If you own a home, it’s probably one of the most valuable assets–if not the most valuable asset–in your portfolio. However, it isn’t always the easiest to extract value from.
Today’s guest, Matthew Sullivan, is working to change that. He’s the founder of QuantmRE, where he helps homeowners unlock their equity without taking on any additional debt. He’s also creating new opportunities for investors to invest in the equity in those homes–and is expecting over $1 billion to be created or invested in equity agreements this year!
In today’s episode, we dig into why it’s so hard for homeowners to put their equity to work, what makes QuantmRE different from other investing tools, and how he’s created a unique system that benefits homeowners and investors alike.
In this podcast interview, you’ll learn:
Andrew Rafal: And welcome back to another edition of Your Wealth & Beyond. Matthew Sullivan, welcome to the podcast. How are you this morning?
Matthew Sullivan: Very well. Thank you for having me on.
Andrew Rafal: You know, we were just chatting about your beautiful background there and how it brings out your eyes. So, thanks for putting that together.
Matthew Sullivan: It’s quite alright. I was explaining that we’ve just moved house and there is a large sort of pile of boxes behind this. And so, I thought I would spare your viewers’ eyes the mountain of cardboard behind me.
Andrew Rafal: So, Matthew, the podcast is really built on building wealth and most importantly, finding purpose. So, as we go today through your story and how you as a serial entrepreneur but kind of have a focus on helping people unlock one of their most powerful assets, which is their home, first, I want to start with what gets you up in the morning? What is your passion as here where we are today in 2022?
Matthew Sullivan: Well, I think it’s creativity and I think if one goes through the same routine every day, it gets stale. So, for the last four years, I’ve been building QuantmRE. And we’re at the point today where we are literally days away from launching a very important component. And so, really over the last four years and way beyond that, it’s really just been about having something creative to do, something that where you can see an outcome at the end of the day where you’ve actually built something. And not all days of fantastically productive but it’s just that concept of making one step of actually getting to the end of the day and saying, “I think I’ve actually taken this thing a little bit further forward.”
Andrew Rafal: And growing up in South London, correct? Was that a passion of yours as you grew up? Were you always creative and thinking about how you can fix things?
Matthew Sullivan: Well, it was more of a necessity, actually, because I discovered at a very early age that I was probably rather unemployable. And so, having to, I think there’s two things really. I started my sort of career as an entrepreneur in the late 90s and it really at that point sort of comes alive where you think you haven’t got the constraints of working for someone but it’s this sort of dual-edged, double-edged sword where you’ve got the freedom and then the creativity but you’ve actually had to live or die by your own success. But, yes, I was born in the UK, brought up. I went to school in London and spent most of my life and moved to the US about nine years ago. But for the bulk of my career, it was really just building businesses and creating something that was successful. That’s the important thing. I mean, you can create stuff but as they say in Lancashire, “It doth butter no parsnips,” if it’s not successful. So, there’s that other part.
Andrew Rafal: And one of your experiences in your working career is you had a chance to work with Sir Richard Branson. So, walk us through a little bit of what that looks like.
Matthew Sullivan: Yeah. That was a really interesting story. So, we worked as a small corporate finance outfit in Kensington High Street, which was literally a stone’s throw away from Camden Hill Road, which is where Richard’s empire was built, which is in Notting Hill. And my boss at the time, Rory McCarthy, as a small outfit, had this dream to fly around the world in a hot air balloon. Fortunately, one of his sponsors, Kodak, at the time pulled out at the last minute. And we happened to have bought a majority interest in the Lindstrand Balloons, which is this hot air balloon manufacturer which every corporate finance company does. And so, Rory wrote to Richard and said, “I’ve always wanted to fly around the world in a hot air balloon. This is the last great uncharted sort of expedition. I think it’s ideal for you. You know, would you like to come along? Would you like to be a pilot?” And he wrote back and said, “Dear, Rory, why not?”
So, we started off our relationship with Richard by being the instigators and the builders of the Virgin Global Challenger, which was that hot air global circumnavigation attempt. I’m not sure if you still remember that but from there, we ended up being pretty close to him and worked with him for a number of years as part of this sort of corporate finance team.
Andrew Rafal: So, seeing and learning from, one, I don’t know him personally but just learning from somebody who is a risk taker, who’s an adrenaline junkie. But really, I think from his success has been delegating and letting people run and be leaders and let them do their thing. So, I’m sure that was quite the experience to work with him.
