March 17, 2017

Recently a reader made me aware of an interesting new way that homeowners can use their homes to raise money. Instead of pledging their homes as collateral for a loan – the familiar mortgage loan -- they sell a claim to future appreciation in the value of the home.

The purchaser who puts up the cash is a firm called Point, working through www.point.com. At this time, Point deals only with owners of homes worth $300,000 or more, preferably single-family. The term is 10 years but the homeowner can terminate it at any time within that period.

Here is an example of how a transaction is structured. The figures are illustrative because no two deals are exactly alike.

A Sample Transaction: Assume the house is worth $500,000 in today’s market. Point applies a risk-based haircut to that number, which knocks it down to a risk-adjusted value of $450,000. Point pays the owner $50,000 less about $2500 in processing, appraisal and escrow fees, in exchange for return of the $50,000 plus 25% of the appreciation, or minus 25% of the depreciation.

The numbers above are taken from an easy-to-use calculator on Point’s web site. But note that the text accompanying the calculator says “In exchange for Point’s investment today, Point receives a share in the home’s appreciation above the Risk-Adjusted Home Value.” This statement omits the return of the Point investment, which is a loan-like feature it prefers to ignore. More about this below.

Assuming the borrower terminates the transaction after 5 years and the house appreciates 4% a year, it will be worth $608,300, with appreciation of $158,300 measured from the risk-adjusted value. Point gets 25% of that or $39,575 plus its gross initial investment of $50,000, or $89,575. The homeowner receives about $47,500 upfront, and pays Point $89,575 after 5 years. The annual interest cost to the borrower is 12.8%.   

Termination: As illustrated by the example, the homeowner terminates the contract by paying the amount due based on the property value at the time of termination. Sale of the home would trigger a termination, or the owner might raise the needed cash by doing a cash-out refinance. If neither a sale nor a refinance occur, the owner must find a way to pay Point at the end of the 10-year term.

Not a Loan, But…Point emphasizes that its transactions are not loans, and it gives short shrift to their loan-like features. One such feature, mentioned earlier, is mandatory repayment of the gross amount advanced to the borrower at termination -- $50,000 in the example. The homeowner’s obligation to repay this amount is not dependent on the home appreciating. Point gets its money back and a little more even if there is zero appreciation. The house value has to fall below the risk-adjusted value of $450,000 before Point takes a loss. Like a mortgage lender, furthermore, Point takes a lien on the house. If the homeowner cannot pay, Point can foreclose, just like a mortgage lender.

Procedure: Steps 1 and 2 involve an online application to determine whether the homeowner qualifies, and a brief interview with those that  do. Step 3 is to have the owner complete an application and provide requested documents, which Point uses to make a provisional offer contingent on the property appraising at a specific value. If the homeowner agrees to proceed, Step 4 is for Point to order an appraisal, which it then uses to modify its final offer.

While the homeowner does not know the final offer until the appraisal has been received and digested by Point, the likelihood is high that the final offer will be as good as or better than the preliminary offer. If it is worse and the homeowner decides to drop out, her loss is limited to the appraisal fee.   

Cost: Point’s calculator measures the cost of a transaction to the homeowner as if it was a loan. The cost is higher the larger is the appreciation and the shorter is the period to termination. With appreciation of 4% a year, the cost cited earlier of 12.8% over 5 years would be 9.5% over 10 years. With appreciation of 6%, the cost would be 16.0% at 5 years and 12.3% at 10 years. These are obviously much higher than the cost of mortgage loans including HELOCs, but lower than the cost of credit cards.

Point versus HELOCs: There are many logical uses of Point funds, such as paying off high-cost credit card balances, or extracting equity from a home that is needed for the purchase of another home. The relevant question is, why use Point rather than a substantially less costly HELOC? Anyone qualified by Point would also qualify for a HELOC.

The answer seems to be that the homeowner wants to avoid the hassle of having to make monthly payments. That implies that the homeowner does not need the discipline imposed by monthly payments and will be able to pay Point the amount due, when due.

Repaying Point: Point says nothing about how a homeowner will obtain the funds needed to pay Point at the end of the term. That is a loan-like contingency that it prefers not to recognize. However, it is clear from its equity requirements that Point expects that homeowners who go to term without repayment and have not won a lottery will repay Point by taking out a mortgage or refinancing an existing mortgage.    

Point requires that homeowner clients have equity of 20% after the Point transaction, which is the equivalent of about 30% before the transaction. This provides reasonable assurance that the homeowner can do a cash-out refinance at term that is large enough to pay Point. The risk is that property value will decline, in which case the refinance option will not cover the full amount owed. That risk is small, and must be set against the major risk associated with HELOCs, which is the possibility of an explosive rise in the prime rate to which HELOC rates are tied.

Concluding Comment: The option offered by Point could be useful to homeowners with special needs, but its web site should be more forthcoming regarding the loan-like features of its program.