Sep 15, 2021
Matthew Sullivan is the CEO and
Founder of QuantmRE, a company that supports homeowners by helping
them unlock some of the equity in their home without taking on more
debt. A seasoned entrepreneur, Matthew has a proven track record in
real estate innovation through his experiences as Co-Founder of the
$50M Secured Real Estate Income Strategies Fund, and as Founder and
a President of Crowdventure.com, a real estate crowdfunding
company.
In this episode we talked about:
Useful links:
https://www.linkedin.com/in/mattsullivanco/
https://www.quantmre.com
Transcriptions:
Speaker 0 (0s): Welcome to the working capital real estate
podcast. My name is Jesper galley. And on this show, we discuss all
things real estate with investors and experts in a variety of
industries that impact real estate. Whether you're looking at your
first investment or raising your first fund, join me and let's
build that portfolio one square foot at a time, or at least in
gentlemen, my name's Jessica galley, and you're listening to
working capital the real estate podcasts, another special guest
today. But before we get there, just wanted to let listeners know
we have a website up for we've had our up for a while, but working
capital
podcast.com.
If you have any questions regarding the show, anything real estate
related or anything related to our guests, feel free to reach out
there. There's a just asked Jesse section. Now without further ado,
I have Matthew Sullivan on the show. Matthew is the CEO and founder
of quantum R E a company that solves a real problem for homeowners
by helping them access a portion of their home equity without
taking on more debt, Matt, how's it going,
Speaker 1 (1m 4s): Jesse? Thanks for having me on.
Speaker 0 (1m 7s): So Matt excited to have you on the show. It's a,
you know, very, very unique kind of discussion. We're going to have
specific to, you know, the product that you're offering. So maybe
before we start with that, what we normally do with guests is have
a little bit of a background, you know, for listeners, how you got
into real estate judging by the accent. You didn't grow up in salt
lake city.
Speaker 1 (1m 29s): Yeah, no, that's right. No, it was a
Birmingham, Alabama, actually, there we go. Now I'm originally from
the UK, moved over here about eight years, eight years ago. And
I've been an entrepreneur all of my life, which literally
translated means I have been unable to get a job for most of my
life. So congenitally unemployable from the get go started out life
as a stockbroker in the late eighties, which was a tremendous fun
breaking countries like Hong Kong, Singapore, Malaysia, Indonesia,
Philippines, Thailand, you know, when they were all the assay and
tigers then moved into stint with a few buddies at a small
corporate finance house.
And then really just decided that I really wasn't very good working
for anybody else or other that was decided for me. So I decided to
become an entrepreneur, got involved in telecoms and then the
internet came along and really just, there was this fantastic sort
of journey dealing with all things technical and platform based.
And finance-based spend a few years working with sir Richard
Branson with the Virgin group. And we worked on projects like V2
music and Virgin clothing and Virgin cosmetics.
But w one of the things I never did, but always wanted to do was
get involved with real estate. So when I moved over here, about
eight years ago, I set up a real estate crowdfunding company. So it
was one of the very first crowdfunding companies to come out of the
changes in regulation and legislation that was, that was created by
the jobs act or the jumpstart, our business startups act that was
signed into action by Barack Obama.
And what that act did was it enabled you to publicly solicit for
funds for what are essentially private placements say beforehand,
you couldn't publicly solicit, or you couldn't advertise private
placements, but the jobs act allowed you to publicly advertise your
deal or your, your PPM. And that really created, or was the birth
of a number of different crowdfunding platforms.
And so that's, that was my baptism by fire into real estate, but it
was sort of leveraging everything that I'd learned beforehand
about, you know, platforms and technology and regulations and, you
know, securities laws. So, you know, it was a, it wasn't a path
that was totally untrodden
Speaker 0 (4m 9s): Right on. And by that solicitation, I assume
you're referring to, what's known in the states is a regulation. D
I think it's correct me if I'm wrong. 5 0 6 B and 5 0 6 C. One of
them is only to accredited investors. And then the other one is
open advertising. Is that right?
Speaker 1 (4m 25s): If you say five or six, B is actually available
to accredited and non-accredited investors, but you have to have a
prior significant prior relationship with those people say, you
can't generally solicit, so you cannot advertise it five or six C
only available to accredited investors. And you have to prove that
they're accredited through independent third parties. So you can't
just self-certify that you are an accredited investor under five or
60, but you are allowed to advertise your deal or your PPM or your,
your offering to, you know, to a wider market.
Speaker 0 (5m 7s): So you move from the space that your, you were
currently in prior to real estate, you go into kind of crowd
funding, this idea that I guess basically the democratization of
private placements, to a certain extent we saw in our industry, a
bunch of these crowdfunding companies start up, where do you go
from there in, in your career?
Speaker 1 (5m 28s): Oh, I gave him one of the challenges really of
trying to start something in a, in a new environment is that it's
difficult to get that initial traction. So one of the gaps that I
had was, you know, local or US-based real estate knowledge to say
it was never my intention really, to do anything other than partner
with people in the U S who have real, you know, you're, you know,
real estate background. So as very fortunate, meet a couple of guys
that I'm still working very closely with today, who are, you know,
very successful and profit real estate developers and
investors.
