Welcome to the show today, cause we’ve got a special show and I’m going to ask you a question. What if it was possible to unlock the equity in your home or your property without taking on more debt and be able to use that equity for virtually anything that you want to use it for. But of course we’re real estate investors. And what I’m thinking of is you would take that equity that you’ve just pulled out of your property or properties and use it to invest in more income producing assets like turnkey rental properties or whatever it may be. So my guest today is someone who is in an interesting space. This is something I’ve actually talked about very briefly in episodes in the past, where you have the ability to take out equity without actually incurring debt.
And it’s an interesting concept. So I’m going to let my guest talk about that here today. So my guest is Matthew Sullivan and he is the CEO and the founder of QuantmRE a company that solves a real problem for property owners by helping them to access a portion of the equity in their properties without actually taking on debt. Now you might be asking yourself, well, how’s that possible? Or how do you do that? Well, hang tight because we’re going to answer that question. Matthew has a proven track record in the real estate innovation space and that’s through his experience as a co-founder of secured real estate income strategies fund. And he is the president and founder of crowd venture.com a real estate crowdfunding company. So with all that, Matthew, welcome to the show.
Thank you for having me on.
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Well, it’s great to have you on here. You know, my audience is probably wondering, well, what exactly does this person do? So tell us more about yourself and where you’ve come from and you know what you’re up to today.
I’ve always had an entrepreneurial background, I think primarily because I think I’ve discovered at a very early age that I was systemically unemployable. Um, so, um, that combined with this sort of burning desire to go out and build things. And so I, my sort of entrepreneurial path really started, you know, gosh, 30 years ago, how time flies. And I started off life as a stockbroker and went into corporate finance and then run my own businesses that were involved in telecoms and technology and finance moved over to the US seven years ago. And what I did, there was really something that I’ve been meaning to do for years, which was to get involved and to start a business that was directly involved in real estate. So the first thing I did was to set up a crowdfunding company, which was one of the very early real estate crowdfunding companies, which took advantage of the changes in legislation that came about by the jobs act.
And that really was my staging point or my platform to enable me to build relationships in the real estate sector over here, I was based in Southern California, sets a real hotbed for real estate innovation, and really one thing led to another. And as we grew the business, we stumbled across this incredibly interesting asset class, which is the equity in owner-occupied homes. And so three years ago, we set up QuantmRE, um, which is the company that you mentioned. And what we do now is we help homeowners unlock some of the equity in their homes, as you say, without taking on debt.
Interesting. Okay. So that’s a very interesting concept. It’s not something that’s new. It’s been around for a number of years. I actually have some experience with it myself personally, because I’ve used it on my own principle residence. So, you know, it’s not something foreign, but I have to admit it’s something that I’m still scratching my head over a little bit, because it’s not something that I think about it every day. It’s not commonplace. So let’s start with the very basics. You guys refer to it as a home equity agreement. I might be getting ahead of myself here, but explain the concept and how it works. And then you can, you know, define or talk about what a home equity agreement is. But let’s talk about how it works. So people understand how do I do this?
Probably the easiest way of starting is to explain what it’s not. And so it’s not a debt product, so it’s not a reverse mortgage. Um, it’s not a home equity line of credit. It’s not cash out refinance. So in other words, all of those are debt products. So the biggest issue that you have as a homeowner right now is that if you want to access your equity and many people have the vast majority of their wealth tied up in their homes, in their equity. If you want to unlock that, you have to go deeper into debt. Now, if you look at the way that commercial real estate transactions are structured, they have a number of different forms of capital within the capital stack. So you have senior debt, you have junior debt has mezzanine financing, which is combination of debt and equity. There’s various forms of equity. So you have preferred equity, you have shared appreciation mortgages, and then there’s pure equity itself. So within a commercial transaction, there are many strata of funding types and funding mechanisms within a residential home. The homeowner only has one funding mechanism available, and that is debt. So what we’re doing really is bringing practices that have been prevalent in commercial real estate transactions since the beginning of time where they are now using those and applying those to residential homeowners and essentially what the program is. A home equity agreement is essentially an option agreement where the homeowner agrees that in exchange for a lump sum when they sell their home, which can be anytime in the next 30 years, depending on the program, when they sell the home, they pay back the initial investment, which was the option fee together with a share of the increase in value of the property.
