Buying a new home is truly exciting, but every owner dreads one thing: debts. Most homeowners who want to get their hands on equity contracts turn to credit or reverse mortgages when acquiring a new property. Unfortunately, these only push them deeper into debt. Thankfully, Matthew Sullivan found a solution to this problem while boosting property ownership. Joining Keith Baker, he explains their work at QuantmRE that gives homeowners access to a portion of their home equity. Therefore, they are not only saved from debt but also tedious monthly payments and interest. Keith explains how this helps homeowners more than just saving money, innovating real estate transactions today.
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On past episodes, we have discussed that 95% or more of my private lending is done out of my self-directed IRA, but there are other ways to get money to loan out that belongs to you without borrowing it from somebody. You can borrow from yourself. For example, you can borrow from your life insurance policy. Certain whole life policies have cash values you can borrow from and arbitrage the interest. The same thing with a home equity line of credit or a home equity loan. If you go to Bank of America and borrow money for 3%, yet you can loan it back out in six-month intervals to flippers for 13% or 12 points. You've arbitraged that 3, 4, to 12 so you're making 8% of that money even after you pay off the loan. It's a pretty neat deal.
Our guest has a very interesting take on the same thing. His company provides homeowners a contract on that equity that they don't have to pay back, except when the house is sold. It's like a home equity line. You're giving up a certain percentage of your equity for cash now that will be realized later on. I'm probably not describing it very well. Why don't we go ahead and get down to the brass tacks of this episode and go straight to the interview with Matthew Sullivan?
I have a very special guest with a very interesting topic. Please welcome Matthew Sullivan to the show. Matthew, welcome aboard. Thanks for coming on.
Keith, thank you for having me on.
I can tell you're from East Texas. Why don't you tell us a little bit about your accent there? Where are you from?
Alabama. I'm originally from outside of London in England. We can't call it Europe anymore because it's not. I moved over here a few years ago. I landed in Orange County and moved to Salt Lake City in Utah. I find the blazing daily sunshine of California far too decent. I felt I needed to get cold again. I might be heading back to California pretty quickly.
[bctt tweet="#NeverTrustAlwaysVerify - remember you must perform your own due diligence prior to investing any money." via="no"]
English bloods are calling out saying you needed some gray skies and some cold weather.
It was great to move. We've got the wanderlust. I was flicking through the advertisements for trailers and RVs. Goodness knows what's going to happen.
I hope it all goes well with you. I don't feel sorry for anyone who can live in Orange County. It's not as nice as my neighborhood, but I don't pity anyone in my neighborhood at all. You do have much better weather. I'll give you that. You may have a very interesting concept. You've started QuantmRE.com. It’s better if you can explain it than I try to bumble it. Please explain what it is that you do.
We have a solution for homeowners who have equity and want to access that equity but don't want to go into debt. It's quite a big problem because there's over $18 trillion of equity in residential homes in the US. Nearly sixteen million homes have 50% or more equity. There were some reports that came out showing that equity in homes has hit an all-time high. If you're a homeowner and you want to get your hands on your equity, the problem is you've got to go to the bank and borrow money. You can borrow money through a cash-out refinance or a second position mortgage. You can increase your existing mortgage. You can get a home equity line of credit. You can get a reverse mortgage. All of those are debt-based products.
That means that you end up owing money, which is secured against your equity, but you don't get any of your equity. You're just getting deeper into debt. That's fine as long as you can afford it or if you qualify. There are millions of people out there who want to try and access their equity but cannot because they don't qualify for loan, they don't have the income, they don't have the credit score, or the debt-income ratio is wrong. We have a solution for all of those people. We can allow them to unlock up to $500,000 with no monthly payments ever. There's no interest and there's no additional debt. They can use the money for whatever purpose they want.
How does one go about doing that? Talk about the mechanics of this.
[caption id="attachment_3099" align="aligncenter" width="600"] Equity Contracts: If your house goes up in value, QuantmRE takes a share of some of that appreciation.[/caption]
First of all, the important thing is to describe what it's not. It's not a debt product. If it's not a debt product, it's an investment product. In other words, we have investors who want to participate in some of the future appreciation of your home. The way they get paid rather than charging you an interest rate is to say, "If your house goes up in value, we'll take a share of some of that appreciation. That'll be the return on the investment for us.” They take a longer-term view and because it's not a loan, that means there are no monthly payments but the investor does get the return.