Matthew Sullivan: And it was. And you’re right, I mean, I think many of us are driven by adrenaline. But one of the things about Richard that I really took away was there is a very deep, measured consideration of things. And it’s a view of life that is actually very different. It’s a view of possibilities and I think a lot of the great leaders shared is where you’re not constrained by how you’ve been brought up or your circumstances. You really just have the ability to see way beyond that. And that takes an enormous amount of vision. But also, being able to deliver on those things takes an enormous amount of hard work and dedication and skill and expertise. And so, none of it is luck. So, I mean, the risk is done. Even though he has this I think this persona of being, as you say, adrenaline junkie, it’s behind the scenes. It’s very different and very measured but still enormously inspiring.
Andrew Rafal: Yeah. Calculated to the highest degree but we don’t see that behind the scenes.
Matthew Sullivan: Yeah. And some of the guys that we worked with and this is a few years ago but they were some of the smartest and scariest people you’d ever met in terms of their intellectual capacity and their ability to make decisions. So, that was some of the stuff that you take away, the fact that these people are actually very, very smart.
Andrew Rafal: Yeah. And it puts you on your A-game. You’ve got to be always, every day bringing it to the table and be the best you can be. So, you’ve over the years, again, not really working for anybody but being an entrepreneur. I’m an entrepreneur. You know, we have the special gene, I guess, that makes us a little crazy. But as we dig in today on your latest venture, which is an interesting component to the real estate sector that I had not really even heard of before we started digging in and learned about you in the company. So, when we talk about home ownership and residential, here at least in the States, it is one of the largest assets that people have and it’s usually locked up. So, that’s a problem, right? So, let’s just talk high level of with you starting QuantmRE and coming up with a new ability for people to unlock this equity from the standard way.
Matthew Sullivan: Yes.
Andrew Rafal: Where did this come from? You know, it’s so relatively new but it is inspiring on how it could change a lot of the landscape here.
Matthew Sullivan: Yeah. It’s something that I came across very early on. When I moved over here, one of the first things I did was to set up a crowdfunding company, because at that stage, the Jobs Act had just been passed and that enabled you to create online platforms and offer online deals pretty much the first time. So, that was the beginning of what has become as a sector and incredibly successful. So, online investing, I think everyone will agree, is now a multi-multibillion-dollar industry. And real estate is one of those assets that I always wanted to get deeply involved with, never really managed it in the UK but was determined to become and to be very involved and immersed in real estate when I moved over here. So, trying to combine those two together. And the real problem with real estate is finding deals.
And hopefully, this won’t be too long of an answer but the biggest challenge is if you’re trying to do real estate transactions online, finding the deals, and if you’re doing, if you’re owning property or if you’re lending money, you’ve got to manage those loans. So, you’ve got to manage those properties. So, the infrastructure that you need to build to be able to have a very large portfolio of deals is significant. And it’s the antithesis of the platform because the platform is designed to be very light and flexible and fast leaving, yet behind the scenes. You have all of this clutter and all of this necessity to be able to deliver. And I stumbled across this concept of buying into the equity of homes that are owner-occupied where you don’t actually own the home. What you do though is you have a construct or an agreement that enables you to benefit from the equity appreciation.
Matthew Sullivan: And really, for investors, that’s all you really want. You want a share of the appreciation. And if you can avoid all of the costs and friction associated with property ownership, that’s ideal. And this was about seven or eight years ago. And over the last few years, this concept of home equity agreements or home equity investments has increased significantly in terms of the adoption by institutions that want to invest in them, and also their acceptance as an alternative for homeowners to unlock the equity in their home. Because, as you say, it is a relatively new concept but actually it’s about a decade old now. And I would say this year we’re expecting over $1 billion to be created or to be invested in home equity agreements across all of the companies in the space.
Andrew Rafal: Okay. So, this compares the old where the way that most of us know to get equity out of a property. They’re going to look at doing a refinance. We’re going to do a home equity line of credit. We’re going to do a cash-out refi or even the newer reverse mortgage. And so, we’ve got this…
Matthew Sullivan: All debt products, all different flavors of loans.
Andrew Rafal: Then let’s talk real high level here. So, what is the beyond? We’ll talk about the investor and why they would do it but me as a homeowner, why would I go down this route versus the “normal” route of debt?
