Blockchain’s Quantm Allows Investors To Own A Piece Of Your Homebr>
Quantm Real Estate is a network for a membership-based real estate marketplace built on blockchain technology that facilitates the primary issuance and secondary trading of investment tokens backed by fractional equity interests in single-family residences.
The QuantmRE Network buys a small part of its members’ home equity in a shared equity transaction. The vision behind QuantmRE is for people to digitize the value of their homes and allow other investors around the world to buy into and benefit from previously inaccessible real estate markets by creating investment-grade tokens backed by real estate assets. .
Typically, the largest personal asset and investment for households is their home. Until now, the only way to access the equity built up in a home has been to borrow against it, increasing the level of debt against the property and incurring a monthly payment. QuantmRE’s next-generation structure for the industry enables homeowners to unlock this ‘dead’ money without taking on this additional debt.
QuantmRE effectively buys a small part of the member’s home equity in a shared equity transaction. For investors and token-holders, QuantmRE will provide the first real estate asset-backed token whose value is supported by a distributed network of these equity interests in residential, owner-occupied homes. For homeowners, it offers the prospect of releasing cash for their equity without increasing their burden of debt.
“Having to borrow from a bank simply to access the wealth that you have built up in your home is deeply unsatisfactory,” said Matthew Sullivan, CEO and Founder of QuantmRE. “Our ability to digitize the value of a homeowner’s equity and realize the locked-up value will solve a huge problem for homeowners worldwide. It’s time for people to be able to access more affordable homeownership options, flexibility, and less financial risk.”
Sullivan talked with Block Tribune about the company and the concept.
BLOCK TRIBUNE: Walk me through how Quantm works for a homeowner and then for how it works for somebody who wants to invest.
MATTHEW SULLIVAN: If you’re a homeowner, you spend every waking moment probably thinking, “How am I going to pay the mortgage? How am I going to get the kids to college? How am I going to pay the student bills?” Pretty much most people are maxed out in terms of what their salaries are and what their expenses are. I think there’s also some statistics about how we are one small … One minor bump in the road can put people significantly in debt. In other words, the amount of money people have, as savings or as a cushion, is very limited. We wonder why, it’s because life is very expensive. As you continue to pay your mortgage, and forgive me for stating the obvious here, over time what happens is your house tends to go up in value, you begin to pay your mortgage down, so you create equity value, which is your money.
Now, that is locked up in your house because your house is a very illiquid asset. What we do is, we say … Well, we recognize that there is value in your home and we recognize that that has significant value, it appreciates. That piece of equity in your home, currently the only way that you can unlock that is by taking out an additional loan, whether it’s a home equity line of credit, or a second mortgage, or in some cases a reverse mortgage. As a homeowner, you know that your house is gone up in value, so you’re celebrating that your house has gone up in value, but it’s a Pyrrhic victory because you can’t unlock it, unless you want to take on more debt. What we do, is we buy a small piece of the current value of your home. In other words, we buy a piece of the equity of your home, and we pay you for that there and then, so it’s not a debt. That means that there’s no interest payments. That means there’s no monthly payments.
It means that we pay you a once off fee and our arrangement with you is that when you sell your home, we agree that a percentage of the increase in the value of your home is ours, together with the original money that we purchased the equity piece for. To give you an example, if you have a million dollar home and you have a half a million dollar mortgage, you’ve got $500,000 worth of equity. If we buy 10% of the value of your home, that’s $100,000, so we would write you a check for $100,000, and we would own 20% of the equity in your home, or 10% of the overall value of your home.
Let’s say that you stayed in your home for five years and the house went up from a million dollars to $1.1 million, you have $100,000 worth of profit in the home, and our agreement is that we would get 50% of the increase in value. The formula is it’s 2.5 times whatever the percentage of the equity that we bought. We bought 20% of the equity, so we would get two and a half times that. We would get 50% of the increase in the value of your home. Of that $100,000 that the house has gone up, $50,000 of that would be ours, and $50,000 of that would be yours. We would get back our $100,000 initial investment, plus $50,000 over that five year period. It means that you don’t have to pay us until you sell the house.
BLOCK TRIBUNE: How will you determine the price of the home and determine how much equity is present?
MATTHEW SULLIVAN: It’s a combination of traditional and sort of technology measures. The important thing for us, as part of the underwriting process, is to be able to accurately fix the price of your home. At the point that we do the transaction with you, we employ automated valuation methods, so we do desktop research to give us some idea of what your home is worth, but then we do a much deeper dive and we employ traditional valuation techniques, such as comparisons, and we will send in an appraiser. We’ll use an appraiser, which is a third-party reference, that gives us a truly independent view of the value of your home. We value your home using exactly the same methodology as you would expect to value your home if you were taking out a mortgage, or in fact if you were selling your home. We use a traditional appraisal approach and that means that we both agree that this is the true value of your home and it’s not based on what you think or based entirely on what we think.
