Matt Sullivan 0:00
And our objective our plan is to make this asset class tradable. And the way that we intend to do that, which is probably enough, our original business plan three years ago, was to make Home Equity accessible investable and tradable. So what we built is an exchange that will enable these Home Equity agreements to be fractionalized and traded through a secondary market structure. Now, there’s a lot of regulatory requirements that we will need to satisfy to be able to do that. So that’s work in progress at the moment. So to answer your question, that is an opportunity for accredited investors to buy into this asset class, and to buy into Home Equity agreements that we originally
Announcer 0:45
Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant We are here to learn from the experts.
J Darrin Gross 1:05
Welcome to commercial real estate pro networks, CRE PN Radio
Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.
Today, my guest is Matt Sullivan. Matt is the founder and full time Chief Executive Officer of quantum Mari, a serial entrepreneur. He’s the founder of crowd venture.com, and a co founder of two real estate funds. And in just a minute, we’re going to speak with Matt about how a home equity agreement works and what it can do for you. But first, a quick reminder, if you like our show, CR e pn radio, there are a couple things you can do to help. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see I handsome our guests are Be sure to check out our YouTube channel. You can find us on youtube at commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest, Matt, welcome to CRE PN Radio.
Matt Sullivan 2:26
Thank you very much Darrin, thank you for having me on.
J Darrin Gross 2:29
Well, I’m so looking forward to our conversation today. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.
Matt Sullivan 2:39
I think best way of describing it is serially unemployable congenitally unemployable? So I’ve been a entrepreneur since my sort of early 20s, which is an astonishingly long time ago, it seems. But I’ve I’ve been involved in primarily telecoms, technology, and finance. And I moved to the US seven years ago. And my I definitely wanted to get involved in something that I’d been interested in for many years, but never really got involved with that was real estate. So when I came over here, and I really sort of started by combining my technology and financial backgrounds and launched one of the early real estate, crowdfunding companies, and sort of really from there, we developed and moved into real estate funds. And three years ago, I set up quantum Irie, which read the room. The reason for that was we came across this incredibly interesting asset class, which was the equity in single family owner occupied homes. So I’m not I’m not sure that I’ve sort of seem to be all over the place there. So I’m not sure that’s a background.
J Darrin Gross 3:57
That’s that’s a good intro or a good kind of a introduction to you and your background there. And let’s get into it here. The Can I think I mentioned you just before we get started, when I was preparing for this, it first glance, I was under the impression that this was basically a home equity loan kind of a program. But as I looked on your website, nanog I came to realize this is clearly different. Yeah. And so maybe the best way to kind of get into this if you can kind of describe for us what quantum Ari is and how the how the equity agreements are different than like a an equity or home equity
Matt Sullivan 4:46
loan. Sure. Great. And it’s funny you say that because that’s, that’s almost exactly the way that we start. All of the discussions that we have with homeowners who are looking at this as a potential funding option. So the problem that we solve, if we start there is, if you’re a homeowner, and you have equity in your home, the only way that you can access that equity, which is your wealth, is to go deeper into debt. So that is by way of a home equity line of credit, or a mortgage or a reverse mortgage, or some sort of cash out refinance. They’re all debt products. So most of those have monthly payments attached of some form. So for those people that cannot qualify for loans, it may be that their credit score has decayed to the point where they don’t qualify, maybe they don’t have income, they could be retired, they could have income that doesn’t satisfy the bank’s, W two requirements, there’s all sorts of reasons why they may not qualify for a loan, the problem they have is that they’ve got all of this wealth sitting there, and they can’t access it. So we solve that problem by way of a home equity agreement, which is not a debt product. So the best way to describe this is to describe what it’s not. So it’s not a debt product is not alone, it’s not a reverse mortgage, it’s not a line of credit, our investors share in some of the potential appreciation of your home, rather than charging you interest. So the way that the investors get paid, is if your property goes up in value, when you sell your home or when you buy back or, or, or terminate the agreement, then they will get back their original investment class a share of the increase in value. So that’s, that is the return on investment that they get. And in exchange for that you as a homeowner get a cash lump sum, that is tax deferred, for up to 30 years with no monthly payments. So because it’s not alone, there’s no monthly payments. And you can use the cash that you get for any purpose. And because it’s not dead, you can use it to pay off debt, like repaying, or paying down credit cards, or paying off your mortgage. Many people use it to invest in other cash flowing investments. So you can diversify out of your home equity into other types of investments which have a monthly yield or monthly cash flow without having a monthly cost associated with that.