Matthew Sullivan: It’s an option. So, the first thing is this is now an option that you didn’t have before. So, in the commercial real estate world, you’ve got all sorts of funding options. You’ve got debt, senior debt, junior debt, you got equity, you’ve got mezzanine financing, you’ve got shared appreciation mortgages. You got all these different flavors of equity and debt and combinations of the two. If you’re a residential homeowner, you’re restricted to debt. So, what we’re doing is we’re bringing commercial-style financial applications to residential homeowners. Now, your question is, why would I do it? Now, with a loan, first of all, you’ve got to qualify for the loan. So, whether it’s a cash-out refi or a HELOC, you’ve got to have a credit score that meets the requirements, you’ve got to have a debt-to-income ratio, you’ve got to have a salary. And also, if you take on additional debt, you’ve got to be able to meet those monthly payments. So, you’re increasing your monthly payments just to be able to borrow money to access your equity.
Now, your equity is an asset but by borrowing money, you’re not getting your hands on your asset. You’re leveraging your asset and you’re increasing your debt. Now, what we offer is an investment. So, we’re not lenders. We are investors. And what we say is in exchange for a lump sum that we invest with you as the homeowner, you agree with us that in the next ten years at the time when the contract comes up and when it comes to the contract end, by then you will pay us back the amount that we invested together with a share of the appreciation or potentially depreciation in the home. So, what we’re doing is we’re investing with you. We’re not asking you for any monthly payments because it’s not a loan.
Matthew Sullivan It’s a trade. It’s an investment where we say, “Here’s our investment. Our bet is that your property will go up in value and that when you come to refinance us out or when you come to sell your property, that we will get back our investment together with some of the appreciation which will give us a solid return on that investment.” And to answer the final piece, you would do this because we are underwriting this investment based on the value of your property, the amount of equity that you have, and where your property is. We’re not necessarily underwriting it based on your FICO score or your income or your debt-to-income ratio. So, that’s why we can help people with the credit score as low as 500, sometimes even lower. And there are no repayments ever during the time of the agreement. And we can help people find capital and unlock their capital that simply may not have been able to succeed in applying for a loan or may simply not want to have those extra monthly payments.
Andrew Rafal: So, it’s a contract. It’s an option agreement. So, you’re not taking any position in the home? There’s no second position.
Matthew Sullivan: Correct. What we do we’re not taking ownership but we protect the agreement with a lien on the property. Those are two very different things, obviously. We ought to think we all know that but it’s a bit like a mechanic’s lien. So, a mechanic’s lien doesn’t take ownership of your property, but they still have, you know, there’s still a cloud on title. So, we don’t take ownership in the same way that a HELOC is represented by a lien. We have a lien. The language is very similar to a trustee but, obviously, it’s not a loan. So, it’s a very similar structure but we don’t own the property and that’s a very important point. We don’t have any – there’s no due-on-sale clauses that are invoked because of this. You don’t run the risk of having your property tax revalued. So, there’s a number of benefits. And also, most importantly, it doesn’t appear as debt on your credit report. So, you can use this money to pay off very expensive credit card debt or to use it as an investment, or to do anything you want with it.
Andrew Rafal: And so, let me get this. So, if you’re going after somebody, potentially this is an option for somebody who can’t qualify for that, right? The refinance or… We’ll get into the or in a second here. And so, ultimately, it’s normally a ten-year window that they have. Okay. So, they’re either going to sell the house in that timeframe. Hopefully, it’s appreciated. You as the investor getting paid off. Until that time, the investor’s getting nothing.
Matthew Sullivan: Well, the investor has an asset and we can talk about that because what you’re doing is you’ve got an equity asset. You don’t have a cash-flowing secured cash-flowing asset because it’s based on equity. And so, yes, you as the investor but we can talk about why this is really attractive to investors in the moment.
Andrew Rafal: So, let’s walk through on the homeowner’s side first. So, ten years is up. I still own the property. Most likely it’s gone up in value. I still have debt on it potentially from the original, the loan. Now, you want to be paid back or your investor does. What happens in that 10th year if I can’t refinance?
Matthew Sullivan: Well, the important thing is that the agreement is due. I mean, if you can’t refinance, if there is sufficient equity in the property, then we can enroll the agreement over and run a new ten-year agreement. So, effectively, we would pay off the first agreement and, in most cases, based on historic performance, there will be enough equity to be able to take out another agreement that takes over the obligation under the first agreement and then runs it for another ten years, at which point the original investor will be cashed out and the new investor will come in.