BLOCK TRIBUNE: Okay. The same process would be employed when the home is sold, or no?
MATTHEW SULLIVAN: Yeah. Well, when the home … The important thing is that what we want to avoid is people gaming the system. If we have a partnership with these people, in other words, we share in the profits and we share in the losses, what we say in that contract is that you have to be fair with us. When you sell your home, we just have to be happy that you’re selling it at market value. If you’re selling it in the traditional way by using a realtor, then that’s fine, because that’s the true market price. If you’re trying to sell it to somebody and we believe that you’re not selling at the market price, then we have the rights to bring in someone to say, “What is the real price?” We can bring an appraiser in at the point that you sell your house if we think that that’s necessary. In most cases, we just … If the house is sold, and it’s a truly hands off transaction, then we’re happy with that.
BLOCK TRIBUNE: If you already have a first and second mortgage, does this put your company in the third position?
MATTHEW SULLIVAN: Yes, it would. Remember, this isn’t a debt, so this isn’t a loan. We sit in third position because what we have as a lien on the title, it’s a performance contract, so it’s a promise that you will perform under the contract. The contract is that when you sell your house, a certain percentage of the value that you sell your house for is actually ours, because we’ve effectively prepaid you for that. The performance [inaudible 00:07:15] trust actually can sit as a third position or even a fourth position and the lenders will always take precedence over us.
BLOCK TRIBUNE: What markets are you currently in and how quickly do you anticipate expanding to other markets?
MATTHEW SULLIVAN: Well, the team that we have on board has experience in primarily the California market, which is obviously a very big market.
BLOCK TRIBUNE: Sure.
MATTHEW SULLIVAN: We brought on as co-founders and as shareholders of the company a team from EquityKey. EquityKey were very much at the forefront of equity release in the U.S. from sort of 2007 to 2016. They focused very much on California and were very successful. They bought tens of millions of dollars of equity and trust from homeowners and from a property value’s perspective, if you added up the value of all of the properties that we had, or the equity had in their portfolio, it was over a quarter of a billion dollars.
At the point that they sort of stopped this process in 2016, they had over a billion dollars worth of homeowners in California alone lining up to offer their homes and equity in their homes. We know that there’s a huge amount of demand in California alone, but our plan is to launch in California, then operate and move into the U.S. on a much wider basis, on a state-by-state basis. Now, every state has its own set of, I wouldn’t say peculiarities, but every state has its own set of regulations around equity release. We have to navigate each state on a case-by-case basis, but our launch state will be California.
BLOCK TRIBUNE: Do you put any restrictions in your contracts about what the homeowner can do with the house? For example, if I wanted to tear down my garage, or if I wanted to paint the house pink, or something like that, are there any restrictions like that?
MATTHEW SULLIVAN: I think the restrictions are primarily about debt. In other words, what we don’t want to do is we don’t want you to take on additional debt, because then that would squeeze out our equity position. That’s the first and most important rule. You’re absolutely free to do whatever you want with your home. However, we do have a clause in there that says that if you’re going to do something that decreases, or reduces the value of the home, then that’s something that we would want to talk to you about. Our relationship with the homeowner is one of partnership, so we don’t want to restrict you to do something, which we think could even improve the value of our combined asset, but if you’re going to lay waste to our sort of asset-
BLOCK TRIBUNE: Sure.
MATTHEW SULLIVAN: Your home, then that’s something that would put you outside of the agreement.
BLOCK TRIBUNE: The flip side of that, would you make recommendations about things that would improve the value of the home?
MATTHEW SULLIVAN: I think what we tend to do is we want to take very much a backseat and be very much a silent partner. One of the issues that you have if you take out a HELOC, is that the banks can be very prescriptive about what you use the money for. Banks can tell you, “Okay, we’ll lend you this money, but you can only use it to improve your home.” We don’t have any of those restrictions. If you release capital from your home using our program, you are free to spend it on whatever you want. It’s your money and we’re not asking to be repaid by way of a loan.
In other words, you have sold us a piece of your house, so that’s your money and what we’re hoping to build, or what we’re aiming to build are relationships with companies such as Home Depot, for example, which will allow you as a member of our network to leverage those relationships, so that if you wanted to buy some home improvement goods or services, then you would be able to get a special discount or a special treatment because of the membership of the network. We certainly wouldn’t want to tell you want to do with the money.
