Is a Home Equity Investment Worth It? | Ep 27

James: Welcome to the Furlo Capital Real Estate Podcast, where we dive into the intricacies of passive real estate investing. And our mission, if you're new here, is to equip people to invest wisely in both property and people so that together we can build our wealth while improve housing. I'm James, and this is my wife, Jessi.

Jessi: Hi, I'm here.

James: Hey, you're here. How's it going?

Jessi: It's good. As I was listening to you say our intro, it made me think of Like we're teaching people to invest in things and people wisely. And it's just, when you think of our kids and how we just, we've had recent conversations about like, are you spending money wisely?

And why would you spend on that? And what would that mean? Our daughter,

James: she really wants a Stanley cup. Well, Stanley cup makes me

Jessi: think of hockey every single time. She's on trend.

James: I mean, it makes sense. She's on

Jessi: trend. Yeah. So I'm like, I had this like heart check where I was like, Did I do that as a kid?

No way. No way. I like bought things to fit in and was like, Oh no, I totally did that as a kid.

James: I had a sweet transport backpack. And now

Jessi: Jean.

James: We all got it. We all got it. We all

Jessi: do it. Yeah. Yeah.

James: What I actually want to talk about today is a poor financial decision that somebody made. And so a little bit of context, we've got a house under contract that we're going to buy.

We have a closing date, but we're probably not going to hit that closing date because. The seller, the current owner has a pretty big issue that we're trying to work through and figure out. Wow. And yeah, and he's gotten himself into a bit of a pickle. And so a bit of this episode is a PSA. If you hear this, don't do it.

Yeah. So, here's what happens. When you get a property under contract, the very first thing that they do is they pull what's called a preliminary title report. Essentially, they see, does anybody have any claims to this property? And effectively, what you want to do is, A, make sure, A person you're buying it from has the right to sell it.

Yeah. Because that's not always true. And B, is there anyone else who has claims on the money prior to that buyer getting it?

Jessi: Follow up question. Yeah. Can anybody pull one of those at any time? That's a good question. I mean, I don't know why you would need to if you weren't gonna buy it.

James: Yeah, I mean, it's all public records.

Jessi: Although, like, So,

James: yeah.

Jessi: If somehow it got missed or something and you want to see it for your own house.

James: Oh, I don't know Yeah, you can I it's it's tricky. So oftentimes you'll go through an escrow or title company And they'll just pull it's kind of the process

Jessi: of it happens within the process of buying a house.

James: Yes. Yeah. Yeah Yeah, because ultimately that insurance so the whole point of like escrow slash a title company is they give what's called title insurance It's insurance that basically says You know We're willing to ensure that you are the rightful owner of this property now. And if someone else comes out of the woodwork and says, whoa, time's out, it's

Jessi: actually

James: mine.

Yeah. They go, we'll insure you. We'll essentially give you your money back. If that happens. Yeah. That's. So part of what they do is they do the research because they want to make sure that they're insuring something that's good to say. Does anyone else have any rights to this property? Yeah, that's the whole point of it.

So we ran it for this guy's property. And one of the things that pulled up was called a deed of trust to secure an indebtedness in the amount shown below. And it was 58, 000. And what was weird about this one was what it was, because anytime you get one of these and we're working through a fidelity national is they have little hyperlinks that take you to the original DS and documents that were recorded with the, with the city.

Cause we just get a summary. Okay. And so, so we get this document and I start reading through it and I'm like, you know, I can't tell what this is. Like it, it seems like a loan, but it's not a loan because it kind of like it's written like one, but there's no, like the language was just weird. And so what I have now gotten into the habit of doing is when I get a document like this and I'm like, ah, there's just a lot going on here.

I will instantly upload that to chat GPT and yeah, just be like, give me a summary. What's going on here? And that's what I asked. I was like, what is this? And it came back. And so I asked it, I was yeah, I was like, what is this thing? And I went, well, it's kind of this two piece It's a deed of trust, which is a loan component.

And then there's this option to purchase. I was like, this option to purchase. Yeah. What are you talking about? And so I was like. Wait, wait, wait. So I asked, I actually said, is this a loan or is this an option to purchase? Like, like, I don't understand because in my world alone is we've given you money and you have to pay it back

Jessi: for some amount of money under some terms.

An

James: option to purchase is I, I pay some money. With the option to buy your property at a later date. Yeah. And I can choose to exercise that option or not. Like those are two fundamentally very different things.

Jessi: Yeah.

James: One is like, you borrow some money. The other is I

Jessi: mean, I could see how you could squish them together and say like, I'm gonna give you some money.

Exactly

James: how that works. But if you don't pay

Jessi: it back, then you could buy it from me.

James: Yeah, kind of. So, so I asked it. I was like, I don't understand. Which one is it? And it was like, It's kind of both. I was like, okay. And so it was talking about how it's a security instrument used to secure a loan and it had a grantor and a lender.

And the, the loan component of it is backed by the property. And, and so some ways it is acting like a loan, but in a other way, it's acting like an option to purchase. Where it specifies there's an option agreement where the beneficiary has the option to purchase a percentage interest in the property.

