A new way to tap equity without going into debt

SF Gate, SF Chronicle ^ | Friday, July 6, 2007 | Carolyn Said, Chronicle Staff Writer

[LIConFem]

"It looks like to me that if you sold after a market collapse you might not have to pay anything back."

That's not what I read. The article makes no mention of any part of the principal (the $100,000 in the example) being forgiven in the case of depreciation. It only says that the actual dollar amount above the principal would be less (an agreed-upon percentage of the sale price). This might not be considered debt in the conventional sense, as it probably wouldn't show up as such on one's credit. But it's still $$$ owed, and in that sense, it's very much a debt.

[wildbill]

This way to the free lunch>>>>>>

[what's up]

I can’t figure out at this juncture whether this is a good deal for the homeowner

It depends in this case on whether his-start up is successful.

[SomeSay]

Actually, according to scenario 2 in the article, if the value of the property depreciates by an amount equal to twice (or more) of the value of the cash advance, REX eats the entire advance ... they get nada.

I expect that would also be true if there were a cataclysmic event where the property were completely destroyed in a manner not covered by insurance (that’s assuming REX’s liability is capped at an amount equal to the advance - else it could be up to half the original value of the home less the advance).

[gcruse]

Or separating the stock price from its appreciation and buying only the appreciation. Derivative investment outpaces my risk adverseness.

[bill1952]

I agree. If the homeowner is looking for some cash for whatever purpose, and has no intention of selling in the short term at all, then maybe.

I would want to see more details regarding exactly what would be owed for various amounts, and I without those I cannot see if it would be better than a small loan against equity.

[M. Dodge Thomas]

The latter two are because the home's title would be amended to show Rex as having a lien against it.

Not clear to me from that article: How is Rex's interest secured? Do Rex's creditors have any recourse (ex: forced sale of property) against Rex's assets?

[Attention Surplus Disorder]

Yes, clearly a second(ary) lien would be placed against the property. Which then leads to questions of how this would work in a recourse state vs a non-recourse state.

It’s an interesting construct, that much I’ll give it!

[Attention Surplus Disorder]

In answer to your first question, no, selling covered calls can definitely be said to be NOT debt, since you own the proceeds of the call sale unconditionally and immediately and do not have to pay it back. The common statements made about selling CCs are: (and they are true)

1: You give up (some of the) upside
2: It produces income
3: You retain significant downside; depending upon which strike calls you sell; and offset by the call sale proceeds.

So, this is why I say this type of arrangement, at least on first glance, bears some resemblance to selling CCs.

Additionally, it would seem that the timing of the equity take-out would matter, just like with CCs. For example, if you bought the home and immediately received such a “loan” (a buy-write!) the odds of the lender taking a hit would increase. If you bought the home long ago and had already enjoyed a big fat unrealized gain, then you’d be “only” forgoing some further upside while protecting yourself against some downside.

I agree with the second part of your post; that if the home really suffered a trouncing in value, the lender could well suffer the biggest part of that hit.