Home Equity Contracts

Innovative equity financing solution for the $32 Trillion Dollar U.S. Residential Market

Home Equity Contracts are an emerging investment asset class, with attractive unlevered returns, capital gain tax treatment, built in downside protection, and broad geographic diversification throughout the top MSA’s in the U.S. Residential Real Estate Market.

Kingsbridge Wealth Management, the leading investment manager in Home Equity Contracts, walks us through an overview of Home Equity Contracts and the investment opportunity.

U.S. homeowners are house rich and cash poor and for about 67% of American homeowners, home equity is the largest asset they own. The Home Equity Contract provides a new financing solution for homeowners to monetize their home equity wealth without the burdens of traditional debt financing. In the past, homeowners could only sell their entire home or borrow against the value of their home to get liquidity. Now, there is an innovative non-debt financing solution to unlock home equity wealth, the Home Equity Contract.

Executive Summary - Home Equity Contracts

The Home Equity Contract allows homeowners to monetize home equity wealth by selling an equity participation in their home to an investor.

The Home Equity Contract is generally structured as an option agreement. The homeowner receives the Home Equity Contract dollar amount while the investor gets a percentage of the current home value and a participation in any future change in the value of the home, for the term of the contract.

Investors get downside protection and upside participation while investing in tangible real property.

• The investor’s initial purchase is at a discount to the appraised value of the property, giving the investor downside protection, and the investor also has an accelerated participation in any future change in the value of the home.
• The Home Equity Contract includes a lien on the home in favor of the investor and the homeowner has an obligation to abide by the terms of the contract.

• The homeowner receives immediate liquidity without incurring debt or selling their home, and if the home appreciates, the homeowner’s remaining equity is worth more, and the investor’s Home Equity Contract is worth more.
• If the home loses value, the homeowner’s remaining equity is worth less and the investor’s Home Equity Contract is worth less if the loss exceeds the initial discount or risk adjustment.

The Market Opportunity

For many U.S. homeowners, selling their home and moving, or adding additional debt, is not a desirable option for homeowners who are looking to monetize home equity wealth.

Home Equity Lines of Credit (HELOC) originations have declined.

HELOC originations approximated $200 Billion per quarter, pre-financial crisis, down to <$15 Billion per quarter in the 1st quarter of 2019, even though interest rates are near all-time lows.

Home equity wealth is increasing.​

There is very strong evidence that homeowners are not seeking to add debt to their homes and are actively seeking non-debt alternatives to monetize their home equity wealth.

Home Equity Contracts are a product created by venture capital backed financial technology companies to provide U.S. homeowners with a non-debt solution.

By using data analysis and software-driven origination platforms, Home Equity Contract Originators can identify the properties and homeowners that are attractive candidates for Home Equity Contracts.

Home Equity Contracts are currently available in 20 states and are expected to be available in 70% of the U.S. by the end of 2020. Origination volume is increasing as contract origination companies scale their platforms and attract investor capital to this new investment asset class.

How Do Home Equity Contracts Work?

The Components of a Home Equity Contract

• The Appraised Value of the home.
• An understanding of any Debt outstanding on the home and the Home Equity available
• The Home Equity Contract Amount (e.g. 12% of the appraised value in this example).
• Risk Adjustment (% of appraised value and potential component of investor return)
• Expected Home Price Appreciation (potential component of investor return)
• Homeowners Financial Condition
• Investor Participation in any change in the price of the home during the contract term
• Contract Term (commonly 10 years)

Sample Home Equity Contract & Investor Return Scenario