When you sell the property, what normally happens is you will give them back the original investment that they made together with a share of the appreciation. That share of the appreciation gives them a solid return on their investment. That keeps them happy. In the meantime, as the homeowner, you have been able to unlock equity. It doesn't matter in most cases if you don't have the income. We can work with people that have a much lower credit score. You get to tap into your equity without having to borrow money.
You touched on people with poor credit or low credit scores. Who is your ideal seller of equity at this point? Who are your homeowners? What demographic are you looking for?
There are a number of states. We're restricted at the moment by the number of states that we operate in. We work either with our capital or with other partners in nineteen states. It's not available across the UK. There are some states like Texas where it doesn't work. That's because of certain regulations around homesteads. I wouldn't say ideally because everyone is slightly different in terms of what they want the money for. Normally, we're looking for someone who has a home that's worth $200,000 or more up to a maximum of $5 million. That's the range. Most people that we work with, the average house value is around $600,000 to $700,000 or something like that.
We're also looking for people that have at least 30% to 40% equity in their property. There's a maximum combined lien-to-value, which means if you take your existing loans, whether that be a mortgage or a HELOC, if you add those together and then if you want to add our investment to that, all of that together must be less than 80% of the current value of your home. That means you still have 20% equity. It means that there's a big enough cushion to make sure that you stay incentivized as a homeowner. There are a few numbers that we work with. Depending on the state, we can unlock under 40% of the current value of your home. In most states, that figure is over 20%. We make an exception for California because there tends to be more equity in the properties there.
This would be a great strategy when the coasts see the real estate market's decline.
[bctt tweet="There are so many parallels in both of our lives in terms of who you work with. It's about changing attitudes or changing views." via="no"]
Also, when the markets appreciate, that's good for the investor. When the markets start getting a little difficult to forecast, we saw that with COVID. What COVID showed us was that homeowners immediately became more willing to explore alternative funding strategies the moment they thought that their home equity was not the sure thing. It's interesting when markets do change and the confidence in markets alters, then people tend to be much more willing to look at these types of alternative funding. The way the agreements work is because they're quite long-term agreements. Over the average duration of an agreement, the investor probably will make a pretty good return.
From the homeowner's perspective, they've got that lump sum of cash that doesn't have any monthly payments, so they can use it. We have people that use it to pay off expensive credit cards but also, they use the money to invest in other things, whether it be stocks, bonds or as a down payment on another property. If you've got hundreds of thousands of dollars locked up in your equity and here's a way to get that without any monthly payments or if you can do better than your home equity or better than the cost of the agreement, then it makes sense for you to diversify out of your home, which is your single most concentrated asset.
I'm curious on this agreement. You talk about lien-to-value. With private lending, Texas is a Deed of Trust and a promissory note state. This was an investment vehicle, not a dead vehicle like a private mortgage would be. What's the paperwork? What's the minutia? How it's done with the counties and the contract?
It depends on county by county. The language is slightly different but it's very similar to a trustee. We refer to it as a performance Deed of Trust. It's not a trustee because there is no loan involved. What it does is describes the performance of the agreement. In other words, what is due when the property is sold or if the agreement comes to an end. In language, that is similar to a Trust Deed. One of the challenges over the last few years has been getting various counties and cities to understand what this is. The good news is that these types of agreements have been around for many years. A lot of those early teething problems have been sorted out.
The investor in this case is you. Do you give a certain percentage of money? Is this a one-time payment to the homeowner?
It's a one-time payment. On average, it's up to 20% of the current value of your home. We have different durations of agreements. We have some agreements that run for ten years. Those are fine for people that want short-term capital. You can use them for bridging purposes. You can pay the agreements back within months if you want and there's no prepayment penalty in most cases. These agreements run for either 10 years or 30 years. There are two flavors. The way that we calculate the equity share is slightly different. The way that it works is that the investor put some capital in exchange for the right to participate in the future value of your home when you sell it or when you buy the agreement back.
[caption id="attachment_3100" align="aligncenter" width="600"] Equity Contracts: With COVID-19, homeowners immediately became more willing to explore alternative funding strategies when they became unsure about home equity.[/caption]
The investor has the option.