So what that means is that the investor, because it is an investment is not alone. The investor gets back their agreement that their original investment plus a share of the equity. So they get paid by the increase in value of the home rather than being paid by interest and say, because of that, the benefit to the homeowner is that they can tap into the equity in their home and it doesn’t impact their credit score. It’s not a loan product. They don’t need to find monthly payments because it’s not debt. And it gives them capital that they can do with what they wish and what we find many people doing is using that as you were suggesting to diversify out of their home equity, which is a large concentrated non-cash flowing nonfinancial asset into other investments that provide cashflow or provide liquidity or provide other benefits that the debt equity in their home doesn’t give them.
That is a great, great explanation. And if that went over people’s heads rewind and listen to that again, because that was a very clear, brilliant, explanation of exactly what it is and how it works. Just to add to the clarity. It would probably feel like a loan on the front end because you are getting what you call the lump sum of cash that you could use to use or invest. However you choose where it differs is that it is not alone and there are no monthly or annual payments towards it. So I guess a way to describe it, you correct me if I’m wrong is your servicing of it is deferred to the point where you either a choose to repay what you’ve received, plus that increase percentage in equity or a you sell the property. And at that point it’s still the trigger where you repay what you’ve borrowed. In addition to, again, that percentage in the increased equity in your property.
Yes, exactly. I mean the biggest challenge for us, and, and it’s really interesting because even you with your, you know, huge real estate experience, we’re trying, we’re sort of stumbling, trying to think, what bucket do we put this in? Feels like alone, but it’s not. So that is in fact, our biggest challenge is getting across to people that if you explain to someone in a commercial real estate environment, they go, yeah, yeah, I get, this is preferred equity with a, you know, with an option and you know. But if you, if you then try and apply that to a residential home, then people start stretching their heads because hang on, it feels like it’s alone because I got a cash payment, but you adding the interest up, is it going to you going to take all of my equity? And then we have to explain, okay, well, that’s, it’s, let’s do this bit by bit.
You get the cash lump sum. What are we getting an exchange? So what’s the trade here. So the trade is your house rich and cash poor. Now we’ve got cash or how investors have cash. And we want to be able to benefit from house price appreciation. Now the benefit to us as investors is that you stay in your home. You are the steward of our investment. You will continue to pay the mortgage. You’ll cut the grass, you’ll fix the roof. You’ll paint, you know, the, uh, you know, keep, keep the house in good condition. You’ll pay the property taxes. So you are a brilliant investment for us because we don’t have the expensive collecting rent or repairing the property or managing you as a tenant. But in exchange, what we’re saying is when you sell the property, we settle up at that point. And that’s really what it is.
We’re giving you some cash today. We’re buying the right to participate in the upside of your home. And then we settle up at some point. Now we can settle up by you selling the home so you can decide to sell the home and pay us back through that process. And there’s no restriction when you sell your home. We can’t tell you to do anything, or you can decide at some point, which can be any point during the agreement. You can decide that you want to buy the agreement back. So you simply say, okay, I’ve had the money for a couple of years. I’ve got back on my feet. I can now borrow that money at 2.8, 5%. So I’m going to buy the agreement back and we say, great, well then here are the terms. This is what we agreed. So we get our investment back. There’s been a bit of appreciation, so that’s our return. And so it’s just a different animal. And I think over time, what’s going to happen is more and more people will understand that this doesn’t go into the debt side of the equation. This is the equity bit. So it’s, uh, it’s like a different account and we’re seeing more and more people are beginning to understand that this is a different animal and it has real benefits.