The beneficiary being like the lender in this case. They're not a lender, but that's, and I was like, okay, a percentage

Jessi: bank who holds the mortgage.

James: So kind of, kind of, it's, it's totally weird. So, so I kind of like. So I'm reading this thing, right? And I'm, and I'm, I'm going through what you're going through.

I'm like, wait, I don't, I don't understand like, what is this thing? And so, so I started doing some more research, right? And I was like, okay, what? So finally I, I changed tactics and I went, tell me about this company. Cause in the, In the title report, it tells you who they owe money to. And usually so what happens is when, when you're buying a place and there are these other loans, the escrow agent will reach out to those companies and say, Hey, what's what they say?

Like, what's your what's your what do they call it? Your payoff statement, essentially. What's it going to take for you to be like, we're good. Yeah. And so they have all their info on contact information. So I was like, who are these guys? So I started looking them up. And so they are a FinTech company, financial tech company, that specializes in home equity financing.

Which at first I'm like, sounds like a HELOC.

Jessi: Yeah, that's where my head jumped. It's a line of credit?

James: Yeah, so they were founded in 2015. And they make what's called an home equity investment, which, which allows, yeah, home equity investment. That is the magic buzz term, which allows homeowners to assess a portion of their homes equity in exchange for a share of a future value of the home.

Okay. This can be an alternative to traditional home equity loans or lines of credits. All right. So here's how it works. You get, let's say, I need some money. Okay. They go sweet. We would like to invest in your home. In this case, we will give you $58,000 And in return for that, when you eventually sell, not only will we get our initial $58,000 but we now have, we get some percentage of your, of the sale of your home when you do it.

And this thing lasts for 30 years and they have an option to extend it for another 30 years, essentially covering your lifetime. It's a very, it's a, it's an intriguing idea, right? It's like, and so for the borrower, no interest, no payments. It's just in the future, some mythical future when I eventually sell my house

Yeah ideally if it goes up in value, cool.

Jessi: Yeah.

James: I just don't get to keep all of it.

Jessi: Yeah. But it's a lot more like a credit card when you shouldn't have one. Yeah. I get that you are leveraging it against your, your home equity, which, okay, at least you have something to pay it back with, assuming you sell.

James: Yeah.

Jessi: But it's also like why don't you just take it online of credit?

And then pay that back, like, cause the line of credit doesn't leverage your house, right? Because typically, alright,

James: here's some of their benefits that they offer. They give you interest. They offer their customers. Homeowners can use the funds for various purposes, such as paying off other debts, making home improvements, or covering a large expense.

Jessi: So they don't have to use it for their 30 year

James: term and they can repay the investment at any time without prepayment penalties. So if they wanted to,

Jessi: they could

James: pay off the good. It is inclusive and accessible according to their website. They aim to provide financial inclusivity by offering their products to homeowners with diverse credit profiles.

In other words, bad credit, making it easier for those who might not qualify for traditional financing to access their home equity. So here's the deal. You don't qualify for a home equity loan because you just got bad credit and banks are like no.

Jessi: Yeah.

James: So these guys come along and go, yeah, sure. We don't care because you don't have to make any payments.

All that matters is when you sell, we get a percentage of it.

Jessi: Yeah. It's totally a credit card.

James: When you're like, no, no, no, don't worry about it. You have to make payments on a credit card. This is, this is different. This is fundamentally different. You're right.

Jessi: It's like a shady loan.

James: It's

Jessi: It's like, oh, I know you can't pay this back, but don't worry, we'll just take it out of your home sales when you sell later.

James: So, imagine, so, I mean, think of it like, No, no, no, think of it this way. Let's pretend you want to make a massive home improvement because you're going to sell your home. And you're like, but this is going to take, but this is going to take two years for us to do it. Okay. You could say, yep, I want to access on my home equity now so I don't have to make any payments because you know, whatever, I'm going to take the two years, make all those improvements and then I'm going to sell it and I'm going to increase the value by more than what that percentage is.

Yeah. Yay. You know, we all win. Does

Jessi: that make sense to me?

James: Yes.

Jessi: It does not make sense to me to say, oh man, I'm strapped for cash, I'm going to use this 58 grand now to live on, to buy a boat, to do whatever I want, because I don't have to worry about it.

James: Well, yeah, which, that's on the person and the borrower and the owner, not the company.

Jessi: Yes. Although they're offering these services to people who You could do the exact same thing

James: with a HELOC or a home equity loan. Like, there's no difference here.

Jessi: You could.

James: I don't, like, that has nothing to do with the company.

Jessi: I thought you had to use a HELOC for your house.

James: Nope. Not at all.

Jessi: You can use it to buy a boat or do whatever you want with it.

James: Yeah. Well, like we use our HELOC to buy another property. Oh yeah. So yeah, no, you don't have to do. Yeah. Yeah, no, it doesn't matter. All right. Yeah. So so it's an interesting.

Jessi: Seems like it could be used responsibly in this particular case. Do you think it was used responsibly?

