A Hedging Option For Your Home
Sirius Value Protection says it has a product for you. The New York-based start-up has created a financial hedging device that it claims will protect against a drop in the value of your home. The product, for which a patent is pending, which will be available through major housing developers later this year, and perhaps as early as next month. The company hopes it will help draw skittish buyers back to the market.
Insurance policy or gimmick?
Before you sign up, read the fine print. There's a lot of it. And the upshot is, this hedge probably won't help you in the one situation where you'll need it most – when you need to sell a place that's underwater.
Here's how it works: Developers bundle the cost of the Sirius Value Protection tool into the sale price -- padding the home price by about 20 to 25 percent. Right now, co-managing partner Andrew Herzberg expects that developers will eat that cost to entice buyers. But as the market improves, he expects developers will split the difference with buyers, charging them 10 percent of the home's value.
Once you're in your new digs, you have six years to exercise your option and let Sirius buy your house for the price you paid for it (including the cost of the hedge). This excludes your closing fees and mortgage costs, of course. But that's not the biggest catch.
This is: Sirius doesn't buy the house back when you exercise the option. No, it only turns over your cash after you've owned the place for ten years. Moreover, to exercise the option and collect on it, you have to own the house and be current on your mortgage.
So basically, you have to know at some point during years one through six that you're unhappy with the value of your house, that you're going to be ready to move out in exactly four to nine years from that point, and that you don't expect prices to bounce back in that time. Yeah, right.
Sirius does throw consumers a bone: If you exercise your option and the housing market comes back afterward, you can still sell your place on your own and pocket the profit. If you don't, you'll forfeit that upside and be looking for a new place to live after ten years roll by.
There's also a bonus option. After you close the deal, you can opt out of the program and collect a bonus that starts at ten percent in the first year and slides down to three percent in year six. Herzberg said candidly that in the focus groups Sirius ran, a lot of people said they would most likely ignore the hedging option and cash in the bonus the day after the closing.
Indeed, this is probably what most buyers will do. After all, people don't buy homes that they believe will lose value. And if you don't need to exercise the option you'll feel silly forfeiting that cash (especially when it just about covers what you paid for the hedging product to begin with).
Moreover, if you don't cash in right away and it does turn out that you need to sell, say in year four, you'll probably opt out of the program then and collect a smaller bonus before putting the house on the market. But if the place is under water at that point, a three or five percent rebate isn't going to offset very much.
Herzberg admitted that this program "isn't for everyone."
It's clearly good for Sirius, which collects its fees with the prospect of paying, at most, 10 percent back to you. There's a small chance the company might wind up holding your house ten years from now, but Herzberg notes that the average American home buyer only lives in a place for 7.2 years. So even if you do panic and exercise your option, chances are you'll sell before Sirius has to make good on it.
It's also good for the real estate giants Sirius developed it for, who can offer some psychological piece of mind to reluctant buyers and perhaps finally move some of the inventory they're sitting on.
But Herzberg couldn't tell me what type of consumer this financial tool would be especially good for and I can't tell either. It seems that no matter how you slice it, the best way to hedge against receding home values is to pay 25 percent less for a place to begin with.