home-equity-loan

It’s every homeowner’s nightmare: being forced to sell for less than the purchasing price of their house. Still, whether it’s due to a career change, retirement or a growing family, many homeowners are facing this scenario every day.

Working Equity is here to help and it has just received $5 million in equity financing from Kleiner Perkins Caufield & Byers to do it. WE’s product, called Equity Protection, works like insurance that pays off when you sell your home in a weakened market.

For example, if a couple buys a home at $250,000 and wants to protect it against a possible decline in the housing market, they would contact WE. The company then quotes them a Home Market Index based on the market covering the home’s zip code. We’ll use an HMI of 100 here.

Years later the couple decides to move and is only able to get $225,000, 10 percent less than their purchase price. The HMI had dropped 10 percent as well, to 90. Ordinarily, the couple would lose $25,000 on the transaction. In this case, the couple signed with WE, which will pay them $25,000 — the 10 percent that the HMI dropped multiplied by their purchase price.

The check that WE cuts is tied to the HMI, and thus the overall condition of the housing market. If a house is sold for more than its purchase price in a decreased HMI, WE still pays. This condition results in a big pay day for the seller. If the HMI at the time of sale is higher than at the time of purchase, though, WE pays nothing.

In theory, WE will be able to turn a profit because the overall trend in housing markets is “up.” If a homeowner sells in a better housing market than when the service was purchased, WE doesn’t pay out any money. Many homeowners are looking for security against another possible crash. If the housing market has hit its bottom, WE is launching at the perfect time. Few houses will be sold in a local market worse off than it is now, which means more fees are kept instead of paid out.

If a customer buys lifetime protection at the time of purchase, it costs 1 or 2 percent of the home’s value. On a flexible term basis, it costs 20 to 30 cents per $1,000 of home value, or about $50 to 75 dollars a month on a $250,000 house. In either case, the waiting period before payouts become available is 24 months.

Working Equity was represented by ClearCreek Partners in the deal with KPCB.