James: I think part of the problem.

Is so there's a critical piece of information here that we've left out, which is what is that percentage?

Jessi: Oh, Oh yeah,

James: because if it's 1%, cool, that's fine. If it's 50%, okay, that's a different, that's a different beast, which on the website they're very explicit about saying it varies. It depends on the situation, which could be read as depends on how desperate you are

Jessi: or

James: it could, or I've also read it as like, it depends on how much.

Money you're asking for relative to your, the value of your home kind of scales. But here's like, here's what's critical is when you'd get a home equity investment, you, when you sell, you owe a percentage plus whatever that original amount was. So in this case he owes $58,000 plus whatever that percentage is.

And based on research, it is typically somewhere between 5 and 10%. Okay. So if he sells his house for $40,000 and it turns out that it's 10%, he doesn't just owe the 58,000, he owes the 58,000 plus the 40,000 mm-Hmm. , which that is an incredible interest rate when you think about when he took it out, which was in 2022.

Like that's the kind of thing where you go, okay, so it's been two years. A normal interest rate might be like 12, let's just easy math. Maybe it's 10 percent on 58, 000 that's around five grand. And in this case, if it's at a 10 percent based on the value, it's four times your normal interest rate.

Jessi: Yeah.

James: And, and I guess it's based on the

Jessi: bigger number.

Yeah.

James: Well, it's, well, yeah. Cause it's not

Jessi: the loan value,

James: right? Yeah. But he didn't have to make any payments. So,

Jessi: you

James: know, it's just a minus basically what he

Jessi: does now, what

James: we've learned. Based on trying to figure out how much he owes, which they're being really cagey about it, which is interesting. Oh, Oh, Oh, I totally forgot.

There's another thing that's a piece to it. They have first right of refusal when you go to sell. Yeah. Oh yeah. So that's another piece. Cause you could in theory see a situation where you go, Hey, I'm going to sell this to my uncle John who I trust for a buck. And then he goes, so I owe you guys 58, 000 plus 20 cents.

Yeah. Or whatever. Right. And then he trusts Uncle John and then Uncle John resells it back to him for a buck. Like the next day, boom, we're all good. You know, that kind of thing or something like that. Or I don't know. He sells it to Uncle John for 58, 000. You know what I mean? Like you can set this up in such a way where that percentage becomes meaningless.

But They have first right of refusal. So if you come along, let's say you're like me looking for a deal They could decide to get an appraiser on the on the property and say no It's actually worth a whole lot more because James was good at negotiating We're gonna buy it at that price and take it. So interesting.

That is something that we're like Oh, this could happen to us where we've got this under contract. So we're holding off on raising any funds right now because I can't, it just wouldn't look good to go out, get all the investment and get ready to rock. And then this company comes in and say, yep, thank you.

Cause then they'll just relist it and that's how they'll recoup their funds. I don't care. And they'll still get their 58, 000 plus 5%. So it's an interesting,

Jessi: so what's your next step? Are you talking with that company to,

James: yeah, well we're not, but the escrow person is, and they're

Jessi: trying to suss out like.

Are you gonna buy this? Are you not? What's your stake? Yeah, well

James: they know we're, they know we're going to buy it. We are trying to suss out what their plans are.

Jessi: Yeah, yeah, that's what I'm saying. Oh,

James: sorry. Oh, you meant, when you said they, you meant the escrow person? The escrow

Jessi: person is talking to the company for you.

James: Yeah, yeah, so, so that's our thing. Based on what we can see, it's probably not worth it for someone. The allure of not having to make any payments is, is true. And, and I get that he, that he, this guy had some health issues and like it was dire straits and he might have potentially lost his house if he didn't do this and so it's still a better outcome than otherwise i get that but at the end of the day it's like this it was not a fantastic deal but who knows maybe he is on like one or two percent we don't know they're not telling us which i think is talk

Jessi: with the And ask what he took the money out for.

Like, I don't know if that matters. We didn't really ask.

James: It wasn't super important. And he couldn't find his loan docs. So, or his, whatever we're going to call this, home equity investment docs. So, we couldn't look at what he signed up for. Hmm. So, yeah, it's a, it's a sticky situation. Yeah. But anyways, my my point is, if you run across a home equity investment, My recommendation would be to kind of keep searching.

It sounds like these guys, they, they're classic hard sales, hard close types of tactics. And now that we're trying to close, they are once again, just being weird about it. That's not as straightforward as like a traditional bank of like, yep, here's how much we owe them. Like, tell us more. What is the transaction?

How are they setting up? What's the structure? Cause they're thinking about like, Oh, we might just take that, which is a weird situation to be in. Yeah. Very interesting. Anyways, I just want to share that. That's my PSA. Don't do it. And if you come across an owner who has that, be prepared for weirdness to ensue.

All right. Yeah. So there you go. That's what we've got. So if you enjoyed this podcast and learning about home equity investments, we would love it. If you left a review, wherever it is that you listen to podcasts. And if you are interested in learning more about investing with us, you can check us out at furlo.com. Thanks for listening and have a great day.