Jarred Kessler is the CEO and co-founder of EasyKnock, the first-to-market residential sale-leaseback company. In this episode, Jarred discusses how EasyKnock’s business model aims to break down the barriers keeping 65% of Americans from having a mortgage, provide them with cash to pursue their financial goals, and reward rental tenants for making improvements to their property.
Jarred Kessler | Real Estate Background
- CEO and co-founder of EasyKnock
- Portfolio:
- 15th biggest owner of single family homes in the U.S.
- Based in: New York City
- Say hi to him at:
- Best Ever Book: Never Split the Difference by Chris Voss
- Greatest Lesson: Experience is invaluable. You don’t always need the latest and greatest.
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TRANSCRIPT
Ash Patel: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I'm Ash Patel, and I'm with today's guest, Jarred Kessler. Jarred is joining us from New York City. He is the co-founder and CEO of EasyKnock, the first to market residential sale leaseback company. Jarred's portfolio consists of being the 15th largest owner of single family homes in the US. Jarred, thank you for joining us, and how are you today?
Jarred Kessler: I'm great. Thanks for having me on your show.
Ash Patel: It's our pleasure, Jarred. 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?
Jarred Kessler: Sure. I'm Jarred Kessler, I'm the CEO and co-founder as was mentioned earlier. Prior to starting EasyKnock I ran equities globally for Cantor Fitzgerald, and then started various different businesses for firms like Goldman Sachs, Morgan Stanley, and Credit Suisse. What we're focused on today, as we talked about earlier, is I'm the founder of EasyKnock, which started as the first company to institutionalize sale leasebacks. Essentially, I want to be a renter of my own home, and get people that flexibility if they want the benefit of selling without having to move, and now we've morphed into more of a platform where we're creating more and more solutions for people where there's really problems in the market that haven't been solved yet for homeowners.
Ash Patel: And not to be confused with a reverse mortgage. I'm assuming the homeowners can lease as long as they want?
Jarred Kessler: Yeah, we have a five-year lease on a term, but most likely will allow our people to rent in perpetuity as long as we can line up the financing... Because most of our financing is on a five-year window. But that should not reflect on the customers. In terms of a reverse mortgage, we take title, we pay for repairs, people pay rent, we pay the taxes, insurance and HOA, they could buy back the home, the kids ended up getting the residual value, because we give people the appreciation out of our fees. So one is a principal product where you're buying a home, and one is actually a lending product, which is a reverse mortgage, and you have to be [unintelligible 00:03:48.01]
Ash Patel: Alright, let's dive into this... A sale leaseback. I'm assuming the ideal clientele for that is people that have a lot of equity in their house.
Jarred Kessler: Yeah. What's interesting is - and a lot of people are surprised when I give this stat, but about 1/3 of the US housing market has no mortgage, so already you're at 30%... And half the country has a loan to value of 55% or less. So over the last 10 years, a ton of equity has been built up. So our target market are people that are looking for flexibility, but necessarily haven't been able to access the mortgage markets; they can have complicated taxes, and they can't show the income clearly, they could have a FICO score under a certain amount, they maybe missed a credit card or mortgage payment, and we're here to say "Listen, you've built up all this equity; it's your equity, let us figure out a way for you to access it through sale leaseback."
Ash Patel: Is there a minimum threshold? Do they have to have 50% equity?
Jarred Kessler: We will give the customer our flagship product up to about 75% of the home value in cash, and then what we do is we give them a contract that says you can buy it back for this amount plus our exit fee, or when the house gets sold, you get the next sale price minus whatever cash we gave you, plus that exit fee. So they have to have usually around 55% or less equity for it to make sense for them to do it.
Ash Patel: Okay, so if I own my home free and clear, it's worth $200,000... Let's walk through the process. Do you go out and get an appraisal?
Jarred Kessler: We mark the price of the home off of the appraised value. So yes, we get an appraisal, we get an inspection; our sales team spends a lot of time with the owner, potentially turned tenant, and explains the process. I wasn't sure if you wanted me to give an example, or you just wanted a high-level explanation? What would be better for you?
Ash Patel: Let's go through it. We have a house that's mostly paid off, but it's a church that we converted to a house. Does that qualify?
Jarred Kessler: Well, that's a little bit of a bespoke situation, so...
Ash Patel: Let's pretend I'm a normal individual, and I've got a house that's almost paid off... But I'd love to have cash to put into commercial real estate.
