#81: Home Equity Contracts
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Today's guest founded a company that provides a really interesting approach for homeowners to unlock the equity in their homes. And coming soon, investors can invest through this platform as well. The overall concept is called Home Equity Contracts.
Matthew Sullivan is the CEO and founder of QuantmRE he's a serial entrepreneur. He's also the founder and president of a Crowdfunding real estate company called crowdventure.com. He's the author of headfirst, a roadmap for entrepreneurs, and the host of hooked on startups podcast.
Matthew is a man on a mission to help homeowners get cash from their equity with no interest or monthly payments. He has helped hundreds of homeowners use their home equity to pay off expensive credit cards, remodel, pay college tuition fees, etc. without taking on extra debt.
In this episode we’re discussing…
· [2:34] His background and his beginnings as an entrepreneur
· [3:32] How he started and launched QuantmRE
· [4:44] What means House Rich and Cash Poor
· [7:15] What are Home Equity Contracts?
· [9:57] How exactly works and the advantages as a homeowner (differences from a loan) and to the investors
· [13:01] The agreements and flexibility it provides to the homeowners
· [18:51] The process and how long it takes to get the contract set up
· [20:46] The type of properties they work with and the ones they don´t
· [23:38] How this industry is growing and the huge future market they could get
Matthew’s Top Tip’s
· “We sort of referring to that as being house rich, but cash poor. In other words, okay, I'm wealthy, I've got half a million dollars worth of equity in my home. But the challenge for me is, I can't spend any of it, you know, I can't go down to the local supermarket with my home equity and spend that.”
· “Now, until Home Equity agreements came along, pretty much the only way you could unlock that would be to borrow money. And that takes you back into that sort of spiral of monthly payments or, you know that that additional burden of debt.”
· “So, it's not a tenancy in common, there's no transfer of ownership, that's one of the key things to get across, you're not selling some of your home”
· “The way that the investor gets paid, is if your house goes up in value when you sell it, or if you decide to refinance the agreement. When you do that, if the house has gone up in value, then they take a share of that appreciation instead of charging interest. So, their return is an equity return as opposed to being an interest payment”
· “The people that are interested in these agreements are interested in long term appreciation of a real estate asset. So typically, the investors that we see today are pension funds, endowment funds, multifamily offices that have a long-term investment horizon. We plan on creating a secondary market, and we plan on creating more accessibility for smaller investors”
· “These Home Equity agreements provide a great investment that satisfies that credit criteria, because it's asset-backed, it is not inflation-proof”
· “If you miss an interest payment on a loan, the lender has the right to foreclose and potentially take your property back. It's that fear that the bank is always there, and you're just sort of a few months away from losing your house, absolutely cannot happen in our situation with a home equity agreement. Because we have no right. If there are no payments, so you have nothing to miss.
· “Depending on the equity that you have, we can be incredibly flexible. So, we can provide you with a cash lump sum with no monthly payments, even though you have a very poor credit score, and may even be in foreclosure. So those situations do not prevent us from enabling you to unlock your capital”.
Resources from Matthew
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Mike Stohler What if you could be doing something smarter with your money that creates income. Now, if you're wanting to get ahead financially, and enjoy greater freedom of choice, if you want a comfortable retirement, and you know you'll have more choices, if you can do more with your money. Now, if you've wondered who else is creating ways to make their money work for them, and you want actionable ideas, honest pros and cons, and deal flow. Welcome to the Richer geek podcast, and work here helping people find creative ways to build wealth and financial freedom. I'm Mike Stohler, and in this podcast, you'll hear from others who are already doing these things, and learn how you can too.
Welcome back to the Richer geek podcast. This is Mike. And on episode 71. We shared how I'll be transitioning to hosting the podcast. Many times episodes are recorded several months in advance. So during this transition, sometimes you'll hear hybrid episodes. This is one of those and we hope you enjoyed today's episode.
Nichole Stohler
Hey, everyone, welcome back to the richer geek podcast. Today's guest founded a company that provides a really interesting approach for homeowners to unlock the equity in their homes. And coming soon, investors can invest through this platform as well. The overall concept is called Home Equity contracts. And I'd never heard of this before. So the interview was actually a really great learning experience. Matthew Sullivan is the CEO and founder of quantum re he's a serial entrepreneur. He's also the founder and president of a crowdfunding real estate company called crowd front venture.com. He's the author of headfirst, a roadmap for entrepreneurs and the host of hooked on startups podcast. Now in today's show, we're going to focus specifically on quantum re and how those Home Equity contracts work. Let's jump into the show. Matthew, welcome to the show.