J Darrin Gross 7:40
This almost sounds like and it kinda reminds me It’s been a while since I’ve dealt with but almost like factoring. Like, you’re taking something you you have, but in order to give cash or you’re trading it,
Matt Sullivan 7:54
yes. What it is, it is exactly I mean, factoring is effectively the discounted sale of a future receivable. So when I was if you have an invoice from someone, or from someone that’s likely to pay you, then you can sell that invoice for a discount. So that invoice, that receivable is an asset, the equity in your home is an asset. And so the two are very similar in that respect. And so what we’re doing, and you’re absolutely right, it is similar because we have investors that realize the value of your equity. But the difference is with an invoice, an invoice has a fixed amount of value. The great thing about real estate is over time, in most cases, it does appreciate. So what the investors have is the opportunity to buy into the current or the present and the potential future value of your home at a discount. So that gives them the return that they want. And again, the balances the the other side of the trade is the same with factoring, you get the cash today that you can go and do something with it, the homeowner gets a cash lump sum. And as I said before, there’s many uses that they can put that cash to because it’s not debt.
J Darrin Gross 9:15
Yeah. I mean, conceptually, it makes sense. I you know, I love the fact that it’s not debt. But you would you have you’ve traded your your equity, yes. for cash. And then in the future. I’m kind of curious to understand more about how the the future value is treated. Is it is it? I would assume because if there’s no payments, that the the equity over time is heavily weighted towards the investors as opposed to the homeowner who got the cash today?
Matt Sullivan 9:54
Yeah, yeah, yes. Well, the the equation really is defined from the outset. So from a homeowners perspective, they have complete transparency and clarity of what that calculation mechanism is. Two very important points. First of all, we have no claim over your current equity. So it’s very different to a reverse mortgage in that respect, where as your debt increases over time, it can eat into your existing equity, these Home Equity agreements have a share of the future looking appreciation. So obviously, the investors want to get back their initial investment. But the equity portion really is just, it’s forward looking. So if the house goes up in value, then the investors will get a share of that increase in value. And the second part of the answer is, they get an augmented or a magnified share of that increase in value compared to the amount of the value of the home that they invested. So as an example, if an investor invest into 10% of the current value of your home, they don’t just get 10% of the increase in value, they will most likely get 30, potentially 35% of that increase in value. So to answer your question, they get to balance their risks, they get a bigger share of the upside. Right,
J Darrin Gross 11:31
right. No, it’s interesting. This is a concept in a different way. And again, I think the the traction just from just, you know, a little bit of a song, what I just heard you say would be the you’re not required to pay it back. Is
Matt Sullivan 11:48
that right? Well, that’s right. Well, it’s not alone. So there is an army, there’s no monthly payments, correct? Exactly. So that there’s absolutely no obligation, the agreement is protected or represented by lien on title. So it is protected there. So it’s very similar to a trust deed in that respect. So will will normally sit in second position. And these agreements run for various different durations. So there are 10 year agreements, and 30 year agreements, the way that the share of the equity upside is calculated, varies depending on the duration of the agreements. But that’s, it’s all based on getting a share of the value of the home at a slight discount. And the as you’re absolutely right, the benefit to the homeowner is that there are no ongoing costs, charges, payments, fees, interest rates. So the cash they get can be put to use without having that other side of the balance sheet, which is that sort of monthly payment.
