JF2589: Can You Really Buy Real Estate with Cryptocurrency? With Michael Waters
While investing in real estate, Michael Waters kept running into the same problem many other investors face as well — he was running out of cash quickly. That’s until he realized the huge pool of money sitting in the crypto world. Today, Michael is talking about how he’s bringing that money into the real world with some actual backing, legally funding with cryptocurrency, and how this method is leveling the real estate investing playing field.
Michael Waters Real Estate Background:
- CTO of Quest Crypto (the world’s first real estate-backed cryptocurrency) and also a full-time real estate investor
- Co-founder of 4RealEstateLeads and co-author of 4Real Estate Success
- Currently working on deals consisting of small hotels, commercial shopping centers, large apartment complexes, and medical tourism projects
- Over 25 years of investing experience with over 200 transactions
- Based in Salt Lake City, UT
- Say hi to him at: https://questcrypto.com/
- Best Ever Book: No B.S. Marketing to the Affluent: No Holds Barred, Take No Prisoners, Guide to Getting Really Rich
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Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest Michael Waters. Michael is joining us from Salt Lake City, Utah. He is the CTO of Quest Crypto, the world’s first real estate-backed cryptocurrency and is also a full-time real estate investor. Michael has 25 years of investing experience with over 200 transactions. He is currently working on small hotels, commercial shopping centers, multifamily and medical tourism.
Michael, thank you for joining us, and how are you today?
Michael Waters: I’m doing terrific, Ash. Thanks.
Ash Patel: Awesome. Before we get started, can you give the Best Ever listeners a little bit more about your background, and what you’re focused on now?
Michael Waters: Yes, so I’ve been a real estate investor my whole life; since I was about 25 years old is when I bought my first property. I loved real estate investing. But I had the problem – I used to think it was just me, but I found out that every real estate investor has the same problem, we run out of cash, and we ran out of cash pretty quickly.
So early in my career, I began to learn the game of juggling half a dozen hard money lenders, half a dozen bank loans, half a dozen lines of credits, and lots and lots of credit card debt to keep my business constantly moving, and cash flow… Which is kind of where I’ve arrived to today. Because I’ve always said, “Gosh, if I just had access to this gigantic pool of cash that I didn’t have to always go to a bank and ask, that would be the solution to real estate.”
And then one day I looked and I said, “There is over $5 trillion sitting in crypto right, now, and a lot of these people can’t get it out of crypto easily.” And I’m like, “If I can find a way to tap into that, I’ve essentially created my own private bank of real estate money.” So that’s really where my journey started in the crypto world, was realizing that there is this gigantic pool of money in the cryptocurrency world and how do you bring it into the real world with actual meaning, true backing… Whereas so much of the crypto was just this volatile up one day, down the next. You can’t do that in real estate; you have to have something solid in value to base it on.
Ash Patel: Michael, when you say, “They can’t get it out,” what does that mean?
Michael Waters: Okay, here’s a really good example. So you hear right now people saying, “I bought my house with Bitcoin”, that’s actually not factually true. What they did was they sold their Bitcoin and bought a house. Taking money out of crypto is very expensive. Let’s say, you bought $1,000 in Bitcoin five years ago, okay? Today, you’re sitting on, say $10 million, okay? You take that money out in cash, you have a capital gains of around 25% on that money, and then you’re investing it in real estate, to which, as it grows, you’re going to have an additional 25% tax on. As well as, if you own large amounts of crypto, liquidating quickly reduces the price. So if you take a crypto for example, that is a relatively new crypto, and it’s worth $5 a coin and you have $10 million in it, if you sell $10 million of it immediately, what happens is the price goes from $5 down to $2 because you dump a large chunk on it. That’s happens in Bitcoin all the time – somebody jumps a large chunk of money and sell them their crypto, and then the price drops down dramatically because of the supply and demand rule.
So when I say, “They can’t get it out” that’s a problem. I’ve talked to many people who say, “I’ve got $10 million in Bitcoin, I want to buy a house; taking it out is expensive in taxes, taking it out will affect the price, taking it out will do all kinds of things to me that I don’t want to do.” They just want to spend it directly.
