JF1643: Unlocking Dead Money In Single Family Houses #SkillSetSunday with Matthew Sullivan
The Blockchain. You’ve heard of it, you may know a little about it, now how can it help us as real estate investors? Matthew has built a company that helps people invest in real estate all over the world without a third party. We’ll walk through a case study of what one can expect if using the blockchain to invest in real estate with his company. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Matthew Sullivan Real Estate Background:
- Founder and CEO of QuantumRE
- Co-Founder of the $50 million Secured Real Estate Income Strategies Fund
- President and founder of Crowdventure, LLC, a real estate crowdfunding company
- Listen to his previous Best Ever Episode:
- Based in Newport Beach, CA
- Say hi to him at http://www.quantm.one/
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
First off, I hope you’re having a best ever weekend. Because today is Sunday, we’re doing a special segment called Skillset Sunday. The purpose of today’s episode is to help you acquire or perhaps hone a new skill or hone an existing skill. Today, here’s a skill – how to use blockchain to unlock dead money or trapped money in single-family residences. With us today to talk about that, Matthew Sullivan. Matthew, how are you doing?
Matthew Sullivan: I’m doing well, Joe. Thank you for having me on.
Joe Fairless: My pleasure, nice to have you back. Best Ever listeners, you recognize Matthew’s name because you’re a loyal listener and you heard that episode way back – it was over 1,000 days ago, episode 435, titled “Buying first and second mortgages and crowdfunding.” Matthew is the founder and CEO of QuantumRE, and he is the co-founder of a 50 million dollar Secured Real Estate Investment Income Strategies Fund. He’s based in Newport Beach, California, and we’re gonna be talking about blockchain and what QuantumRE is up to, and how that can help us as real estate investors.
With that being said, Matthew, will you just give the Best Ever listeners a brief background, just for a refresher, and then we’ll get right into it?
Matthew Sullivan: Of course. My background is finance, technology and real estate. My first venture was a real estate crowdfunding company, which I set up 4-5 years ago. Then as we saw the emerging technologies and blockchain technologies come into play, it seemed a natural fit to evolve our real estate crowdfunding business into something that has a much wider audience, by leveraging blockchain technologies.
Joe Fairless: Got it, okay. And for listeners who are familiar with what blockchain is but it’s still a little fuzzy, how is blockchain relevant to us as real estate investors?
Matthew Sullivan: It’s fine, the first time I heard the term “blockchain” was at a conference about five years ago. Like everybody else in the audience, we all googled this word blockchain, because the guy up on stage was saying how this is gonna change the world. And when we googled it, it said “distributed ledger technology.” We were all looking at each other, going “Well, what is this? It’s obviously the wrong blockchain, because this sounds really dull. How can this possibly change the world?” But what blockchain does is it introduces a level of trust that we don’t currently have with all of our databases and systems that are currently used on the internet.
In very simple terms, it’s a ledger that’s distributed across lots of different computers, and each one of those computers has their own copy, and it makes it very difficult, if not impossible, to make any changes to that distributed ledger or to that record of events or record of data without destroying the whole ledger. So if you’ve got a system which you can’t corrupt, you can’t change, you can’t edit, you can’t manipulate, then that means that people tend to trust that much more than other systems, and that becomes the foundation of being able to do things on the internet that we couldn’t previously do because we didn’t really trust it that much.
Joe Fairless: For example, as real estate investors, where would that come into play?
Matthew Sullivan: From a real estate investment perspective, what a blockchain enables us to do is to take an illiquid asset such as the equity in single-family homes and create liquidly-traded tokens that represent those previously illiquid assets. What that means is that we can take something like the equity in someone’s home, put it into a structure and enable people around the world to buy tokens that represent ownership interests in those equity investments. We’re creating the ability for people to invest in a much more liquid, low-cost, transparent and rapid way, without the need for bank accounts, or stock brokers, or settlement firms, or all sorts of other third-parties that add cost and time to any transaction.
Joe Fairless: Will you walk us through a typical use case, just to bring it down to the ground level with how this would work?
Matthew Sullivan: Of course. If you’re a homeowner and you’ve spent a number of years paying off some of the equity in your home, you probably still have the mortgage, but let’s say you built up a few hundred thousand dollars worth of equity. The only way currently that you can release the equity in your home is by going back to the bank and borrowing money secured against your equity. So you’re not actually tapping into your ownership, you’re just using it as security. That means that you’ve got additional monthly payments, you’ve got more debt burden, and you’ve got interest payments that are accruing on a monthly basis.
