very important rule - buy low, and sell high. This creative tool wouldn't exist if they didn't fully believe that housing was overly punished and will shine again in the future. When's that future? Just read their fine print - anytime after the "early exit" fee.

Does anyone know of the tax implications with this type of transaction ? What, if anything woyuld IRS or the State want ? Wpuldn't it be considered income, since you are essentially "selling" a share of your house in advance of a "full" sale ?

Does anyone know of the tax implications with this type of transaction ? What, if anything woyuld IRS or the State want ? Wpuldn't it be considered income, since you are essentially "selling" a share of your house in advance of a "full" sale ?

Does anyone know of the tax implications with this type of transaction ? What, if anything woyuld IRS or the State want ? Wpuldn't it be considered income, since you are essentially "selling" a share of your house in advance of a "full" sale ?

How did this program do in NY since summer? They are advertizing heavily in Chicago right now (2/08). Were NY customers satisfied? Anyone want to comment on the pros/cons of this verses a reverse mortgage given the current market? (esp. for older retirees)

Thanks

Chris makes a great point, these are business people and have doing background on this program for years before they introduced it to the public. They wouldn't be offering it if they weren't making profit in the big picture and the losses stayed at a minimum. The scary thing to me is that it's just one more way to get people further in debt. Seems a bit premature to start programs like this again. 25% can be a hefty chunk of change.

To answer the IRS question, if it acts like other types of options, the true value is not realized until the position is closed, and that's when taxing takes place. I'm not an accountant or lawyer but that's how the other options I deal with work. Seek tax and legal advice before trusting my description.

Example:
I buy a house today for $300,000 cash and immediately sell an "option" (Rex agreement) on 1/3 the future value of my house for $100,000 cash (open the option position). 15 years from today, I sell my house for $600,000, of which, I get to keep $400,000 (2/3 value and $100,000 profit), and Rex gets $200,000, (1/3 value and $100,000 profit).

Me
Today
-300,000 buy house
+100,000 sell option
Future
+600,000 sell house
-200,000 Buy option
net 200,000 gain

Rex
Today
-100,000 sell option
Future
+200,000 sell option
net 100,000 gain

This is where it gets interesting, technically the option is never exercised because Rex never actually takes posession of the underlying instrument. In other words, all Rex is doing is buying an option on 1/3 value for $100,000 and then selling the option back to the "owner" at closing for $200,000. The $300,000 profit made on the house may be taxable to the "owner" as capital gains, even though the "owner" only gets to keep $100,000 of that profit because he must buy back the option. That said, they may be able to write off the $100,000 of capitol loss on the option to Rex. This is where a tax accountant or tax lawyer is needed to hash out the details.

Usually, options are looked at as a completely seperate instrument from the underlying instrument, so the profit made on the sale of the house is completely seperate from the profit made on the sale of the option. In the example, the option is sold for $100,000 today and bought back for $200,000 when the house is sold. The house is bought for $300,000 today and sold for $600,000 15 years later. That means for the owner, there is a $300,000 capital gain on the house being offest with a $100,000 capitol loss on the option.

I'm really curious how a tax accountant or lawyer would see this and what the current law is. Keep in mind, If there is a tax benefit to this type of program, the law could change during the agreement and wipe out any and all tax benefits with no recourse for the owner.

Scratch what I said up there, I just watched their demo. They seem to structure it so the option does exercise, therefore the total option exercise price would be taxable as long term capital gain.

Also, if they only make advance payment of a small portion of the option exercise price, this deal is not worth the paper it's written on. The only way I'd take a deal like this is if they offered at least 90% of the option exercise price as advance payment. In their own $1,000,000 example the owner seems willing to give up 35% of the future value of their home for an advance payment of 10% of the current value. That's a scam every way I look at it. For the sake of the risk they're taking, I could see them offering 30% up front for 35% of future value, but I'd still never take that deal, particularly at a time when real estate value can't get much lower.

I think the math is a tad more complicated than you show on your spreadsheet. In fact, I'd go on to characterize your spreadsheet as simply wrong on a couple of counts.

First of all, not all Rex deals are 50% of the profit deals. You have to take out approximately 14.2857% of the value of the house as a front payment to be in a 50% Rex deal. So, either the value of the Rex cash out ought to be fixed percentage of the current house value or you need to reflect this sliding percentage scale somehow. My personal suggestion would be to fix the amount being pulled out via the up front Rex payment. I would also disagree that the Rex payment to the home owner is a loan. It is not a loan. It is the sales prices for an option agreement between the homeowner and Rex.