So there are, they became our partners. But one of the things that
I also came across in the early years about five or six years ago,
was this concept, or rather a construct, an agreement that allowed
owner occupied properties allowed the owner to access some of their
equity without having to borrow money, say it was, it was something
that wouldn't have worked a few years ago because the agreement
itself was structured in a way that meant that it was either not
investible, or it would have created all sorts of potential issues
for the homeowner, but I sort of kept a close watch on it, and it
was fascinated by it and intrigued by it saw that industry begins
to develop in the contracts, begin to develop and decided that this
is something that really could be an incredibly large untapped
industry.
So it felt like I was at the beginning of mortgage securitization.
And so I really wanted to get involved. We set up quantum Ari with
the mission to enable homeowners, to unlock their home equity
without taking on more debt. And at the same time, creating a
marketplace where the paper that is created when you allow a
homeowner to access their home equity, where that could be traded
and creating liquidity for home equity effectively.
So, so, you know, this, this whole idea of making home equity
accessible investible and tradable was, you know, fascinating,
intriguing, and it's something that still, you know, is hugely
exciting, you know, even today for four years on, yeah.
Speaker 0 (8m 1s): When you say the CMBS feel like you're on the
ground level, just reminds me of the big short kind of that scene
when they, when they first started realizing they're tradable
securities that they could package in terms of, you know, before we
get into the nuts and bolts of it. Cause it, it really is one of
those things where if you haven't heard of this type of, I don't
know if you'd call it an asset of structure before, it's almost too
good to be true. People are thinking, okay, how do, how is it
possible to unlock equity in my home without taking debt? But
before we get into that, can you just talk a little bit about this
concept of house rich and cash poor?
Speaker 1 (8m 36s): Well, it's a real problem. And even though it
sounds relatively benign for people that have the bulk of their
wealth tied up in their home, even though on paper, they may be
worth hundreds of thousands of dollars. The only way that they can
access that is to go back to the bank and borrow money. Now,
particularly with the current economic circumstances that have
been, you know, triggered by COVID. And in particular, we're seeing
today more and more people that are in the strange position where
on paper, you know, they're, they're worth a lot of money, but on a
day-to-day basis, they are struggling to find the cash to meet
their everyday expenses, expenses, you know, like grocery bills,
school fees, that sort of thing.
And so the term house rich cash poor really is sort describes this
position where, and there are tens of millions of Americans that
are in this position where your, the bulk of your wealth is in a
single, concentrated nonfinancial, non cash flowing asset, which is
effectively the equity in your home. And the only way, if you don't
want to borrow money, the only way, you know, previous to, to, to
what we offer is to sell your home. So you're, it's a bit, you
know, it's a two-edged sword, it's this, the wealth becomes this,
this, you know, the, the sort of necessary evil, why would you want
to sell your home?
So that is what we mean by that is it's something that is, and
we're seeing this even more with the rampant house price
appreciation over the last year or so, you know, that gap is
widening, you know, even more,
Speaker 0 (10m 16s): Yeah, fair enough. So in terms of the actual
mechanics of it, I believe home equity contracts is, is the, I
guess you call it a product. I would, I would say,
Speaker 1 (10m 26s): Yeah, I, you know, in the same way, it's a
financial product. Exactly.
Speaker 0 (10m 29s): So this, you know, financial instrument, this
product basically run us through it. What is it exactly? And how
would it work for, you know, somebody that would be interested that
has, you know, maybe a 50, 60, 70% plus equity in, in terms of
their, their equity to, to their asset value.
Speaker 1 (10m 50s): Sure. Well, let's, let's start really by, and
again, I'm very conscious of what you said earlier, which is that
this is too good to be true because that's, that's something that
we come across frequently and we can really understand why somebody
thinks that. But if we start by saying what, it's not in a home
equity agreement or home equity contract, it's an agreement, it's
not a loan, so we are not lenders. So it's not a home equity line
of credit. It's not a mortgage, it's not any form of debt.
And the easiest way of describing it is if you look in the
commercial world, the capital stack of any sort of commercial
development comprises a number of different layers. So you've got
your senior debt, junior debt, there's mezzanine financing, that's
preferred equity, the shared appreciation mortgages, which have a
combination of debt and equity, pure equity. So there are different
types of funding layers within the typical cake that you get in a,
in a, in a commercial real estate transaction, if look at
residential real estate, the capital stack there it's, it's
primarily debt.
So a few different flavors of debt, you know, there might be a home
equity line of credit. There might be a reverse mortgage. There
might be a, you know, standard sort of mortgage. There might be a
variable rate mortgage, but it's kind of variations of the same
thing. So the equity portion of the home, which in, in your
example, if you've got 50, 60, 70% equity, that's the majority of
the capital stack doesn't have any mechanisms attached to it, to
enable other people to invest in that.
So currently from an investor's perspective, you've got a $23
trillion asset class, and that's all of the equity in, in
residential homes in the U S that you can't invest in because you
can buy some of the debt. Sure. You can go and buy a tape of, of,
you know, first position or second position performing a
non-performing notes, but how'd you get your hands on the equity in
homes that are not for sale. So it's really interesting from an
investors perspective, but from the homeowner's perspective, what
instrument, the option agreement in its simplest form, it's a
transfer of ownership.