Ash Patel: And you were on a quest to find a solution for that?
Michael Waters: That’s exactly, I was on a quest. And that’s why we named the coin that way, it’s exactly the reason. I’m like, “There’s got to be a way to do it.” I’m the guy who says, “There is a way, I just got to find it.” And so—
Ash Patel: And what is the solution?
Michael Waters: Well, apart of that I can’t say on this call or I’d have to kill you, Ash. It’s part of our patent, we have a patent on the process. The simplest way to explain it is we have found a legal way to attach the cryptocurrency to title in the form of a permanent title cloud that attaches to the crypto, and it’s equal to the taxation authority, meaning we can put it ahead of a mortgage, we can put it ahead of everything, on the property, and guarantee that first position. So to give you an example, if you had a million-dollar property and you owed $500,000 on it, we would put our recordation on the property. And even though you already had a $500,000 mortgage, ours would slide in underneath it, legally. This is all 100% legal, we’ve already tested it. It would slide under it; then we would, for example, issue a million and one dollar tokens, sell the million and one dollar tokens, use $500,000 from the proceeds of that sale to liquidate the mortgage to zero, and hand the homeowner the other $500,000.
Ash Patel: And the people that are buying these coins are who?
Michael Waters: Okay, very good question. So what happens in the crypto world – the perfect storm that created Quest Crypto happen several years ago when the government came back and said, “If you take your money out of crypto, we’re taxing it as a capital gain.” The minute they did that, they locked up all that money in crypto and no one wants to take it out, because of the heavy taxation they’ll take. So what happens is, a guy let’s say, will make a Bitcoin trade and he makes, say, $50,000 in Bitcoin. What happens is he has that profit, but if he stays in Bitcoin and it drops down, his profit goes away. So what the government has said is, if you trade from one crypto into another crypto – sounds familiar, right? 1031 exchange. If you trade from one crypto into another crypto, there is no capital gains; it’s a like-for-like exchange.
So what we’ve done at Quest Crypto is we’ve created dollar-for-dollar coin, and we’ve said trade your crypto in for this dollar-for-dollar coin. And because it’s attached to the actual equity in the property, the value is there, and it will not fluctuate; it’ll actually go up over time with the equity of the property. So what the crypto buyer is buying is they’re buying a safe place to put their money until their next investment comes along; essentially a land-backed or gold-backed dollar.
Ash Patel: Alright, I’m going to do my best to follow you and break this down again. So if I have a half-million dollar mortgage on a million dollar property, you issue a million dollars of coins. What is this coin called?
Michael Waters: It’s called a Quest coin.
Ash Patel: Quest, okay.
Michael Waters: And to keep it simple, we attach it only to equity, not to occupancy or anything. So we’re just selling the equity, that’s it. Okay?
Ash Patel: Got it. But you’re issuing a million dollars of coins?
Michael Waters: Yes.
Ash Patel: So where does that half a million dollar shortfall come from?
Michael Waters: Well, let’s just, say, we sell all million of the coins, okay? The contract we would make with you, Ash, would be that we’re not going to give you the million-dollar coin, we’re going to pay the mortgage to zero. Now, even though I did state that we can come in ahead of the mortgage and actually we could foreclose the mortgage company out, we don’t feel that’s morally right. And even though we have the legal precedence to do it, doing so it’s just not going to set a good precedent, so.
Ash Patel: So you pay the mortgage off?
Michael Waters: We pay the mortgage to zero and then we give you the other $500,000.
Ash Patel: Okay.
Michael Waters: Now you have zero mortgage on your property, Ash. That’s it.
Ash Patel: Right. And I have my $500,000 in equity in coins.
Michael Waters: Yes.
Ash Patel: Is this just ordinary investors that are buying these coins?
Michael Waters: The people who are buying them right now are crypto guys, because like I said, they have a volatile currency; they want to, when it’s up, sell, and put it in something that’s not going to go down. And then they want to wait until something else goes down, sell out of the Quest, go back into that something that goes down, wait till it goes up, and then jump back into Quest. The equivalent of when you invest in stocks and you make a lot of money, and you buy dollars, and you sit on the dollars until the next investment. That’s what we’ve created for the crypto world.
