My H4P epiphany had its roots during my time as a financial advisor. When the asset-backed securities market melted down in 2008 and originators lost access to so many product types, I decided to try something different, so I went to work at Merrill Lynch and later for Morgan Stanley. As a securities-licensed advisor, I was haunted at both firms by a recurring phenomenon.

Wealth managers use what is called a Monte Carlo simulation to predict the probability that a client will not outlive their money. It’s basically a powerful computer program that looks at thousands of iterations of possible market outcomes (e.g., what if stocks go up and bonds go down?). A good outcome is a high number—meaning you have a good chance of making it until the end with at least a dollar.

When a financial advisor is trying to get a prospect to switch from a competitor to their firm, they usually ask for the prospect’s account statements and run a Monte Carlo simulation on the prospect’s current portfolio. Then they run another analysis on their suggested portfolio, print pretty reports and say, “See, if you switch to us, you’re more likely to not run out of money when you get old.” That, of course, is an oversimplification, but you get the idea.

When I ran numbers, I would repeatedly see cases where someone had a portfolio worth over a million dollars, but their number was in the 60 percent range. That means they had a 40 percent chance of completely running out of money based on their desired lifestyle.

If there’s one common characteristic among adults it’s that they want two things: choice and control. Running out of money as we age means we lose both. And if someone doesn’t have kids who will take them in, it means much worse.

So here was my epiphany: If the nice folks who have seven-figure investment and retirement accounts are going to run out of money, what about the other 99 percent of the population? We’re talking a national crisis. To prove that’s not hyperbole, consider that the Government Accountability Office released a report last June on the current financial status of households between 55 and 64. This report said the median household approaching retirement has a nest egg of between $10,000 and $20,000; 41 percent of these households have no retirement savings; and 56 percent of households are homeowners, although only 22 percent are mortgage-free.

Three factors are going to make this challenge even worse: longevity, soaring health care costs and low interest rates on retirement savings. Today, there are more than 48 million people who are over 65. By 2030 that number will grow to 73 million. While there are currently around 75,000 people age 100 or older, by 2050 there will be over 1 million.

I can assure you, when financial advisors are designing portfolios, they are not modeling survival to age 100. And low interest rates make the long-considered safe withdrawal rate of 4 percent suspect. With the world’s central bankers all talking about or moving toward negative interest rates, the “I can’t earn any interest anywhere” problem is only going to become more challenging.

So the problem is “rich” people don’t have enough money saved for retirement and everyone else is really in trouble. When there is no solution per se, avoiding mistakes becomes paramount. Let’s look at how wrong conventional wisdom can be.

The default advice when a retired person cannot make their finances work, even with a reverse mortgage on their current residence, is to sell and rent. That seems reasonable; after all, what other choice is there? The following analysis shows what a terrible mistake that is. Mind you, the people suggesting “sell and rent” don’t know about downsizing, buying a home with a reverse mortgage and saving the difference.

The question we want to answer is this: If a homeowner sells their house and realizes $300,000 in net proceeds, how does their net worth differ if they use the sale proceeds to pay rent versus buying a smaller home, using part of the proceeds for their down payment and investing the rest?

After all, having access to one’s wealth, in the form of cash, is the cornerstone to preserving choice and control.

Our rent-versus-buy analysis sought to keep the comparison like for like (apples for apples) as much as possible. In the rent scenario, sale proceeds covered rent and renter’s insurance. Both were adjusted for inflation on a go-forward basis. In the buy scenario, the investment account proceeds were used to pay property taxes, insurance and HOA dues. House appreciation was the same as the rent and insurance rate of inflation. And in both cases, the investment account earned 4.64 percent, which is the 10-year average of a low-load, tax-free bond fund.

Two factors that would have enhanced the outcome of the H4P strategy were purposely excluded: 1) eventual recapture of mortgage interest deduction, and 2) in California, transferring a lower tax basis from a previous residence via Props 60/90. The results were significant enough without them.

The important takeaway is this: The H4P strategy is almost $100,000 better after five years, $250,000 better after 10 years and $700,000 better after 20 years. This scenario was based on a 67-year-old person, who very well may live to be 87, so a 20-year planning horizon is reasonable. Of course a renter or homeowner may use other income such as Social Security, savings, annuities, pension, etc., to extend the time when their investment account hits zero, but the conclusion is the same.

Eventually, the homeowner will likely sell and perhaps move into an assisted living facility. Far better to still have some wealth than to be a burden on one’s kids. Even 20 years out, the homeowner still has some net worth. What do we do with this knowledge? How do we move the needle for America’s retirees? How do we save some from making a half-million-dollar mistake? It starts with education.

Can a reverse mortgage be used to purchase a home?

21% said no

39% said they didn’t know

 

How familiar are you with reverse mortgages?

47% said they get the concept but don’t know the details

6% said they didn’t know much about them

 

Financial advisor misconceptions

45% thought the bank would take the house

18% thought the borrower’s estate was liable if the loan balance exceeds the home’s value

The H4P strategy is going to require more than financial advisors giving the right advice; we also need real estate agents to learn the strategy and be able to explain and teach it. The following page illustrates findings from a detailed survey I conducted with real estate agents in my local market.