So we do not entendres owners. The agreement states that the owner
commits to share in some of the parent and future value of home in
exchange for cash lump sum today. So the trade is we're investors.
We're not lenders as we're not lenders, there's no interest. If
there's no interest, there's no monthly payments. So that sort of
that's, that's how we don't have that, that issue there, but we do
get paid and we do make money on the transaction.
And the way we do that is by sharing in the appreciation when you
get to sell your home. And the way we do that, as I said is through
this agreement, that really is very similar to an option agreement.
So it sits on the side of the ownership structure of the home. It's
protected by a lien on title. So that means that when the home is
sold and when we go through the SBA process, the lien holders such
as us, we get paid before the homeowner gets the balance. But what
that enables us to do in exchange for that initial investment is
get our investment back together with a return on that investment
by way of a share of the appreciation.
Speaker 0 (14m 24s): Yeah, that makes sense. The way, when I first
heard you, it's funny, we, we connected, you know, one way, but I
also, I remember I was like, these things sound so familiar. I've
heard a podcast on this before, and we'll be holed. It was a, it
was a podcast you were on. And the way it was easy for me to think
about, it was kind of this idea of having a, you know, a player in
the juniors that you're basically kind of making an agreement with
them that, you know, provided you go pro we're going to take a
little bit of a piece of that, your future, you know, future
earnings at the point where there's some sort of capital event.
So if I understand it correctly, correctly, you know, say just for,
instead of percentages is figures say you have $500,000 of equity.
Number one, I assume you, you know, you can take a piece of it. You
can T you can have this product for all of the, all of it, and
whatever way you go, you, you get this product. And basically
you're providing capital to me. There's no interest payment, it's
not a debt instrument. So I don't have anything going out. However,
if you know, use Toronto as a good example of, we've had a bit of a
hockey stick graph in terms of appreciation in our market.
So what you would see in five years from now, if I go to sell this
house, it's almost as though there was a lien on the house that
you're in, you're in first position that you have, I assume in your
agreements, maybe you could talk a little bit more about this.
You'll have a, you know, a certain percentage return that that is
basically paid out to you, kind of like a waterfall. And then
anything above that would be, you know, equity appreciation that
I've made on the home. Do I have that right?
Speaker 1 (15m 55s): Yeah. It's we are partners and we share in the
appreciation. And what we do when we go into that agreement is we
are very specific about what that percentage is. So the agreement
is clear and we say, you know, this is the investment, it's an
absolute sum. So it's a, it's a number. This is the current value
of your home. And we agree on that by using a third party
appraisal. So these are people that we don't instruct
ourselves.
They're instructed through a third party intermediary. So it's, you
know, we try and be as arms length as possible. So we've got the
starting point. And we then say that when you sell your home, a
fixed percentage of the value of the home goes to us. So
effectively, what you're doing is you're selling some of the
current value of your home to us or the, or the, the rights to that
at a discount. So it's the whole present value, future value
calculation.
In other words, money today is worth more the money in the future.
So we're going to get our money in the future, but if we're going
to do that, then we want some sort of discount to factor in all the
various risks that could happen along the way. And that's really
what it is, and it's in its simplest form.
Speaker 0 (17m 18s): So if you were to explain it a little bit more
to people in my industry on the commercial real estate side, would
you, would you start the conversation by saying, think about this
as preferred equity? Yeah.
Speaker 1 (17m 29s): It's exactly what it is. It's, it's a
preferred equity position where our equity, you know, is paid
before your equity. So the definition of preferred equity, we get
out our equity first, but it's not debt. So we're always in a sort
of junior position, or we're always behind the primary or the
secondary lenders. So the debt portion of your home will always
take precedence. If you don't have any debt, then obviously we'll
be in first position.
But in most cases, we're in, you know, second position we try and
avoid being in third or lower.
Speaker 0 (18m 8s): So your subordinate to the debt, if any, but
you are senior to the current equity or, or the, you know, which is
likely the homeowners.
Speaker 1 (18m 17s): Exactly. But there's also a much more of a
partnership element with a debt product. Your capital is always do
no matter what the value of the underlying security is. So, you
know, the lender will always hope that the security is worth more
than the capital. Some should. They have to call the loan in our
agreements. The amount that you repay is directly proportionate to
the value of the home when you sell it, or when you decide to
refinance, if you want to buy us back.
So there is a potential for our investors to get a lower return,
or, or if house prices do significantly fall and you sell, we may
be in a position where we get back less than we invested so that
the other big differences, the repayment is directly correlated
with the value of your home when you sell it.
Speaker 0 (19m 14s): So, one of the things that when I started
looking into these, what I was curious about is this aspect of, you
know, regulatory environment changes regardless, you know,
depending on state country, one of the things for us, we found that
when we would do say a cash out refinance or a home-ec, let's,
let's use the home equity line of credit, because it's a little bit
easier. So say you have an ability to take a 300,000 of a home
equity line of credit. Now you don't have to tap into it yet,
right?
That's the whole point of it is that it's going to be there. Now,
what we have found is that from a credit perspective, it will
affect your credit because you have the ability, basically the bank
knows that you have the ability to access it. So, so I've seen a
bit of a shift that people are careful with how much that they take
out. I remember in the past, it used to be, get as much as you can
have it, sit there, but now it's a burden to a certain extent, from
a credit perspective, how does this play into, you know, how banks
look at you is if somebody is, you know, getting approved for
another mortgage for a different property, how does this show
up?
