Home equity accounts for approximately 61.7% of a United States households’ wealth. Yet, for so long, homeowners were unable to leverage their home equity without taking on debt, and the added burden of monthly payments and interest. In this episode of The Agent of Wealth Podcast, Marc Bautis is joined by Matthew Sullivan, the CEO and Founder of QuantmRE, a company that solves a real problem for homeowners through home equity agreements. Sullivan has a proven track record in real estate innovation through his experiences as Co-Founder of the Secured Real Estate Income Strategies Fund, and as President and Founder of Crowdventure.com, a real estate crowdfunding company.
In this episode, you will learn:
- What a home equity agreement is, and how it differs from a reverse mortgage or a home equity line of credit.
- How to determine if you’re a good candidate for a home equity agreement, depending on variables QuantmRE uses.
- Current and future opportunities to invest in home equity agreements.
- Advancements and expected growth in this industry.
- And more!
Welcome back to the Agent of Wealth Podcast. This is your host, Marc Bautis. On today’s show, I brought on a special guest — Matthew Sullivan. Matthew is the CEO and founder of QuantmRE, a company that solves a real problem for homeowners by helping them access a portion of their home equity without taking on any debt. Matthew, welcome to the show.
Marc, thank you for having me on.
It’s no secret that for a majority of Americans, home equity is their largest asset.
Even though it is their largest asset, as a financial planner, I rarely factor in home equity when I create a financial plan. Because, firstly, people need a place to live. But also because there aren’t that many options to access home equity. While there are reverse mortgages, they come with such a bad rap — although the product itself has gotten a bit better recently.
So, I’m looking forward to talking about home equity contracts, an alternative way of accessing the equity in your home. And I’m looking forward to talking about it as a potential alternative investment as well. So, Matthew, can you start us off by explaining what a home equity contract is, and telling us about how you created your business?
What Is a Home Equity Agreement?
A home equity agreement is a way for a homeowner to access equity in their home without having to take on debt. Instruments like a reverse mortgage or a home equity line of credit are debt products.
If you look at the commercial real estate world, there are any number of different ways to raise capital that combine debt and equity. There’s senior debt, junior debt and mezzanine finance — which is a bit of debt and a bit of equity. Then there’s preferred equity, equity and shared appreciation mortgages. So, for commercial borrowers, or commercial developers, there’s a range of ways to fund real estate. But options are severely limited for residential homeowners, and those options focus entirely on debt.
What we’re doing at QuantmRE is bringing the commercial type of funding to the residential homeowner.
To answer your other question, I stumbled across this concept probably six or seven years ago at a crowdfunding conference. I found it to be a really interesting concept because it had such a large potential marketplace and solved such a major problem for homeowners.
Can you walk us through a scenario where a homeowner would use this, and how it works?
Sure. Earlier you said when you look at a homeowner’s wealth, you don’t take into account their home equity. It’s ironic, because for most people their home is their most valuable asset. A 2017 Survey of Income and Program Participation (SIPP) data showed home equity and retirement accounts accounted for 61.7% of households’ wealth.
The reason many people don’t take that wealth into account is because accessing it has, traditionally, been difficult. As a financial advisor, it’s probably not great advice to tell a client, “You should go out and borrow a ton of money against your home.”
So to answer your questions, it’s worth remembering that this is not a debt product. Investors get paid based on how much your home goes up in value — we invest in the potential for your home to increase in value. And we take a share of that appreciation.
Because we get paid very differently from a lender. our risk is different. But on the flip side, we run the risk of possibly not getting paid — or losing money — if your home falls in value.
Is a Home Equity Agreement Right For You?
So what sort of scenarios would this work in? There are certain minimums.
- You have to own a certain amount of equity in your home.
- You need to be left with a certain amount of equity after our transaction.
It works very similarly to an option agreement. We don’t take any ownership of the home. It doesn’t trigger any due on sale clauses, or any property tax revaluation. It sits outside of the home ownership.
Essentially, it’s a promise by the homeowner to share some of the future value of their home when you sell it, in exchange for a cash lump sum. Now, the cash can be up to $5000,000, if they have enough equity. The minimum investment is around $30,000.
