Regrets suck

Home sweet home

Never underestimate the creativity of the financial industry when it comes to finding new ways to repackage risk and returns. Recently, an American start-up called point.com has provided a new way to finance your home. Their slogan: Regrets suck so let’s avoid them. The basic idea is as follows. Point.com buys an “equity stake” in your home, you can use the money they pay for whatever you want, and you don’t have to pay any interest. Isn't that great? When the contract ends after a predetermined number of years, you pay back the equity stake, interest free. If the value of your home has gone up, you additionally pay a percentage of the home’s value appreciation.

For example, it could work like this. You sell a 10% equity stake in your home which is valued at $ 200,000, in exchange for 20% of the home's appreciation. This means you get $ 20,000 from point.com, which you have to pay back at the end of the contract. Let’s assume the estimated value of your house will then have gone up to $ 300,000. You pay back the original $ 20,000 plus 20% of ($ 300,000 - $ 200,000), i.e. the share of point.com in the value appreciation of your house. The total amount you pay to point.com is therefore $ 40,000. If your house has gone down in value by that time, you only pay $ 20,000. According to the point.com website, you can cancel your contract and pay back at any time before the agreed term.

This is definitely a very smart idea. Not surprisingly, point.com is backed up by an impressive list of investors including Andreessen Horowitz, one of the most prestigious VC-firms in Silicon Valley (*). However it is also a dangerous idea. If this new way of financing homes takes off, it is going to create a lot of trouble. First, the use of the term “equity” is very misleading. Point.com don't buy an equity stake in your home. Rather, they give you a loan (without interest) which you have to pay back. In return for not having to pay interest you give point.com a call option on the value of your home. If the home value goes up, point.com get a significant share of the appreciation. Basically, you sell a convertible loan to point.com. They are actually rather vague about how high the share they get will be. The only indication I found on their website was an example, in which the home owner has to give 20% of value appreciation in case of a 10% equity stake. This call option implies that the higher the value of your house, the more you have to pay to point.com.  If you’re cash strapped, it is therefore likely that you will have to sell your house, unless you have become substantially richer by the time you have to repay point.com. But if the value of the home goes down, you might also be in trouble. Point.com always gets the full amount of their loan back. If you have borrowed $ 20,000 from point.com and the value of your house declines from $ 200,000 to $ 150,000, you still need to pay back the full amount of $ 20,000 to point.com. If you don't have that money, you will be forced to sell your house at a substantial loss.

From a macro point of view, this seems like a new “trick” to make money out of people who can't afford to buy a house and will have to sell their home when the loan expires. It creates the illusion that you don't borrow: you don’t have to pay any interest! But in the end, you always pay.

(*) I recommend Marc Andreessen on Twitter; Ben Horowitz has written an interesting book on start-ups: these are very smart guys.