The Rex Agreement is a relatively recent development which offers a new way to cash out the value of your home. It was developed by a finance group called Rex and Company. Here’s how it works: Rather than lend you money against the home’s value, Rex and Company pays you a portion of the value of the home in exchange for the right to participate in any future appreciation. In essence, the company buys an option to purchase your home which lasts between 40-50 years, and allows them to capture their portion of any profits you may realize should you sell you home.

The benefits of the Rex Agreement approach are substantial. First and foremost, since there is no loan made, there is no interest to pay, and no payments to make, ever. It allows you to free up your capital without impediment, to use in any way you wish. Further, in most cases, you should be able to defer taxes on the payout until you sell your home. (Note: we do not give tax advice, and your situation may be different. Consult your tax advisor before considering this technique.)

There are some downsides to watch out for, of course. First, you lose the opportunity to benefit from at least a portion of your home’s appreciation. Interestingly, though, the company also participates in any loss of value your home may suffer, so this cuts both ways. Of more concern to many will be the potential for the company to force you to sell your home. According to the Rex and Company website, this can only occur in the following circumstances:

  • You fail to maintain your home as your primary residence
  • You become delinquent on your taxes, insurance, or mortgage payments.
  • You fail to maintain the property in good condition (subject to ordinary wear and tear).
  • You do not maintain proper insurance coverage
  • You take out loans that amount to more than an agreed-upon limit against your home

Even if one of these cases occurs you can repurchase the option at its present value instead of being forced to sell. At first blush, the terms appear no more onerous than a standard mortgage or lease agreement. However, consulting an attorney before considering this option would be a wise choice.

So why might one want to choose this option and lose out on the appreciation of a home’s value? The answer has to do with leverage. Few people realize that a house on its own is not all that great an investment, even in a bull market on housing. A 10% annual increase in average values is considered a rip-roaring bull market, but it doesn’t even match the average return of an index fund. What makes homes so profitable for most people is that their investments are highly leveraged. A home owner who puts down 20% of the value of a house and pays another 10% in mortgage payments annually actually earns a 33% return on the money he or she has actually invested from a 10% gain.

The Rex Agreement, on the other hand, only entitles Rex and Company to a proportional percentage of the appreciation in your home’s value. It allows you to free up that money in a non-leveraged manner, and use it however you like, although the wisest choice would be to invest it in a more lucrative asset. So how does Rex and Company make money from this arrangement? They use leverage themselves. The borrow the money to purchase their option, using their ownership stake as collateral.

The Rex Agreement is presently only offered for detached single-family homes which are used as a primary residence by the owner. This is a sign of a solid, conservative strategy, which is refreshing in the wake of recent subprime mortgage lending shenanigans. For home owners looking to get their hands on some cash, but who are leery about present mortgage conditions, the Rex Agreement deserves a look.