The leadership team behind a new equity release product made available at the end of 2018 understands that it is competing with standard home equity conversion products like reverse mortgages, but also say that the increasing prevalence of tools dedicated to tapping home equity is helpful in educating prospective customers about ways in which they can access cash from their housing wealth.
“I think what we’re saying is that it’s about education, because people right now are not aware of potential opportunities that are available to them to release money that is effectively theirs,” said Matthew Sullivan, founder and CEO of QuantmRE, based in Southern California.
A relatively new company that offers to partner with homeowners by investing in their property, QuantmRE offers an alternative equity release strategy that is tailored for people who are trying to avoid taking on new debt.
“A reverse mortgage is one solution for people that don’t have cash-flow,” Sullivan told RMD. “What we’re saying is that we now have another solution for people that don’t want to increase their debt, or for the people that don’t qualify [for a reverse mortgage]. So, what we’re doing even then is competing.”
Where business interests align and diverge
Still, even if QuantmRE may see reverse mortgage products as competition, Sullivan says that he also sees those offering them as partners in the ongoing process of educating people about accessing the equity they’ve built up in their homes.
“If we can expand the overall understanding with homeowners that their equity is not something that is dead any longer, and that technology and legislation is now enabling that to become more liquid, then the market will expand. And then, it will benefit everybody within our sector,” Sullivan said.
One of the ways that QuantmRE wants to distinguish itself from reverse mortgage products is also in appealing to people who don’t qualify for a Home Equity Conversion Mortgage (HECM) under the rules established by the Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA).
“It is a competitive product to a reverse mortgage, and as such, the demographics would be very closely aligned,” Sullivan said. “The differentiator is that there are all sorts of restrictions around a reverse mortgage that are not the same with us. […] What we’re saying is that this is a completely different structure, and I think the benefit there is that there are a number of people that wouldn’t consider a reverse mortgage because of the debt element.”
Spinning out of a prior effort to create a new crowdfunding platform about five years ago, Sullivan established QuantmRE in an effort to explore equity in single-family homes due to their status as an “untapped asset class” in that market.
“The problem that we had, though, was that finding family offices or other investors to actually buy into this pool was going to be a big challenge because the asset itself was very illiquid, because you had to wait until someone sold their home before you could get the return on your investment,” Sullivan said. “And, it wasn’t cash-flowing.”
As a result, the eventual establishment of QuantmRE came from a desire to find solutions to problems of liquidity and cash-flow. One of the solutions to the issue of liquidity came out of the arrival of blockchain, a growing list of records and transactions linked by cryptography.
“When we were introduced to the blockchain about two-plus years ago, it became obvious that the blockchain and the creation of digital assets could be a solution to the liquidity problem,” Sullivan said.
“The creation of tokens, or security tokens that were potentially tradable on this expanding ecosystem of security exchanges, by solving that liquidity problem we believe that we’ve found a way to unlock capital so we can start investing,” Sullivan said.
In terms of singling out target users of the QuantmRE equity release product, Sullivan told RMD that the client profile is derived partially from the efforts of EquityKey, a real estate investment firm that provided equity-based home financing. In fact, QuantmRE secured former members of EquityKey’s management team, and folded them into the ownership and management structure of QuantmRE.
“EquityKey’s target market – which will probably end up being very similar to ours – tended to be older people who have built up large equity positions in their homes, but suffer from an inability to raise capital through debt,” Sullivan explained.
“Many of these people don’t qualify for reverse mortgages. They’re in their late 50s, and they find themselves in a position where they’re close to retirement age, they have – if settled in Southern California – potentially hundreds of thousands of dollars of equity.”
How it works
Sullivan described for RMD the ways that QuantmRE’s formula works. “We take two-and-a-half times the percentage of the value of the property that you release as the percentage of the increase in value,” he said. As an example, if a potential customer has a million dollar home and releases 20 percent of its value, they release $200,000. If ten years go by and the value of the home increases to $1.1 million, then the sale of the home is the point at which QuantmRE will collect its return on investment.
“[After the sale], you pay us back from the sale proceeds the original $200,000, and we use our multiples. So, we take the 20 percent, which was the value of the home that you released, we multiply that by 2.5, so we would take 50 percent of the increase in value, which would be $50,000. That would be our return on investment,” Sullivan said.
Because this arrangement is a partnership, however, QuantmRE also runs the risk of not getting any returns. “If [the property] goes down in value, there is a point where we could potentially suffer some loss, as well,” said Sullivan.
Anathema toward debt
Much of the reason these customers engage with QuantmRE’s product, as opposed to a more typical reverse mortgage, is because they have “a real anathema towards [taking on more] debt,” as Sullivan describes them.
One of the concerns shared by both those in the traditional reverse mortgage business and QuantmRE is one of a property’s upkeep, and making sure that it doesn’t fall into disrepair, in order to maintain the probability of a home’s resale in the case of a traditional reverse mortgage, and to ensure there’s not a preventable depreciation of the property in the case of QuantmRE.
Sullivan shared that the approach his firm takes in protecting the property’s appreciation value is proactive, and is done in a way to try and maintain their customers’ pride in their home that can only come from a sense of ownership.
“I think one of the problems with debt is in a reverse mortgage for example, as the debt increases over time one tends to feel less associated with the property, and it becomes less and less theirs, and more and more the bank’s,” Sullivan explained. “With our equity release product, it’s a once-off transaction. Then, the equity that you have in your home can actually increase over time as the value of your home increases.”
The firm is also selective in the properties that it will do business with, looking primarily at buying into properties situated in what Sullivan describes as “high-growth areas.”
Aging in place
Naturally, one issue that will arise from people who examine the benefits of an equity release strategy like QuantmRE’s and an offering like a HECM is the ability for a prospective senior to age in place without worrying about being pushed out in the final years of their life.
“I think one other thing to point out is that this is a shared partnership, and if someone decides to sell us a fraction of their home, they can stay in that home for up to 30 years,” said John Livesay, QuantmRE’s co-founder and Chief Marketing Officer.
“And, that’s a question a lot of seniors have: ‘do I have to pay this back, or sell my house with this?’ So, if you’re already 60 and we say that in 30 years you have to sell your house or buy us out, that gives people a lot of comfort that they don’t have to worry about losing their home by taking this cash,” he said.