There are other figures, like the maximum investment that we’ll make, which is between 25-30% of the value of your home. This largely depends on the location. If a homeowner adds that to their existing mortgage, then there’s this concept of a combined lien to value.
So there are these sort of goal posts. If you fall within the goal posts, we are able to make you an offer. If not, this type of program wouldn’t work for you.
Understanding a Home Equity Agreement, Using a Scenario
Let’s use this scenario. Let’s say someone owns a home valued at $600,000. Let’s make it simple, and say there’s no mortgage. They decide to come to you to access equity. Are you making an offer based on the value ($600,000), or are you making an offer based on the potential growth of that home?
A bit of both, actually. I’ll give you an example.
If you want to access 10% of the current value of your home, which is valued at $600,000, you agree that when you sell your home — which can be anywhere from the next 10 years to 30 years, depending on the contract — you’ll pay us 16% of the value of your home at that time. You can choose to sell it, or you can even buy back the agreement at any time.
For the later scenario, we’d use an appraiser to value the home at the time you choose to buy the agreement back.
As a synopsis, a homeowner sells 16% of the future value of their home in exchange for cash, representing 10% of the current value of the home.
Is there any difference if they sell their home the next year, versus in 10 years?
Yes. Obviously, it wouldn’t be very fair if someone received an investment from us and then sold their home six months later. So we cap the maximum amount that we can earn on that agreement to 18% each year. In other words, if your property skyrockets in value, then the amount that we can make as a return on our investment is capped. And that’s an annual cap that’s calculated every month. It’s on a pro rata basis. So if you sold within six months, for example, you would only pay six months worth of that return cap.
In the scenario where a homeowner decided to do a renovation project… Say they put $100,000 into their home, and perhaps it doesn’t increase the value by $100,000. Is that somehow factored into the agreement?
Yes, it is. And it’s very important for people to make sure of this because there are some agreements out there that don’t factor it in. At QuantmRE, we take that into account. If you’re using the money that we invest to increase the appreciation of your home, we’ll strip out that increased appreciation due to your investment. That’s as long as it’s a material investment — not just painting the exterior, for example. The homeowner will have to quantify that and have it validated by a third party, such as an appraiser.
If You Don’t Want to Sell Your Home…
You mentioned that these agreements can last anywhere between 10-30 years. What happens if the homeowner decides they don’t want to sell within whatever the length of the agreement is? Is there a formula that’s used to calculate what your return would be, and then they figure out how to pay it back?
Exactly. One of the benefits is you don’t have to sell your home, but you do have to settle the agreement when it’s due. We do return at 10, 20 or 30 years, but you can buy this agreement back. In other words, you can refinance this agreement at any time without penalty — including no early payment penalties.
The Risk Involved on the Investment Side
What happens if the home doesn’t appreciate? What if the value of the home goes down over time?
There’s two possible scenarios.
If the home doesn’t appreciate, there’s still a built-in cushion for the investor to make a return. Because investors are buying a chunk of the value of the home for a lower amount of money, there’s built-in appreciation. That’s really what makes this attractive to investors. It’s got to work for both sides, after all.
If the home depreciates by 35-40% or more, there’s a risk that the investor could lose money.
However, if the homeowner sells their home at a lower price, the homeowner isn’t allowed to buy us out at a discount. We’ve learned that the hard way.
In other words, the agreement says that if your property has significantly depreciated through no fault of your own — in other words, if it’s the market conditions — then we’ll take the potential loss. But you can’t refinance at the loss because that’s gaming the system, and that doesn’t work for our investors.
How do you determine which house or type of house qualifies for this program?
Primarily it’s geography. If the property is in a major MSA, where it’s relatively easy to price the property, that’s a check in the box. Rural properties that are expensive or difficult to price are normally not within our investment purview.
Normally, we invest by exception. We assume that your property will qualify if it’s in a major MSA, in a good state of repair and within our investment guidelines… which is a property value of $150,000-$5,000,000.
- Within the pricing guidelines.