J Darrin Gross 12:55
So a couple thoughts. One is just underwriting from your standpoint. You mentioned a couple of of, you know, types of people that may, this may be a good opportunity for they don’t have a job or they’ve got the equity, but they don’t have the other things that a traditional lender would be looking for. Can you speak to some of the underwriting? I mean that Yeah, I would think that somebody is in a, a, you know, tier one market? Yep, hot neighborhood. There’s going to be assumably a lot more appreciation there. Yes, opportunity versus a tertiary market where, you know, he could buy things for the same price you 20 years ago.
Matt Sullivan 13:39
Yes. And that’s right. And so there’s, there’s a number of parts to answer that question number numbers of elements. The first is the underwriting is really split between underwriting the property and underwriting the person or the homeowner. So the property itself, we offer Home Equity agreements in certain states, I mean, we’re able to provide programs in 17 states at the moment. There are some states where we don’t offer In fact, there are many states where we don’t offer programs, and most of those states are areas where there is unlikely to be the same level of house price appreciation that we will see in the states where we’re active. So I think, you know, most people are aware of the sort of the the sort of Central, you know, states where, you know, property prices just simply don’t appreciate as quickly as you know, California, Florida, New York, you know, and those areas. There are other states like Texas, for example, where they have laws in Texas’s case, the homestead regulations make it very difficult for our investors to protect their investment under the lien, so we’re not active there. So underwriting the property, and really we’re looking for properties that are easy to value. So any properties that are above sort of Four to $5 million, we won’t, we won’t be able to offer programs to. We don’t like properties in rural areas, again, because it’s difficult to value them. We really like properties in metropolitan service areas where there is a lot more clarity about what the current and potential future potential future value is. But still the size of the market, there’s $18 trillion worth of equity in single family homes. So even though we’re only operating in the number of states at the addressable market is still enormous, you know, by anybody’s standards. The second part of the underwriting is the person themselves the homeowner. So you know, we have a minimum credit score of 550. Depending on the equity, the more equity you have, the less concerned we are about debt to income ratios, and where your income is coming from, with maximum the maximum amount of combined equity and Home Equity agreements. So the sorry, let me start again, the maximum debt that you have, combined with the amount of investment that we make normally must be no more than 70 to 75%. So that means that as a homeowner, you’re always going to have at least 25% equity left in the home. And it also means that you still have a very significant interest, you’re still involved in your property with a meaningful equity percentage. And for us, it means that our exposure is still low compared to the overall equity position. You know, we do obviously need to make sure that there’s enough income to support property taxes, mortgage payments, and the usual requirements of not being in bankruptcy. And you know, what it would also apply, as you as you would imagine, but the underwriting process for the homeowner is a lot less invasive than it would be for a loan, because we’re not aiming to increase the overall borrowings of that person. So we can be very flexible when it comes to income. And if you’ve got a lot of equity in your property, we may not need to see any income at all. And that’s particularly helpful for retirees, or people that have income from different sources, which is lumpy or difficult to prove.
J Darrin Gross 17:32
The target market or I guess, the primary client, quantum Murray, so far, has it been more of the retiree or somebody that it’s a race,
Matt Sullivan 17:45
it’s arranged, and funnily enough, I mean, COVID has had a big impact on just altering the general makeup of of people that that we’re working with. The vast majority of cases that we work with at the moment, are for people that simply just need cash for whatever reason, whether it’s to, to, you know, pay down credit card bills, or you know, unexpected expenses, or just really to have, you know, that sort of cash position that they don’t have at the moment, because of the uncertainty of the economy generally. And again, the great thing is that the cash that you generate from a home equity agreement has no corresponding monthly payment. So it is, you know, it does truly increase your cash position. And so those are most of the people that we’re working with, and of those people. It’s a range of retirees of employ people, self employed people. And people come from all walks of life. And again, these people have built up equity, and have found themselves in a position where, you know, they do need to find a way to get their hands on some of their wealth. And they either cannot borrow money or simply don’t want to go back into debt. Another way of answering the question is to say what are the use cases. And it’s funny because the use cases do vary from repaying debt to investing in other real estate projects. So we have a number of people we’re working with at the moment, who are unlocking equity simply to buy new properties. They see real opportunities in the current market and their perception is that you know, that they’ll be able to pick up some some pretty decent bargains. So they’re using the equity in their home as a downpayment for some of those properties. And, you know, we also have other examples where Investment Advisors are working with clients to unlock equity to put into other types of more liquid investments that generate cash flow. So it enables them to diversify out of what is effectively a single concentrated non financial asset?