There is no reason you couldn’t distribute this same survey in your local market. It will lead to conversations and questions with prospective partners. You can tell those agents, “I’m not here to disrupt your existing mortgage relationships, I just want to help you with the new business I’m going to help you get.” Todd Duncan, author of High Trust Selling, calls this the lost leads conversation.

To quote an old saying, “It’s not what people don’t know that’s the problem, it’s what they think they know that just ain’t so.” Look at the misconceptions and educational opportunities I found among real estate agents in my market.

 How familiar are you with using a reverse mortgage to finance a purchase?

50% – Get the concept, don’t know the details

50% – Comfortable with the strategy

How would you rate reverse mortgages?

75% – Favorably

25% – Raving fans

Can different lenders charge different fees for the same reverse mortgage?

13% – No, fees are mandated by HUD/FHA

63% – I don’t know

In addition to a lack of understanding, the HECM for Purchase has a few product deficiencies. These must be explained by the buyer’s agent to the seller’s agent. They’re not deal killers, but they do require different language in the purchase agreement.

 

The major challenges include:

New construction needs a Certificate of Occupancy prior to application

Sales contract needs an amendatory/escape clause as an addendum

Must be owner-occupied within 60 days of closing

No seller concessions allowed

No lender credits allowed

No contributions from any other parties

Repairs are paid for by the seller prior to close

Repairs must be completed before closing

No Power of Attorney or guardianship on a HECM for Purchase

Sale price can exceed appraised value by lesser of 10 percent or $25,000

Buyer pays for home inspection and home warranty

 

Now for the good news.

What are sales agents’ concerns and how big is this opportunity for them?

75% – Don’t know how they work – need education

50% – Not sure how to advise a buyer or seller

38% – Not sure how to educate borrowers

50% – Don’t have an established relationship with a reverse mortgage specialist

 

How many new buy-sides per year are possible if a buyer could finance without having a mortgage payment?

50% – 1 to 3

13% – 4 to 6

25% – more than 6

 

Average commission from a buy-side

13% – $6,000 to $10,000

75% – more than $10,000

 

How many new listings per year are possible if the seller could downsize, finance 50 percent or more, and have no mortgage payment?

13% – 1 to 3

38% – 4 to 6

38% – more than 6

 

Average commission from a listing

88% – more than $10,000

 

In summary, America’s retirees need to understand how financially dangerous it is to follow the conventional wisdom of selling and renting, and losing an appreciating asset in the process. As a renter, they’ll still make a mortgage payment, it’ll just be their landlord’s.

Financial advisors need to understand that this option exists. For Realtors the H4P strategy could mean an extra $50,000 to $100,000 in income each year.

Bottom line: Real estate agents should become part of the solution to one of America’s biggest challenges (seniors outliving their money) and they could earn considerable revenue for their newfound expertise. Advisors would be appreciated for giving good advice, and seniors would preserve their wealth. Everybody wins.

Do you agree that getting this information into the marketplace is a moral imperative? Ours is noble work!

 

REALTOR SURVEY

Which of the following designations do you have?  Realtor 88% ABR – Accredited Buyer’s Representative 13% CRS – Certified Residential Specialist 6% SRES – Seniors Real Estate Specialist 38%

How loan ago did you first hear about reverse mortgages? 0-5 years 6% 6-10 years 38% 11-20 years 25% 20+ years 25%

 How would you rate reverse mortgages? 1 – Against 6% 2 – Skeptical 6% 3 – No opinion 13% 4 – Favorably 50% 5 – Raving fan 25%

How familiar are you with using a reverse mortgage to finance a purchase? Don’t know much about a HECM for Purchase 6% Get the concept, don’t know the details 50% Comfortable with the strategy 31% I’ve closed a purchase that had a reverse mortgage 13%

Which of the following recent HUD changes are you aware of?  FHA now requires income qualification 56% FHA now requires credit qualification 56% Non-borrowing spouse has survivor rights in the property 38%

Does your local market have inventory with downstairs beds/baths? Yes 88%

Percent of last year’s transactions that had a downstairs bed/bath? 44% said 26-50%

Percent of last year’s transaction fall-out that was due to financing issues? 81% said 0-20%

Percent of financing fallout that had a buyer over 62? 88% said 0-25%

How many new buy-sides per year could you have if the buyer could finance without having a mortgage payment? 56% said 1-3 25% said more than 6

What is your average commission from a buy-side? 75% said more than $10,000

What is your average commission from a listing? 75% said More than $10,000 Can different lenders charge different fees for the same reverse mortgage? No, fees are mandated by HUD. 13% Yes, lenders have discretion. 19% I don’t know. 69%

What concerns do you think Realtors might have about reverse mortgages? 1. Don’t know how they work. 2. Not sure how to advise a buyer or seller. 3. Not sure how to educate borrowers. 4. Don’t have an established relationship with a reverse mortgage specialist.