184: Should You Pay Off Your Mortgage?

Buck: Welcome back to the show everyone today my guest on Wealth Formula Podcast is Matthew Sullivan. He’s been on the show once before. He’s the director, full time Chief Executive Officer of Quantm.one Incorporated. Matthew has actually started a number of real estate companies in the past before Quantm.one and has utilized FinTech significantly in the last you know 10–20 years he’s also worked with Richard Branson at one point on his corporate finance team on a number of high-profile projects so he is a guy who is definitely on the move. Matthew, welcome back to the show.

Matthew: Thank You Buck for having me it’s a pleasure to be on.

Buck: So you know it’s been a while and just kind of re-acquaint everyone with you and remind me myself, but let’s start a little bit about your background tell us about that path from you know going from Richard Branson’s corporate team to real estate how ultimately that led to Quantm.one.

Matthew: That is a chasm to cross I wish the two were were related but my time with Richard was in the late 90s so that was a while back actually but it’s still very much fresh in my mind in terms of the energy and the excitement that one used to feel working you know working around him. And it was I think really real estate has been something that I’ve always been very interested in but never really got terribly involved in until I moved to the States which was about you know six years ago. And my first venture in real estate over here was to set up a crowdfunding company which was taking advantage of all of the changes in the securities regulations which came to her JOBS Act so that was my first real sort of baptism by fire in terms of bringing real estate projects to people via online financial platforms.

Buck: Right what is that company called?

Matthew: Crowd Venture, so crowdventure.com so it’s still there it’sI mean the primary real estate is the QuantmRE which as you can see behind me thanks to the glorious technology provided by zoom so thank you.

Buck: Yeah it’s an interesting technology, I mean we were thinking about trying it myself but I’m likely to blow myself up. So remind us exactly kind of what problem Quantm.one solves what’s the problem what’s the solution and how is Quantm.one figure into all that?

Matthew: It’s a huge problem that we’re solving and the problem is if you are a homeowner and you have equity in your home the only way that you can access it today is by going to the bank and borrowing money and you borrow money by way of a mortgage or a reverse mortgage or a home equity line of credit HELOC. So many people and there are millions of Americans as fourteen point seven million Americans who have more than 50% equity in their homes so equity is a non financial asset, it doesn’t generate cash, you can’t spend it and most Americans have the bulk of their wealth as I’m sure you know tied up in the equity in their home. So the real problem is if I’m worth all this money, how do I get my hands on it? And the current solution which I don’t think is acceptable at all is I have to go back to the bank and borrow money secured by that equity which means I have to go back into debt and I’ve got the prospect of monthly payments and if something goes wrong then I have to you know I run the risk of my house being foreclosed because I can’t pay the mortgage. So we solve that problem at QuantmRE by enabling homeowners to sell some of the current and potential future value of their home for cash today and they can spend that money on whatever they want and the best part is there is no debt, there’s no monthly payments, there’s no interest to pay so it’s completely different to borrowing money from the bank.

Buck: Let’s talk about sort of the you know the real-time play here say I’m a customer coming in and I love the idea is something that’s done completely online? Take us through the process.

Matthew: Well part of it’s done online but because this is a relatively new way of accessing the equity in your home is you know home equity contracts have been around for 10 years or so but they’ve only really become I wouldn’t say mainstream but they’ve become more popular in the last two to three years so because of that there is a fair amount of education that needs to happen from a homeowner’s perspective. So people can apply online they can go through a process they can use our online calculator then enables them to find out and if they would qualify and how much potentially they could release. But after that point when they’ve given us their contact details their name and address and what happens is a human will contact them and we’ll go through the process of explaining how it works because the question we get to start with is why on earth would I do this and then at the end of the conversation is it’s why wouldn’t I do it. So you know what we do is we take people through the process we explain to them how it works and what the contract is and find out if it’s something they can do.

Buck: So let’s do that. Say okay I’m in you know say I’m in California I’ve got a million dollars equity, now is this is this available to people who have mortgages but also have equity or do you have to own your home?

Matthew: There are a number of programs that are available in 31 states and those programs enable people that have mortgages and don’t have mortgages to access some of the equity in their homes.

Buck: Okay so let’s just as an example okay say I’m living in California I have a million dollars of equity in my home and there’s a mortgage on it. Let’s take it from there say I want to go in and get some preliminary ideas on how much equity I could “sell” to you.

Matthew: Yes the first question is how much is your house worth because if you’ve got a million dollars worth of equity…

Buck: Say it’s worth two million.

Matthew: So half of your home is debt and the other half is equity so that’s a great place to start. So there are a number of programs that we work with. Some of the programs are programs that we provide capital, but the most important thing is to be able to provide a solution to the homeowner. So at the moment we also have a partnership with another company that acts a bit like the Expedia of home equity contracts so we have access through that relationship to a wider range of contracts. It’s a bit like an open sort of systems architecture.

