I am usually not into financial complexity, but I ran into a service today called Point that could be useful for some people if they need?credit and:
- you have a well maintained property in a neighborhood that has appreciation potential
- you have a strong credit history
- you have household income that covers your debt obligations (and some)
- you have built up some equity in your home. After Point funding, you should still own at least 20% of the equity in your home
- you live in one of the areas where Point is currently available
- we reach agreement with you on a fair value for your property
- you will sell the home within the term of your Point Homeowner Agreement or you will be in a position to repay Point at the end of the term
The basic idea is that you sell a fraction of the equity/ownership of your home to Point. ?You will still have to maintain it and service all of the debt on the home, but beyond that, you can live in your home rent-free. ?When you sell the property, Point gets its share of the sales price. ?According to the Bloomberg article:
With Point,?credit scores can be less than 620, but?homeowners must have at least 25 percent to 30 percent equity in their houses. Point adjusts the cost of its investment based on the owner and the property, taking a larger percentage of price appreciation from riskier customers. Should the homeowner not pay Point, the firm has the right to sell the home to recoup its investment and take its portion of the gains.
Those who decide not to sell their homes have to pay the company back at the end of the 10-year period, similar to a loan, with an annual effective interest rate that?s capped at about 15 percent, comparable to rates on some credit cards or unsecured consumer debt. Annual percentage rates at LendingClub range from 5.32 percent to almost 30 percent on three-year personal loans.
Point is investing in properties it expects to appreciate in value, initially focusing on California, with plans to fund homeowners in other states next year, according to a company marketing document.
Repayment with appreciation occurs at the earlier of the end of a 10-year term, sale of the property, or the will of the owner to buy out Point’s stake at the appraised value.
So, what could go wrong?
Personally, I like the idea of selling an equity interest because it delevers the owner. ?The owner does not have to make any additional payments. ?He forfeits some appreciation of?the property, and faces either a need for liquidity or a sale of the property 10 years out. ?(The 10-year limit is probably due to a need to repay Point’s?own property investors.)
Possible issues: you might not like the price to buy out Point should you ever get the resources to do so. ?You may not want to sell the property 10 years out if you realize that you can’t raise the liquidity to buy out Point. ?If you do sell your home, you will incur costs, and may have a hard time buying a similar home in the market that you are in with the proceeds.
But on the whole, I like the idea, and think that it could become an alternative?to reverse mortgages in some markets where properties are appreciating. ?An alternative to that odious product would be welcome.
Full disclosure: I don’t have any financial dealings with Point. ?I just think it is an interesting idea.