Why a Senior May Opt for Alternative Equity Over a Reverse Mortgage

Alternative equity tapping options – including products like sale leaseback or shared equity investments – do not typically have an age restriction similar to the ones which are active for reverse mortgage products. Nevertheless, for a senior who is looking to tap into the equity they’ve built up in their home, it is possible that they may choose to opt for some of these alternative options instead of taking out a reverse mortgage.

This is according to a discussion with executives at three leading alternative equity tapping companies which took place at RMD’s virtual event HEQ: The Future of Home Equity in Retirement last month.

Reputation or qualification differences

While a typical customer for an alternative product has a fair amount of notable differences with a typical reverse mortgage customer, in those instances where someone at or over the age of 62 is considering both types of options then a decisive factor may be the qualification process. This is according to Jeff Glass, CEO of Hometap.

“There typically is a meaningful first mortgage that is on the property [of our customers], so the LTV requirements are quite different [from a reverse mortgage],” Glass explains. “And there’s an overall set of requirements and nuances to these products relative to reverse products that make them quite different.” 

A big commonality that exists between the two product categories is, of course, the fact that the majority of a prospective customer’s assets are illiquid in their home. If a similar level of the bulk of someone’s wealth was tied up in another resource, most financial professionals would try and find a way to diversify that person’s sources of wealth, Glass says.

“If that were a stock, and you had 60-90% of your net worth tied up in one stock, no matter how much you love that stock, any financial advisor would tell you you’re over-concentrated, particularly since you’re over-concentrated in an asset that’s illiquid,” Glass says.

Jeff Glass, CEO of Hometap

, Occasionally, Hometap will see homeowners come to them for the express purpose of asset diversification, recognizing that much of their wealth is locked in their home. It’s possible that the perennial reputational issues that the reverse mortgage industry faces has turned them off to the idea of engaging with one, or that they simply do not qualify for a reverse mortgage and must seek out another equity tapping option.

“[They’ll] want to diversify a little bit and take that capital to go invest in something else, particularly something more liquid or something that generates cash flow for them,” Glass says. “So, we’re beginning to see that. And I think those are the linkages in terms of where perhaps some homeowners who aren’t really interested in a reverse mortgage or maybe aren’t qualified for a reverse mortgage may find interest in a home equity investment.”

Financial planner interactions

Like the reverse mortgage industry, alternative equity tapping companies are also seeing some more direct interactions with the financial planning community oriented toward making the best, and most holistic financial plan possible given the assets the customer has.

When someone has access to a planner and may choose to opt for an alternative equity product over something like a reverse mortgage, that simply comes down to what’s best for the client. This is according to Thomas Sponholtz, founder, chairman and CEO of shared equity investment company Unison.

“Specifically on financial planners and financial advisors, it really starts with what they do,” Sponholtz says. “The financial planner or advisor, their goal is to help the client meet different goals for their financial needs, and that means they need to take a complete and holistic picture of their net worth and their liabilities. If you look at the assets of an average american, they have [as much as] 80% of their net worth tied up in the house.”

Thomas Sponholtz, founder, chairman and CEO of Unison

This is why incorporating the home into a financial plan is so important, since the fact that it makes up the majority of the person’s assets often dictates that a financial plan’s first order must be the home, Sponholtz says.

“That is for two reasons: one is that it’s your biggest financial investment, but number two is that it’s emotional in placement,” Sponholtz explains. “It’s a place where you live, it has functionality. Right now we’re all working from home, we’re teaching our kids from home, we’re shopping from home. The home is much more than just a financial investment, and the financial planner can really help the homeowner separate the utility of the home from the financial aspect of the home, and then include that equity into the financial plans alongside stocks, bonds, and cash.”

How alternative equity and reverse mortgages could work together

In following up on Jeff Glass’ previously-stated idea in which alternative equity tapping companies are more complementary to reverse mortgages than they are competitive, this idea can be greatly emphasized when talking with financial planners, Sponholtz asserts.

“If you’re marketing reverse mortgages, and potentially thinking about adding equity products like [ours], then when you talk to a financial planner, it completes the financial plan for them,” he says. “All of a sudden they go ‘whoa, wait a minute, you can include the home and you can get liquidity?’ Then that enables them to do things they never could do before.”

If a customer has a financial planner, they’re generally better off financially when compared to customers who don’t employ one, Sponholtz says. That generally comes with the planner client having more assets which would mean a bigger home, and potentially more equity. This increases the likelihood that the customer and their planner will be averse to taking on additional debt.

“By including the equity in your home in that financial plan, now you can better decide whether you want to reduce your debt, maybe take equity out of the house or pay expensive debt off,” he says. “Maybe you want to help your child buy a home as part of the down payment. And maybe a financial planner wants to increase the monthly income that somebody in retirement might have so they can sell a piece of the equity they have, which they own way too much of in their financial plan.”

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