Ash Patel: So the Quest coin is a stable coin tied to the US dollar?
Michael Waters: No, no, it’s tied to the equity of the property, and that’s the key.
Ash Patel: So if the equity in the property goes up, the investors in that coin reap the benefits?
Michael Waters: Exactly. So let me give you that same example we did on a million-dollar home – let’s say you, Ash, bought all $1 million of those tokens, and you have $1 million in tokens in your wallet. Next year, the house appraises for $1.2 million; each of your $1 coins is now worth $1.20.
Ash Patel: Now, let’s say I don’t own any real estate. I just want to buy $100,000 of Quest coins.
Michael Waters: Mm-hmm.
Ash Patel: Where does that money get dispersed into? Is it just a slew of different properties?
Michael Waters: So what we do—
Ash Patel: Or is it one particular property?
Michael Waters: Yes, that’s a great question. So what we do is we take the Quest coin as a stable $1 a coin, then you create an equity token, and that is what we call a stable-plus coin; that is attached to a specific property. We have an MLS type database where you would go in and see the properties that are tokenized, and you can pick which properties you buy, you’d put your money in. So in your example, Ash, if had a $100,000, you could conceivably put $100,000, $1 investments in $100,000 separate properties.
Ash Patel: So if the owner of the Empire State Building and the Waldorf Astoria want to issue coins for their properties, I, essentially as an investor, can buy $100 of coins in each of those properties?
Michael Waters: Correct.
Ash Patel: So it’s similar to a crowdfunding model?
Michael Waters: It is a crowdfunding model. It’s actually the best kind of crowdfunding model, because in cryptocurrency you have this thing called a blockchain, and the blockchain is unalterable, and you can’t steal from it. And what it tells you who the owners of different coins are – they are there, they’re verified and it’s undisputable. So what you have is a crowdfunding model where the guy who invests $1 will be treated exactly like the guy who invested millions of dollars; they will all be treated on the fair playing field. So it’s the best crowdfunding model in the world and it allows somebody who does have just $1 to be a real estate investor right alongside Warren Buffett. You can have a guy with $1 and Warren Buffett in the exact same property, and they will all be treated equally.
Ash Patel: Now, because this is a Quest coin that’s going to have different values based on different properties, does the name of the coin change once it’s assigned to a property?
Michael Waters: Yes, what we do is we assign a unique serial number. So you have the Quest coin, which is always $1. And that’s our exit coin; you sell that for $1 and get out, and you get your money. Once you buy an equity coin, let’s say it’s in one property in California, it would be Quest-90210.
Ash Patel: Got it.
Michael Waters: Just as an example, right? And then the one in Utah would be Quest-84404. So each of them would be different, you would be able to go into our MLS and type in Quest-84404, and you would bring up the appraisal, pictures and the details of the property that your coin is invested in.
Ash Patel: Alright, so here’s a question for you. I’ve got a strip center worth a million dollars and I want to tokenize it. And now I have investors that have paid money to be a part of my deal. How do you keep me honest?
Michael Waters: Well, how I keep you honest – that’s a very good question, because that’s the first thing I thought of. First of all, the way we put the—we call it a lane, but it’s not really a lane. The way we put the documents on there permanently clouding title is we take 100% of the equity; so there’s no way for you to get $1 of that equity. So even if you tokenize the property and kept half the tokens for yourself, which you might want to do, just because you’re still want to maintain some equity in your own property, right? All those tokens, we come in and grab 100% of the equity. So the title company is going to issue a HUD one, you’re going to get $0. Then what happens is we take the cheque from the title company, we plug it into the blockchain, and it takes the sale price and it divides by the number of tokens and equally distributes.
Ash Patel: Well, I get that. My question is more so in terms of operating. So how do you keep me from taking $100,000 salary off of that property?
Michael Waters: Oh, okay, I understand the question now. So first of all, what we’re doing with Quest on this level is called a equity token, meaning you’re keeping the rents; I don’t touch the rents, that’s yours. I don’t own the rents, I only own just the equity in the property.