How does the home equity contract, if it does it all?
Speaker 1 (20m 23s): Well, again, that's the thing. It doesn't
because it's not debt. So because it's not debt, there's couple of
other advantages, one it's effectively your own capital that we
have bought from you at a discount. So it's, it's the sale of
something that you already own. So there is no debt element to it.
So it just does not appear on your credit report as debt, even
though we do check your credit report, before we go into the
agreements, to make sure that your someone that we'd like to invest
alongside when the transaction is completed, it's not a debt
transaction.
So your credit score is not affected. It doesn't appear as an
additional line item. Now, the benefits of that is that you can use
that money to pay off other creditors that are part of your credit
score. So if you have existing credit card debt, or if there is
some lane that you want to refinance, you can do that because
you're not robbing Peter to pay Paul as it were. Now, you're not
over leveraging, you're actually reducing your leverage. And again,
these are all concepts that psychologically one sort of struggles
with because you're always, you know, tuned to think of this as
debt, but you're not, you're actually paying off your credit card
or your other debt with wealth that you have been able to access
from your home equity.
Hmm.
Speaker 0 (21m 50s): Yeah. That makes sense. In, in terms of the,
like you mentioned before, you know, call up or basically it's,
it's an option. What I'm curious about, you mentioned if, if there
was a situation where a market changes now, obviously it's not like
shorting a stock. There is an unlimited losses. We don't go to
negative numbers in real estate. However, if, if there was a 20 or
30% downturn in a given market, and for whatever reason the owner
had to sell, how would that, how would that play out in, in terms
of what the payout would be for, for that preferred equity
position?
Okay.
Speaker 1 (22m 25s): Th there's a, there's a calculation for the
amount for the upside, and there's also a calculation that's agreed
for the downside. So in other words, whatever, the percentage that
we've agreed at the, at the beginning, that, that standard, the
two, and normally with our agreements, the two are the same. There
are other companies in our space and they have slight variations.
So they'll pay a certain amount or you will pay a certain amount on
the upside and the investor will pay a slightly different number on
the downside. But those figures are all agreed on the basis that if
the property does fall below a certain threshold, the investor is
going to get back less than they invested.
You know, there is no recourse to the homeowner. There is no
ability for us to set a minimum return because then that starts
falling into the purview of being alone. So, you know, you've
either gotta be fish or foul in the solar business. So, you know,
if it is a risk-based agreement, then we have to take risk.
Speaker 0 (23m 28s): So I, I imagine somewhat similar to
syndications or other private placements. It's not a guaranteed
return. There's a bit of a preferred return.
Speaker 1 (23m 38s): It is exactly. But what you do is in the
underwriting stage, you're careful with where you're investing.
We're not investing in properties where we're not likely to see
house price appreciation. And there are a number of states where
you're not going to see the same level of appreciation. Then you're
going to see in California or New York or Florida, for example. So
we tend to operate in only a certain number of states. And in
addition to that, we're careful about where we invest.
So there's certain minimum house prices and the certain maximum
house prices and the ha the maximum house price is sort of
counter-intuitive because you would've thought we would want to
invest in a $20 million Hollywood mansion. But the problem is when
the market starts getting a little uncertain, if you get three
appraisals round one, we'll say it's worth 10 million. One was that
it's worth 20 and another will say it's worth 30. So you can't
price. Those types of houses say, w you know, we stay very much in
a sweet spot where price transparency and price discovery is far
easier.
So we try and reduce the opportunities for our investors to, to
lose money. But again, there has to be risk. Otherwise it's not an
investment, but, but, you know, we try and mitigate that risk by
using intelligence and underwriting and information and forecasting
to, to give us the best chance.
Speaker 0 (25m 2s): Yeah, it makes sense. But Matthew, you know, we
always have three appraisals, the, the broker, the buyer and the
bank. Yeah, exactly.
Speaker 1 (25m 8s): Yes, yes.
Speaker 0 (25m 9s): That's. So that was basically leading up to my
next, my next question. It was more from, from the business
standpoint, in terms of market selection, it seems like, you know,
one of the challenges we always have as real estate investors is
that we want areas that are appreciating from a price perspective
where we can force appreciation, but also, you know, the
double-edged sword, we don't want cap rates to be compressed. It
seems like you're, you're in a position where you can at least
focus a little bit more on what are fundamentally a good markets
for price appreciation. How do you model that out?
What do you look for in those markets?
Speaker 1 (25m 43s): Well, first of all, the difference between
this and other investments is the scalability, because we are
investing in homes that are not for sale. So this investment has a
number of benefits compared to ownership of real estate. So if
we're looking to buy real estate in certain areas with that comes
the burden of management, you know, debt servicing, perhaps, you
know, tenants, servicing, finding tenants, repairs, et cetera. So,
you know what we're doing, doesn't involve any of the burdens
associated with home ownership.
So we have a much wider of pitch or a much wider field to look at
because we are co-investing in properties that are not for sale. So
that's a slightly different, we're a very different dynamic than
actually thinking, where are we going to buy? So what we're looking
at really is generally over time, we know that, you know, real
estate will appreciate in any 10 year period, and it is most likely
to outpace inflation the way that the agreement is structured, it
builds in a form of structural leverage.