J Darrin Gross 20:04
So you have been in business three years, right?
Matt Sullivan 20:07
Yes.
J Darrin Gross 20:10
We’ve talked about kind of the model and the typical client. What, what’s an average term on the agreement is that you mentioned it can go and vary in length,
Matt Sullivan 20:23
we have two flavors of agreement that we can provide our homeowner plans with. One is a 10 year agreement, and the other is a 30 year agreement. So what that means is, the 10 year agreement needs to be settled within 10 years so that the agreement can be settled by buying the agreement back so you can refinance it, you can buy it back with cash that you’ve got from somewhere else, or you can buy it back by selling the property. And a share of the appreciation goes through the escrow process, and the investor gets paid that way. Same with a 30 year agreement, but it just obviously has a longer duration. Now, it seems even though that, you know, these programs have been around for a decade, they’ve really begun to become much more mainstream over the last two to three years. And I think COVID had a big impact in terms of his like a hiatus for about six to seven months last year, where most of the investors were on hold, sort of scratching their heads trying to figure out what was going to happen to the housing market. But they’re all back on line, which is a real, you know, testament to their belief in the strength of this type of investment. But the completely lost my train of thought now, that will completely Teach me just to go off on a tangent.
J Darrin Gross 21:43
When you’re talking about the flavors, the Yes, flavors
Matt Sullivan 21:46
exactly say we don’t have a huge amount of evidence yet as to how long they run for. But it seems to be true that they are following the profile of other investment products like mortgages, where someone will take out a 30 year mortgage, run with it for maybe four to five years and then refinance it. So it seems like this product has a similar type of profile in terms of its its, its real duration, the 10 year programs. And again, the evidence that we’re getting is that they’re being paid off, obviously, a lot sooner than 10 years, normally between, you know, between three and five years. So they tend to be paid off earlier, because people find capital, they sell their homes, the 10 year agreements tend to be used for shorter funding purposes. We have people that use them for funding, fix and flip properties, for example, they use for bridge financing, they used to get people out of a particular debt problem so that they can then refinance using more traditional debt financing. So, you know, the experience that we’ve got so far is that none of them are likely to run or very few are likely to run for the full voltage duration.
J Darrin Gross 23:04
So let me ask you a 10. year versus a 30 year agreement, would I be right to assume that the 10 year mate might have a higher percentage equity to the investor whereas the 30 year is equal percentage? Yeah, there
Matt Sullivan 23:18
are different ways of calculating the the opposite of the payment. So the equity share in a first year agreement is that share of the upside. Normally, what we see with the 10 year agreements, certainly without any agreements, is it’s a straightforward sort of exchange is a discounted exchange. So the investor will provide say, for every for every 10% of the value of the home, the investor will get back a slightly higher percentage when the homeowner sells so in the tenure programs, it’s a trade or a discounted trade. And typically, for every 10% that the homeowner unlocks the investor will be entitled to 16% or there abouts when the homeowner sells the property. Now, the thing to layer on top of that, is that in many cases, there’s a return on investment cap. So, if the homeowner sells the property in the early years, then that cap comes into play, which means that there is a maximum amount that they will be charged by way of return on the investment. And that varies, you know, depending on the investor, you know, between say 1012 15% 18% in some cases
J Darrin Gross 24:47
and, you know, you mentioned flipping and the use for you know, salons Are you strictly limited to owner occupied No,
Matt Sullivan 24:59
no And again, the great thing about these products is that they are available to investment properties. And there’s some tweaking that we do in terms of maximum combined lean to values. And there’s a few other nuances in the underwriting. But these products are, are really useful for non owner occupiers, or the owners of investment properties, where there is equity that’s been built up in those properties. I think there are many small portfolio owners who had the properties for a number of years, and they’ve, you know, the the tenants have helped pay down the mortgage, and they’ve got significant equity build up equity amounts built up there. So it’s a great way of unlocking that equity using that lump sum to, you know, to expand their portfolio. So,
J Darrin Gross 25:46
I have a non owner occupied property, I could get a equity agreement.