What we do is we enable you to sell us a percentage of the value of your home right now. So we’ll buy some of the equity in your home, you pay us back when you sell your house, but in the meantime there’s no interest, there’s no monthly payments, there’s no debt. The way we make our money is we share in the potential future appreciation. If your house goes up in value, because we own part of the rights to that appreciation, we share in that appreciation. So we get our initial money back when you sell your home, plus a share of the profits. That creates a real estate asset for us, which we put into a REIT structure (a real estate investment trust), but rather than issuing normal shares or LP interests, we issue tokens. Those tokens are digitized assets. That means that they are a certificate or a share, but it’s represented in digital form, rather than in paper form, or rather than held on a company spreadsheet somewhere.
That digital asset can be traded around the world in a number of exchanges that are beginning to emerge. That means that people that want to have exposure to that real estate asset, which is the equity and owner-occupied single-family homes, if they buy our digital asset, if they buy our token, then they can get exposure to that asset. The asset should appreciate over time. So that gives people exposure to real estate which they couldn’t previously have.
Joe Fairless: Thank you for talking about the structure and how that works. It’s clear in my mind how it works, so let’s dig in a little bit and just talk about perhaps some questions that I’m sure have come up before. One is if I were to buy some tokens in the REIT in order to get access to buy people’s equity ownership in their primary residence, then the way I make money – and I think the only way I make money – is if the market continues to appreciate, and then they sell their house. Is that accurate?
Matthew Sullivan: Exactly. You’ve gotta imagine over time there will be hundreds and thousands potentially of different properties within that single fund. So you’re not exposed to one property, you’re exposed to lots of properties over time. Over time, people move in and move out of homes; as each person sells their home, if the house has appreciated from the time we bought the rights to the house, to the time that they sold it, then the profit that we make goes back into the fund, and the value of the fund increases. What that means is that the secondary market value – in other words, the value of the tokens – should also increase, as the value of the underlying pool of assets increases as well.
Joe Fairless: Got it. And if the value goes down whenever they sell, how does that work?
Matthew Sullivan: We have that exposure. As we are an equity participant, we are exposed to the value of the house going up or going down, and that’s why it’s very different a debt. If it’s a debt instrument, then it doesn’t really matter if the house goes up or down, you still owe us the money. But if our ownership or if our returns are tied to the equity component, then it’s much more like a partnership, so we’re also exposed. That’s actually quite good for the homeowner, because that means they don’t have that additional exposure to compound their worries if their house is going down in value. Our job is to make sure that we buy homes in places where over time they’re likely to appreciate.
Joe Fairless: And how do you determine where those places are?
Matthew Sullivan: That’s the hardest job on earth, really. What helps though is we focus to start with on California. We know that historically, California is a high-performing real estate economy/marketplace. The other thing is if we look at a longer-term view, we know that residential houses are cyclical, but over time they tend to outperform inflation. So we know that if we get a big enough sample of houses in the primary residential areas, then there’s a very good chance that over time our investments will perform in line with or will perform better overall than the general house price index.
Joe Fairless: That makes sense, because I was wondering if you’re buying all across the country… I was born in Flint, Michigan. My grandma is 103 years old, and she lives in Flint, Michigan, and she has lived in the same house for 70 or so years, and the house is worth less today than it was 70 or so years ago. Do you have an idea of how Flint, Michigan — I mean, perhaps there’s some good things ahead, but at least for the last 70 or so years her house has gone down in value… So I was just wondering ways you protect against that.
Matthew Sullivan: You’re right. And again, I think what we do is we underwrite the asset, primarily. This is another reason why it’s so very different to debt. With debt, you’re underwriting the person’s ability to pay your mortgage or your HELOC. What we’re doing is we’re saying, “Well, let’s look at the asset primarily. Let’s focus on assets in areas where we think that there’s a very good chance of appreciation.” That does mean that we’re targeting specific regions in the U.S, but again, that’s very similar to any other type of fund that would be looking for performance in that same asset class.
Joe Fairless: Do you have a certain loan-to-value that you adhere to, so that you’re not over-leveraged?
Matthew Sullivan: Yeah, and again, these are all critical components. The maximum that we will advance is 90% of the combined loan-to-value. That means if you take the existing mortgage and all of the other debt that’s associated with the property, and if you add the equity that we release, there has to be a 10% cushion. What that does is that gives you as the owner — you need to have some equity in the house as well, otherwise you’ll wake up one day and feel that this house is no longer yours. But also, it’s important for us to have some level of cushion in case that there is a downturn. The maximum equity that we will release is 30% of the value of the home. So there are limits.
