July 18, 2013:
I just read about a very interesting new way to invest in real estate through a real estate exchange called Primarq. It essentially is a marketplace where homeowners and homebuyers can “sell” part of their home to investors in exchange for cash. Primarq seems to be a startup, and as such, they are presenting an intriguing but yet unproven concept.
On their website there is a presentation of how this would work. There are 2 options – one for new homebuyers and one for existing homeowners.
For new homebuyers, Primarq would work with the buyer to find and purchase a property with investors as a co-buyer. The investors would essentially provide down payment funds in exchange for equity in the property.
For existing homeowners with equity in their homes, Primarq would allow them to sell part of their equity for cash. This cash would not have to be repaid, which is a huge plus compared to doing a refinance or taking out a home equity line of credit. A homeowner could sell enough equity to pay off any existing loan and then live in the house without any mortgage payment.
In both options, the property is listed on the Primarq exchange, and investors bid for how much cash they will offer for part of the equity in the house. The homeowner accepts the best offer, and receives the cash. The homeowner is considered the owner and can live in the property without restrictions. I expect the homeowner could also rent out the property.
What are the benefits? For new buyers, they can purchase a house with little or no money needed for a down payment. And because the money they receive is not debt, there is no monthly payment. They also can avoid private mortgage insurance (PMI) which is a requirement if the buyer puts down less than 20% of the purchase price.
The investor will profit from rising real estate prices by having a leveraged equity position. He receives equity in the home that he can either hold on to until the property sells, or sell it on the Primarq exchange to another investor.
When the homeowner eventually sells the property, the homeowner and the investor split the profits as determined by their ownership percentage. Investors may have first right of refusal to buy the property when the homeowner sells.
This is certainly an interesting development for both homeowners and investors. For investors, it could allow them to participate in residential real estate without having to be a landlord.
There are, of course, risks involved for investors. If home prices decline, the homeowner may decide to walk away from the property since they have less equity in the property to lose. And we have seen that homeowners are willing to walk away from their homes en masse when real estate prices go down.
Another risk is that of liquidity. The Primarq exchange will only have real value for investors if there are many people taking part in it. If the investor wants out early before the homeowner decides to sell, with few participants the exit price may be poor. And investors cannot force a homeowner to sell, so the final exit and profit participation date is determined solely by the homeowner.
I will be keeping an eye out for developments with Primarq, and will pass along anything new I learn.
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