Matt Sullivan 25:53
Yes, absolutely. I say that, but he depends on the state. So, you know,
J Darrin Gross 25:58
presuming you like in a state that works, if we’re in the state of acceptability, it could be placed on that.
Matt Sullivan 26:06
Absolutely. And that will give you, as the owner of the property, a cash lump sum, which you could have full use of for either 10 or 30 years, depending on the agreement, there’s more flexibility with the 10 year agreements. And typically, you’d want that capital probably for a shorter period, than then a homeowner that wants to stay in their home for a much longer period.
J Darrin Gross 26:30
Right. Now, I was thinking I’ve got a client I know that they’ve done Oh, I mean, I think historically be considered a hard money loan, but they’ve re engineered it to where they actually instead of lending you the money, if you’re the if you’re the, in this case, we’ll call it the the property owner, you found a property you want to buy to flip. And you come to me, and instead of just lending you the money, what what I do is I buy the property in my name. Yeah. And we agree, and I’ll fund the the renovations. But we split the Yep, the profit on the back end. And it just had it cleaned up any that default kind of mess of trying to foreclose on properties and stuff, because now that it’s already in my name, and weathers it’s all in agreement, correct? Yes. And in this way, I’m thinking like, from a standpoint of a somebody that was trying to, you know, invest in a property. There was some repairs needed to be made, but there was a, you know, recognizable market value upon completion. Given a shorter time,
Matt Sullivan 27:48
is that would that fit in yours? It does, that is absolutely a common and valuable use case. So effectively, what we’re doing is we’re providing equity based funding on a short term basis, so that you can add or force appreciation on the property by way of repairs or additional square footage or, or whatever. So, yeah, we work with a number of providers, a number of companies that use that funding as a mechanism to add value to a property, whether it’s a homeowner who wants to simply, you know, fix up their roof or put a new kitchen in before they sell it to a more commercial organization that uses this type of funding, as an adjunct, or in addition to the debt funding that they can also raise.
J Darrin Gross 28:39
And are we still limited to strictly single family,
Matt Sullivan 28:43
single family, multifamily up to four units, condos are also acceptable? And again, it does depend on where the condos are, where the the, the homes are, but we do you know, it is not just single family. It’s not just single family homes.
Unknown Speaker 29:01
Got it?
Unknown Speaker 29:04
What about the
J Darrin Gross 29:06
how this equity agreement is treated? for taxes? I know like with a home equity loan, used to be I’m having for a while but it used to be able to you could write off the the interest like you can with a mortgage. Yeah. And I is there because there’s no interest. Is there any tax treatment? Well, what you’re getting really is you’re getting the proceeds that you get
Matt Sullivan 29:31
the advice that we’ve had, and again, you know, the caveat is, you know, obviously do your own research, but it’s a deferred liability. So the cash that you get through a home equity agreement is really an option fee. That is based on an agreement that will settle at a future date. So your tax liability is most likely to be capital gains tax when you ultimately sell the profits. So at that point, you’re set up with the IRS, and the payment that you’ve received will be an advanced payment on your overall settlement figure. So what that means is the capital that you get from a home equity agreement does not have an immediate income tax or capital gains tax liability. So you have full use of $107, even though the property may have a capital gains tax liability attached to it, when it is subsequently sold. All right.