Buck: Yeah sort of bidding and giving you the you know who’s gonna give you the best terms or whatever.

Matthew: Absolutely so from your perspective you would qualify for all of the programs out there because of the amount of equity that you have in your home. So some of the providers look at your credit score because they want an indication that you are likely to be able to continue paying of the mortgage that you have. So if we want to narrow it down and if you have a credit score of 650 and above you would fall into one bucket, if you have 650 and below you would fall into another bucket. But let’s say that you have good credit. The next question then is how much would you like to take out, so how much of that million dollars equity would you like to take out.

Buck: As much as possible

Matthew: Well I think that then we were looking at the cap on equity is normally 25% or half a million dollars. So the most you be able to take out would be half a million dollars. That’s about half that’s 25% of the value of your home so that’s half your equity. So and the next question then is really how long would you like to be able to stay in your home, how long are you planning on staying in your home.

Buck: So that’s a tricky one right if you’re not really planning on leaving until you die.

Matthew: Well then then there are two currently there are two sort of shapes of contracts one is a 10-year contract which means you’ve got up to 10 years to either sell your home or refinance or renew the contract and there are other contracts available that run for 30 years. so that gives you up to 30 years to sell your home or refinance the contract and at the end of the 30 year period you’re able to to pay pay off the contract without selling your home so you can find other ways but 30 years as a is a fair amount of time for these types of contracts.

Buck: Right so presumably so if you did 10 or 30 years what you’re talking about there is over a period of time there will be presumably a reset, hopefully there’s more equity in your home at that point.

Matthew: Exactly and what happens is the way it works is use you are committing to sell a defined percentage of the value of your home and a defined percentage of the increase in value so anything over and above that is owned by you so as your house goes up in value over the next 30 years some of that equity goes to the person that or the investor that provided the capital and bought the home equity contract but the rest of that equity goes to you and unlike debt it’s defined as a percentage of the value of your home so if your home doesn’t go up in value so much the amount that you owe doesn’t go out up so much at the end of the contract. If your home goes down in value then the provider of the home equity contract also shares in that potential downside risk. so it’s very different to debt where the amount that you owe is constant and it goes up it stays the same irrespective of whether your house goes up or down.

Buck: Right so then I guess the next question is all right so I want $500,000 from this property I get the you know I go through the process, I find someone who’s willing to buy, presumably there’s an appraisal process, the appraisal process says this is you know this is legit okay then I get five hundred thousand dollars. I have five hundred thousand dollars I can do anything with and I don’t have a monthly payment.

Matthew: That’s right and the really interesting thing about that is from a home wealth management perspective what you’ve done is you’ve sold and you know you’ve sold you haven’t leveraged you’ve sold some of the equity that you own for cash. And what many people do is they take that cash and they invest it in other instruments that generate cash or appreciate faster or in a more diversified way compared to their home equity so what they’re doing is they’re using a home equity contract to diversify out of their single concentrated non cash flowing asset into a range of investments that can provide cash flow or can provide better returns than their home.

Buck: Tell me what the what is the risk here I mean the risk from the consumer standpoint. Trying to break this down.

Matthew: The risk from a consumers perspective is that they are selling some of the value the potential future value of their home at a discount. Now that’s not risk what that is a decision where what they’re saying is I’m going to accept money today in exchange for potential value in the future. So there’s no risk that something will happen that will completely change that relationship, but that risk is shared by the provider of the home equity contract because if the house goes down in value the hold of the contract also shares in some of that downside as well. So what what the homeowner has to decide is do you think your house is going to continue to rocket in terms of its appreciation over the next few years and if you want to hold on to that potential future appreciation and lock into that when you sell your home then this type of contract is not for you, but if you want to lock into some of that money today and not prepared to sell it at a discount and to give up some of your potential future appreciation then you get cash today it’s the sort of present value equation.

Buck: I guess one of the I’m trying to understand the one thing that’s not clear to me is the okay let’s say you got a 10-year contract and you’re you know you you’ve got more equity in your house, you want to stay there you have no intention of leaving you’re saying renegotiate a contract, I’m trying to understand what that contract looks like at that point.

Matthew: What that means so in a in a ten-year contract there is a certain amount that you owe at the end of the ten-year period so that is based on a percentage of the value of your home. So then you that contract is due and payable at that point so the next question is how do you pay that contract off. Now you can either sell your home or you can say well what do I owe and the calculation is it’s going to be a percentage of the value of your home at that time. So you can decide potentially you might want to take out another contract to pay that off, you might like to renew that contract for another ten-year period and you can do that if there’s sufficient equity in your home or there might be some other way that you have of paying it off you might decide at that point actually I’ll take out a mortgage, I mean it happens. So you have the opportunity to pay it off in a number of different ways, you’re not forced to sell your home.

