Finally, there’s a way to literally bet against the house in the event of a real estate collapse. A California firm is offering cash on the barrel head for up to 15% of the value of your home in exchange for a 52.5% share of any capital appreciation when you sell it.  We at Rick’s Picks have inferred that the intention of the company, San Francisco-base Real Estate Equity Exchange Inc, or “Rex,” as it is known, is not to insure homeowners against deflation, since Rex would never make such an offer if it thought real estate prices were about to fall.

Consumers may not think so either, but with home prices across the U.S,  already having declined 10 percent in the last year, it might look like a decent gamble, especially to that undeniably broad swath of Americans who are “asset rich but cash poor.” From Rex’s point of view, it’s a straightforward way to earn 3.5% of the gains for every 1% it pays homeowners for the option.

Not So Crazy

It’s not as crazy as it sounds, since the deal would allow consumers to tap the equity in their homes without incurring any debt or payment obligations. There would be no taxes on the cash received, and property owners would have up to 50 years to sell, according to Investment News, a weekly newspaper for financial advisers that reported this story in its February 12 edition.

Naturally, Rex’s competitors in the reverse mortgage business were quick to diss the product, suggesting consumers would never go for it. “The biggest downside is the 50% capital gains for a measly 15% of the house,” said Scott Hanson, co-owner of a reverse-mortgage firm headquartered in Southern California. Hanson might be right if the Rex product were designed merely to allow consumers to extract cash from the equity in their properties. But Rex would also be sharing in the homeowner’s downside risk, and that fact will give its product a kicker that reverse-mortgage firms cannot match. Fees charged by both firms are comparable: Rex would assess a service charge of $15,000 when a house is sold, while reverse mortgages typically generate an origination fee of about $17,000.

Rex’s Deep Pockets

Rex’s biggest shareholder is American International Group, no slouch when it comes to handicapping asset risk. According to Investment News, “The company has agreed to provide capital to homeowners through a hedge fund it set up, Odin Investment Management LLC of San Francisco. AIG also is the largest participant in that fund.”

My prediction is that this product will prove to be so popular that Rex and its backers will  close the door to new business within 18 months. Assuming the venture is moderately successful and Rex strikes a deal with, say, 50,000 homeowners living in dwellings with an average value of $500,000, the firm and its partners would be on the hook for $3.75 billion should real estate prices merely stagnate.

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Boca Raton Seminar

I’ve received numerous requests to offer a Hidden Pivot seminar in Boca Raton, Florida, among other places, and will do so if there is sufficient interest. Please let me know if you would be seriously interested in attending the class.  The two-day session would be held sometime in the Spring of 2007. To get on my mailing list, drop me an e-mail, including your contact information. The cost would be $1,500 USD.