J Darrin Gross 30:39
So let me ask you is from from an investor standpoint, if if I wanted to invest in quantum Ari, what are the what what are the opportunities there? And how are you? Are you in until the maturity? Or is there an in out opportunity of us from the investor side of thing? Well, we,
Matt Sullivan 31:03
if you look at quantum Mario has two entities. One is the ability to invest in the asset itself, which is the Home Equity agreement. So we have a relationship with a San Diego based fund that invests through us into Home Equity agreements that we originate. So that fund is able to accept investments from accredited investors. So there is a way for accredited investors to buy directly into these types of Home Equity agreements via a fund structure. And so you’re not you’re not involved, you’re not you’re not buying directly into the individual, you know, investments themselves. Our objective or our plan is to make this asset class tradable. And the way that we intend to do that, which is probably enough, our original business plan three years ago, was to make Home Equity accessible investable and tradable. So what we’ve built is an exchange that will enable these Home Equity agreements to be fractionalized, and traded through a secondary market structure. Now, there’s a lot of regulatory requirements that we will need to satisfy to be able to do that. So that’s work in progress at the moment. So to answer your question, that is an opportunity for accredited investors to buy into this asset class, and to buy into Home Equity agreements that we originate. going forwards, we intend to open this marketplace up to a much wider range of investors, ultimately, non accredited investors, but I think we’re a good sort of 12 to 18 months away from that happening. Correct.
J Darrin Gross 32:49
But but the the fund through the San Diego firm is your primary vehicle for, for investing. So
Matt Sullivan 32:59
that’s, that’s that’s the way and there are other there are other people that we’re working with the gain, are always happy to receiving, you know, investments from qualified or, you know, accredited investors, and they also invest in these types of Home Equity agreements in the marketplace is growing the investor appetite for this type of instrument, and in particularly over the last few months, we’re really seeing growth there.
J Darrin Gross 33:25
So if someone were to get a net equity agreement through quantum RA, and you use the funds as you need to, but then you’re ready to move on, is it? I mean, is it just like a regular, you know, I’m I get a mortgage replacement, or I sell my property and the the funds transfer based on where money is owed. And
Matt Sullivan 33:53
absolutely, and again, it’s our agreement will be paid off, as the property is sold as funds are transferred through the escrow process. So because we’re a lien holder, the lien holders will get, you know, get get paid first. So the amount of the, you know, the amount paid, will appear on the the, the overall sort of settlement settled status Exactly. But the great thing is, with these agreements, the amount due is very clearly iterated, and very easy to calculate. It’s based on a starting value of the home. We know what the home is worth when it’s sold, because that’s the sales value. And it’s a very clear way of calculating the share that is owed to the investor. And all of that is really iterated or put down in black and white in the terms of the the performance deed of trust that is attached to the property with the lien.
J Darrin Gross 34:51
Just real quick, I am curious on the way you guys are looking to potentially structure this as a more of a tradable asset in the Future is at, like a blockchain type technology that up.