Buck: Seems to me like the the advantage the biggest bandage would be for people who really expect to you know to move at some point and in some ways it actually provides you a potential hedge for the value of your home.

Matthew: That’s exactly right because if you think your home is probably not going to get much more valuable than it is today in the foreseeable future, why not take some chips off the table because with that money you can do much more with it than your home is going to for you so that’s one approach. The other approach is people who have credit issues people who are unable to borrow money, this is a real lifesaver for them because they may be sitting on hundreds of thousands of dollars of value in their home but they cannot unlock it because they simply don’t meet the bank’s requirements so this this really works very well for those for those people, but also you find people that have built up equity in their homes over a period of time and they simply want to get access to the cash I mean maybe they’re retired or maybe they have homes that have been appreciating rapidly in certain areas like the Bay Area of San Francisco for example. Why not tap into that because it’s capital that you cannot use. So we have three types of customers those that are unable to borrow money those that are unwilling to borrow money and those that simply see it as an investment strategy a hedge mechanism as you as you rightly said.

Buck: Right right so when we were first talking last time you were on sounded like you were you know you were just you were getting rolling but I understand since then you’ve made some significant progress, you’re in a lot more states, tell us about what’s going on.

Matthew: Well the great thing about the relationship that we have with our sister company which is this open architecture company that means that we’re not restricted to products that we are able to fund ourselves. So that means that if a customer come to us or a homeowner comes to us and says this is my home and they don’t meet our specific requirements, we can pass them across and our sister company is able to offer them a range of different contracts which means that currently we can help the customer get access to nine programs in over 30 states. So it’s not really important to us right now that the capital has to come from us the important thing is that we’re able to help the customer because we still maintain that customer relationship. As we grow and as the capital sources that we are able to access grows we will be able to offer more and more programs ourselves but right now the important thing is not to say no to customers but to say yes even though we’re providing them with access to someone else’s program.

Buck: So most people have already are very familiar with the idea of home equity lines of credit mortgages, you called this is our more generic term you called it a home equity contract right is that you know give me a sense if you have an idea of like how much this concept is really gathering steam, is this something that you know because most people haven’t heard of it but it sounds like it’s certainly a growing area, is that right?

Matthew: It is absolutely right and it’s funny there was an article on Bloomberg yesterday that said that homeowners are just not tapping into their home equity anything like they used to because I think they’re afraid of going into debt, this is all post the 2007–2008 crash people are worried that if they get into debt, they’re not going to be able to get out if their house prices go down and there are trillions of dollars of available equity, I think in the Bloomberg article it mentions six and a half trillion dollars that’s sitting there that people are afraid to tap into because they just don’t want to get back into debt. So the big difference between this and a home equity line of credit or HELOC and a reverse mortgage or a mortgage is there is no debt component. You simply decide if you want to sell some of your equity you sell a fixed percentage of the current and potential future value of your home so that the only thing that goes up or down is the value of your home, the percentage stays the same and I think that’s really far more attractive to homeowners who can say I know where I’m going so in other words if I go ahead and release capital through a home equity contract I know where I’m gonna be in 10 years or 20 years time, there’s no there’s no mortgage that’s gonna creep up and and I’m not going to get a letter from the bank saying you know you’ve missed a payment because there are no monthly payments there is no interest.

Buck: Interesting. Is there ever a potential role in, I’m just thinking about loud hear about this concept, but in a way to even have initial acquisitions? Let’s start from the beginning with this kind of co buying co equity model.

Matthew: Yes there are there are absolutely because there are there is a company out there Unison for example that will invest with a home buyer so what they will do is say we will put some of our capital in, we will go in with you as partners and help you buy your home, we’ll be an equity partner with you. So when you sell your home a percentage of the proceeds of the equity goes to us as the co owner and that’s another really interesting development it’s been around for a number of years it’s not something that we do we’re much more focused on helping existing homeowners tap in, but you’re right what we’re seeing there is this innovation in home finance which really begins at the home buyer and ends at the homeowner level and I think to answer one of your questions earlier, what we’re seeing is the tip of the proverbial iceberg where more and more people are going to be much more involved in accessing their home equity in these innovative ways because the banks and other financial institutions are beginning to become much more interested in them and when that happens they become more mainstream. So over time there’s going to be all sorts of different innovations in the way to access or to buy homes.

Buck: How about in the case of you know we in this show we have a you know a lot of real estate investors. So people who have real estate may be rental homes duplexes even apartment buildings, it may be it may not be something that you’re doing right now but it seems to me that that target is potentially a huge one because then you’re in situation where people are doing this kind of thing all the time right where they are where they’re leveraging one property to buy another etc, do you see role for this in and I presume this is not something that you’re doing right now.