So what that means is even though your house may only appreciate by
three or 4% a year, the agreement itself gives the investor a
bigger return than the underlying house price appreciation. So
we're not looking to get a one for one, the agreements are
structured. So we get maybe a two or three X return on what the
underlying house price appreciation is. So if your house goes up by
5% and you sell it, we're probably going to make about three times
that once we've got our share of the equity back.
So there's we, so we have that non debt leverage that's built in.
So you've got an option agreement that has a leveraged return, but
we're not using debt. There's a bit of downside protection because
we're buying into your property at a discount. So, so there is some
protection for the investor. So that gives us the ability to
actually look at quite a wide range of real estate, because we're
not restricted to just look at property that's for sale. So we can
actually go and pick some really prime estate real estate that is
owner occupied and could be owner occupied for the next, you know,
20 or 30 years.
Speaker 0 (28m 10s): So if I understand that correctly, say you
have a million dollar asset. It goes up in a given period by say,
6%, $60,000, but you have built in an equity position of a hundred
thousand dollars or preferred equity. So now that six 60,000 is 60
per 60,000 with the initial investment of a hundred. And that's how
that multiplier kind of plays out.
Speaker 1 (28m 32s): Yeah. I mean, the numbers are, if you have a
million dollar home and we unlock, we access for you a hundred
thousand dollars, that's 10% of the current value of the home. What
we will then do is say, when you sell your home, you give us 16% of
the value of your home at the time you sell it. So let's say you
sold it for 1.1 million. We would get 16% of 1.1 million.
So we would get about 170,000. So our a hundred thousand dollars
becomes $170,000. So that's a good return for us now, from your
perspective, you know, over a period of years, the re you know,
the, the actual returns compress. So it becomes close to the sort
of costs that are the average home equity line of credit would be,
but that's, that's in the, in the longer term, in the shorter term.
However, if you sold your home, that would be quite expensive. So
we build in a cap where the most that we can get as a return on our
investment is kept each so that if your property does rocket up,
and then, you know, the amount that we get is actually kept so that
the balance goes to you.
So, but in any case, we are buying some of your current value at a
discount, and that serves two purposes. One, it gives the investor
some cushion in case the property goes down in value, but secondly,
it gives the investor, this sort of structurally leveraged upside.
And for you, the homeowner, it's great because you've got access to
some of your capital. It's free and clear. So there's no monthly
payments, there's no tax implications. And I'll talk about that in
a second.
So you don't have to pay income or capital gains tax at the time
that you get the capital and you can use that money for what, and
if you're paying off credit cards at 30% a year, then you're,
you're doing very well. Or if you're investing as a down payment in
another property, because that's not debt, then you've suddenly got
yourself another, another property in your portfolio.
Speaker 0 (30m 42s): Yeah, I would imagine also no land transfer
tax, because like for the, on the investor side, because you're
not, you're not purchasing exactly.
Speaker 1 (30m 50s): There's no, no change of ownership, but
there's no, no triggers. So from a mortgage perspective, there's
no, you know, early settlement due to, you know, sale or transfer.
There's no partial transfers. It doesn't trigger property tax
reevaluations. It doesn't trigger capital gains tax. Now, the
interesting thing is there's obviously a cost of the money. So if
we provide you with a hundred thousand dollar investment is going
to cost, you let's say $150,000. If you settle a few years time,
now that $50,000, which is the cost of the capital, you can use to
offset against any capital gains tax liability you may have on that
property.
So, in other words, if you were going to, if you had a $500,000
gain, you can reduce that gain by $50,000 now. Yeah.
Speaker 0 (31m 40s): I mean, that's, that's where the first, you
know, first thing that comes to mind is too good, too. Good to be
true. It's it's like a tales. I wouldn't heads you lose, but
Speaker 1 (31m 50s): Yeah, again, it's just think of it in terms of
what, what is the preferred equity structure in a commercial deal?
Yep. Same, same thing. So the owner of a commercial property gets
to offset the cost of the, in the app to against the capital gains,
because it's, it's, there's, there's no magic. All you're doing is
you're just using financial structures that are used everyday in
the commercial world. You're just using it in the, in residential
world. Yeah. It used to it. And that's the thing, isn't it?
There's no difference.
Speaker 0 (32m 22s): Yeah. It, it, you know what I, it really is.
And I'm sure this is, this is what made me, whether you'd use the
word challenging, but this is the thing, the education piece, where
people are so caught up in the idea, especially with residential,
anytime I'm taking money out of this house, it has to be attached
to some sort of debt structured that where, whereas in the capital
gains example, again, even, even myself, I've been in commercial
real estate industry industry, my whole career, and the way I think
of it, even having to catch myself, oh, that's right. It's a cost
of the transaction.
It'll reduce your liability.
Speaker 1 (32m 55s): Exactly. And that's the biggest challenge we
have is the psychological attachment. People have to the equity in
their homes. The biggest challenge we have, if all the, I'd say the
biggest roadblock is for people who don't like the idea of giving
away something that they haven't got, you know, so that they're
trading the expectation of having future equity. That, and the
interesting thing is people look at this in a very narrow
focus.