Jarred Kessler: Sure. So what you'd normally do if you wanted the money and didn't have access to a HELOC, or whatever it is - you would sell your house. But a lot of people, especially with kids, don't want to be uprooted... And today, it's really hard, because you can't qualify anywhere, because of where rates are. And if you have a low FICO score, even qualifying to rent is hard. So what we would do is let's say you had a $100,000 house and you had a $10,000 mortgage - we buy the house for 100,000, and then we give you 75k in cash, of which $10,000 would pay off the mortgage, which is gonna help your FICO score... And then you now have $65,000. You rent and you pay market rent, we pay the taxes, insurance and HOA, and then at some point - you could do it 10 minutes after we do the transaction, which wouldn't make sense, or like whatever, you come in and say "EasyKnock, I want to buy back my home." Your buyback price is the $75,000, and then there's usually an exit fee on average of about two and a half percent that we accrue. Or they can say "I want to sell the house", we give them the control of the sale process; they can hire an agent, they could do it themselves... And let's say that $100,000 house appreciates to $200,000. They would receive $200,000 minus 75k, plus that exit fee I just described. So we're giving people a ton of flexibility; it's very anti-predatory, and it allows people to buy back their home. A lot of our customers have a big jump in their FICO score, because we take out their mortgage when we buy the home.
Ash Patel: And 2% is all I pay to buy the home back?
Jarred Kessler: I'll give you all the fees involved with EasyKnock, because it sometimes sounds too good to be true, so I'm going to be as transparent as possible for any of your listeners...
Ash Patel: Yeah. And also, what comes to mind are those payday loans or car title loans.
Jarred Kessler: Yeah.
Ash Patel: So let's dispel any of those myths with EasyKnock.
Jarred Kessler: Well, first of all, we're not a lender; we're a principal. I'll make that clear; we're buying your home. If for some reason things don't go well, we're not going to foreclose. The process would be an eviction, which we've done less than 2%. We're way below the national average, because we try to lead with compassion as our competitive advantage. But the fees are the following. You normally pay a real estate broker 5%. That's what we take up front; we take a processing fee of 5% of the purchase price. The customer then pays market rent; we use a third party source, and whatever market rent is for that home in that neighborhood, whether it's your church turned home, or a home in general, we charge market rent, and we pay for repairs, taxes, insurance, and HOA. So you really have to look at if you're comparing to your previous situation of what the net rent is, because those are charges that we're paying, that you were previously paying.
And then when they sell the home, hopefully there's appreciation. Since 1968, the average depreciation is 5.8%, and then up to five years, annually; there's an exit fee of two and a half percent - that gets taken out. I'm giving you the average. And then after that, we don't charge any more for the exit fee. So your option - you could pass it on to your kids, you can keep it... If you pass away, it doesn't go away. We're really focused on making sure people feel like this is a good outcome for them.
Ash Patel: In five years I end up paying the exit fees. Do I need to actually sell the house? What if I want to stay there for three more years?
Jarred Kessler: The contract's up to five years, but I will tell you most likely we will extend the lease, but we'd like to have the flexibility; just given what's happened in the last three years in the market, you've got to put a term of five years. Otherwise -- it's just very hard to predict what's going to happen, so I'm trying to be as sincere as possible, that EasyKnock is aligned with the customer; we make more money the longer someone stays, because we paid for that person to come, and we're collecting the rent. So if they're happy, we're happy, because we're making more money, just to be completely transparent. So the only factor that would impact that is the macro environment, for whatever reason.
Ash Patel: Alright, this is interesting. So my daughter is in eighth grade. Our plan is soon as she graduates high school, sell this house... So this would be ideal, where we can get cash up front. You don't care what we do with the cash, right?
Jarred Kessler: You know what, that's actually the point, is your example of your eight year old is exactly -- people that probably have their kids in their house for another 10 years, are approaching retirement at some point, and they want to do things with their money. Now, remember, if we're taking 75% cash out day one, you're not now operating on your lifestyle and hope; you're not hoping the market goes up. You're actually taking control, you're taking at least 75% out, and then you can decide if if you feel like, "Look, maybe it goes up a little bit, you're still exposed to that benefit, and if it goes down, you're gonna be happy you basically essentially hedged out some of your risk." And most people's biggest asset is - which I'm sure you talk about all the time on this show, is their home. It's the biggest asset class in the world. So what we're trying to do is give people more options, because the status quo - it just needs to go.
