Like Reverse Mortgages, Alternative Equity Tapping Faces Educational Hurdles
A reverse mortgage allows senior citizens to access the equity they’ve built up in their homes in order to access additional cash to accomplish certain goals. Whether that’s making ends meet during their post-working years, to finance a home improvement project, to pay for some kind of care or to tap a more stable resource in a down stock market, the reverse mortgage can provide a necessary degree of flexibility for those who can qualify for it.
That fact is key, though: not everyone who seeks out a reverse mortgage can qualify for one, whether you’re talking about an FHA-sponsored Home Equity Conversion Mortgage (HECM) or the increasingly expansive suite of private reverse mortgages being made available by lenders. For those who may be either unable or perhaps unwilling to engage in a reverse mortgage transaction, alternative equity tapping companies can present a viable alternative in the form of products like sale leasebacks or shared equity investments.
However, similarly to the kinds of hurdles faced by reverse mortgage companies that often have to deal with rampant misunderstanding of the product category, alternative equity tapping products are largely an even deeper niche than reverse mortgages and come with their own levels of misunderstanding.
Similar hurdles to understanding
For shared equity investment company Point, product education accounts for a major investment and aligns with one of the company’s core values of transparency. This is according to Michaela Gifford, business operations lead at Point.
“We require homeowners to have a comprehensive understanding of what Home Equity Investments (HEI) are and their associated costs,” Gifford tells RMD. “Although HEIs are new to some homeowners, it’s a very intuitive class of product. Fractions are one of the earliest tools we all learn in elementary school math so fractional sharing of home equity and appreciation is easy for homeowners to grasp.”
For senior clientele who are generally already familiar with reverse mortgages, the fractional sharing arrangement of Point’s HEI product provides an “easy-to-comprehend alternative to complicated negative amortization tables,” Gifford says.
QuantmRE, which also offers a shared equity investment product, tends to focus on offering an alternative to debt-based lending in its appeals to clients. This helps to facilitate greater understanding according to Matthew Sullivan, founder and CEO of QuantmRE.
“In each case where the homeowner is looking to unlock equity, they are looking for a cash sum that they can use for a specific purpose – for example, paying down high cost credit cards, remodelling their home etc,” Sullivan says. “In our case, we are offering an alternative, equity-based solution that gives the same outcome that the homeowner wants from a loan – i.e a cash lump sum. Our challenge is to explain how it is possible for us to provide this lump sum without the additional burden that comes with a debt-based product.”
When facing major challenges for product education, the biggest issues that QuantmRE stems from their being confused for a lending entity because of the explanations surrounding a lack of interest, monthly payments and debt. The company also encounters assertions about the cost of engaging in such an arrangement, and suspicion from seniors that it’s some kind of scheme to take away their homes.
“These types of reactions are understandable because the product is relatively new and solves such a huge problem for so many homeowners,” Sullivan says. “In order to combat these initial (misguided) assumptions, it is important that all of our communications with potential customers are entirely open and transparent. My view is that all of the companies in this sector (QuantmRE, Unison, Point, Noah, Hometap) are working towards the same objective. I believe all of the companies in this sector understand the importance of building trust with potential customers at every stage of the process.”
Comparison with reverse mortgages
When it comes to comparing the ubiquity of alternative equity tapping products, the alternative products have a noted advantage due to its relative simplicity in comparison with reverse mortgage products. This is according to Jarred Kessler, CEO and co-founder of sale leaseback company EasyKnock.
“I think [a sale leaseback] is a much easier product to understand,” Kessler tells RMD. “We’re buying your home, you pay us this rent, and this is what you get at the end. So it’s not as complicated, it’s pretty straightforward to understand. But, the brand awareness and the trust factor is more challenging because people may have not heard about it before.”
Still, EasyKnock has previously engaged with the reverse mortgage industry in the past to facilitate solutions for borrowers who may not qualify for that product, and that acceptance has only increased due to current events, Kessler says.
“We’ve seen an accelerated acceptance of our product,” Kessler says. “[We’ve even seen] reverse mortgage loan officers expressing interest in finding more arrows in the quiver to sell, because either they can’t sell the reverse mortgage, or more people need other options.”
In Point’s case, comparison with a reverse mortgage to facilitate more understanding isn’t described as a key element since it has a counseling apparatus to ensure optimal understanding of the arrangement by clients. It’s during this counseling process that reverse mortgages may come up as an alternative option for them.
“To ensure older customers have a thorough understanding of our product’s financial implications, we require that our customers aged 62 and over either a) complete a one-hour financial counseling session with an independent non-profit HUD-certified financial counselor, or b) have their heirs, as interested parties, review and consent to the HEI agreement,” Gifford says. “During the financial consultation, options other than a HEI which may be available to customers are discussed, including reverse mortgages, other housing, social services, health and financial options.”
The ability to compare and contrast different options is generally helpful for clients in making a decision, Gifford shares.
“Customers 62 and over definitely value the ability to compare products as there may be a lack of familiarity with Point’s HEI and there may be false assumptions made of solutions like reverse mortgages,” she says. “It’s best for everyone if we strive to find the best solutions rather than just promote the product we happen to offer.”
At QuantmRE, sometimes prospective borrowers assume on their own that the shared equity investment it offers is itself a reverse mortgage, Sullivan explains.
“With many of our potential customers, we have seen that there is a natural assumption that our home equity agreements are some form of reverse mortgage as there are no monthly payments,” Sullivan says. “With regards to the comparison with reverse mortgages, we do try and explain at the beginning of the sales process that our agreements are not a loan, they are not a line of credit and they are not a reverse mortgage.”
Even in comparison with reverse mortgages, shared equity investments and sale leaseback products are not nearly as well known as the concept of reverse mortgages. This presents a unique difficulty for alternative equity tapping companies to overcome that is decidedly different from the general perception of reverse mortgages in the public.
“For us, the biggest challenge is around awareness,” says Jeffrey Glass, CEO of Hometap. “We offer something that hasn’t really existed (at least not at scale) for homeowners. It can be very confusing for homeowners to understand the difference between an equity investment in one’s home versus something like a home equity loan.”
Reverse mortgages don’t often come up in Hometap’s educational processes, since most of its clients are exploring an alternative to other kinds of home-based solutions, Glass shares.
“Reverse mortgages do not come up often in our conversations, since most of our homeowners are considering us in comparison to cash out refinances, HELOCs and other second mortgage products,” he says.