Andrew Rafal: And so, in theory, then you guys to make this work, it’s securitizing a lot of these type of loans, these type of investments.
Matthew Sullivan: Yes. And again, that’s really one of the biggest challenges of this asset class is it’s potentially illiquid for ten years. But ten years is not too long of an investment horizon, particularly for real estate. But it doesn’t cash flow either. So, those are the two big problems that we encountered very early on when we set Quantm up. And really, those are the problems that we set about solving with Quantm at the very beginning. So, we said, “Okay. We know this is a great asset class,” and we’ll talk in a moment about the returns, the downside protection, and why now this is one of the best real estate investments that I can think of. But the biggest challenge is someone says, “Well, if I don’t get any cash burn, I have to wait ten years.” How do you solve that problem? So, we built an exchange which we’re going to be launching next week.
And what that exchange does is take each one of these home equity agreements. We use blockchain technologies to fractionalize each one of those agreements into one-hundreds, and then we offer for sale the benefits of that agreement to smaller investors. So, an investor could come in and fund a $200,000 home equity agreement, and then they can sell some or all of their interests in $2,000 chunks to smaller investors who want to buy into the potential equity appreciation of high-quality homes that are not for sale. So, that gives your initial investor a return on their investment. It gives them their money back. And in the marketplace, small investors are able to buy into home equity agreements, which are still very much the preserve of large institutions, multi-family offices that are not available to Main Street investors.
Andrew Rafal: And with this, so you’re kind of bringing your crowdfunding venture that seven years ago you created, bring It into this new world. Are these credited? They’re going to have to be accredited investors who…?
Matthew Sullivan: To start with, yes. But towards the end of this year, because they’re securities, you need to be accredited but it’s a self-accreditation process. Towards the end of this year, we will be applying for a different type of exemption, which is called Regulation A Plus, and that allows non-accredited investors to invest and it also frees up their ability to trade their interests without any lock-up period. So, our initial launch will be to accredited investors and then later on this year subject to qualification and approvals, we’re aiming to launch this marketplace to a much wider non-accredited audience.
Andrew Rafal: So, back to the actual equity contracts. So, in today’s environment, and just learning about this through our talk today, I can see it as it becomes much more beneficial the way you’re presenting it for two purposes. One is obviously a higher interest rate environment means. If I’m going to do a HELOC, my HELOC now is going to probably be 6%, 6.5%, a lot different than when it was 3%. Secondly, I have this 30-year fixed mortgage at under 3%. We know that a lot of the reason the inventory out there and here in Scottsdale and Phoenix, it’s still relatively it’s so small, we have no inventory. It’s getting better and better but that’s because people are like, “Well, I’ve got a 2.75% mortgage. I can never leave my house.” So, would I be correct in that assumption that we don’t want to refinance our debt because it is an asset for the homeowner. Now, your way, equity contract, I can get that money to me in a lump sum without having to go beyond the red tape and the cost. Now, I get to keep my current fixed mortgage, my fixed debt, which is almost, in theory, like free money.
Matthew Sullivan: Yep. That’s exactly what it is. It is an alternative additional way of accessing capital. Now, if you are a savvy investor, you will be able to make more as a return on the investment that it’s going to cost you from us. So, that’s the other way of looking at it. Your asset, the equity in your asset, if you are unwilling to borrow, which obviously why would you refinance at 7% when you’re locked in a 2.75? That doesn’t make sense at all. And yet your equity is sitting there. It’s appreciating. We allow you to access that equity. There’s obviously a cost of that capital but there’s no servicing cost from your perspective. There’s no debt implications. So, it doesn’t affect your ability in terms of if you want to use it to buy another property, that’s an equity down payment. It’s not treated as additional debt from your perspective. So, there are benefits.
What you’re doing is you’re diversifying out of your primary residence. And this is also available to non-owner-occupiers. So, if you have rental properties that are owned in your name as opposed to a company name, we can also work with rental properties.