Ash Patel: Got it.
Michael Waters: So you’re going to take a salary, you’re going to do whatever you do; there’s no way you can rob from the equity because I own 100% of the equity.
Ash Patel: And you don’t participate in operational upsides?
Michael Waters: No, I do not. Now, have a token that will do that, and that’s a rent token. Here’s a really good example. We’ve got a customer that’s coming on board now and they had Phase I of their apartment complex built. Phase II is almost done, and Phase III is just an empty field. Along comes COVID, shuts them down, they can’t collect rent, and now Phase II is sitting there with no windows in and the weather’s destroying it. And Phase III is just a pipe dream, right? They can go into our system, and they can advance sell the rents on units II and III. They can say we’re going to sell off 30% of the rents for the next 10 years, and they’re valued at this approximately. They can go in and sell those tokens, and then they can use that money to finish the project. Then, as the rents come in, we require a management company – they would lose the right to manage the property at that, because we don’t want exactly what you said, that theft to occur.
So the agreement is we’re going to now manage that property, we’re going to hire a property management company that’s bonded and insured. And when you’re buying that rent token, you’re going to see the prospectus and how it’s going to be managed and who’s going to get what, and that third-party management company is going to guarantee it. So if somebody steals, people are going to jail, because they were actually stealing against what was agreed to, just like any other financial instrument.
Ash Patel: So that rent token – is it net rent or net profit on rent, or is just off the revenue?
Michael Waters: It can be off the revenue or it can be net profit. Net profit is harder for people to understand, especially if you’re not a sophisticated investor; you think, well, you collected $1,000 in rent off that unit, so the net profit is $1,000, when it’s clearly not. So the easiest way to do it is just up the net proceeds.
Ash Patel: So that 30% is just typical profit margin number.
Michael Waters: Yes. Yes, so you just, say, get 30% of the rents. So if the rents $1,000, it’s $300.
Ash Patel: Now, would you create a tokenized coin on a new purchase that is in contract?
Michael Waters: Yes, we do that too. We tokenize a contract, and we actually have teamed up with another company called Ubitquity (not Ubiquity; there’s a difference). Ubitquity – they do digital recording of title and blockchaining of title. So what they would do is they create the digital escrow. So what you do is you’d put the property in and you’d say, “Here’s the acquisition cost, I need $6 million to buy this strip mall.” We would then sell the coins, but you don’t get the money; the coin is held by Ubitquity in an escrow. And then as soon as the $6 million is available, we notify the title company and Ubitquity cuts the cheque to the title company, and you close, we record our documents on there. Now, you own the property, but not the equity because you essentially crowdfunded the equity.
Ash Patel: And when I go to sell it, if I own 20% of the coins, I get 20% of the upside of the difference between purchase and sale?
Michael Waters: Right. So let me go back to that million-dollar example. You had a million coins issued, and you used 500,000 to pay off, and then you kept 200,000 coins for yourself, and the property sold for 1.2 million. Each coin’s worth $1.20. So if you had 2000 coins, you have 2000 coins, you can get $1.20 [unintelligible [00:18:02].12]
Ash Patel: Yes> So what I’m missing now is, how do the coin holders get interest on their coins?
Michael Waters: They don’t get interest, because they’re just buying the equity. So they don’t get interest, but they do get the upside of the increase of the value; we require the properties in our system to be appraised every year. Now, we do buy a gap policy, okay? We buy a gap policy that’s insured by a very large insurance companies to guarantee that if the house ever sells at below the value that it went into the system, that the gap policy will cover it, just like mortgage insurance.
Ash Patel: So the coin holder doesn’t lose money?
Michael Waters: Correct.
Ash Patel: But they don’t get interest on the money that’s being held by the landowner?