Second, your calculation of Rex profit are materially incomplete ... and simply wrong in a number of cases. At sale in a 50% deal, provided no additional penalties are due, Rex has the option to receive 50% of the sale price provided Rex pays the strike price. The strike price is set equal to the value of your home at the time you entered into the Rex transaction times the Rex deal percentage (50% in case of your spreadsheet) less the amount paid for the option (i.e. the cash out amount). While the math comes out the same in many cases, if the value Rex would owe at closing to execise the option is less than what Rex would pay at closing, Rex clearly would not exercise that option. So, if there is a significant price decrease in the value of the house, it is possible for a Rex option to go out of the money. This is at least one reason why the Rex folks want the deal to last at least 5 years and have penalties associated with ending the deal prior to that.

One interesting question to which I do not know the answer is how the Rex loan treats closing costs for the purpose of calculating the selling price. If Rex does not have to pay its share (presumed to be 50% for this transaction) of selling costs, then your calculation is correct provided the strike price is above the amount Rex will receive for exercising the option.

With respect to the sale to the brother in law, on a related party transaction or if the sales prices is sufficiently different from the appraised price, I am sure the Rex contract gives them enough leverage to give the homeowner an option ... either Rex acts to block the sale or the homeonwer agrees to the Rex repayment calculation based on an appraised value.

I would agree that the bottom line is this is very expensive way of liquidating equity in a home. On the other hand, it does have certain uses for those folks who are house rich and cash flow poor ... such that they could not necessarily support a home equity line of credit.

Oh, compounding interest in excel is easy:
For [B20] =B12*((1+B19)^B18) converts simple interest over to annually compounding interest for your loan investment "earns" cell ... though that cell really represents the entire value of both the initial principal plus all "interest" earned thereafter.

Finally, I would concur that visiting with a finance professional/planner prior to entering into such a Rex agreement would probably be prudent. The math is not easy and little things like whether or not Rex pays a portion of the closing costs matter. This is especially true in light of the current exemption from income taxes for the first $250,000 gain on sale of a primary residence (subject to certain qualifications).

My parents are 82, have no mortgage on their home and are considering a Rex. They're looking at this as income infusion. I have not seen the agreements, just an email proposal with no more info than is available on their website. What do you think of Rex in this scenario? Any idea what might occur if they passed away. How does Rex handle their agreement in this case (they both have wills). Thanks!

There are some interesting facets to this that may make sense for some, but what I see this as is a way the corporations are taking our earned equity in our housing by offering something that up front, and for those with less patience, is a way to live the glamorous life they probably can't afford.

Housing prices typically double every 7-10 years, and for a first time homebuyer that is very important in that after living in a place for several years that might not be the ideal property, they can also know that in those few years they will most likely have made significant equity in their home. This probably will allow for them to move into a more appealing home. What this program is doing is essentially taking a large portion of that potential equity from a customer, and while housing prices continue to climb, the REX customers are stuck in the same house valuation if they want to move on, or may even be forced to downgrade in a like priced market because they cannot bump up their house payments above what they used to have.

If you cannot afford to take a home equity loan and make payments, then you probably should not be taking a REX as an option to do something that is probably not critical. It may be soemthing useful for some, but the risks, the sacrifice of equity, and the potential regulatory issues that I could see rising from this. Seriously, is this good for the housing market and the US economy, taking people's hard earned equity and pumping it into a company like this? I see a huge potential for abuse, from pressure to hold a home, possible calling in debts and forced sale, REX not allowing the reasonable price to be set for a home to sell, etc. Giving up control of one of your greatest assets is extremely risky. If I were a regulator I would be in reviewing all contracts and terms of anything like this to protect the consumer. Last thing this country needs is a housing crunch part 2. The more creative the lenders get, the more wrong things seem to go.

I live in seattle where the market is not nearly as bad as other places. I want to only take about $25,000 and pay off credit card debt. We have only been in our house for 2 years and plan to stay for at least another 8. We also need to refi our 5/1 arm and have 2.5 years left to do it. Will the rex hurt our crdit score? Or our chances of refi? Does anyone have any answers?

Has anyone seen the agreement? Does anyone know the secondary market in which REX is liquidating its positions... ? I cannot imagine they are looking to hold onto an option for 30 years. Can someone explain the option premium? Does the lump-sum paid at time zero give REX an option for up to the maximum years allowed by law?

I have a second home in which I have significant equity, which I want to get reinvested. This deal looks nice because it appears that it would not impact my borrowing power.

Is the Rex Agreement available nationwide and also for condos ? Can the owner at anytime after signing to the Rex Agreement refinance the home ?

The goverment introduced reverse mortgage for the elderly===age 62 and above. i don,t know why an 82 yrs should go for rex, with profit sharing. real estate is bad enogh now and we should all be cortious. be careful out there, read beetween lines before you sign anything

Hey dear I mean, they say they'll pay part of your mortgage if you agree to give them a percentage of the money you'll get by selling the house later on. But what if you decide to never sell the house?

mayes
Lawyer Directory:

Hey dear I mean, they say they'll pay part of your mortgage if you agree to give them a percentage of the money you'll get by selling the house later on. But what if you decide to never sell the house?