Andrew Rafal: So, for my listeners, for myself, let’s go through a real-world scenario here of how this works. So, let’s say I’ve got a house worth $500,000. I’ve got $100,000 debt on it. My mortgage payments are relatively small, so I’m not going to refinance, but I would like to get 100,000 out of the property or I’m sure there’s a percentage. You’re going to look at debt-to-equity but in this case, we have 400,000 of equity, would we be able based on, you know, I know there’s probably other requirements, 100,000, right? So, your investors, you guys come to the table to the homeowner and come up with the equity contract and the homeowner receives $100,000, right? Now…
Matthew Sullivan: No, no, no. Yes, exactly. Your numbers worked perfectly here. And all I was going to say is, in some respects, that is actually as simple as it is. It really is. We’re looking at your property. We’re looking at the debt. You’ve got plenty of room there and we can go up to 25%, 30% of the current value of the property. So, $100,000 is 20% of the current value. And if we do that to your existing mortgage, it’s less than 75% loan-to-value. It’s going to be about 40%. So, you’re well within tolerance. And the way that the agreement works is in exchange for 20% of the current value of the property, you agree with us that when you sell or refinance, which can be any time in the next ten years, you will pay us 32% of the value of the property at that time.
Andrew Rafal: Where did that come from? That 12%, is that based on…?
Matthew Sullivan: It’s 10%. For every 10% that we invest, we get 16% of the value of your home. So, in other words, if we invest 20%, we get 32%. So, it’s a discount where we’re buying 32% of the future value in exchange for 20% of the current value.
Andrew Rafal: And then on I know we can’t get tax advice per se. As an owner of an investment advisory firm, we do look at tax strategies but this 100,000 that I received as a homeowner, I am not taxed on that when I receive it?
Matthew Sullivan: That’s correct. That’s right. Because it’s a future-based transaction. So, it’s not income and there’s no capital gains tax calculation. And this is actually quite interesting because it is a very tax-efficient way of receiving capital. If you were to refinance us or pay us back by selling your own property and if you had a capital gain due at that time, you can reduce your capital gains tax liability by the cost of our capital. So, in other words, let’s say that your $100,000 costs you $150,000 in total to include the original $100,000, that $50,000 extra cost of capital can be used to reduce your capital gains tax bill. So, in other words, what you’re doing it’s a tax-efficient way and that means that your real cost will be lower. So, in terms of what you’re paying as a cost of capital, if you factor in that capital gains tax benefit, your real cost of money is lower.
Andrew Rafal: And you had mentioned earlier with regards to if I have a current debt, that this will not subject me to a due on clause right now. I’d lose my mortgage.
Matthew Sullivan: That’s right. Because you’re not selling your property, you’re not changing anything from the title perspective. We sit in a junior position to the existing lenders, so we’re not having to go to your lenders asking them to swap places or do anything which is likely to upset them.
Andrew Rafal: And I guess on your guys’ side because I could use that money for anything, I can invest it in another business, I can invest in the market. But I guess selfishly for your side, you would want them to invest back in the property as a remodel because that’s going to increase the value maybe a little bit more two or three times than if somebody took that money and didn’t do something with it because you’re getting in a sense like a business now, this house becomes more valuable because I put more money into it.
Matthew Sullivan: Yes, you’re right. But also, that’s not terribly fair from the homeowner’s perspective. So, we are probably, I think, the only company that gives the homeowner an allowance. So, if you do invest more than $30,000 of the capital that we invest, if you invest that back into your home, when you come to secondary with us, we will factor that in and we won’t count that towards the additional value of your property. So, in other words, you will get the benefit of that, and we don’t. So, that’s I think fair. There are other companies in this space that have a different approach but that does give you the incentive to put that money to good work. But again, from an investor’s perspective, we’re talking about the ideal steward of their investment as a homeowner who is still, you know, you’ve still got 60% equity or so. You’ve still got a fair chunk of equity. You’re still very involved in your property. So, for us as an investor, that’s an ideal partner to have.
Andrew Rafal: I mean, I guess it more closely resembles a reverse mortgage. I know those are a little bit complicated, a little bit more. They’re obviously expensive. But like what happens at the end of the term is that now that client didn’t have the payments. They have to sell or they die and the bank is eventually getting paid. The difference of what the home has gone up and what the interest has gone up to. Would that be safe to assume?