Matthew Sullivan
Go Thank you for having me.
Nichole Stohler
I am really excited to talk about this topic. Because as I was just mentioned to you before we actually started recording, I've never heard of Home Equity contracts before. So we will get into that. But first, before we do that, tell us a little bit about your background and how you came to be in this space.
Matthew Sullivan
And for the sake of your listeners, I'm going to give you the short version here. But I'm an entrepreneur, so I i've and that's something that I wear. It's a it's sometimes it's a burden sort of announced that you're an entrepreneur, because actually what it means is that you're sort of congenitally unemployable. But I've been a I've run my own businesses for, you know 25, 30 years. And I've been very much involved in three key areas, which is finance, and software and technology and telecommunications to a certain extent. And when I came to the US, which was about seven years ago, one of the first things I did was get involved with crowdfunding, which was when the JOBS Act first came out. And really this asset class, which is the equity in people's homes, is one of the really interesting asset classes that I stumbled across. Really, when I first started my real estate crowdfunding company. So it was something that was like a bee in my bonnet for a number of years. And the you mentioned earlier that you'd never heard of it. Well, that was the problem because no one had heard of Home Equity contracts or Home Equity agreements, including finances and capital sources. So it was really quite early, then. But you know, two or three years ago, it really began to get some momentum. And so that's sort of coincidentally the same time that I launched QuantmRE.
Nichole Stohler
And I think that the timing is so appropriate for this conversation, too, because there has been a wall and I'm going to speak about Arizona where I am, but the appreciation, the equity that people have in their homes, it's just continued to grow over the past 10 plus years. So there are a lot of people kind of in this position. So tell us a little bit because, you know, one of the things that I think that you kind of talk about or share is a little bit about people being house rich and cash poor. What does that mean?
Matthew Sullivan
What it's funny people's view on home equity is a very interesting view which I think has been conditioned because of years and years of having Single option to unlock it. So Home Equity can only be unlocked by selling your home, or by borrowing money. So if you're one of those people that doesn't want to borrow money, or you can't borrow money, because for whatever reason you don't fit in the box that the bank suggests you do. In other words, you don't have W2 income or you don't have, you know, the right credit score, even though you've got potentially hundreds of 1000s of dollars locked up in your equity, if you can't borrow money, you can't access it. So in that sort of situation, we sort of refer to that as being house rich, but cash poor? In other words, yes, okay, I'm wealthy, I've got half a million dollars worth of equity in my home. But the challenge for me is, I can't spend any of it, you know, I can't go down to the local supermarket with my home equity and spend that. So, it's a concentrated asset, which means it's not diversified across a multiple, you know, portfolio, it's in one investment, it doesn't throw off any cash. It's not liquid, it's not financial, which means I can't trade it for anything, it just sits there. And obviously, it goes up, it accrues in value as house prices appreciate. But it's not much used to me unless I can actually get my hands on it. Now, until Home Equity agreements came along, pretty much the only way you could unlock that would be to borrow money. And that takes you back into that sort of spiral of monthly payments or, you know that that additional burden of debt.
Nichole Stohler
On the other thing I'm thinking about, and that's why I really am excited about this topic is a strategy that is often talked about of buy rehab, rent, and then refinance properties. And people use this as a foundation to grow their rental portfolio in single family homes. And sometimes, sometimes that process can be challenging if, you know, like you said, you don't qualify, or, you know, there's there's a lot of pieces to that. So tell us, you know, what are home equity contracts?
Matthew Sullivan
Well, they aren't an option agreement in their very purest sense. So I tell you a number of things that they're not, first of all, so they're not a form of loan. They're not a form of debt finance. So in any commercial property transaction, you get multiple layers of financing, which comprise of primarily comprised debt, and they comprise equity funding. So in a commercial transaction, you've got Junior debt, you've got senior debt, first position, second position, loans, mezzanine, which is sort of a bit of equity and a bit of debt, then you've got on the equity side, you have preferred equity, you have equity, you have all sorts of different mechanisms. But for the residential homeowner, you've got debt. And that's it. So the only funding mechanism that's available to someone who owns their own home, is the ability to borrow money in various shapes. And that could be a reverse mortgage, it could be a cash out mortgage, a second mortgage, home equity line of credit, they're all the same thing, but slightly different flavors. So Home Equity agreement, is an option agreement where we do not transfer ownership of the property. So it's not a tenancy in common, there's no transfer of ownership, that's one of the key things to get across, you're not selling some of your home, we're not going to come knocking on your door demanding to live in your spare bedroom. What happens is, the option agreement says that in exchange for a fee, which is the capital that you get, as a homeowner, the investor buys the right to participate in some of the potential future appreciation of the home. So the way that the investor gets paid, is if your house goes up in value when you sell it, or if you decide to refinance the agreement. When you do that, if the house has gone up in value, then they take a share of that appreciation instead of charging interest. So their return is an equity return as opposed to being an interest payment.