Yeah, I get it. I would almost call it an equity share agreement. You know, there’s a, it’s
It’s gone through so many different names. It’s so, you know, it’s honestly, but you can call it an equity share agreement. And we just sort of decided to call it a home equity agreement, because just to sort of have a starting point so that we can, then when people say, what is a home equity agreement, and then we can begin to explain how it works.
So, I mean, this is maybe a crazy question, but what if someone has no intention of selling the property? You know, they intend to keep it for generations. How do you exit?
I think the issue there it is that it is an obligation and the obligation is in a contract. So it’s a contractual obligation that is protected by a lien on title. So if we get to the point where, you know, the homeowner is breaching their side of the agreement, then we would have a number of the protections that would be available to us as if it were a mechanics lien or a, you know, a first position mortgage lien. So it’s protected in that way. So in other words, there are processes that we can go through as a lien holder, but obviously we’re an equity owner. So what we wouldn’t want to do is do anything that reduces our chances of recovering, uh, you know, the investment, but we haven’t seen any situations yet where that situation has arisen. And I think it’s really because the number of grievances that have been written are there, they’re still in the early stages. So we haven’t done that 30-year life cycle yet to actually figure out what happens at the end of that period. When people start saying, you know, they don’t want to pay, but there’s a lot of existing case law that, that helps us protect the investment.
Yeah. I wasn’t making the assumption that someone didn’t want to pay or had the intention of not paying. I’m just thinking that down the road, someone might decide, well, I want to keep the property, you know, uh, for generations and pass it on down to my kids. And there’s no intention of ever selling the property.
Well, I think what is possible, it is possible to renew the agreements. It’s not ideal because then it becomes expensive. But in that sort of situation, I think really what one would try and do is get that person to buy that agreement back because then they haven’t got that encumbrance of that obligation. So, you know, if that is a situation, but I think really the important thing for us is to make sure that those people are identified at the beginning because we’ve got to make sure the product is suitable for them.
Is there a downside to this? I mean, clearly people have options. They can do a refinance, pull cash out, they can get a home equity line of credit. You know, there are some, maybe a second mortgage, there’s some creative ways to pull equity out and use a granted you have monthly payments, but when we’re looking at the home equity agreement, are there downsides to this?
I think it’s the same as any product. The question is, is it good for you? So if you are able to borrow money at a very low rate and do you have the means to make the monthly payments, then it makes more sense to borrow money than it does to use your equity. But you may be someone that simply doesn’t want to borrow money. So in which case it’s about suitability. So it is a suitable product. If you want to do it, or if you cannot borrow money and have equity. Now, the only downside is that you are sharing in the potential appreciation of your home, but that’s not really downside. That’s just the agreement. Now, some people see that as downside. And some of the objections that we get are from people that say, well, I don’t want to share in the appreciation. I don’t like the idea that when I sell my home, you’re going to take some of that upside. In which case, the answer is fine. You know, no harm, no foul. The product is not for you. So there are no fundamental downsides that will affect people and make them regret that decision. Everything is defined upfront in terms of what the sharing ratio, what the cost of funding’s going to be. And the cost of a home equity agreement is entirely dependent on the value of the home when that agreement is settled.
Yeah. I see that being the main difference with a loan, whether it’s a HELOC or refinance or a second mortgage, and you’re pulling equity out, you can calculate to the penny exactly what you’re going to pay over exact period of time, you know, months or years, you know exactly what you’re into it for and what you’re going to pay for that. Whereas with a home equity agreement, because it’s based on the equity and you have no crystal ball to determine what the property value will be in a year, three years, five years from now, it’s going to be a percentage of that increase. So it might be small. It might be large. You just don’t know because it’s based on equity.