So when you talk to them about the, the future value of their home,
excuse me, they see that as absolute. Well, they don't take into
account is w what could happen to them and their lives and their
job, or, or, you know, healthcare bills, or that they're assuming
that everything in five years or 10 years time will be exactly the
same as it is today. And their equity will be there for them. So
what, after, you know, a bit of conversation, then people begin to
start unpacking that stuff and realize that, you know, if I do have
a life change, or if my, I do lose my job, then I'm never going to
be able to borrow money.
So that equity, you know, I might, I might have might as well have
$20 million worth of equity because I can't ever get my hands on
it.
Speaker 0 (34m 13s): Yeah, for sure. I mean, it's one of those
things, I think as real estate investors, we're a little bit more
open to the idea of the, of the fact that if you have a hundred
percent of your house paid off, or a hundred percent of an asset
income producing asset paid off, it would be looked at as a
negative thing from a real estate investors point of view, see your
return on equity is going lower.
Speaker 1 (34m 34s): Yeah, exactly. So trying to have that
conversation, you can do it, but you have to pick your, your moment
because what you end up doing is you're not just talking about your
product. You're then embarking on this sort of financial education
journey, where you're talking to people about the value of their
home. People want to pay their mortgages off because they want to
be debt free. But then you say, well, look, you realize that your
house that was going up in real terms, 15 or 20% a year is now
going up by 3% a year, because you've lost that three to one or
four to one leverage.
So there is this such a thing as good debt, if you can't afford the
payments and you're getting that leverage effect. Yeah. So sure
there is education is that it does lead onto a whole other
conversation, but you know, all of it's very positive because you
know that there is no gotcha. There's no catch to what we do. The
decision is this is what it's going to cost you. This is, this is
how we make our return. This is what you get in exchange. You know,
what do you think, you know, here, here is everything black and
white.
And so you can make very informed decisions about this, which is,
which is great. But as I said, it's not, it doesn't suit
everybody.
Speaker 0 (35m 50s): Yeah, for sure. I could definitely see it from
that psychological barrier, especially, you know, the, the American
kind of idea of home ownership is, is sacrosanct. And you kind of
toying with that or talking about that. If it's not done, like you
said, if you don't pick your pick your place or your spot, I'm
curious Matthew, the, the actual investor side of the coin. So when
you're, when you're looking for investors to invest in these
products, what does that side of the equation look like in terms of
how you raise capital or how you source investors and Instructure
that side of the, the coin
Speaker 1 (36m 23s): Biggest challenge? Again, this is something
that we came across right in the very early stages, four or five,
six years ago, you've got a, an asset that potentially doesn't pay
off for 30 years. And in the meantime, there's no flow. So it's
like, so everybody wants stuff that pays off next year with tons of
cashflow. So it's like, you know, well, how do you, how do you go
about fixing that problem? And there are investors. So there are,
you know, hedge funds and family offices that have capital
allocations that are suited to long-term asset backed
investments.
So, you know, money comes from those areas, but what we've built on
our is an exchange. So our objective is to create a, you know, a
system, a marketplace where the paper that's generated when you
create a home equity agreement, that return profile that is backed
by the lean on real estate. So you've got a real estate asset
backed investment with a structurally leveraged return and downside
protection on residential real estate in prime areas.
It's a really good investment downside, no cash flow because it's
equity based. And potentially you've got a ways a long time before
you get the liquidity event. If we can create a marketplace where,
where you can sell your interest. So as the underlying value of the
property goes up, your return is going to go up because the two are
directly linked. So in the same way that there's a marketplace for,
you know, life insurance, settlements, and other types of, you
know, non-cash fling, you know, securities, we've created a
marketplace where you will be able to buy and sell fractions of
home equity agreements.
So you can or will be able to build a portfolio of homes or the
equity in homes that are not for sale. And you don't have to buy
the whole chunk we're using blockchain technologies and the
efficiencies that we're partnering with the algorithm protocol. So
what we do is we take a home equity agreement. We use these super
efficient blockchain technologies to chop it up into little pieces.
And the blockchain allows us effectively to keep track of where the
ownership is of all of those little pieces at any one time.
So we can use that and we can create this marketplace where those
fractions can be bought and sold, that creates more liquidity or
liquidity options for the investor. And then that suddenly
completes the picture.
Speaker 0 (38m 55s): So in terms of, you know, you have the average
investor looks into a home equity contracts wants to go forward
with it, ha what's the first step that they would take.
Speaker 1 (39m 5s): This is stuff that w that is in the pipeline.
We have a few weeks away from being able to get our first few deals
on the platform. So there's a lot of structuring, fair amount of
technical work. That's still in the finishing touches. You can go
to our website today and register as an investor. You can see what
the platform looks like, and it's going to be very familiar. It's
very similar to crowdfunding platforms, or, you know, E-Trade or
platforms where you see the investment.
You can find out details about what's behind the investment, what
the terms of the agreements are, and you can make informed
investment decisions. You can't do that yet, but it's going to
happen very soon.
Speaker 0 (39m 49s): So the, the markets just generally speaking, I
assume, right now, the focus is a U S specific markets in the U S
or like you said before, there's, you know, there is cushion in
terms of which markets you can look at. And like you said, it's,
you're, you're buying houses that aren't for sale or, sorry,
you're, you're investing in, in home ownership partnerships with
homes that aren't for sale.