It's structured as an option agreement in most cases. I say most cases because we have our own agreements that are structured as an option. We also work with a number of the other players in this space. There are slightly different variations on their agreements. Some of them work as option agreements. Some work almost like a purchase option where we have the right to purchase your property at a certain value. All of those are variations on the theme. None of those are loan. The important thing is they steer clear of any language or any obligations which would make this fall into the bucket of being a loan.
Just playing a devil's advocate being in the insurance industry for so long. Back to your lien-to-value, I assume that there are going to be some provisions where if I've sold a piece of my equity off to you or done the option or if I refinance, it takes advantage of some lower rates. I’m sure there's a provision there that as long as it’s all-in and it's still at that 80% threshold, then I can do what I want. It's just if I go over that, then there's a problem.
The position is an equity holder. We've got to be quite careful to make sure that you don't diminish or dilute that position by taking on more debt. We're always going to be in a junior position in terms of the order of play with the liens. Having a lien, if you want to refinance your existing mortgage, you would need to get a waiver from us or from whoever the investor is, allowing the lender to remain in a senior position. Having a lien on the property does give us that protection, which means that it makes it more difficult for you to add additional debt without us knowing about it.
I don't live in the world of startups like you do, but I've been a part of one. Once the parent company came in and wrote a big check to help, you can't get any loans. You can't open any more credit and you can't dilute shares. That position had to be protected at all times, which is funny. As you know, when you're starting up, you need a photocopier or fax machine and you have no credit.
The great thing about this is it doesn't increase the leverage on your home. If you're using the money to fund a startup, one of the things that you don't want is additional monthly payments. It's part enough paying for stuff as it is. These are great instruments if you've got equity, to use that equity and get the business off the ground to the point where it has a credit score or where you have some income. You can buy these agreements back at any point. You're not locked into it for 10 or 30 years. It's flexible. There's no seasoning period. With some of the agreements, there's an incentive to pay these agreements off early. What we do in some cases is cap the maximum return that the investor can get in the first two years. If you pay these agreements back quickly, then there's a benefit to you as the homeowner. There's a benefit to us because we can get that money back. We'll get a good return on it and we can then invest that out again. The more times we can do that, the more return we're likely to make.
[bctt tweet="Depending on the state, 40% of the current value of your home can be unlocked. In most states, that figure is over 20%." via="no"]
We walked through two scenarios. One, it's a ten-year agreement and I'm the homeowner. I get 20% of my equity paid to me. In 1.5 or 2 years, I get transferred, whatever the case may be. Now I'm going to sell the house. I'm assuming in that performance deed, at that point in time, you as the investor have to make the decision whether or not to exercise your option to participate.
What happens is the option is triggered by the sale. Part of the process is that option becomes due in those. We are able to exercise that option when certain events happen. The sale of the home is one of those events. In that scenario, you've got two agreements, a 10-year agreement and a 30-year agreement. Both of those will be triggered when you sell your homes. If you decide to sell your home, when the sales proceeds come in, they would get distributed to us through the escrow process as one of the lien holders.
You gave an example of $200,000 loan, 20% is $40,000. In the course of two years, I'm going to have to give back more than $40,000. If I use this as a loan, for example, I get some quick cash. Business goes well and I pay you off in 18 to 24 months. Obviously, you're not doing this for free.
That's the important thing. Everyone needs to understand that the investors do make money out of this. Otherwise, you step firmly into that too good to be true territory. The way the investor gets paid with the 10-year agreement is a straightforward discount. For every 10% that we invest, when you sell your property, we will get back 16.7% of the value of your property at the time that you sell it. If you unlock 20%, that means that we get 33.4% of the value of your property when you sell it. If your property remains the same price, let's say it's $200,000, then in exchange for giving you $40,000 when you sell your property, we will get $66,000 approximately out of the sales proceeds. If you sell your property earlier than that, there's a cap on the return of 18% per annum that kicks into play.
If you sold your property after six months, we would not apply that multiple. We would say, "What is the lowest figure? Is it 18% per annum over six months, which would be 9% or is it that multiple?" What we have is a cap to make sure that if you pay these agreements off early, you don't have to pay the full multiple. There's a ceiling to the amount that you can pay. That's the same for the 30-year agreement. There's a cap, which is the maximum in the case of the 30-year agreement, that can be as low as 12%. If we look at the 30-year agreement, because that's a longer duration agreement, we have to calculate the return in a different way. Otherwise, what happens is the return would decay over that 30-year period