EquityKey and Shared Risk
September 13th, 2007
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In the past we have looked at the Rex reverse mortgage program, a kind of equity sharing arrangement — see our posts from July 9th and July 18th.
Another example of an equity-sharing reverse mortgage comes from EquityKey. The basic arrangement is that you get cash from EquityKey and they get a 50 percent interest in any future property appreciation.
The program, open to those aged 65 and above, “gives you the opportunity to receive debt-free cash without risking any of the existing equity in your home,” according to the company. “Your payments are based on the projected future appreciation of your home and you never have to pay back any of the money that you receive, so long as you keep up your end of the bargain. In exchange for cash today, EquityKey obtains the right to participate in the future appreciation of your home. EquityKey is not a debt and will never touch your existing equity.*”
What about the asterisk? That leads to a note which says “any purchase price paid by EquityKey for your home will be less a fixed disposition cost which is equal to 10% of the initial appraised value of your home; other fees may apply. There can be no guarantee that participation in the EquityKey program is suitable for you. Please consult your own legal counsel, financial advisor, tax planner and any heirs to your estate before making a decision to participate in the EquityKey program.”
What’s interesting with this shared-appreciation reverse mortgage is that you essentially lock in your current equity — less that fixed disposition cost.
Conceptually, I like the idea of lenders sharing risk. As EquityKey points out, if the value of the property declines “you keep the money. EquityKey believes that real estate is a safe long-term investment. If your home loses value then EquityKey will lose the money that it has paid to you. The amount you receive from EquityKey is not a loan and doesn’t create debt; therefore, EquityKey faces the risk of loss if your home does not grow in value.”
Check out the EquityKey web site for more information. As always with any reverse mortgage product, check all the details and costs, and be sure to get independent advice from an attorney who specializes in elder law before signing any paperwork.
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July 7th, 2008 at 5:07 pm
Here’s a question on the EquityKey program: assume my wife and I both qualify and we give up all the appreciation from date of contract. I will likely precede my wife: at that point in time must the house be sold, or could it wait until she passes, perhaps years later? Please advise.
September 30th, 2008 at 6:03 pm
Dear Marvin,
To address your question, I will point you to sections 4 and 5 of the Client Disclosure provided by EquityKey:
4. When can the option be exercised?
Our right to exercise the option to purchase your property only arises upon the death of the last
surviving homeowner involved in our transaction or your breach of the agreement (that you
don’t cure or fix), whichever occurs first. We will proceed with closing on the purchase of your
property within six months of exercising the option, unless there are claims or disputes that
delay the closing. (A breach of obligation here is outlined in section 8 of the attached Option Agreement)
They would include failure to maintain mortgage, tax and insurance payments or the condition of property, etc…
5. You (or your estate) have the right to keep the property if you don’t want us to buy it.
If we decide to exercise our option, before we proceed with purchasing your property, you (or if
applicable, your estate) have the right to keep the property by paying us the amount we are
entitled to under our agreement. The amount we are entitled to will equal the applicable Early
Termination Charge for a breach of the agreement that occurs within the first ten years, or our
share of the appreciation if there hasn’t been a breach or it’s past ten years from the date of the
agreement, plus any amounts we have paid on your behalf in accordance with our agreement.
In the paraventricular of the life insurance industry it would be “second to die” before the option may be exercised. If you sell or default the option may be accelerated too.
Of the three companies offering “equity sharing” EquityKey, NestWorth and REX & Co. all have unique terms and conditions that must be individually reviewed. this information is subject to change without notice.
You can find more information on http://EquityOptionsUSA.com
Warm Regards,
David H. Schwartz
Broker