And that’s why it’s so different today. Now, again, going back to commercial transactions where you have shared appreciation mortgages, and again, those types of funding mechanisms, which is a combination of debt and equity, where the loan is repaid, but the lender gets a share of the appreciation as well. And so it’s almost a bit like a mezzanine finance. So those they do exist. And again, really, you can say, okay, if the value of the property is X, the repayment will be Y so you can forecast what the cost of capital will be given certain circumstances. So you’re not sort of, you know, completely in the dark. Obviously what you can’t do is forecast what the value of the property is going to be at that point, but you can calculate given certain scenarios. So in other words, there is clarity about what the cost of capital is if the property sells within the certain range.
So how do you guys determine the value of the property at the time of the agreement? And then at the time of the repayment, is it based on appraisals?
It’s based on appraisals? Exactly. So we use independent appraisal companies. So we use the same mechanisms that lenders do, where we instruct a third-party organization to provide us with an independent appraisal. If you’re buying out the agreements at some point, rather than selling your home, we’ll do the same thing. So we’ll create a value based on an appraised value. If you’re selling the property, we will normally take that valuation as long as it’s an independent sale. So if you’re selling it to your brother-in-law for half of its price, then you know, we’ll probably ask for an independent appraisal at that point.
Sure. Okay. So this is the property needs to be owner-occupied, or can it work on second homes and investment property?
The great thing about this product is it can work with investment properties, rental owner, occupied properties, as long as there is enough equity. You’ll need a little bit more equity if you’re not the owner-occupier, but this is great for people that have portfolios of properties, where they have lots of equity and maybe they cannot borrow more money because they’re up to their maximum debt to income ratios. So this does work with investment properties as well.
Is it a fair question to ask, you know, what the terms of an agreement look like? Just because I’m sure there’s people thinking about, well, okay. That sounds great. It sounds like maybe an easy option, but how does it compare to me getting a HELOC or refinancing? I know we’re comparing apples to oranges. They might both be fruit, but, um, at the end of the day, you’re borrowing in two different ways. So, you know, there’s an analysis that will be done.
But you’re absolutely right. It is. You’ve got, you’re comparing debt to equity. Now, remember the cost of debt in a commercial situation is going to be very different to the cost of equity. So we must keep those two things clear when we’re doing this because there’s also, there’s more risk involved in an equity transaction than there is in a debt transaction. And remember there are no monthly payments. So there’s lots of benefits to an equity based transaction, the basic mechanism. And if we look at a 30 year program, the mechanism is we will invest, or our partners will invest a certain amount of capital up to a maximum loan to value. Normally the maximum loan to value is around 20 to 25%. And again, that depends on who the investor is. So if we take 20% is the figure. That means that the maximum investment is 20% of the current value of your home.
So if you’ve got a $500,000 home, the maximum investment would be a hundred thousand dollars in order to qualify for that. If we take your existing mortgage and any other loans that are secured on that property. And we add that to the 20% investment that combined figure must be less than 70% of the value of your home. So that means if you wanted us to invest 10% or $50,000, then that means that you must have no more than $300,000 by way of your mortgage. So that if we add 300 to the 50, that’s 70% of the value of your home. So couple of goalposts there, first one is maximum combined lean to value and the second sort of market it’s the maximum investment.
So it sounds like the maximum combined loan to value is 70%, is that correct?
Now, there are other programs where that can go up to 85% and those tend to be for the shorter duration contracts. So you’ve got different flavors. Some contracts run for 30 years and they work in, they calculate how the return is in one way. There are other programs that run for 10 years and they have a different way of calculating how much the returns should be to the investor. But the general way of calculating it is, is a share of the appreciation. So in other words, when you get, when you settle the agreement, let’s have our initial investment back, and then we calculate a share of the increase in value. Now, there is a risk that if the property goes down in value, significantly, there is a risk that the investors will get back less than they’re invested. So one of the other big differences is if the property does significantly depreciate for whatever reason. And we now, I think we know that predicting the future is a, a fairly risky business. So if it does depreciate for any reason, this agreement does mean the investor has that risk of loss, as well as the list, uh benefit of the potential harm side.