Matt Sullivan 35:04
Yeah, yeah. So he would say, you know, we use a we built our exchange using distributed ledger technologies. So you know, and and over the years, there’s been a fair amount of confusion as to what is the difference between Bitcoin and blockchain and cryptocurrencies that we use in our platform, the same underlying technology that enables cryptocurrencies to operate, because blockchain or distributed ledger technologies are a really good way of keeping track of ownership of fragments of a home equity agreement. And really, what we want to be able to do is just use these really cool technologies that are very light. And they’re very expandable, they’re very scalable. And we’ve seen the effect that they’ve had in terms of the growth of cryptocurrencies. So it’s a very good technology. So we use that technology to enable our exchange, but we manage that exchange. So we don’t have any immediate plans to enable tokens or representations of Home Equity agreements to sort of fly around the sort of crypto sphere generally. So we will, everything that we do will be within an environment that we control, because it needs to be that way for regulatory purposes. And we need to be able to maintain control of who’s buying who’s selling, and, you know, where the money and how the money flows. Yeah, and
J Darrin Gross 36:37
I think that, you know, looking back to the Oh, eight crash, and and all that happened there, had blockchain been in existence for you know, just title work. Back pre then are, you know, that I could have avoided a lot of the I don’t know, who’s, who owns water, or the, you know, the
Matt Sullivan 36:58
what, what have we bought, basically, yeah,
J Darrin Gross 37:00
yeah. So I think it’s, it’s fascinating, fascinating to me that, you know, and it’s something I don’t really, totally understand, but I do understand the concept of just the ledger and the ability to like, fractional, you know, if, if I own a piece, you know, I can break that into multiple, you know, or there’s, there’s, I guess the investor has some control on on the ability to invest, divest with others within whatever the framework of the of the marketplace
Matt Sullivan 37:31
allows, it’s just ownership rights is the same as fractional ownership in anything, whether it’s a fractional ownership in a, in a in a boat, or in a timeshare, it’s making sure that as you move the ownership of that fraction from one person to another, there is this record of that transaction, so that at any time, we have this true ability to analyze, who owns what, and how the trade worked beforehand, and you know, what the what the trades will likely to be afterwards. So that’s, that’s really, why blockchain is so good at that is because it does it in a way that is very difficult to to change. And so you have this sort of idea of what has happened. Once it’s enshrined in the blockchain, it becomes, you know, the truth, which is a concept, I don’t think any of us have any idea what it means anymore.
J Darrin Gross 38:32
Scary today. That’s good. Hey, Matt. If we could, I’d like to shift gears for a second. By day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with risk. And there’s three strategies that we typically look at and then consider. The first we look see Is there a way we can avoid the risk. And if that’s not an option, we look to see if we can minimize the risk. And for the risk that we can’t avoid or minimize, we look to transfer the risk and that’s what an insurance policy is. And I like to ask my guests if they can take a look at their own situation, whether it be your your clients, your investors, tenants, the market, you know, however you want to define it. But if you can identify what you consider to be the biggest risk, and for clarification, I am not looking for an insurance related answer. Specifically if you if that’s your, your, the way you want to answer it, so be it. But if you’re willing, I’d like to ask you, Matt Sullivan. What is the biggest risk? Well, I
Matt Sullivan 39:49
think the answer is relatively straightforward, because from an investor’s perspective, it’s a real estate investment. It’s an equity investment. And so the risk to the investor is that the value of the underlying real estate decays to the point where they no longer have an interest because their equity interest has been reduced. Now, as you quite rightly say, so that is the risk, how do you mitigate that risk? How do you reduce that risk? How do you remove that risk. So the way the contracts are written, there are protections in there for investors. So, when we value the property, in some cases, we’ll build in a little bit of a discount so that if the value of the property doesn’t go up very much, or in fact stays the same, there’s still a return in there for the investors. But really, the way that we look at the risk for both sides is it is absolutely directly correlated to the value of real estate. And so there are no extraneous risks that I’m aware of, there’s no sort of risks that would not be sort of directly related to whether the value of the property goes up or goes down. So that’s actually quite easy to quantify. Because we know from an investor’s perspective, what the returns are going to be if the property goes up, what they’re going to be if the property goes down, and the same for the homeowner, if the property goes up significantly, they’re going to have a bigger share of the equity that they’re going to be going to be paying. If it goes down, the homeowner actually benefits because they may not have, they may have to pay back far less than they originally received. And the other thing to mention is for our business as a whole, the biggest challenge, which is a bit like a risk, is education is getting people to understand what this Anneli what this animal is, how it’s not debt, how it is not too good to be true, how it is a viable financial tool. So I hope I’m not mixing apples and pears there. When I’m talking about sort of, you know, risks and challenges, but I didn’t, you know, I, we are seeing far more interest and willingness from homeowners funnily enough to investigate these types of alternative funding options. So, I mean, risk is a word I, I’d like to finish on opportunity, rather than risk however, that, hey, you
J Darrin Gross 42:36
know, I love the, you know, the creativity and just the outside of the box kind of thinking and applying, you know, a different model to a traditional marketplace. Yes. And coming up with some, you know, a new way for for people to access the equity in their home, and then do more. I mean, it’s, it’s incredible to me, if you think back in the last 30 years, how much of the economy has been built around? people accessing the equity in their homes?