Ash Patel: Jarred, I want to dive into maintenance for a second. I'm assuming you get a benchmark of what kind of life is left on roof, HVAC, mechanicals... And how do you account for those if they're end of life? Because you don't want to take over maintenance on something that's not going to last much longer.
Jarred Kessler: It's great question. So roofs don't miraculously break if they just get replaced. So we look at the situation, we have a team in-house that are experts on this; if something is questionable, what we'll do is we'll reprice the home based on the curing costs. So let's say we have to replace the roof and it's $10,000. In the example I gave earlier, instead of them getting 75k, and 65k in cash, because there's a 10k mortgage, then they get 55k. So we take care of that before. But remember, this is one of the most coolest things, and the most important parts of EasyKnock, is what we have essentially created is a rental product that if someone makes improvements to the home, they're getting the benefit. Because remember, at the end of the transaction, where they buy back, they invested in the home, or if they sell it, the home is worth more. So either way, they're getting that benefit, not us, because we have a fixed exit fee. So for us, it's really about making sure that they understand that, and we will take care of all those repairs before. Ongoing, we have a warranty, and we're responsible for fire or life safety, but we're not responsible for mowing the lawn; they have to take care of stuff like that.
Ash Patel: So you guys don't benefit at all on the upside. If the house appreciates by 50% - come on, you could have written that into the agreement where "Let's get 20%, 13%, 14%, 15% of the upside." You don't do any of that.
Jarred Kessler: No, we took a position very early on that we want a company that's anti-predatory. We're making enough money at 5% rent, exit fee... We don't need to be egregious. And I think that's the type of products that are needed in the market, where people don't push it. It's not what you can do, it's what you should do.
Ash Patel: And then Jarred, if there's a massive housing downturn - look, you're the 15th largest owner of single family homes in the US. You're left holding a lot of toxic assets.
Jarred Kessler: Well, I don't really see it that way, and I don't blame you for making that comment. In a normal situation, the 15th biggest owner would have a lot of real estate exposure; we're a little bit different, because remember, if we're giving the customer up to 75% in the form of cash, that's our cash exposure. So if the house drops by $10,000 - remember, it's the net sale price minus the day one cash. That doesn't affect EasyKnock; that sits with the owner turned tenant, that risk, until it goes down more than 25%. So we essentially have built a cushion. That wasn't the intention, but that's the benefit of our business. So we're at risk, but we're not as much as risk as if you're buying the house with full cash upfront.
Ash Patel: Okay, so you have that roughly 25% margin of error.
Jarred Kessler: Uh-huh, exactly. It's a good way to put it.
Ash Patel: And to be clear - look, if I sell you my house for $100,000 market value, and it goes down to 80k, I'm still good. I get to walk away, right?
Jarred Kessler: Yeah, you're in the same position you were in before, and you're gonna pay a broker 5%. You're gonna have to pay for moving costs. So really, the only additional costs are you can look at your rent versus your mortgage, but you probably saved money, because you didn't have to go to high credit card debt, and all that. That's what you should be comparing it to, not your mortgage. And secondly, hopefully the exit fee is neutralized by the appreciation, because of the stats I shared earlier. 5.8% a year. Look, in this market, you may catch it at the wrong time in the short-term, but over the long haul you'll make money.
Break: [00:14:11.08]
Ash Patel: So I'm thinking out loud - people that inherit a parents' home, probate, right away, their inclination is to sell, cash out. "I don't want to deal with the headaches. I just want my money, split it amongst my siblings, take the cash and run." However, with this scenario, I can get a handful of cash, 75% of it, out of the property, put it back on the market as a rental. Can I do that? Can I rent it out?
Jarred Kessler: We do make exceptions for subleasing it; we have to understand who the tenant is, just like any other landlord... But for your example, you can stay in the house, you can make [unintelligible 00:16:40.14] while you're living there, and then sell the house, which is another way to go. But your audience - if you told me everyone in your audience was a divorce lawyer and a probate lawyer, I'd be thrilled, because those are exactly good examples of case studies of people that really utilize our product. Because it's similar to a probate. If you're getting divorced, everyone understands how that works. Someone has to pay off the house, and someone gets to keep the house. Usually, the person that has the house in a lot of cases doesn't have income, so they can't get a mortgage. So we give people the benefit of selling without having to move, so they can take the cash out and actually take some of that pressure away from - I'm sure you've known people in your life that have gotten divorced. It's not fun. So it's one less thing to worry about.
