U.S. Home Equity Fund I, a real estate investment fund managed by Nada Asset Management, has purchased 132 home equity agreements from an affiliate in an over $10 million transaction.
Nada launched the fund in February of this year, with the aim of creating a diverse portfolio of HEAs, also referred to as home equity investment contracts. This is the fund’s first transaction.
Nada started in 2021 and has originated more than 250 home equity agreements comprising over $115 million in value with its active portfolio delivering realized payoffs with a weighted average internal rate of return of 17% since inception, the company said.
What are home equity agreement contracts?
In a typical home equity agreement, the homeowner receives an upfront payment for a share in the property’s future value. It is not a loan, unlike a closed-end second lien or a home equity line of credit.
But the growing industry is facing legal challenges, including from the Massachusetts Attorney General’s lawsuit against Hometap filed in February.
On the other hand, Hometap was among the first of the home equity investment companies to go to the securitization market, putting out a rated transaction last June. Both DBRS Morningstar and Kroll Bond Rating Agency have methodologies in place to rate this securitization type. At the end of May, Point came out with a DBRS Morningstar-rated issuance
Nada is looking at the same endgame for these assets.
“Our goal is to build up our portfolio and then utilize the securitization market for our pool of assets,” said Jesse Stein, Nada’s chief investment officer.
What makes home equity agreements attractive for investors?
What is attracting the demand from institutional investors for home equity investment agreements is what is going on in the macro economic environment.
“This product, the way that it’s structured, provides significant downside protection to an investor, but at the same time, because it is an equity investment, it does deliver equity type returns,” Stein said. “So the risk reward paradigm is pretty attractive compared to other types of real estate debt or equity products.”
This is why institutional demand for the asset class is growing quickly, he continued.
Nada fund activities going forward
Future purchases from the affiliate will be made on an ongoing basis as money comes into the fund, Stein said. It will only acquire assets from Nada. The fund owns all of the assets, and investors will own a limited partnership interest in the fund.
Nada currently operates in 14 states, but the initial package consists of agreements from five: Texas, California, Florida, Arizona and Colorado.
An important characteristic is that the combined lien-to-value ratio (between any loans and Nada’s lien on the future value) is 51% for this portfolio, meaning the homeowner has retained a significant amount of equity, Stein pointed out. Metrics that measure tappable home equity for lending purposes set the bar at an 80% loan-to-value ratio.