Matthew Sullivan: Yeah. It’s conceptually similar because the payment comes at the end, but that’s really where the similarities end. And so, a reverse mortgage, again, is a debt product. So, if the value of your house goes down, your loan and the interest that you owe is still there. So, that means that the bank is going to want more of your equity if the value of your house goes down because you’ve still got to pay that loan back. In our case, the amount you pay us is directly related to the value of your property. So, if your property goes down from 500,000 to 300,000 because there’s a market crash and you sell at that point, we would get 32% of 300,000, which is actually less than the amount that we invested. So, there is a risk on our side and that makes it more attractive to a homeowner. Also, if you decided to move out and rent your property with a reverse mortgage, that wouldn’t be allowed. And also, with a reverse mortgage, you’d have to replace your 2.75% 30-year fixed fantastic mortgage with a far more expensive reverse mortgage because you can’t have two mortgages. So, there are all sorts of restrictions. It’s much more expensive.
Andrew Rafal: What about…? Okay. So, I die. What happens then? Is there a due on death clause?
Matthew Sullivan: There is. So, the last surviving, at the death of the last surviving owner of the property that’s a signatory, then that triggers the repayments of the agreement.
Andrew Rafal: So, I’ve got a lot of friends out here who own five homes, 30 homes, etcetera, in different LLCs but over the years they’ve securitized that. We’re going to bulk these ten and I’m going to get this debt against them. If I have ten homes, how would that work? And these are rentals and I’m not living in it. Can I look at this as an option to get money out of my properties?
Matthew Sullivan: Yes, with certain restrictions. First of all, there’s a maximum that we will invest, which is half a million dollars per person. So, these are designed to be personal contracts. Secondly, your property has to be owned in your name as opposed to a company name. And the reason for that is that when you move, if the property is owned in your name, you’ll transfer the property to the new owner. If it’s owned in an LLC, normally you just transfer the ownership of the LLC. So, that means that no one’s actually selling the property. So, there are a number of reasons why we can’t work with properties that are owned in companies but we can work with rental properties that are around in individuals or natural person’s names.
Andrew Rafal: Interesting. Okay. So, let’s talk about the market environment now. Not saying that an ’08 is happening with the real estate. We’re definitely seeing changes. It’s becoming less of a, well, no more of a seller’s market. So, we’re seeing price reductions. So, for you guys and I know the investors works, you know, we have a lot of diversification in the loans, etcetera. So, we have a pullback in the market. There’s a 20% pullback. And although we have a ten-year window of selling, what happens if you get a rush of people that are selling in the next 3 to 5 years? You know, your investors, I guess, know that there’s a potential for losses here, right?
Matthew Sullivan: One of the things I said earlier was that and I wanted to explain why I think that this is one of the best way to save investments for the current market. And to go back to your example, where we’ve invested $100,000 with your house, which effectively that’s 20% of the current value. But you’ve agreed to when you sell, you’ve agreed to give us 32% of the future value. So, we’re buying $160,000 worth of value for $100,000.
Andrew Rafal: And it doesn’t matter the time, whether it’s two years or ten years upon that happening, that is when it’s due to you based on the value of the home?
Matthew Sullivan: Exactly. But again, what we do for the homeowner is we cap the amount that we can own and we normally cap that at around 18.5% a year. So, if you sold your property next year and you sell it for the same amount, half a million dollars, and then we wouldn’t want $160,000 at the end of one year because that would be too much. So, what we would say is that because you’ve had it for a year, what is the lowest figure? Is it 16% or 32% of the current value? Or is it the amount that we invested plus the equivalent of an 18.5% return? So, if you sold your property after a year, you would pay us back $118,500, not $160,000, or 32%.
But again, coming back to why this matters in potentially a falling market, and if your property value falls to $400,000 and you sell, as a normal investor, I would be taking a loss. I bought your property at $500,000, you sell it for $400,000, I’m taking a loss. With a home equity agreement, if you look at what is 32% of $400,000, it’s about $120,000. I’m still 20% up because I gave you $100,000, you give me $120,000 back. Even though your property has gone down in value by 20%, I’m still at 20% on the contract because as you said earlier, it’s an option agreement, but there is a significant amount of in-the-money element that protects investors in a down market.
Andrew Rafal: Right. So, the investor is safe where this would really, really affect and be an awful investment or an awful option. In that scenario, the homeowner paid a lot for that capital, right? They basically got hit pretty good in that scenario where they X and now it’s worth Y and they had to pay you Z or the investor back Z, then it became a lot more costly capital than them refinancing or taking on the additional rigmarole of getting regular debt. So, that’s kind of the rolling the dice if property values go down because I’m still on the hook to pay you guys the agreed-upon amount.