Michael Waters: Right, but they do get the growth of the coin. So in this case of the million-dollar house, if it’s worth $1.2 million next year, they have a coin worth $1.20. Now here’s what’s killer, Ash, about this system is – it’s the only investment mechanism in the world where someone can put their money into real estate and get out at any time they want to, without talking to you. So if I own, let’s say, $100 in your property, Ash, and I walk up to you, I said, “Dude, I loaned you 100 bucks to buy this property, I need my 100 bucks right now.” You’re going to tell me no, because you’re going to say, “Look, I’ve got operational things. And the idea was, we’re going to sell the property seven years from now. That’s when you’ll get your money”, all of that, right? But yet, I want my money right now.
In the real world, all I have to do is just say, “Well, I guess not, maybe you’ll buy it from me at a discount or whatever. But either way, I want my money now, and I can’t have it.” In the world of tokenization, if I own that $100 in your property, and right now it’s worth $120, I can trade it for Ethereum and leave, and go get my money; someone else will buy that.
Ash Patel: Yes, so one more question on the initial funding of a deal under contract. Normally, I would pay interest to the bank.
Michael Waters: Mm-hm.
Ash Patel: Now, it seems like with this – where’s the interest component?
Michael Waters: There isn’t. That’s the beauty of it.
Ash Patel: So am I getting $5 million for free, no interest?
Michael Waters: You’re not, you’ve sold your equity.
Ash Patel: I’ve sold my equity. Okay, so I don’t own the building, I own the operating margin.
Michael Waters: Correct.
Ash Patel: Unless Unless I buy a handful of these coins?
Michael Waters: Right. You don’t own the equity, but you own the building, and you have the right to collect rent, you have the right to do advertisements, you have the right to do anything else on the property. But if you ever sell it, you own nothing.
Ash Patel: Interesting. So in reality, the coin holder is getting some benefit by not having interest coming out of the property?
Michael Waters: Correct. The property becomes worth immensely more, because now that you don’t have a mortgage payment, you are improving the property, you are making more expenses, you have every motivation in the world to get as much profit out of that property. So you’re going to make it better, you’re going to do things that increase the value of the property. And every year when we reassess it and it goes up in value, the coin owner gains a value. A point that I want to make here, Ash, that will help you understand what I’m describing, is there’s two motivations here, and the motivation of the coin owner is completely different than the lender. If I’m the lender and I lend you $1, my motivation is you’re going to pay me $3 over the next 20 years, that’s my motivation, right?
Ash Patel: Right.
Michael Waters: I’m going to lend you $1, you’re going to give me three. And the moment you stop paying me, I get really mad, because what I wanted was that interest. The coin owner doesn’t have that motivation. The coin owner wants to have something that has a value that will not go down, so that they can take their volatile investments and park their profits in a safe place. So their motivation is they want to have something that tomorrow isn’t going to be worth 25 cents when they paid $1 for it. So they’re like, “Hey, this is great, I have it, it’s worth $1. Tomorrow, it’s worth $1. Heck, next week, it might be worth $1.10, but it won’t be worth 90 cents.”
So my motivation is, you’ve given me a way to secure my dollar in a way that I’ve never been able to do it before, and I don’t have to take it out of the crypto market, so therefore I don’t have to pay taxes. And I can continue to invest and grow.
Ash Patel: Alright, so here’s an example. I have a $5 million strip centre under contract, the NOI is $200,000, the debt service is about $260,000. So if I don’t have to pay on the debt, do I get to keep the $200,000, NOI, and the $260,000 that I would otherwise make mortgage payments on?
Michael Waters: Yes, you do. It’s yours.
Ash Patel: So every year, I would net $460,000 instead of the $200,000?
Michael Waters: Correct.
Ash Patel: Do I have to sell it at a certain point?
Michael Waters: No, you don’t, and you probably won’t need to. We realize — again, we’re talking about the motivation of the coin owner. If you sell it, what happens to the coin owner is he goes in his wallet and the coin will show up as no longer valid; then he has to go to our website and say, “Apparently, the property was sold, cash me out.” And he has to go through a series of processes that he doesn’t really want to go through. He will if he has to. But ultimately, he would rather just have that value be held there, because again, he can trade out of that value at anytime he wants, without talking to you. So you get to keep that extra money. Now, it sounds like, “Oh, wow, why wouldn’t everyone do this?” And the answer is, “Yes, why wouldn’t everyone do it?” It is a really good deal.