Nichole Stohler
Okay, all kinds of questions that are immediately coming to my mind, because I know that on your website, you have you know, both sides of the transaction, you have the homeowner and then you have the investor side. So if you're, you're on the investor side, the immediate thing I'm thinking is how, how long are your funds tied up? What is the timeframe? Is there some kind of agreement that the homeowner would seek to sell the home in 10 years or something like that, or how does that work?
Matthew Sullivan
And these are great questions because obviously as we get into the detail here, what we're creating with a home equity agreement. And let's just put things into context. So last year, we estimate around, you know, five $600 million was invested in the US Home Equity agreement marketplace now, this year if you if we haven't have had COVID. And how many times have we heard that, but if we hadn't have had COVID, we think that this year, about a billion dollars plus would have been invested. So the important thing to get across is that this is something that has momentum now. Now, the the real estate agreement creates or the Home Equity agreement creates a real estate asset. And that asset has a return profile, based on the appreciation of the home. So it's an asset that is secured by a lien on the homeowners property. So when you sign the Home Equity agreement, we put a lien on your property, which protects the investment, it's not a loan, but it says the same sort of thing. So in other words, you can't sell your home unless you settle this home equity agreement first. But the people that are interested in these agreements are interested in long term appreciation of a real estate asset. So typically, the investors that we see today are pension funds, endowment funds, multifamily offices that have a long term investment horizon, where the investments that they're buying, and there's only a very small allocation of their funds need to go into these types of investments, with the investments, these Home Equity agreements provide a great investment that satisfies that credit criteria, because it's asset backed, it is not inflation proof. But historically, house prices have always outperformed inflation. If you look at any 1, 10 year, sort of analysis, and our website once your other question, we plan on creating a secondary market, and we plan on creating more accessibility for smaller investors. Because if you can trade these agreements in the same way that you can buy and sell fractions of a mortgage, then that means it doesn't matter so much that these have potentially a long duration, because you can buy and sell them. But primarily right now, there's an enormous amount of interest from large institutional capital sources that want an inflation hedge secured by a diversified pool of residential real estate.
Nichole Stohler
Okay, got it. And what are the differences then between them and I can already start to see the difference between this and refinancing. But it's talk us through some of the nuances like again, very curious about term. Is there some kind of term?
Matthew Sullivan
Again? Yeah, so because it's an agreement, all of these things that you talk about, we have specific answers to So in other words, yes, they come in two flavors, 10 years and 30 years, most of the agreements that we work with are 30 year agreements, that means the homeowner has up to 30 years to settle the agreement. And they can do that by selling the home, or by simply buying back that agreement. And during that process, or during that period, rather, there's no pressure from us, and we cannot force the sale of the house, unless there's been a significant breach of the terms of the agreement. In other words, you fail to pay your mortgage or the houses falling apart, or you know, something serious like that. But there is unlike a loan. So this is where the differences start to kick in. If you miss a an interest payment on a loan, then over time, the lender has the right to foreclose and potentially take your property back. That's why people don't like debt secured on properties. It's that fear that the bank is always there, and you're just sort of a few months away from losing your house, absolutely cannot happen in our situation with a home equity agreement. Because we have no right. You know, if you you know, there are no payments, so you have nothing to miss. And the other big difference is the capital that you get, you're free to use it on whatever you want, in many cash out refinance situations, and particularly things like reverse. Reverse Mortgages. You know, the banks determine what you spend your money on. If you're raising capital to improve your home. You have to prove to the bank that you have spent the money or you're going to spend the money on that. In the case of a reverse mortgage. The bank may insist that you bring your house up that you do certain repairs before the reverse mortgages is completed. A lot more flexibility from our part. And most importantly, really the biggest differences. Aside from the fact that there are no monthly payments ever, which is a huge difference is the way that we underwrite these agreements. Because we're not lending you money, we can be much more flexible about your income. And also, we can be much more flexible about your debt situation. So in most cases that we deal with, people have been turned down by the banks, because their credit score is too low, because their income is non standard. In other words, it's 1099 versus W2, or it's a combination. And their debt to income ratio is too high. Depending on the equity that you have, we can be incredibly flexible with all of those criteria. So we can provide you with a cash lump sum with no monthly payments, even though you have a very poor credit score, and may even be in foreclosure. So those situations do not prevent us from enabling you to unlock your capital.