BLOCK TRIBUNE: Are there any adjustments needed to your existing mortgages or homeowners’ insurances as a result of this deal?
MATTHEW SULLIVAN: No, because what you’re doing is you’re free to sell interests in your home and the way that we’re structuring this agreement, it’s effectively a future contract. At the point you sign with us, you’re not selling an interest in your home at that point. You’re selling us the future rights to a percentage of the increase in value at the time you sell your home. What that does not do is it doesn’t trigger any acceleration clauses, and balloon mortgages, or loans that you have. I’ve now forgotten your question, I’m sorry.
BLOCK TRIBUNE: It was just that do you need to contact your homeowners’ insurance, do you need to do any other sort of-
MATTHEW SULLIVAN: Well, the answer is what tends to happen is that I think there are many cases where people sort of forget about their homeowners’ insurance and they tend to be under-insured. I think one of the things that we tend to remind people about is, “By the way, is your homeowners’ insurance up to date? Because when you bought your home for half a million dollars, you had half a million dollars worth of insurance. Now, it’s worth a million dollars. Then you better go and double check to make sure that all your insurance is up to date.” One of the other things that we’re planning to do is to work with major insurance companies so that we can offer special or discounted terms to our members, so that if they want to increase their homeowners’ insurance so it’s up to date with the value of their home, then we can offer them a special deal on that as well.
BLOCK TRIBUNE: Have you done any of these deals in beta, or are you waiting to do an ICO and then you’ll move forward with all these plans?
MATTHEW SULLIVAN: If you look at over the last three years, so our team, the principles on our team have experience in doing in over $150 million worth of these types of transactions. We have real experience in these types of transactions where we were the owners of the intellectual property, the contracts, the relationships, the processes, the understanding, and the platform to make these happen. What we’re doing is we’re using that experience and we’re putting that on the blockchain. Rather than … Because the way it would traditionally work is that you would raise capital from a hedge fund, or from an institution, and that capital would be the money that you would use to build your portfolio of fractional equity interests.
The problem with that is that it’s very much a niche investment, because it’s not cash flowing, and it’s not liquid. If you tokenize that, you solve those two problems. You make it liquid and it doesn’t need to be cash flowing, because as the value of the token increases, if you want to lock in profit, you can sell some of your tokens. Now, because of that sort of illiquidity, there are only a very few institutions in the U.S. that are interested in investing in fractional equity ownership and it’s primarily because, as I said, it’s not liquid, not cash flowing. The asset class itself is very attractive if you solve those two problems. To answer your question, we’re building the platform, and the knowledge that we already have significant experience in the deployment of these types of contracts, and we already have a pipeline of literally a billion dollars worth of people who have been approaching our partners who are now part of our company over the last two years saying, “When you guys get back online, please will you buy my equity?”
BLOCK TRIBUNE: Are you making your evaluation on what deals you will concoct based solely on the value of the home, or are there other considerations like the credit score of the individual occupying the home, etc.?
MATTHEW SULLIVAN: Sure, yes. We’re underwriting the value of the home and we’re underwriting the borrower, but we’re underwriting the home primarily, because it’s the asset that we’re looking at as the primary piece. We’re looking at, what is the opportunity for this piece of real estate to increase in value over a particular horizon? At that point, we say, “Well … ” We then say, “Let’s take a look at who the borrower is.” If there is a borrower … Because in some cases, there is no borrower, because there may be a … The mortgage may have been paid off, or it may be such a minimal … It might only be a very small percentage of the overall value of the home.
You get that a lot in the older generation who have paid down their mortgages, but still don’t have access to their capital. If we are underwriting the borrower, or we’re underwriting the person who owns the house, we’re looking at their ability to continue to pay their existing debt. As opposed to their ability to take on more debt. Now, if we were underwriting it as a lender, we would be saying, “Do you have the capacity to take on an additional $100,000 in debt?” That’s not what we’re looking for. Our underwriting is focused on, are you able to make your existing mortgage payments on time? The fact that we’re sending you a check for $100,000, that’s probably going to make that easier. If anything, we are reducing your risk of none payment of your mortgage, because we’ve just written you a pretty big check.
BLOCK TRIBUNE: Now, you’re focused on residential real estate. Do you anticipate perhaps at some point if this is successful, doing the same with businesses, or anything else, or is it just real estate and other tangible goods that attract it?
