Finding an alternative to America’s favorite alt

October 13, 2023
Ashley Bete

The saying goes “buy land, they aren’t making any more of it.” A home often represents the largest investment a family will ever make and the base of intergenerational wealth development. Today, $29 trillion is tied up in the residential real estate market — $20 trillion of which is trapped in these investments. In recent years, a new financial tool has hit the market that enables qualified homeowners to tap the equity in their home, creating a new investable asset class for savvy investors looking to take advantage of the strength of residential home prices.

It seems we may have found a way to make more land.  

A home equity agreement (HEA) provides a homeowner the ability to sell a portion of their home’s equity for cash now to an investor. This equity agreement will come due at its maturity date or at the sale of the home, allowing the investor to participate in the upside benefits of the housing market as an alternatives investor — not a homeowner.

The downside risk for homeowners is limited by most HEAs rules and the upside is significant for all parties. Even if more homes are built, interest rates relax or there is a major correction in housing prices, the general trajectory of the market makes HEAs the best alternative to traditional real estate-based alternative investments.

How HEAs work for homeowners

Quiet simply, an HEA allows homeowners to sell a piece of the value of their home. Much in the way a company sells stock, an HEA gives homeowners access to the capital value of their house to utilize as they see fit — be it enhancing financial stability through debt payments or using the cash to invest in another property or business.

No matter how they use that money, there are no monthly payments and the investor is paid when the agreements ends — often with the sale of the property or a traditional refinancing agreement. Of course, there is risk and the owner is seeing a portion of their property thus limiting the held value of their asset. But they access liquidity for their needs today without additional debt at near historic high interest rates.

How HEAs work for investors

Real Estate is one of the best understood and most widely utilized alternative investment. Beyond a family home, investment properties and REITs have long been used to diversify high-net-worth investors’ portfolios. HEAs can serve a similar purpose, with lower exposure to default.

Bundling HEAs into an investible vehicle provides lower risk than many other bundled offerings as they represent a much smaller fraction of a home’s total value and because of the manner in which the agreements are structured there are several ways in which homeowners can fulfill their obligations, such as refinancing or a sale of the property.

However, even as the industry faces a slight slow down in prices of homes, due partly to high interest rates, the continued housing shortage provides evidence that housing prices will remain resilient in the coming years with values remaining stable or increasing slightly.  Put differently, the housing market is extremely hot.

Demand for existing housing stock remained high — pushing prices up — and the general economic environment and fears of a significant downturn makes access to capital free from interest rates more important for homeowners. The HEA provides both homeowners and investors the best alternative to access cash and diversify a portfolio in a complicated environment.

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