But understand that my motivation for you, Ash, is – I know that you’re taking care of the property. And we do make a contract with you on a strip mall; you’re not allowed to just run it into the ground. You have to spend so much on maintenance a year, we tell you there’s a minimum of 3% a year you need to spend on maintenance and upgrades… There’s things that we contractually do because we want to protect the coin owner’s situation. But at the end of the day, you are making more money because you’re not paying that debt service, and that’s okay. That’s okay for you. And I don’t care, because — the key is, Ash, if I only have $100 a month to put into real estate investing, I have no outlet. But now what you’ve given me by tokenizing your properties – you’ve given me the ability to invest as a silent partner in your property for $100 a month, and participate in part of that uptick. So I don’t care that you’re making money off the rent. And the people know that, they know you’re renting it out.
Ash Patel: Michael, what kind of regulations do you have to abide by?
Michael Waters: That’s an excellent question. Right now that is currently and completely in flux. The SEC has said anything you do, anything you think about, anything you talk about in crypto is a security. That’s what they’re saying. That’s not law yet. We did have a letter of compliance from the SEC on our initial product that’s not a security on the equity token. So on the equity token, it’s not considered a security, because it’s no different than what real estate agents sell. If we have to get a security’s license for selling equity, so does every real estate agent, title company in the world has to do it. So we’re very safe in that area. We anticipate there is going to be some regulation in the future.
The nice part about blockchain is it can never be an embezzlement, because the blockchain doesn’t allow for that. So the only accusation that’s ever going to come up for us is going to be, we need you to comply this way, versus this way. So we’ve anticipated that and we know what’s coming, we just don’t know what it is.
Ash Patel: Back to my $5 million deal, another question that I had is – I’m going to personally guarantee this loan of around $4 million. Do you pay off that bank loan with the coin equity?
Michael Waters: Yes, we actually require — in your contract, if you ever have a bank loan, we require that we will not release any of the funds we get from the coin sales until that loan is reduced to zero. The primary reason though is not because we don’t want to screw over the banks; we don’t. But the primary reason is actually, the number one reason why properties go into a state of non-maintenance and not being taken care of is financial hardship; that’s the number one reason. If you had a strip mall paid off, you didn’t owe anything but just the taxes and light maintenance, how many tenants do you have to have to keep that in good shape?
Ash Patel: Less than half.
Michael Waters: Right. So the primary reason why properties degrade, whether it’s residential, commercial or whatever, is because the rent is so heavy — the rent is not heavy enough to cover the debt service, and the debt service basically consumes the property. And I know you know exactly what I’m talking about.
Ash Patel: My question was almost invalid, because in reality, if this is under contract, I can go to you and avoid the banks altogether.
Michael Waters: Correct. That is my number one reason for this – it is because you don’t need a bank qualifying for you. Look, we follow all standards in real estate; you can’t do this without an FHA HUD-approved appraisal. We follow all the industry standards for appraisals, there’s no hinky stuff. We don’t allow you to use your own properties as comparables, nothing like that; everything has to be above board. We get title insurance on our interest. We close at title offices, realtors work with us, we record at the county recorders. Everything we do operates within the existing real estate world.
The only thing that actually changes – we just sold a house that was in our system, and the title pulled it up and they said, “What is this, this lien on the property? We don’t understand it.” And we said, “We own all the equity, please send the cheque to us.” And the title company says, “We’re going to call the owner and make sure they know that.” And the owner said, “Yes, I was aware”, and they sent thee cheque to us. Then we go into the system, we type in the cheque, and it says “X number of tokens were issued; everybody’s tokens are now worth $1.45.”
Now, one real quick thing, Ash… We actually are tokenizing hard money loans for purchasing the property as well.
Ash Patel: How long ago did you launch?