Matthew: What we do and the great thing is that we do offer the ability for landlords to access some of the equity that’s locked up in their portfolio for precisely that reason because it’s dead equity to them, they may not be able to borrow more money because they may be at their upper limits of their you know their debt to income ratios or their rentals to income ratios. And we see this with many small portfolios where people have held properties for a number of years, have built up significant equity positions and they can’t do anything with it because they can’t borrow more. So we offer a solution to them those are 10-year contracts that, we don’t offer 30-year contracts but we offer 10-year contracts to landlords who have equity in their homes and they use that to buy more homes or to increase their portfolios or really to leverage into other investments.

Buck: Yeah what’s interesting about that to me too is just thinking about how that mechanically might work, I mean you would effectively have the same cash flow on a property but all of a sudden free up equity.

Matthew: Exactly right because you’re not increasing the debt yeah on that individual individual property so you are doing exactly that you are freeing up some of the money that is locked up in the equity and and you’re turning that into available cash which you as a property investor could use for fix and flips, you could use it for you know just building you know your portfolio, using it as a down payment for an additional home. What you’re doing is you’re locking into that piece of the of the capital stack that is currently not available to you.

Buck: Got it. Do you guys do the commercial stuff too or do you farm that out too others?

Matthew: Well we we will look at residential properties that are owner occupied and rented so we look at everything and what we say for our own sources of capital we will work with both owner occupied and rental properties. If it doesn’t meet our criteria there are other people that we can introduce you to in the same breath so we’re not gonna throw you know throw the case over the fences, we will work with you to help you with one of the other providers that you know that we have access to, but we do to answer your question directly we do offer directly home equity contracts to rental properties.

Buck: So it’s an interesting concept that you know I feel like we kind of even flushed out a little bit more this time around. You know as I’m thinking about this while I’m talking to you I’m wondering what else should I be asking you. Is there anything else that I haven’t covered that you think is important to understand about this model?

Matthew: Yes a lot of people ask well what are my obligations as someone who’s just released some capital you know what Sam what are the things that are gonna you know what are the gotchas. And the short answer is that there aren’t any they’re just all common-sense things so as a homeowner or as someone who has released some of the equity in your home it’s your obligation to continue to pay the mortgage if you have one, to continue to pay your property taxes and to continue to keep your home in a good state of repair because the asset is now shared between the owner of the contract and you, so those are the things that are common-sense things. Other questions that we get are well what happens if I take the money that you give me and improve the property surely that’s that’s that should be my improvement and the answer is yes so if you use the capital to add value to your property the amount that you’ve added is yours we don’t take a share of that going forward so it’s you know that’s fair and other questions are well what happens if I don’t pay my mortgage what happens if the house is foreclosed? Well as an equity owner even though we have a preferred equity position we’re still at risk so if the house goes into foreclosure because you don’t pay the mortgage on time, we’re at risk we’re not a debt providers so we can’t you know we can’t jump in the banks take what they take and we divide what’s left between us. So there are no issues there are no things there are no sort of as I said there’s no gotchas the process takes normally four to six weeks, we do need to send an appraiser out in some cases the appraiser will do a home inspection. There are some programs that look at your credit score and there are some that look at it but are not really that term that bothered by the credit score depending on how much equity you have so there are. We don’t we don’t need to see your three years accounts like a bank would need to see it’s much more Friendly’s much easier for self-employed people and for people that are not on w-2 and to be able to release some of their equity.

Buck: And the business again is Quantm.one and is there anything else that we ought to know? Matthew: Well yes well they don’t the website the company the actually registered companies is Quantm.1e but but the name of the platform is QuantmRE so it’s that the website is QuantmRE.com they all they will go to the same place but that’s our website and on the website you can click on the button that says I own a home and there are there’s a calculator that gives you an approximation of how much equity you potentially could release subject to you know underwriting and subject to approvals but and we do try and accept as many people as possible that qualify so that it’s not a it’s not trying you know put a camel through an eye of a needle as it were we know there are literally hundreds of these people that are accepted every year.

Buck: Got it well Matthew it’s been good talking to you it’s always good to talk about the topic of equity in general I think it’s one of those things that like you said I mean a lot of people are programmed to just think that they just need to sell you know they need to pay off their mortgage and sit on a bunch of dead money, I’m not of that school myself so it’s good to know that there’s other options out there and we’d love to have you again sometime as this type of marketplace continues to mature and you can kind of let us know what’s going on wonderful.

Matthew: And I’d love to come back and you know if very kind to invite me back on anyway so it’s been an absolute pleasure being on.

Buck: Fantastic. We’ll be right back.