And my last point is that our team has carried out over 300 transactions in the last few years in this space, so we do have some good experience in understanding where the wrinkles are and where the roadblocks or the humps in the road could be.
Joe Fairless: What’s the smallest transaction amount that you all do? I’m thinking of homes that might be purchased for $5,000 and they’re worth $15,000, and someone wants to do this…
Matthew Sullivan: Yeah. Again, we don’t see a lot of those houses in California…
Joe Fairless: Oh, right, right. You’re only in California now?
Matthew Sullivan: At the moment, we’re only in California. And that’s for a number of reasons. First of all, because each state has its own intricate web of regulations around this type of product, and we have experience in navigating those waters in California. Also, of the 15 trillion dollars’ worth of equity that’s currently available in single-family homes, about 40% of that is actually in California, so there’s an enormous potential marketplace for us. So that’s why we’re here, that’s why we’re focused on the West Coast.
Joe Fairless: What are you doing to gain more traction with this business? Because it’s gotta be challenging to increase adoption when you’ve got to explain a lot of things before you even get to the business model… So how do you go about doing that?
Matthew Sullivan: You’re absolutely right. The challenges are — there’s all sorts of buzzwords like cryptocurrency and blockchain floating around… The important thing is when we speak to a number of different audiences, the first audience is the homeowner. So the way that we communicate with a homeowner is really — you don’t need to know anything about blockchain or cryptocurrency, or funds, or REITs, or tokenization. So we try and mention as little as possible about that, and we lead the homeowner through a journey on our website that enables them to put their home details in and apply in a very simple way for us to be able to take them to the next stage.
The education process is really about getting them to understand that this is not a loan, and that they have the ability to raise capital that’s theirs, they can take some chips off the table, they can spend the money on whatever they want. So the education process for homeowners is really about the asset class itself, about how we’re releasing the money, and we absolutely avoid referring to tokens and that sort of stuff.
From an investor’s perspective, our focus is really on liquidity and explaining to investors that you get the same rights with this investment as you do with a traditional investment; in other words, you get ownership of the pool of assets, but it’s better because there’s a much greater chance of you being able to sell your certificate, or your token, or your asset, rather than having to sit on it and wait for the sponsor to sell the property, which normally happens in smaller real estate transactions.
So you’re absolutely right – education is one of the many challenges that we face, but we are making some real inroads, and we have hundreds and hundreds of people that have contacted us and expressed their interest to be part of the program.
Joe Fairless: What else haven’t we talked about as it relates to your company and the value proposition that you all have that we should talk about?
Matthew Sullivan: I think really just the asset class itself is incredibly interesting. I know we have talked about it, but it’s such an untapped, disregarded asset class, the equity in single-family homes… And the ability to release value that people own without getting them to take on more debt is a really interesting conversation. We talk about changing home owners — or rather, let me rephrase that… We talk about home owers and home owners. Most people want to be home owners, but the reality is that they are home owers, because they owe so much money to the bank, and their mortgages are so great. So our objective is to change that, so more and more people can actually be home owners.
I think the interesting conversation as well is what happens in an economy if you start moving money out of equity, into the economy as a whole, without increasing debt? How does that help? That’s a much bigger conversation, but that could be something that could be quite material if we do as well as we hope we’ll do.
Joe Fairless: How can the Best Ever listeners learn more about what you’ve got going on?
Matthew Sullivan: We have a website, which is quantmre.com. We have a lot of information, videos, articles, pieces that we’ve written over the last year… We’d be delighted if you go around and take a look. You can contact us on all the usual social media channels, we’d be delighted to answer any questions you have.
Joe Fairless: I love learning more about this space. It’s educational, it’s exciting… I am glad that there are people like you, who are on the frontlines, because there are people like me who do not want to do that at the beginning, but we’ll be happy to jump on board once you figure things out and you’ve established a path… So thank you for helping establish the path, on behalf of everyone who will benefit from…
Matthew Sullivan: It is a fantastic front. It is really exciting being at the front. I appreciate your words, and I very much appreciate what you do, as well.
Joe Fairless: Well, I hope you have a best ever weekend. This is educational, as I mentioned, and we’re looking forward to staying in touch and talking to you again soon.
Matthew Sullivan: That’s be wonderful, Joe. Thank you very much.