MATTHEW SULLIVAN: We’re entirely focused on real estate. The reason for that is that the market is enormous and we certainly don’t want to move outside of real estate into other intangibles, whether it’s art, or other things. I mean, we’ll leave that to the other platforms. We have an expertise in real estate. We want to continue to grow that expertise. What we will be doing is we will be moving outside or expanding the product set so it’s no longer purely residential real estate. Although, this is a very exciting asset class because it’s untapped, and it is huge, and it’s very scalable. It also has some great historical performance as well. Our platform, the way we’re building the platform, it will enable us to move into commercial real estate and other real estate asset classes over time. Again, we will only build that as we bring in specific expertise onto the team. If we were to do nothing other than single family residences in California, we have a multi-billion dollar business, just in that one asset class alone.
BLOCK TRIBUNE: Obviously, you’re bullish on California residential real estate. Do you see any risk factors moving forward? I mean, the state has got its problems. It’s also got its huge benefits. What’s your outlook?
MATTHEW SULLIVAN: I mean, we are comfortable with California as a launch state. For us, it’s important to have a diversified asset core, so that means that California is the launch platform, but over time it will be one of many states and the U.S. will be one of several countries that we have on our platform. We’re already, as you can tell from my deep southern accent, I’m not from around here, and so we have some very strong ties in the U.K., so we’re already exploring the legal and regulatory environment in the U.K. so that we can offer fractional equity interests in U.K.-based properties. The outlook for California is obviously very important. The important thing is to say that this [inaudible 00:20:29] is really targeting at offering access to real estate investments outside of purely California.
BLOCK TRIBUNE: Do you have ICO plans?
MATTHEW SULLIVAN: Yes, we do. Again, currently we are seeing so much support from potential strategic partners that we believe we will be able to raise the capital that we need to build a platform from a small group of … Not institutions, but a small group of strategic partners, which would effectively be a private sale. Right now, we are assessing whether or not we will have a public ICO and our thinking is that that’s probably unlikely now, because as I said, we’re seeing so much support from people that understand the size of what we’re doing, the experience that we have in the team, and the fact that we’ve done this before in a number of different shapes, and the fact that we’re creating something that is predictable and it’s not purely technology-based. The capital that we’re raising, I’m pretty confident that we will raise that quite soon from a small group of strategic investors. To answer your question directly, I think it’s unlikely we will do a public ICO.
BLOCK TRIBUNE: What is the difference between this and a REIT?
MATTHEW SULLIVAN: One of the things that we’ll be doing, which will significantly differentiate us from a REIT, is that our platform over time will enable people to buy fractions of single family residences. Rather than having access to a token that represents a pool of assets, which is very similar to a REIT, our platform will also allow you to go in, if you have $100 for example, you can actually go in and you’ll be able to zoom in to particular properties, potentially anywhere in the world, and say, “I want to have a small piece of that property there.” You’ll be able to build your own portfolio of real estate and these could be all sorts of different types of real estate deals, but primarily they’ll be residential equity focused to start with, but you will be able to buy small fractions of many different homes, so you as a small investor will be able to look at all of the properties in your local area.
They’ll be a function that allows you to zoom into a map and you’ll be able to select houses in areas that you know and say, “I’ll have a piece of that, a piece of that, and a piece of that.” You’ll be able to build your own small portfolio. You’ll be able to manage it. We’ll give you all the tools to show you the performance. You’ll be able to sell those interests back into our own internal market over time as well. Our plan really is to create a truly … I suppose the word democratize is overused, but it’s to be able to take real estate and carve it up literally into thousands of fractional pieces, and to enable those to be bought, and sold, and invested in by anybody around the world.
BLOCK TRIBUNE: What will this do to traditional mortgage lenders, particularly those who specialize in second mortgages?
MATTHEW SULLIVAN: I think those guys are feeling the pinch anyway right now because of interests. As interest rates increase … There was an article in the Wall Street Journal the other day about how second charge mortgage lenders are under pressure anyway. As far as primary mortgage lenders are concerned, we are friendly to them, because what we’re doing is we’re deleveraging, or we’re de-risking their assets. They’re already going to get … They already have the loans in place. What we’re doing is we’re making those loans more likely to perform, because we’re selling a piece of equity that the banks don’t own, and we’re releasing that, so we’re creating more liquidity for the homeowner.
As far as banks are concerned, we’re a friendly sort of synergistic partner. Where we compete, is you’re absolutely right, in the HELOC space, in the mortgage space, and what we’re doing is we’re providing an alternative form of capital raising, which is not leveraged. I think it’s better for the homeowner. I think we’re competitive in terms of the … If you do costs of like-by-like comparison. I think that’s an area where we will see competition and it’ll be interesting to see how they respond. As I said, as far as the primary lenders are concerned, we don’t see them, or they shouldn’t see us as competition. It’ll be interesting to see how those various sort of tensions play out.