Michael Waters: We launched actually this year; that was when we did our first property. And it’s funny, because we did our first property, not just to prove the concept, but our CEO and my partner is an attorney. So the plan was, we’re going to put the property into the Quest cryptosystem. And then me, I’m going to attempt to sell the property and force him, my partner, who has this Quest crypto lien on it, into a short sale. I wanted to see if there was any way I could force him into a short sale. So we tried seven different purchases, we came in seven different ways with different people, trying to buy the property, and then we had a mortgage recorded on it. And we had our lien. And our lien was recorded after the mortgage, by the way. And we went in, and in every single case, the title company said, “These guys are going to take in the shorts, these guys are going to take in the shorts, this lien has to be paid in full, 100%, or there will be no title insurance issued.”
So we knew at that point that we had proven the model that our superiority of lien on the title will guarantee the value of the crypto. And now we’ve taken on investment from a hedge fund that wants to use this, of all places; they want to tokenize the land, but they want to just tokenize the mineral rights on the property, because they have some lithium mines that they want to finance. So they’re pretty excited about that, and they’re like, “We’re going to put it in the Quest Crypto, and then we’re going to tokenize just the subsurface rights and allow people to buy the mineral rights on the property.”
Ash Patel: And there’s a number of different companies doing or trying to do what you’re doing. I don’t know how many of them have come to market yet. Do you know the answer? How many others are there?
Michael Waters: Yes, there’s a whole bunch of companies; some of them are about to get served by our legal department, because we have a patent on what we’re doing. Most of them are doing it so wrong, that it’s easy to wipe them out. A lot of them are doing it just like a mortgage; they’re saying, “Okay, we’re going to put a crypto [unintelligible [00:32:07].05] and we’re going to call it a mortgage on the property.” The problem there is if you don’t pay taxes or any of the underlying things can push that mortgage out, and the mortgage suddenly, that was attached, is no longer attached.” [unintelligible [00:32:21].12] crypto, for example, is one of those, they’ve come in, and they’ve attached debt on the property, and they’ve tokenized it, and now they’ve come under fire. And a lot of those guys are going to wind up in jail, because they’ve tokenized the property and said they owned it. But because of exactly what I said, title positions and clouds have squeezed them off the end, so now they don’t own it anymore. And now they have a problem, because they have a token owner who bought something that they don’t own anymore. So there’s a lot of that going on.
There’s a lot of tokenization of real estate. The way we do it is actually our opinion – and the opinion of many attorneys – the only legal way to do it. So anybody else that’s doing it is either misguided or they’re about to find out that it’s not as solid as they thought it was.
Ash Patel: Michael, typical due diligence for residential is 30 days, for commercial, 45-60 days.
Michael Waters: Mm-hm.
Ash Patel: Are you able to fund commercial deals within that timeframe?
Michael Waters: Yes. What that would be is you would let us know well in advance. You would have to bring us all of your homework – your comps, your rent rolls, everything to establish the value; we put all that in at once into our system, and then offer the tokenization. And what we actually have is we actually have a series of investors, we have a lot of guys with $1, $2, $100, $500, but we also have guys with lots and lots of millions of dollars. And they’ll see the property, we’ll notify them that it’s coming in, and they’re basically going to cover whatever isn’t sold and buy it themselves. Because remember, it’s the motivation that changes for them; it’s a safe place to park their profits. They’re going to take it out later, and they’re going to go off and do another investment.
Now with that being said, I do want to say one thing – our challenge is absolutely “Do we open the floodgates and allow everyone in the world to use it?” It will crash our system; there’s not enough liquidity in the system to handle it. So we’re in the ramp-up phase; and the ramp up phase is going to be slow. So for the next couple of years, it’s going to be by invite-only and select properties go in. And then as more and more properties go in, and their liquidity pools grow, we can bring in more and more and more. Our intent is to absolutely open it up to the world, because this is a direct competing product with the banks.
Ash Patel: And how do you vet me, the guy that’s buying a strip mall?
Michael Waters: Well, the first thing we do is do a standard credit check. By the way, our lien will stand up in bankruptcy court, divorce court, any of those things. So what we’re looking for is are you absolutely a criminal? The only thing that we can’t undermine is criminal activity, right? If you’re manufacturing meth on the property, they’ll come in and grab it. However, if we seize the equity, they’ll take the property, they’ll sell the property, we’ll still get paid, but we might get short sold, because the government would order an immediate sale, and then we’d have to use the gap policy and other types of things.