Matthew Sullivan: Yeah, exactly. But again, and I think we’re looking at it through different lenses. If you look at it through an investor’s lens, this is a great opportunity to buy into first-class residential homes that are not for sale with significant downside protections. And even if property values fall horrendously, I’m still in the money. I can still make a positive return.
Andrew Rafal: Correct. 100%.
Matthew Sullivan: And it’s nothing else that we know. From a homeowner’s perspective, the amount goes down that I own. So, even though my property goes down in value, that means I own less. Now, if it was a loan, I’d still owe the same amount. So, it actually benefits the homeowner as well because the amount they pay us back is less. But even though it’s a lower payment, the investor is not getting penalized. So, the homeowner, this is more expensive than traditional debt, but there are so many other benefits.
Andrew Rafal: Yeah, to look at this, things can change, but it would probably make sense for somebody who’s me as a homeowner to do this. I want to probably say my goal is to be in the house for at least five years. People are going to sell in two years, just like with anything else. Let’s hold on and not do anything because that’s just not going to make sense.
Matthew Sullivan: But what some people do actually is they use the money to rehab the home and add significant value. So, you force the appreciation, and the amount that they get back from the sale prices is greater than the cost of capital. So, it is a very useful tool in that sort of short-term scenario.
Andrew Rafal: This is definitely very interesting to the majority of the population and you think even advisors and CPA. We just haven’t heard of this. What’s the reason? Is it just because it is so new or is the mortgage…
Matthew Sullivan: Yeah, it is that. I mean, if you look at (a) it’s new and also different. So, in other words, if it’s a new type of debt for like when HELOCs first came out, there’s that finances. But people are sort of familiar with HELOCs because it’s a loan, and you’ve got the two challenges of it being a different type of product is equity-based. It’s a place to being a loan.
So, people are trying to get their heads around the fact that there are no monthly payments, and therefore, it’s too good to be true. So, there’s that sort of change of mindset that needs to happen. But it is happening because it’s being driven by people who need capital and who cannot borrow money or just don’t want to. So, there’s that need that’s driving that sort of exploration.
And you’re right, it’s only been around for about 10 years. For a financial product for homeowners, that’s a drop in the bucket. So, I think over time and there’s more demand and particularly high-interest rate environment such as this, that this really does drive. The need is still there, but debt products aren’t going to be able to service that need. So, our time is now, I think so, for home equity agreements.
Andrew Rafal: And with you being a competitor of yours, of course, is the Goliath in the mortgage industry, the banks, as this becomes more popular and more money flows into it, have you started seeing that landscape where they’re getting notice of you? Like you’re a threat to them?
Matthew Sullivan: It’s positive. No, we’re not a threat because what we’re doing is we are deleveraging the homeowner. So, if we’re deleveraging the homeowner and we’re giving the homeowner more cash without additional monthly payments, we’re putting them in a stronger position and we’re making it more likely that they will be able to continue to service their existing mortgage. So, that avoids bankruptcies, that avoids having to reschedule that debt.
And if you reschedule a loan, there’s all that cost involved from a mortgage. There’s an additional risk. So, by tapping into the equity side, what you’re doing is you’re bringing investors into an entirely different part of the property’s capital stack, creating liquidity which benefits the homeowner. And if it benefits the homeowner, that means that they can continue to pay their obligations. So, that stabilizes the environment from an economic perspective rather than creating the potential for economic distress.
Andrew Rafal: In the growth trajectory, what are you predicting in, let’s say, five years of capital that will flow into the equity contract?
Matthew Sullivan: I know we’re seeing unprecedented growth at the moment, and that is because of two factors. One, the ability for us to originate these deals is increasing. So, there are more and more companies that are out there that can actually create these deals. And also, the return profile for investors in the current market is significantly, beneficially attractive, and advantageous.
And so, all of that from an investor side, there’s lots and lots of billions of dollars of capital looking for these deals. And also, it’s great because it solves a real problem for homes. So, this is not a nice to have, this actually fixes a major problem. If you can’t borrow money and you’ve got equity because your home has shot up in value in the last two years, here is a way, here is the only way that you can get your hands on that and put it to good use, which for many people can really make a difference. So, there is that real sort of benefit to the homeowner as well.
Andrew Rafal: And I assume that some may use it to– if they’ve got a variable rate on a HELOC, etc., that maybe they’ll use it to pay that down.