Yeah. Just to be clear for everybody listening, when you refer to investor here in the last two minutes, it’s not the audience listening to this as the investor, because they look at themselves as investors, you’re referring to those people behind you that are lending the money to the people, listening to the show, your investors are the people that are making that.
Yes. Yeah, exactly. Well, they are, they’re buying their group. They’re the investors. Now, typically the investors in home equity agreements are pension funds, hedge funds, endowment funds, long-term capital sources that have a specific allocation to asset-backed investments that have a long-term investment horizon. So for those guys, these are great investments because they’re diverse. In other words, they’re not concentrated in large investments, they’re managed by the owner occupiers. So they’ve got that low cost of servicing, and they’re also, you know, their, their investments in potential areas of high house price appreciation. So it’s a very good, scalable investment for the investors. Now, our plan over the next six to 12 months is to make this type of investment accessible to non-institutional investors. In other words, primarily accredited investors. And then further down the road using certain exemptions, we intend to offer this type of investment opportunity to non-accredited investors. So, you know, this is something we’ve been working on for three years. First of all, let’s originate. These transactions let’s work with homeowners. The next part of the development is let’s open up this type of agreement because there’s $18 trillion worth of equity in single-family homes. It is a vast untapped real estate asset class. And I think as more and more homeowners become aware of the ability to unlock equity without taking on more debt, that creates more and more opportunities for investors to diversify into other residential real estate asset class.
Yeah. And that’s where I see the benefit. If people have the ability to pull that equity out and reinvest it to grow their portfolio, increase their cashflow, you know, further leverage and maximize their ability to create wealth through real estate. Then this makes a lot of sense. It may not be the first choice, you know, because you have other tools like refinancing and you know, the, not as common second mortgages, but you have the ability to tap into equity to do that. But if those aren’t an option, this becomes, you know, an option for sure.
And also the two are not mutually exclusive. So as long as you don’t breach that maximum combined lien to value, you can mortgage your property and have a home equity agreement. So you can use both of those together.
How has this recorded if at all, how has the document, whatever document that might be recorded in public records to protect you as an investor in this recording,
It’s a lien, so it’s recorded it depending on the city, but the way it’s structured is similar to a deed of trust. And there was, it uses some of the language of a deed of trust. Um, but it’s referred to as a performance deed of trust. In other words, it’s, there’s obviously no loan involved. So there’s no, you know, the language is different there, but it’s recorded in the same way that a normal deed of trust would be recorded. Um, so that protects the investor because when the home goes through the sell process, as a lien holder, they’re going to be in line to be paid before the funds are distributed to the homeowner.
So it’s much like a, a contractor’s lien.
It is or any other lien. Exactly. So, um, and the lien holders, you know, a part of the sales or part of the escrow process. So they’ll get paid first. So that protects the investor from the homeowner, accidentally selling the home without telling them,
Okay, so this is foreign to some people I’m sure other people have heard of this, but for some people, this is probably very foreign and they might be thinking, well, you know, this doesn’t sound real or maybe it’s too good to be true. How do you address that concern or question?
It’s a common question. And the way we address it is to explain what’s in it for the investor. So in other words
Which investor you, the people behind you funding it, or people listening to the show.
The people that are funding these home equity agreements. So if we look at this again as a trade, the trade is you’re the homeowner. As I mentioned earlier, you’re house rich and cash poor. The investor has capital and wants to invest in real estate. So the trade is in exchange for their capital. You’re giving them an opportunity to invest in your equity. So to combat the question is too good to be true. Um, you have to explain what’s in it for both people. Now what’s in it for you as a homeowner, you get cash it’s tax-deferred. So there’s no immediate capital gains or income tax obligation. You can spend the money on whatever you want. And you’ve got up to 30 years to settle the agreement with no monthly payments. Now for the investor, they’ve got an investment in your property. That’s protected by a lien where they will share in the increase in value of your property.
