Posted on 07/06/2007 8:54:22 AM PDT by Attention Surplus Disorder
Bill and Elaine Nolan paid top dollar when they bought their Tiburon house a few years ago at the height of real estate frenzy. Now, of course, the market is cooling rapidly.
So Bill Nolan, who deals with money all day long as a partner in an investment management firm, wanted to diversify. He turned to a startup based on a new concept: Let homeowners tap their equity without taking on debt.
(Excerpt) Read more at sfgate.com ...
Prediction: should this catch on, a bubble will form. The bubble will burst and ma and pa kettle, Joe Lunchpail, and Beer-gut Larry will lose millions as members of congress bray for reform etc., etc. How often does this narrative have to repeat itself?
Free lunch in San Francisco.
Is this like selling your house but living in it and taking payments like an annuity?
Not as good of a deal as doing it on your own with debt, honestly. In a high appreciating market the guy doing providing the money makes a killing.
Good point.
It is interesting. I like the idea of covered calls. - I haven’t done any in a decade, but an interesting idea.
This is insanity.
It would seem to me (without having considered this for more than a minute or so, so maybe this is obviously wrong) that it make more sense to structure the deal so that the homeowner just received the $100,000 (or whatever) investment, and then when he sold, he would only fork over the percentage of appreciation that had been agreed on, not the upfront money of $100,000.
I wonder if that bit about returning the original "investment" is due to some sort of income tax implication.
I’d almost say go for it as long as the contract allowed for the lender to take a loss with no judgement against you if the equity isn’t available at sale.
;-)
From Rudyard Kipling’s “Gods of the Copybook Headings” :
In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: “If you don’t work you die.”
Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.
Having just read this, I can’t figure out at this juncture whether this is a good deal for the homeowner. It doesn’t seem like it would be necessarily favorable or unfavorable in the longer term.
Clearly, an early exit would badly crunch the homeowner, who, assuming they had to or wanted to sell, would pay both a RE commission on the gross sales price (not gross-$100K) plus the early exit fee.
The “lender” in this case, is also taking some risk.
What happens if the owner of the house forecloses, goes bankrupt?
They probably have some sort of lein against the property and would have the same rights as a second mortgage holder.
I do not see that happening. And I do seriously question taking out equity for anything other then dire emegencies and improvements/repairs that will ad comparable value to the property.
Well, it is of course debt, but it is not debt that has to be serviced a la monthly (or other) payments, which is a great big difference. Meanwhile, the “lender” foregos about 30% ROI in the form of 5%/yr T-bill interest, and the homeowner theoretically gains the same.
I will bet, though, that a few of these deals going bad could produce an IRS imputed interest charge against the homeowner should there be a bad default.
Interesting, anyway.
It’s still borrowed money that has to be paid back, id est, it’s still a secured loan and as such, precisely what the article claims it isn’t: DEBT.
Ain’t no free lunch.
Seems to me it’s more like selling a covered call on stock you own.
Is that considered debt in the conventional sense?
It looks like to me that if you sold after a market collapse you might not have to pay anything back.
I was being sarcastic.
There is something to be said for using arbitrage and investing equity, but only if left in liquid investments with conservative risk levels. But that’s another topic.
It’s a great way to finance a startup company.
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