Matthew Sullivan: Yeah, we do. And in a lot of cases, we have people that pay off the HELOCs. They just are afraid of where the rates are going to be in a year, let’s say. Or particularly if they’re resetting and they’re at the mercy of the market so people can use it to pay off all sorts of debt, credit card debt of 20-something percent. I mean, that disappears because the benefit of that going away is important. And that makes a difference to people’s lives. And when that debt is gone, they haven’t got that sort of Damocles hanging over them every month, then that makes a real difference.
Andrew Rafal: What is your 10-year plan? What’s your vision for Quantm? As a company, what do you want to be?
Matthew Sullivan: Well, we see this. I mean, if you look at the huge growth in mortgage securitization and trading, we want to be the largest global platform for the trading of equity in residential homes. So, that will involve our ability to originate transactions. But we want to be the platform where you can buy and sell this unique asset class. You can’t do it at the moment, but
Andrew Rafal: So, you’re having fun, you’re trying to change an industry, and…
Matthew Sullivan: Oh, build a new one, which we’re adding to. That’s the thing. We’re doing a change. I’m trying to change the mortgage industry. You’ve got more chance of drinking the oceans. But we’re adding to it. We’re creating something new. We’re solving a problem and creating a new asset at the same time.
Andrew Rafal: And as we end today, your leadership, what have you learned over the years for you to lead your team and look to create an industry on its own? What are some of the successes you’ve had and even some failures?
Matthew Sullivan: Well, I think most of the failures come from try and do it all yourself. And I think I figured out that the things that I’m good at are primarily bringing people together, synchronizing or assembling people and products. The vision is there, but to try and do it all on your own, I think is always a fatal mistake.
And so, I think you need to be coachable. I think you need to say, okay, this is my vision. This is what I see. That doesn’t change. But you need to be able to take the advice from people that bring value in certain different stages and not be pigheaded about this is my way or the highway.
So, I think, all of the places where I’ve gone wrong in the past is where, you mix vision with execution and, okay, you’re probably quite due to executing stuff, but there are people that are just much better at it than you, in certain respects, people that have just a different view of life that you really need, like underwriting, for example. We work with leaders. Some of our guys, they have that clear digital perspective on life that makes them perfect underwriters, and I don’t share that view so I’d say the team is so important, good team, and relying on them and giving them the ability to help you grow the business.
Andrew Rafal: And do you have a mentor yourself? Do you work with a coach to help you?
Matthew Sullivan: I don’t, but I am very lucky in the sense that the people that I have working with me, I take advice from them. I don’t have a specific coach as such, but every day it feels like I’m learning, I’m listening. And if the answer is no, we don’t do it this way, or we should be doing it that way. And we have this constant sort of confirming process of where are we? Where are we going? What have we built? Are we on track? So, there’s a lot of that process that happens on a daily basis. And I think that is effectively sort of the same effect.
Andrew Rafal: Wonderful. The last question is the most important. I’m going to be in London next week.
Matthew Sullivan: Yes.
Andrew Rafal: Any two restaurants that you recommend? I’ll be near the Soho, at the Café Royal, so near the public garden.
Matthew Sullivan: I’ve been there for years. I’m sure it’s still there. But the Ivy is the place where– I haven’t been there in like nine or ten years. And Le Gavroche, that was always a great place. But also, if you go around the back of– on the other side of the road to Harrods, which is not too far away from Soho, there are some fantastic little places there actually.
Andrew Rafal: Awesome. You’d moved about seven or eight years. Why did you move across the pond?
Matthew Sullivan: Combination of personal reasons. I got married, I got four children, and just a big change of circumstances over in England and serendipity, I think.
Andrew Rafal: Yes.
Matthew Sullivan: It’s a combination of all these things that came together.
Andrew Rafal: Beautiful. Well, I’ve really enjoyed our conversation today. You’ve opened my eyes up.
Matthew Sullivan: Thank you. That was great to be here. Thank you so much.
Andrew Rafal: You’re doing some good things. So, I’m excited about this industry that you’re building. We’ll be definitely following you, and listeners, in the show notes, there’ll be plenty of opportunities to follow Matthew and his company and to be able to reach out. And I’m sure we’re going to hear much more about this as the years go on. So, Matthew, thank you for spending some time with us here on the Your Wealth & Beyond podcast.
Matthew Sullivan: Pleasure is mine. Thanks very much.
Andrew Rafal: Been a pleasure. All right, listeners, stay tuned for later this month for a brand-new episode of Your Wealth & Beyond. Happy planning, everybody.