Significant return on Investment
HERO (Home Equity Retirement Options) is a real estate innovation that addresses the need of aging homeowners to convert some of their home equity to cash without selling and relocating or taking on debt. This program provides new opportunities for real estate investment. Under HERO, cash is advanced to the senior homeowner in exchange for an option to purchase the property exercisable on his/her death or removal from the property. For aging homeowners, many of whom are asset rich and cash poor, HERO can serve as an invaluable tool, providing a way to convert a portion of the equity in their homes into cash while allowing them to continue living in their homes. The growing necessity for older Americans to cash in on their home equity has been pointed out in a New York Times editorial:
“The financial challenge of retirement is to make one’s money last while paying health care costs that inevitably increase with age. It is becoming clear that to meet that challenge, many older Americans will need to cash in their home equity.” [April 22, 2006]
A business based on the HERO model has the potential to become a secure, profitable long-term investment for banks, REITS, insurance companies and major portfolio managers. The return on the investments is based on the difference between the property’s market value when the option becomes exercisable, and the discounted price at which the property can be bought in accordance with the terms of the option. That discount includes the sum equal to the cash given to the homeowner at the time the option was entered into and another sum based on a percentage of the current market value of the property multiplied by the number of years the option was in effect. This formula can produce significant returns on the investment which is especially attractive in this era of low rates. An additional feature of interest in the option formula assures the investor of participation in any appreciation in the market value of the property occurring during the term of the option.