- In a good state of repair.
- Straightforward to determine the value.
By good state of repair, it can be C3, for example. It doesn’t have to be perfect. But we will accept or turn down properties if they’re in a very poor state of repair.
Does it have to be an owner occupied property, or can it be an investment property as well?
Uses for Real Estate Investors
It can be either. This is a great option for landlords, typically those with a small portfolio, who want to access capital. Many landlords have their properties for a number of years without payoff. Yes, the tenants help them pay down the mortgage, but the payoff usually doesn’t come until they sell the property. That’s because cash flow never really materializes after the costs of toilets, tenants, termites and trash.
So a home equity agreement is a great way for landlords to access equity, which they can then use for any purpose. Many use it as a down payment on another property.
Do you look at the credit worthiness of the homeowner, or the landlord, before making this type of investment?
Yeah, we do. But we look at credit through a different lens. For us, credit reports are an indication of what’s happened in the past, and a bit of a clue as to what’s likely to happen in the future. Our minimum credit score is around 550, which is much lower than you would see with a HELOC or a mortgage.
We still need to have some comfort that a homeowner is going to be able to pay their mortgage, property taxes and maintain the property. So we do look at credit reports, but really just to make sure that they’re likely to maintain the status quo.
Having said that, there are exceptions to a 550+ credit score. We have invested in properties where the homeowner has had a much lower score, but a much higher percentage of equity in the property. That way, there’s more coverage for us.
I know that it probably varies, but what’s a typical timeline from when someone starts to process to when they actually have that lump sum in their hands?
Usually four weeks, but right now it’s closer to six weeks. Because there’s a fair amount of pressure on appraisers with the current real estate market, things are a bit delayed. These are third party service providers that we need to use, for example, for recording the liens on title. But normally it’s closer to three to four weeks.
I know the scenario we used earlier was when someone owned their property free and clear, but let’s go back to the one where someone has a mortgage on it. They’re still able to participate in this program, correct?
Yes, absolutely. I would say about 95% of our customers have mortgages. Very, very few people own their homes free and clear.
How to Invest in Home Equity Agreements
Alright. We’ve been talking about home equity agreements through the lens of the consumer. Now, let’s look at the investment side. At QuantmRE, do you fund these agreements or do you have investors who can participate?
We originate home equity agreements for investors, so we don’t take capital risk ourselves. We are in the process of delivering a platform that will enable smaller investors, or non-accredited investors, to buy into these home equity agreements.
A home equity agreement has a return profile — there’s an obligation on the part of the homeowner. It’s not a debt obligation, but it’s still a promise to do something in exchange for the cash that they receive. Now, there’s a return profile which creates a real estate asset. In other words, it’s secured by a lien on their title. So, it’s a secured investment that has a return articulated in the agreement. It has some value. At the moment, QuantmRE is originating those for other investors.
What we plan to do is take each one of the home equity agreements and, using some clever blockchain technologies, chop each into lots of little pieces. Then, smaller investors can then buy fractions of a home equity agreement. So, very soon, you’ll be able to go onto our platform and invest in a number of these different home equity agreements. You’d be buying into a fraction of a single agreement.
Okay, I have a couple of questions. One, the plan to get smaller investors involved… Is that like Fundraise, or some kind of crowdfunding platform?
Yes, very similar. It’s a concept that enables people who don’t have deep pockets to buy into the same types of agreements that are normally reserved for hedge funds, family offices and institutions.
The big difference is that we intend to make it tradeable on both sides. That’s a big leap for us — apart from the fact that we are making this asset class available through a home equity agreement, which hasn’t been done before us. There’s a number of things that we are acting as the pathfinder of.
Being able to trade your investment will definitely be interesting. But how do you envision the valuation of that? For example, if I have stock in Apple, I can see what it’s worth instantly, being that it’s traded on exchange. With a home equity agreement, it’s not as liquid and the pricing isn’t as readily available. How do you see that working?
On a stock, the price is really just the function of buyers and sellers. If there are more buyers than sellers, the price goes up. It’s literally the supply demand calculation.