Nichole Stohler
Do you see people then they take a talk about foreclosure, so then they would take the funds and they pay off?
Yeah,
Matthew Sullivan
Yeah , if they have enough equity, because that, you know, the two have very different accounts. You know, if you're in foreclosure, you obviously can't borrow more money. But there are situations where we are able to unlock the capital, working in conjunction with the bank. So that that capital immediately goes to restore that homeowners position. And these are, these are situations where the homeowners literally have, you know, most of their house paid off. But for some reason, and we all know what those situations are, they come out of left field, they've been unable to meet their their monthly payments on their mortgage, or perhaps even on their property taxes.
Nichole Stohler
And then you talked about the lump sum, is there some kind of cap or criteria that you're looking at, because if you were to compare to mortgage or Home Equity, there's a, you know, 80% loan to value, or what are those rules
Matthew Sullivan
Exactly the same theory behind that, in other words, what we want to do is maintain the homeowner, make sure that they can take that they maintain that feeling of ownership. And so the most that we will ever invest is depends on, you know, the location and the home. But I would say the most is normally 25%. In most cases, it's around 20% of the value of the home. So, if you have a $500,000 home, the most we will invest will be $100,000. Now, the other thing is the, we refer to it as the combined lien to value. So if we take your existing mortgage, and any other secured debt that you have against the property, and if we add that to the amount of investment that we make, that figure has to be less than 70%, and in some cases 75%. But in most cases, it has to be less than 70% of the value of your home. So again, if we take that $500,000 example, if you want to be able to unlock some money, you need to have less than $300,000 mortgage to be able to give you some room to be able to, you know, for us to be able to invest as well.
Nichole Stohler
Okay, and what does the process look like? Let's say someone contacts you and says, Hey, I'm interested to understand more, how, how long does it take? And do you do an appraisal? What does all that look like?
Matthew Sullivan
The time period is normally four to six weeks. And that really can be a lot quicker, depending on how quickly the homeowner returns all the paperwork. So a lot of it is down to the homeowner, sort of, you know, scratching and trying to find that insurance certificate or, you know, trying to find their latest mortgage payment. And the process is very straightforward. It's online. And but you know, there are a number of humans involved in the process. So, first of all, we make sure that we speak to the homeowner and there is a process of primarily education to explain as we're doing today, how these work, why they're different to a loan, how we can possibly have the ability to provide you with cash, but we don't want monthly payments and how can that possibly be? So it's that understanding of it's an instrument based on a different part of the value of your home and it works differently. And the process is primarily online after that. So all of the application is online, the submission of documents is online. We do send an appraiser out that appraiser is instructed through an independent appraisal management company so We don't get to pick and choose who the appraiser is. So that maintains that independence. And the agreement is then set Finally, on the appraised value of the home. And all of the multiples all of the sharing ratios are calculated based on that. And so you as the homeowner, again, in most cases, you don't have any upfront payments, we normally take the burden of paying for the appraisal on the basis that it will ultimately go through. And typically, as I said, it's four to six weeks for that entire process to happen.
Nichole Stohler
And then Are there any rules or policies around secondary rental properties versus primary homes?
Matthew Sullivan
Yeah, I mean, it's we're very, we're expanding the types of homes. So we work with single family homes that are owner occupied, that are also rental properties. We also work with multifamily offers multifamily properties, and whether up to four units. And we also work with certain condos. So it's not just single family homes. But the good news is if you are a landlord, and you have a number of properties, then we can possibly work with you as well. And a couple of issues, or a couple of caveats. We can't work with properties that are owned by LLCs, or owned by other non natural persons, such as irrevocable trusts are other types of corporate structure. So we can only work with you, if you own the property in a person's name, as opposed to a corporation's name.