Matt Sullivan 43:11
Absolutely.
J Darrin Gross 43:12
And so I, I don’t see that stopping, I think there’s probably some lessons that have been learned, and I’m sure your underwriting models take into consideration some of the lessons learned, you know, just for overextending, or, you know, putting your investors at risk, you know, not, you know, return to capital, but, but no, it’s I mean, I think homeownership is still one of the, you know, I guess the cornerstones to a lot of Americans ability to create some wealth, and to be able to access it, as opposed to, you know, just leave it there and not not have accesses access to it. And, and I think also the The other thing, I know, in the early days, it was a lot of people were buying all the toys, and, and all the vacations and stuff. And I think, as an investor myself, I would tend to look at it in ways that how can I use that to increase my portfolio or my holdings, as opposed to just let’s go to Disneyland? And
Matt Sullivan 44:24
who knows? And again, you that’s actually great, because we are seeing, you know, many people see this as a diversification strategy. In other words, how do I get money that’s locked in my equity? How do I put it to work so that it gives me a better return? Or gives me the ability to liquidated at the flick of a switch if I want it? So can I buy assets that are much more liquid much more tradable? And so, and your point about the economy is absolutely right as well. The difference here is we’re not increasing leverage. So I unlike the scenario that we saw in in the early 2000s, what we’re not doing is loading the homeowners up with debt. So we are still enabling the homeowners to have a big share of equity. But we’re using money from a different account, which is the equity account. And if we can get that back into the economy, and then I think that’s going to be much more advantageous and much more savory and sensible, and then simply, you know, leveraging the homeowners up to their eyeballs.
J Darrin Gross 45:31
Well, and just to carry that thought one, one more step there. So essentially, you guys are not in a position to necessarily foreclose?
Matt Sullivan 45:42
Well, I think the agreement is protected by lien. And right, if there is a significant breach of the terms of the agreement, depending on the state, there is the ability to, to, to foreclose, or based on that lien. Now, those activities need to be fundamental in the sense that you are allowing your home to fall into serious disrepair, whereby the asset is likely to be compromised. But remember, we are always in a junior position, if there’s an existing lender. So we were very, we’re very unlikely to try and exercise the rights under the lien, because there’s a very good chance that we will end up getting back less than we originally invested, because the property will be sold at a at a you know, at a fire sale price effectively. So, you know, the rights are there. But, you know, our aim, our objective is always to try and cure the problem. So, you know, if mortgage payments have been missed, can we somehow pick those up and get the owner, you know, back on their own two feet? We’ll add that to the bill, of course, you know, but there are ways that we try and cure the problems first, you know, but but you’re right there is there is a the opportunity to foreclose, given the right legal suits your circumstances.
J Darrin Gross 47:06
Well, it is fascinating, and I appreciate you sharing the information here. And thank you for having me on. Yeah, absolutely. Where can listeners go if they would like to learn more connect with you.
Matt Sullivan 47:22
Everything’s on our website, which is Quantum ari.com, qu, a n t m r a.com. So we have a calculator there, that gives you a estimate of the amount of equity, you could unlock all sorts of information, there’s a free guide that you can download. All of our contact details are there. So you know, as this is a growing asset class, we’re very keen to talk to people answer any questions they have. And so please feel free to reach out to any of us through the site.
J Darrin Gross 47:56
Alright, wait, man, I want to say thanks for taking the time to talk today. My pleasure. I’ve enjoyed it. learned a lot. And I hope we can do it again soon.
Matt Sullivan 48:06
Great. Likewise, thank you very much.
J Darrin Gross 48:09
All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to commercial real estate pro networks. CRE PN Radio.
Announcer 48:28
You’re listening to CRE PN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CRE PN Radio