Real estate is slightly different because even though it’s still driven by supply and demand, there are third party valuations. Now, a home equity agreement’s return is directly proportional to the value of the home. If we know what the home is worth, we can instantly calculate the value at that time of the home equity agreement. Oe is a direct coefficient to the other.
The residential homes in the areas we invest in have a lot of information available, as to the value, on websites like Zillow, HouseCanary and CoreLogic. These are huge companies that provide enormous amounts of information, updated daily.
We know the value of the home when we go into the agreement, because we have that third party appraisal. So we know that’s our data point at the beginning. What we need to do is track the change in value over the term of the agreement. We do that, monthly, by using third parties. Again, HouseCanary and CoreLogic are examples.
As an owner of a fraction of a home equity agreement, you can decide what you want to sell your fractions at. The net asset value is only a guide, because we don’t know what the property is going to be sold for to the ninth decimal point… until it’s actually sold. But we have a very good indication of what the property is worth. But again, you are free to buy or sell those fractions at a price of your choosing.
I know you mentioned that this is upcoming, and it’s really for the small investor. You also mentioned the accredited investor. Is QuantmRE currently coming up with a way accredited investors can invest in home equity agreements?
We’re in the process of doing that, yes. It’s interesting to point out that one of the other companies in this space, called Point, just announced the first securitization of home equity investments last week. That was, I believe, $146 million worth of home equity agreements. So we’re seeing this industry grow from a concept, to the beginning of institutional acceptance, to securitization. It’s following the path of some very successful home based financial products, such as mortgages.
But to answer your question, we do work with a small number of accredited investors. Our plan is to significantly expand that over the coming weeks and months.
Is there anything else you see as “upcoming” in the industry?
Expected Growth in This Industry
Well, to give you an idea of the scale, the amount of equity in residential homes in the US is over $23 trillion. The number of homeowners who have 50% or more equities is over 18 million homes. So it’s a very large asset class.
I think we’re going to see more money coming in from similar institutions that have invested in mortgage products, because they’re getting access to that same asset class, which is residential real estate. And again, we saw an announcement a few weeks ago that one of the other companies in this space had received capital commitments of a billion dollars to invest in home equity agreements. That would’ve been unheard of a year or two years ago.
We’re going to see a lot more money coming in, and I think it;s a really interesting space because it solves a major problem for homeowners. That’s what drives all of this.
In other words, you could create a really cool product, but if it doesn’t solve a problem, it’s not going to go anywhere. This really solves a problem for homeowners.
This is a way of accessing equity, unlocking a major asset and putting cash to work in other types of investments. People with tons of home equity can now access that, without debt and without the fear of missing a monthly payment.
“This is a way of accessing equity, unlocking a major asset and putting cash to work in other types of investments.”Matthew Sullivan
You mentioned on the investment side, potentially using blockchain. Is that used as a central repository of who owns what, eliminating the need for a custodian?
Yes. And it also creates visibility. If you’re buying something from a technological perspective, it’s really good to use because it’s scalable, cost effective and it allows you to keep track. Blockchain is a distributed ledger technology, the keyword being ledger.
We use blockchain in its truest sense, to keep track of all transactions as they move from owner to owner. It’s done in a way that is available to be viewed by the public. Now, you can’t tell who the buyer and seller are, unless you are good at interpreting 128 bit encryption code.
This builds confidence, because people can see an audit trail of transactions. It’s also very good from a securities law perspective, because we need to be able to trade these securities in a compliant way. So blockchain really helps us get to market quicker, more cost effectively and in a way that generates trust.
Yeah, that makes sense. So we’re just about out of time. Matthew, I’d like to thank you for being on the show. You gave some great information about this really exciting, new real estate asset class.
How best can someone reach out to you if they’d like to find out more information about you or home equity agreements?
Everything’s on our website, QuantmRE.com. There, we have a calculator where you write in your property address and we’ll give you an estimate of how much we could unlock for you. We have an e-book that you can download that describes how these work. There’s lots of video and podcast episodes there, too.
Great. We’ll link to that in the show notes. Thank you to everyone who tuned into today’s episode.