And we know that over time properties are more likely than unlikely to appreciate over a 10, 20 or 30-year horizon. So we know that the investors are very likely given historical performance to make a good return on their investment. So once you explain how both sides of the trade works, then the question moves from being is too good to be true, or why would I do this? It normally ends up, well, why wouldn’t I do it? And again, the way that that is answered is if you don’t want to share in some of the increase in value, it’s not for you. If you don’t mind sharing in some of the potential increase, then this is, you know, it’s a great solution for you.
Interesting. Okay. What else would you like to share that I haven’t asked you? I think we’ve covered the nuts and bolts of this.
I think really the important thing is everything is very transparent in terms of what the terms are. And again, we understand this is not for everyone. There are some people that can borrow money that are used to loans, and they see this as something that’s interesting, but possibly not for them. There are other people that really like the idea of tapping into debt-equity with no monthly payments and then getting on and investing that money, knowing that you haven’t got that, you know, that sort of sword of Damocles, that you have to make some sort of interest payments. So, you know, it’s not for everyone, but there’s 15 million homeowners that have more than 50% equity in their homes. And as I said, there’s trillions of dollars out there. So we know it’s a huge market. Um, there’s nothing that’s hidden. There’s nothing that is untoward.
Everything is very transparent. You can make a clear informed decision from the beginning as to whether or not this agreement is for you. There is a fee that is charged as a once off fee. That is between three and 5% of the capital that is invested. So there are no hidden fees. Everything is upfront. There are no servicing fees, no monthly payments, no ongoing fees. And really the agreement is pretty clear and gives you the ability to make that informed decision, whether or not it’s something that works for you, you know, and the average size of a transaction is just over a hundred thousand dollars. And for many people, that’s a very useful sum of money to deal with because it immediately increases their cash position.
Yeah, for sure. Well, that sounds, and you kept mentioning homeowners. I just want to make sure that people understand and are clear that this applies to real estate investors as well to have income-producing property, not just your principal residence.
Yeah, owner-occupied and non-owner occupied. So rental properties, investment properties, and yes. In any sort of residential home, single-family residences multi-family residence is up to four units. And we work with condos as well. So it’s not just single-family as well.
Matthew, this is very interesting. I’m sure some people are going to want more information, where can they learn more? Or where would you like people to go to find out more about you and what you’re doing?
Well, we try and put everything on one place, which is the website. So it’s QuantmRE and that’s QuantmRE.com. And so we have a downloadable guide, free guide, but we have a calculator there. We have all of our contact details. Um, so, you know, reach out to us. Uh, we try and be as responsive as possible. In other words, we’ll try and get back to you as soon as we can. If you have any questions we’d love to hear from you. So just, you know, contact us through the website.
Awesome. Well, Matthew, thank you for taking some time to come on the show today and explain how the, uh, equity share. What do you call it? Is there a name for this?
I do know. It’s, I think equity share is great. I think it’s, um, uh, we, we call it a home equity agreement. It goes by many names, but, um, I think you’ve absolutely, uh, sort of nailed it when you call it an equity share agreement. That’s exactly what it is. So we can stick with that if you like.
Whatever you want. All right, Matthew, we’ll thank you for taking the time to come on today. Appreciate it.
Thank you. The pleasure’s mine. Thanks for having me on Marco.
Thank you. And for everybody else, listening today, remember to download your free report, the ultimate guide to passive real estate investing available on our websites, get your free strategy session. If you’re thinking about real estate investing, of course, everything Matthew was just talking about is very interesting. Maybe look into that as well, because it may be an option for you today or down the road. If you have any questions about real estate investing, be sure to reach out to my team or myself, and we’ll answer those on upcoming episodes. Remember to subscribe. Don’t miss another episode, share the show with like-minded people. Thank you for listening, and we will see you on our next episode.
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