Speaker 1 (40m 12s): I think really, for us to move into, I mean,
we're active directly in California and indirectly through partners
in 18 other states. And that's probably going to be about the
number of states, because there are a number of states where you,
you have regulatory issues. You've got challenges like in Texas,
for example, homestead regulations there make it unattractive for
investors, because it's very difficult to, you know, protect the
investors if, if something goes wrong with the agreement.
So it's a combination of where is the appreciation going to be? How
predictable is that appreciation or depreciation and how liquid, or
how, how attractive is that marketplace? And also what's the
regulatory, what regulatory hurdles, or would we have to overcome.
And again, the us is sorry to be master of the bleeding obvious,
but it's a very large place. There are tens of millions of
homeowners who have more than 50% equity in their home.
So, you know, th th th th it would just be unfeasible to make even
a tiny dent in that available marketplace, you know, in, in our
lifetime.
Speaker 0 (41m 32s): Yeah. It's pretty, it's pretty crazy in terms
of the actual number. I think you mentioned earlier right now, from
an equity point of view, roughly 20, 22.
Speaker 1 (41m 41s): Yeah. Freddie Mac, the, they publish their
figures frequently. If you look at the entire residential
marketplace, the amount of equity compared to debt is around 20, 23
trillion. That doesn't mean to say that that's available equity. I
think the available equity figures around 9 trillion, which is
still enough to keep you occupied for a few weeks
Speaker 0 (42m 4s): And not to put you on the spot here, but I know
it's always ebbed and flowed in the states in terms of percentage
of people that own their homes. You, I think, you know, from the
sixties to low seventies to we're we're where are we at right now?
Roughly?
Speaker 1 (42m 17s): Yeah. I don't know. Okay. I don't know. I know
where to find that information right now. I, again, may I, may I
plead the fifth on that
Speaker 0 (42m 29s): And you plead the fifth, it's something I'm
always curious about because it's usually in stark contrast to
European countries w you know, with, with home ownership
percentages, obviously being lower,
Speaker 1 (42m 39s): It's a lot less, I mean, if you read it. Yeah.
I remember reading lots of articles, which really it's astonishing
how low home-ownership is today compared to where it was maybe in
20, 30 years ago. So, you know, my sort of memory is that it is in
decline, which is counter intuitive, but, you know, I think I'll
stop digging at that point.
Speaker 0 (43m 1s): Yeah, no, I'll check that out. And yeah, we'll,
we'll look that up and put a link to any of the stuff we see. I, I
think it peaked, I remember reading a book 10, 15 years ago, where
it was talking about kind of the Bush one in that era being over
70%. And I was like, wow, that seems like a high figure if not
higher, but I'm right on. I want to be respectful of your time
here, Matthew, but we'll, we'll talk a little bit about where
people can reach out and link to you, but we have four questions.
We ask every guest. So if we change gears, if you're game for that,
I'll, I'll hit you with them.
Speaker 1 (43m 34s): Yes. Now I haven't actually prepared for
these. So you've actually got me on the spot. So I don't,
Speaker 0 (43m 41s): Oh, they're easy ones. You'll, you'll be fine.
You've had a bit of a storied career. You've, you've done different
things. If you kind of went back to the beginning of your career,
gave yourself advice, you know, what would you, what would you say
to a younger Matthew
Speaker 1 (43m 58s): Buy low, sell high, not the other way around
you idiot.
Speaker 0 (44m 3s): All right. Take it easy on, on younger Matt in
term, in terms of mentorship, you know, obviously you're working
with a company, you have team members, what's your view on
mentorship for younger people in our industry? I think
Speaker 1 (44m 17s): It's one of those things. The funny thing is
you don't realize you need it until you need it until you've, you
know, it's one of those things that I wish I had embarked on at a
much earlier age, but the headstrong, yeah. Matthew of younger
years felt that I should have written a book when I, when I, when I
was younger. Cause I knew everything and you know, you don't, and
there are, there's such value that people bring its perspective.
The key word is perspective.
They may not have specific knowledge about your marketplace and it
doesn't matter if they don't and you know, don't ignore them
because you think, how could you possibly help me? Because you
don't know what the high-speed split-level taper Shang ratio is.
It's they bring perspective. They bring experience in things that
are very similar. So I am a great believer in mentorship. I wish I
had, you know, listen to other people at a much earlier age. And
you know, I think I, I learned from other people is my, is, is what
I,
Speaker 0 (45m 23s): For sure. I'd like to read that book then, you
know what all book odd that there was no citations in it in terms
of resources or books you're reading right now. Is there anything
you, you kind of have on the go, you could share with listeners?
Yeah, no,
Speaker 1 (45m 39s): I don't really read that much. And cause you
know, you're constantly sort of where is the time, but, or I'll
pick a couple of books up and just read the first few chapters, but
there's a book. I can't remember the author it's called something
like getting stuff done and I'll, we'll find out what it is, but
it's something that I picked up because one of the things that I'm
thinking
Speaker 0 (46m 3s): Of getting things done, David Allen,
Speaker 1 (46m 6s): David Allen, that's it. Yeah, exactly, exactly.
