Some home improvements are the type you have on a wishlist, and don’t need to be done, like a new kitchen. But there are some, such as a new furnace or roof, that are hard to ignore once they’re failing. Either way, a lot of people just don’t have enough extra cash laying around to devote to a project, whether they want to or not. Unfortunately, this leads to many people putting off maintenance and renovation projects until they can save up enough money, take out a loan, or rack up their credit card bills.
While a home equity loan is often an option, even if you have a lot of equity built up in your home to borrow against, some people have difficulty accessing it because they’ve recently lost a job, have credit issues, or simply can’t handle an additional monthly payment for a home equity loan. Or perhaps you’re well qualified, but want to avoid paying the current interest rates.
So imagine how appealing it would sound if you got a letter in the mail saying you could get your hands on all the money you need to do your projects, without having to pay back a single cent… at least for now.
Business Insider recently reported that there are companies that offer to give homeowners cash they can use toward home improvements, without having to pay the money back until they sell their house.
What’s the catch? On top of paying back the original amount they loan the homeowner, they’ll also take a percentage of how much the home has appreciated during that time.
Sound a little too good to be true? Well, it kind of depends upon your situation and point of view.
You Get Money Now, They Get a Chunk of Your Equity Later
Companies offering to pay a lump sum of cash in exchange for a share of your home’s future appreciation isn’t actually a new thing. They’re known as home-equity-sharing agreements or home-equity investments — a type of financing that’s been around for decades. But with Wall Street looking more and more at residential real estate as a great place to invest money — and increased backing from some of the largest investors in the world — there’s a good chance this type of offer will become more commonplace for homeowners to hear about.
It’s being posed as a “partnership” with homeowners, as opposed to a traditional loan you might get through a bank or mortgage company. Technically the owner isn’t taking on more debt, or required to make monthly payments to pay the money back, but ultimately they’re giving homeowners money that needs to be paid back with a form of interest tacked on (even if it’s not called that).
For example, in one particular deal they cited in the above mentioned article, a man was given $60,000 to do some home improvements in exchange for just under 65% of any appreciation on his home when he sells it.
Theoretically the financiers are taking the risk that you’ll get some free money if the market value of your home goes down, but it’s a pretty safe bet for them to make. While home values might dip on occasion, they’re banking on a home’s value appreciating in the decades to come, which history has shown tends to happen. These are sophisticated investors, and they wouldn’t be putting their money on the line if it wasn’t a fairly safe investment overall. Will they lose money on a deal or two? Probably. But more often than not they’ll do more than fine on their initial investment.
But just to be on the safe side, they’ll also likely word the contracts in their favor, and increase their odds by making sure that there’s some “appreciation” built in. For instance, in the above noted deal an appraiser valued the owner’s home at $275,000, but the finance company based the value at only $231,000 in their agreement. They applied a 16% discount to protect themselves in case prices fall, but it also gives them a head start on how much appreciation they have stake in by undervaluing the home up front.
Make Sure You (And Your Attorney) Read the Fine Print
Whether these are a good option for you or not is ultimately a personal decision. As with most things, they have their pros and cons.
In an ideal situation, it’s probably best not to give up so much equity in the future. So if you can borrow money in a more traditional manner, or save up the cash you need, you’re probably better off in the long run.
But if you need some cash and are willing to forgo a chunk of your future equity and appreciation, it may be a better alternative than a traditional loan through a bank or mortgage lender.
Just be aware that these companies and products aren’t as highly regulated as the mortgage industry is, and are seen as “options contracts” by federal courts, so you won’t have the same protections you would with more traditional home loans. Make sure you understand the terms and conditions you’re agreeing to, and consider having your attorney and accountant review the contracts as well before signing on the dotted line.
The Takeaway:
When it comes to home improvements — especially big-ticket items like a new kitchen, furnace, or roof — many homeowners find themselves short on cash and options. Which is why home-equity-sharing agreements, where companies provide upfront cash for renovations in exchange for a share of your home’s future appreciation, may sound enticing to a homeowner.
It might sound tempting to get the money now and pay later, but homeowners need to consider how much appreciation and equity they’ll need to share with the financing company in the future; it could be quite a substantial amount. While it could be a lifeline for some, it’s essential to weigh the benefits against the long-term implications and seek legal advice before diving in
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Mar 5, 2024