Nichole Stohler
That could be a challenge for the rental properties I was thinking about. But it Yeah, interesting. But
Matthew Sullivan
yeah, I think that but that's an evolution, that's that's where we are today. But that doesn't mean to say that's where we're gonna be tomorrow. So I think over time, as more and more investment comes in. And the reason for that, primarily, is that one of the sort of criteria for the agreement coming to an end, is when the last surviving signatory to the agreement passes. Now, whether an LLC or another non natural, you know, a corporation, they have a, you know, a lifetime, that doesn't naturally come to an end. So that's one of the reasons but again, this industry is enormous, there's $18 trillion worth of equity in single family homes in the US, and over 15 million homeowners have 50% or more equity. So the amount of capital going into this particular piece of that real estate asset class is growing phenomenally. So over time, I think the applications for corporations is going to come under that umbrella as well.
Nichole Stohler
I think it's, it's so interesting. And you've talked about like that, that piece that might cut that will come as you believe over time. And then the other piece would be secondary market and enabling investors to invest in this equity. If you're not part of a pension fund or a family office, I think that could be very exciting as well. Because I do look at and say, okay, the the bur strategy, so to speak, could be really interesting, in this dynamic where you've got, you know, a couple of single family rental properties. So those will be interesting things to keep an eye on, as your company does more, or is it kind of an industry regulation thing that,
Matthew Sullivan
then it's really just the, it's just, we're at an early stage, there's only five companies that are in this space right now. And, you know, four of those five companies are sort of three or four years old. So it's a very, very young industry. So it's a very young industry, but its enormous, it's very similar in some respects to the mortgage industry, when it was in its very early stages. And when everyone was sort of finding their feet, and you had that sort of initial conservative approach, really, because you wanted to find out, you know, where the wrinkles were, or whether the speed bumps were. And, you know, Home Equity agreements have been around for almost a decade now. So there's an enormous amount of experience that has been gained over that period. And so this is absolutely I would best describe it as we're sort of page 25 of a 500 page novel. So it's very much at the beginning. Not you know, not just in, in single family homes, but just dealing generally with the equity in residential homes.
Nichole Stohler
It's such an interesting concept. I love that it's kind of you know, early stage startup type of piece of the industry. You talked about the size of you know, all the capital that will actually all the funds that are amazing In a home equity, and so it's really, really interesting to learn more from you today. Tell us where can people get in touch with you and learn more on their own?
Matthew Sullivan
Well, we have our website, which is quantum, Ari QUNTMR ri.com, there's a calculator there where you can put your address in and give us an indication of what your current mortgage is. And that that gives you a rough idea about what you may qualify for. There's also, you know, downloadable guide that's free. There's all of these, you know, videos and podcasts and other material that's there to give you some sort of background. So everything is there, all the contact details, you know, feel free to reach out any which way you can, and we would be delighted to to help you out.
Nichole Stohler
Awesome, thank you so much for joining us today, Matthew.
Matthew Sullivan
Thank you. The pleasure was mine. Thank you.
Mike Stohler
Thanks for tuning in to the richer geek Podcast, here we're helping others find creative ways to build wealth, and financial freedom. For today's show notes, including all the links and resources from our show, and more information about our guests, visit us at www. Richergeek.com slash podcast. And don't forget to jump over to Apple podcasts, Google Play Stitcher, or wherever you get your podcasts and hit the subscribe button. share with others who could benefit from listening and leave a rating and review to get the podcast in front of your eyes. I appreciate you and thanks for listening.
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ABOUT MATTHEW SULLIVAN
Matthew is the CEO and Founder of QuantmRE, serial entrepreneur, Founder and President of crowdfunding real estate company crowdventure.com, author of “Headfirst: A roadmap for entrepreneurs” and host of the Hooked on Startups podcast.
He also spent a number of years working alongside Richard Branson and the Virgin corporate finance team in London, UK, where he was appointed a director and Trustee of Virgin’s London Air Ambulance
After studying Law at Birmingham University, he pursued a career in finance and stockbroking. He then chose an entrepreneurial path and founded Europe’s first internet billing application service provider. Over the years, he has founded and led companies in the United Kingdom, Australia, the United States in the finance, telecommunications, technology, and real estate sectors.
Matthew Sullivan is a man on a mission to help homeowners get cash from their equity with no interest or monthly payments. He has helped hundreds of homeowners use their home equity to pay off expensive credit cards, remodel, pay college tuition fees etc. without taking on extra debt.