That it's a brilliant book because for those of you who stay awake
on Sunday nights until three in the morning, going through
countless lists of stuff, you've got to do, he just explains that
that is absolutely the last thing you should be using your brain
for your mind is for creativity's for it's for creating things. And
if you try and use your brain as some sort of storage mechanism, or
you're going to go mad B, you're going to run out of storage
capacity very quickly.
And this is not designed to do that. So get a book or some trusted
source and write the stuff down that you need to do there. And then
you can rely on that and go to sleep thinking. I haven't got to
worry about this stuff because I know what I've got to do because
it's in my book and then your brain is suddenly unfettered and free
of this clutter. And then you can start creating stuff. So, but all
of that was it. There's one of these few books that you read that
you think, God, this is good shit. This is actually useful.
And so David Allen, you know, you know, my hat goes off to you. So
if we're writing something that is incredibly
Speaker 0 (47m 16s): Useful, you know, it's funny, you mentioned
reading a couple chapters in a book. I was just talking to a friend
about this book. Cause I think they, I think they updated it
because a lot of it, I mean he wrote it, he was a pioneer. It was I
think at the beginning of Excel. So there w there was a lot of, it
was physical storage, storage and filing systems. But the takeaway
from that book, what I told my friend, I was like, the biggest
takeaway was like, your brain is not for storing things. If you
have something amazing idea, whatever it is, get it out of your
brain as quickly as possible because that's, you know, once it's in
there long enough, you'll lose it and, and then it's gone or
potentially gone.
Speaker 1 (47m 53s): And he does. And you just, as I said, you just
go mad. Cause you, you keep trying to remember stuff and you just
never, you know, you say you're, it's it doesn't do you any good
at,
Speaker 0 (48m 2s): Yeah, for sure. Anybody also we'll put a link
to that, that book as well. And anybody interested as well, I've
found useful is the idea of a brain dump mind map, whatever you
want to call it. You know, maybe it's Monday morning, you just
write everything. Don't worry about if it's not organized, just get
it out of your head. But yeah, we'll, we'll put a link to that. All
right. Last question. My favorite softball first car make and
model.
Speaker 1 (48m 27s): It was an Austin mini 1000. It was, there's a
little story that, cause I was about eight 17, just passed my test
and I'd been working at a fruit packing firm to save up the money
to buy it. So I bought these cars 200 pounds from this gun, the
farm, and I go to at home and I had to didn't even have my driving
license at that point. And it was a 1973 yellow mini 1000. And so
when I woke up the following morning, ran outside to see my new car
at 17 road and there was a flat tire.
And so I got the Jack out of the back and started jacking the car
up to, to, to change the wheel. Cause I thought, well, I can do
this. And I'm jacking away in Jacqueline way for like, you know,
you know, a very long period of time, far longer than it should
have been. And then I sort of realized that the Jack has actually
gone through the floor because the, the, you know, the whole car is
so rusty that it's literally just like, you know, and there was a
lump sponge that had been stuffed in the back and painted black to,
you know, to pretend there's metal.
So I then realized at that point that, you know, the, the, the
world was not full of honorable people, but most importantly, men
is of a certain age. We're prone to Russ say, yeah, that was my, I
still remembered. I'm traumatized by this.
Speaker 0 (49m 47s): It's amazing. What a memory is. We bring up
with that last question. That's that's fantastic. We've never had a
mini, I would venture to guess if, if it was of that era, I mean,
that car wouldn't even be a leader. I'm thinking 6,998
Speaker 1 (50m 0s): CC
Speaker 0 (50m 1s): 98 CC. All right. I was going to say it was 800
or 900 CC,
Speaker 1 (50m 5s): 60 miles an hour in approximately four
weeks.
Speaker 0 (50m 7s): Yeah. Yeah. That's great. All right, Matthew, I
appreciate taking the time. It was great to, to kind of dive into
these contracts. I found that, you know, it's like, oh, could we
talk about one thing for half an hour, 40 minutes? And these ones,
I think you really can and need to, to understand the product. So
for listeners that want to get more information, if they have other
questions work in, they head to,
Speaker 1 (50m 30s): Yeah, the website is quantum Ari, Q U a N T M
R
e.com. Everything's on there. So we have a calculator where you
can see how much equity we can unlock there's details about the
investment side. We've got all sorts of eBooks and podcasts and
videos and articles say it's a fairly rich site. We've been around
for a few years. So, you know, there's quite a library of
information that you can, you know, download or, or read or listen
to. And also we have a phone number, so there are human beings
behind the site.
So if you want to speak to one of us, ask us a question, just, you
know, pick up the phone and, you know, feel free.
Speaker 0 (51m 8s): My guest today has been Matthew Sullivan.
Matthew, thank you for being part of working capital, Jesse,
Speaker 1 (51m 13s): Thank you for having me. And it was my
pleasure.
Speaker 0 (51m 23s): Thank you so much for listening to working
capital the real estate podcast. I'm your host, Jesse for galley.
If you liked the episode, head on to iTunes and leave us a
five-star review and share on social media, it really helps us out.
If you have any questions, feel free to reach out to me on
Instagram, Jesse for galley, F R a G a L E, have a good one. Take
care.