How It Works
Home Diversification Corp. created their patent-pending process and product, the Home Diversification Agreement, to help homeowners protect the home price value and the equity in their homes – often their most valuable asset.
The HDA is straight-forward financial contract that enables a homeowner to exchange the local market real estate index of their home for that of a national market index. Think of this as an agreement enabling you to switch your eggs (largest investment – home) and spreading them across the country in different markets versus leaving them all in one basket – your local home market.
Fact is a local real estate market can present homeowners with a tremendous amount of risk and vulnerability. This is often evidenced by volatile price swings, declines or underperformance relative to other markets caused by a variety of factors, ranging from plant closures and deteriorating economic conditions to environment issues, natural disasters, and more.
Spreading that risk around to multiple real estate markets nationally helps dampen the volatility and reduce the risk – a concept known as diversification. A homeowner utilizing an HDA agreement can reduce their home equity risk by more than 40-percent; the same holds true regarding foreclosure risk.
What it Does
Unfortunately, you can’t move your home to take advantage of another market that may be performing better than your own. But an HDA contract does something even better. It switches your local market home value index for a national diversified home price index. Diversifying nationally provides price stability and reduces volatility by more than 60-percent, so you are at less at risk to your local home market…many of which declined 30 to 50-percent during the 2008 to 2012 real estate crash.
Later, when you decide to sell your home, if your local market value has underperformed the national home-price index value, you will receive a check for the difference in amount. (see Example 1 below).
How it Functions
The HDA contract is created whenever you sign up, be it at the time you purchase your home or a later date. The approval process is a simple questionnaire to ensure the product is suitable for you as a homeowner.
The contract is separate from your mortgage, and importantly, is not a mortgage. It is a product that serves to enhance your mortgage. If done at the time of mortgage origination, the contract is completed with your mortgage paperwork and requires nothing more than signatures on your part, as well as your first monthly payment. If the HDA contract is entered into after you have originated your mortgage, you will sign a simple real estate junior lien and security agreement. An HDA for a typical $225k home will cost approx. $19 monthly.
The HDA does require that a junior lien be filed on your home in your local jurisdiction (e.g.- county court), much like a mechanic or contractor lien. It’s important to remember that the HDA does not preclude you from engaging in normal home finance activities, such as refinance or taking out a home equity “line of credit.”
The HDA contract remains in effect until the home is sold.
Payments are automatically withdrawn monthly from your bank or financial institution (e.g.- ACH or credit card payments) and you will receive statements detailing your account activities and balance. That balance reflects the HDA value of your home, which does fluctuate as national vs. local home prices indices move up and down. Other than the normal HDA fees, no payments either from you or to you will occur until the termination of the contract, which is typically only when you actually sell your home
Life of Contract
Over the life of the contract, the HDA account value will fluctuate as home prices appreciate and decline both locally and nationally. If your local home market underperforms the HDA national price index, the value of your HDA account increases. Conversely, if your local market home prices outperform the HDA national price index in a given month(s), your HDA account value will decrease.
Sale of Home
When the home is sold, the account is settled at closing. A homeowner with an HDA-covered home that has underperformed the market will have a positive balance. That balance represents the difference between the price of their local market versus the HDA national home price index. That difference (positive balance) is paid to the homeowner. In such instance, the homeowner receives more for their home than they would if they didn’t have the equity protection provided by the HDA agreement.
For a homeowner fortunate enough to live in a community that has outperformed the HDA national home price index over the life of the contract and maintaining a negative balance in their account, a portion of their excess profits in the home would be foregone at closing. (see Example 2 below).
Example 1: Homeowner with an HDA-covered home in an underperforming market
Purchase home at $200,000 and 5 years later when you decide to sell, for any host of reasons the local market price for the house decreased to $193,000, representing a loss of $7,000 on your investment.
Meanwhile, because the national average has experienced moderate increases in home prices of 10-percent in those 5 years, your HDA national index value has increased to $220,000.
In this scenario, your HDA account would have a positive balance of $27,000 – the difference between the local market home price of $193,000 and the HDA home price value of $220,000. You would receive a check from HDC for that $27,000 at closing.
Example 2: Homeowner with an HDA-covered home in an overperforming market
Purchase home at $200,000 and 5 years later when you decide to sell, you’re fortunate that your local home market has increased in value by 20-percent to $240,000, representing a gain of $40,000.
Meanwhile, the HDA national average underperformed your hot market, experiencing a gain of just 17-percent in the same period. The HDA account value would have increased to $234,000, but would have still underperformed your local market by $6,000. Your HDA account would show a negative balance of $6,000, which would be settled at closing.
In this scenario, you would forego $6,000 in profits at closing, representing the difference for the selling price of $240,000 and the HDA value of $234,000.
Keep in mind HDC offers options that can limit/significantly reduce the amount owed by a homeowner fortunate to live in a local market that has outperformed the national market index.