Creative Cashflow Raising In A Difficult Environment.

Feb 28, 2009

This month I want to share a creative approach to raising cash if you own a business in need. This approach doesn't fit every business owner's scenario, but a few of you may be pleasantly surprised. This approach, which uses personal real estate eguity to raise cash without borrowing money or selling the property, is called a Reverse Equity Exchange (REX) .

 An example of a REX transaction is as follows. A typical REX provider will offer $70,000 cash to the owner of a $900,000 house who is willing to share 30 percent of future appreciation, based on an appraisal at transaction date. That rises to $117,000 in exchange for a 50 percent share. Existing equity in the home -- and future value growth attributable to capital improvements -- are not affected. There are no interest rates or monthly payments, and the timing of the end of the agreement usually is up to the property owner, although it's generally tied to a sale. Unlike a reverse mortgage, where interest charges accrue and are added to the debt that must eventually be repaid, the REX provider makes its profit or takes its loss when the house is sold or the agreement otherwise ends. At that point, the owner repays the cash he was advanced. If values remain flat, the homeowner repays that amount, without interest, out of the sales proceeds. If values go down, the REX provider takes a loss equal to the percentage of the value change it shared in the agreement, thus reducing but not eliminating the homeowner's loss.

What's in the fine print of these cash-for-appreciation deals, and why are they not for everybody?

No. 1: All the programs to date are highly targeted toward specific property types. For example, the REX does not allow condos, duplexes, townhouses, rental real estate, tenant-in-common dwellings, or houses that are not single-family, detached dwellings that are "typical" for their area.

No. 2: Typically REX providers require at least a 25% equity stake by homeowners, based on a current appraisal.

No. 3: Although sponsors bend over backward to emphasize that these transactions are not "mortgage debt," the fact is that they are real estate transactions that give REX sponsors the legal right to a portion of an owner's future market value. At the extreme, owners who take the money but do not abide by the contract agreements can face legal remedies ranging all the way to foreclosure.

I have greatly simplified the REX transaction. Hopefully this approach will spur some creative thinking during this tough economic climate. For more info click WWW.REXAGREEMENT.COM  a REX industry leader.  Additionally call me or e-mail if you would like to discuss the REX  further.

More from Gene M. Wilhoite…

About the Author

Gene provides companies in the Metropolitan Washington DC area with on-site Chief Financial Officer services on an as needed, cost effective basis. His 30 years of experience range from commercial banker to entrepreneur to CFO, resulting in a thorough understanding for what it takes to maximize a business's cash flow, profits, and value. Gene's extensive background in serving both commercial and federal government clients, across the banking, real estate, outsourcing, staffing, and IT service sectors, has prepared him for supporting firms in areas such as:

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