Franchisors offering buyers 'Home Price Protection'

Payouts tied to market index instead of individual properties

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Nov. 4, 2011

Share this Story:

Payouts tied to market index instead of individual properties

Steve Bergsman
Inman News™

Declining home prices and the foreclosure backlog are not the only obstacles to a housing recovery. There is also the psychological factor: Potential homeowners have lost confidence in the asset class.

It's easy to understand why. After decades of relatively steady, mostly upward movement in prices, home price appreciation soared during the boom -- until the recession brought prices crashing back to the trend line.

First-time homeowners and even families already in single-family residences who would normally move up to a bigger home have become fearful that the asset class is essentially unstable and could easily behave like the stock market with wild swings in pricing. Why move into a home bought at a certain a price, when tomorrow the value of that same house could be less than it was at move-in?

That's the issue T.J. Agresti, CEO of Greenwood Village, Colo.-based EquityLock Solutions, has tried to address with a program called Home Price Protection, which essentially offers buyers a chance to recoup dollars if home prices in their local market declined at the time they sell their homes as compared to move-in date.

"The only way to overcome revulsion to an asset class is for people to have faith and confidence in it again," Agresti said. "At the time of the bailouts, Federal Reserve Chairman Ben Bernanke talked about this type of product, but when asked why doesn't the government back a private company to provide insurance, he said flat out this has to be a private-sector answer."

The concept of using insurance or contracts to protect housing prices has been around since the 1970s, but with home prices very strong and then the advent of the bubble at the turn of the century, it wasn't something anyone was even considering because the thought that home values could fall as well as rise seemed like an impossibility.

After the mortgage crisis, recession and the flood of foreclosures trampled the housing market, the concept of home-price protection once again looked like a reasonable idea.

"In 2009, about a dozen companies formed to try and bring this product to market," Agresti said. "These included undercapitalized concept companies looking for funding."

The problem was, there were two different approaches: an insurance product that would protect homeowners from loss or a non-insurance product that would protect homeowners from risk.

Agresti chose the latter route.

"We were the first to market in May of this year," Agresti boasted.

Apparently, Home Price Protection filled a need because by midsummer, EquityLock Solutions finalized agreements with RE/MAX International, Keller Williams Realty and Prudential Real Estate. In addition, Stonecrest Homes, an Atlanta homebuilder, will include Home Price Protection on all of its completed homes and plots under development.

This is not insurance, but a financial agreement to pay the homeowner upon resale if the House Price Index (determined by the Federal Housing Finance Agency) declined in the marketplace. The contract is not purchased to insure against the loss of value in a particular real estate parcel. Instead, the contract pays out based on declines in the relevant market index, regardless of whether the home sells for a gain or a loss.

The minimum period for the contract is two years and the maximum is 15 years. There is a cap on the payout of 20 percent of the contract price.

Real estate companies have become interested in home-price protection because it provides an incentive to get buyers in the door. It also helps sellers. Generally, a price stalemate happens when a buyer wants a certain price cut, but the seller will go only so far down in the offering. Now the seller can say, "I won't reduce my price anymore, but I will pay for market protection.' "

Chris Brown, CEO at RE/MAX Connection Realtors in New Jersey, is involved with the Home Price Protection pilot program for RE/MAX in his state, which went live on July 26. When I spoke with Brown a few weeks afterward, his company already had eight commitments to contract, including one sale.

"In New Jersey, a normal seller has to compete with property values that are depressed because of foreclosed homes," Brown explained. "Sellers have to sacrifice equity to match up with price competition. Home Price Protection is a mechanism that will allow the seller to have the property stand out among all other properties and the seller doesn't have to reduce prices to match up with foreclosed homes."

Page: 1 2 |Next
Add to favoritesAdd to Favorites PrintPrint Send to friendSend to Friend

COMMENTS

ADD COMMENT

Rate:
(HTML and URLs prohibited)