So to answer your question – if you’re not a criminal, if you’re not a guy that lives to abuse the system, that’s easy to find out those things. Do you have problems with insurance claims? Do your properties magically burn down every six months? Do you have insurance fraud cases? Are you currently in litigation with the government for money laundering? Those standard things like that. If you’re fine there, your credit doesn’t matter.
Ash Patel: Interesting, I love it. This is exciting. That should change the way real estate transactions are done and financing is done.
Michael Waters: Well, it will, and it’s going to change it for the better, because – I meant what I said. If a guy with 100 bucks badly wants to be a real estate investor, and he has no way to do it, he can literally buy into any property he wants now and you can watch his money grow with the equity. And if his complaint is, “I want to make more money,” well, then you need to be like the guy that collects the rents in that. So you need to accumulate enough money that we allow you into the system to do that. But that’s the beauty of it, is anybody with $1 in their pocket can now become a real estate investor, on par with Warren Buffett, sitting in the same room, getting paid the same return, and nobody gets shortchanged. That’s where it’s going to change the world.
Ash Patel: And they’re liquid?
Michael Waters: Mm-hm.
Ash Patel: Yes, Michael, we didn’t do a whole lot of real estate talk on this, but what is your best real estate investing advice ever?
Michael Waters: My best real estate advice ever is – the minute emotions get involved, you need to get out.
Ash Patel: Great advice.
Michael Waters: It is absolutely, unequivocally — you fall in love with your spouse or your girlfriend, you do not fall in love with the property. As soon as you do that, you will make the stupidest mistakes ever.
And then I would follow that up with a second piece of advice – determine now what profit you’re happy with, because what happens is that greed gland kicks in later. And you’re like, “Well, I don’t know, maybe I should hold out for more.” And literally, if I had talked to that you a year ago, you’d have said, “60 grand and I’m happy.” And now you’re going, “I’m making 80k, but maybe I should try to make 100k.” And then you play with the mouse and then you lose everything, and you don’t end up selling it, and then you regret it. So that’s my two pieces of advice.
Ash Patel: Yes, that’s powerful advice.
Michael Waters: Get your emotion out, know your exit number before your entrance. That way, when it comes in you go, “I wanted 60k, I’m getting 80k, sold.” Done. And it’s a 5 second decision.
Ash Patel: Great advice. Michael, are you ready for the Best Ever lightning round?
Michael Waters: Yes
Ash Patel: Let’s do it.
Michael Waters: Okay.
Ash Patel: Michael, what’s the best ever book you recently read?
Michael Waters: Best Ever book I recently read is No B.S. Guide To Marketing by Dan Kennedy.
Ash Patel: And what was your big takeaway from that?
Michael Waters: It is never, ever outsource marketing. Be involved at the very granular level, because only you know what the message is that you want to send.
Ash Patel: That is another great piece of advice. Michael, what’s the best ever way you like to give back?
Michael Waters: Actually, I’m in the process of that right now. We want to build houses for the homeless, tokenize the equity, take the money out, and then build another house for the homeless, tokenize the equity and keep it going in perpetuity. We’re actually trying to get a deal going with Habitat for Humanity to do that. Because I want to be able to house the homeless, and this product will allow that to happen.
Ash Patel: Michael, how can the Best Ever listeners reach out to you?
Michael Waters: You can reach me at firstname.lastname@example.org. That’s my direct email address, so please don’t abuse it, people. [laughs]
Ash Patel: Michael, thank you so much for sharing what you’re doing with us.
Michael Waters: Absolutely.
Ash Patel: This is exciting. No doubt, what you’re doing is going to be part of the future of real estate banking, and decentralized finance, so…
Michael Waters: Yes.
Ash Patel: Thank you again for sharing your story.
Michael Waters: Thank you, have a great day.
Ash Patel: Best Ever listeners, thank you for joining us, and have a best ever day.
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