Ash Patel: Interesting. So let's say the divorced parent who gets the house - he or she, if they can't afford to make the payments, they can take a lump sum of cash out and maybe afford to keep the house through their kids' education, and then sell it.
Jarred Kessler: Correct.
Ash Patel: Interesting. How are you guys not marketing this with every divorce lawyer or probate attorney out there?
Jarred Kessler: We're trying. It's one of those areas that if anyone's listening in your audience, I would be running a startup to take the fragmented market and consolidate it. There's been a few companies, but it's one of the most fragmented channels out there, I would say. So we've tried; it's been really hard, to be honest. It takes a lot of money, and a lot of marketing dollars to educate people and build awareness. There's a lot of noise in the world, as you know. I'm sure you're trying to double your audience, and more people should be listening to your program, but they just don't know.
Ash Patel: Jarred, I'm sorry, but I've not heard of you guys, and I should have, if you're the 15th largest homeowner out in the US. How do you guys market and get your name out there?
Jarred Kessler: So it's interesting, there's two channels. There's direct to consumer, which - we do television. Jerry Rice is one of our ambassadors. We do search, we do social, we do content marketing, we do affiliate marketing. And then on the b2b channel it's folks like probate and divorce lawyers; it's mortgage companies that are turning down people. At that moment of time when you're turned down, you feel awful, because you went through a process and now you don't have an option. It's a great time to show people our option, and we work very closely with mortgage brokers, agents, credit repair, debt settlement... Anyone that's trying to fix a problem that we can solve are great partners for
us.
Ash Patel: And how much of those predatory companies hurt what you're doing?
Jarred Kessler: Look, we don't really compete with anyone I know.
Ash Patel: I know, but they've given the industry a bad name. I was a little skeptical when you came on... I asked that question, "How's this different than reverse mortgage? Are you one of those payday lenders?" I wonder if a lot of your audience will react the same way, because there's been so many predatory companies out there, and here you guys are trying to do the right thing.
Jarred Kessler: So the way I would answer that question without sounding like a used car salesman is I always say "Don't take my word for it. Look at our Trustpilot rating." We have a 4.6 out of 5. We're dealing with one of the most emotional decisions in someone's life, and in many cases, it's not something that people necessarily want to become a renter in their home. I personally think it's a sexy, smart move, but some people don't... So I would say take my customers' word for it. Right? Look at what they say about our company. Is everyone happy? Absolutely not. But most people are. And we're doing better than most, so... That's what I would say. I think over time, as things get more challenging in the market, we're gonna have a lot more people understanding our product. But we do things like this, this podcast, to make sure people understand, because we're keeping people in their homes, we're doing a good thing, and we're changing people's lives; people that are stressed, that have a lot of pressure on their shoulders - I can tell you millions of stories about customers.
Ash Patel: Jarred, you're a brilliant Wall Street guy, great background... What prompted this idea to start this company?
Jarred Kessler: I am not brilliant, but I appreciate the compliment. I'm good at faking it. Just kidding. But thank you for the compliment. Look, I've always sat at the crossroads of different asset classes; I started a business that was at the crossroads of private and public equities, I created a credit-focused equity business that sat at the crossroads of credit and equity... So for me, I've always found these crossroads of different asset classes to be fascinating... And we started talking, and one day someone said, "What about an alternative for people to be a renter in their own home? We didn't really understand why that'd be interesting, but it sounded cool, so we started digging into it more and more and more and more... And then we realized the unintended consequence that came out of the credit crisis was the buy box has shrunk because of subprime, and people are just shut out, and then you had this huge run in the housing market... But people need more money than ever. 56% of the population can't even deal with a unexpected bill of $600. So you're in that dynamic right now, where 65% of the housing population doesn't have access to the mortgage markets, and they need it more than ever. So for us, we saw that very early on, and we decided to focus on that, and that's been evolved into our platform today.
Ash Patel: Would you consider doing this for industrial or triple net retail buildings?
Jarred Kessler: Yes. So what's interesting is there's a company that I'm an advisor for called KeyWay, that does what we do on the commercial side. I'm just an advisor there; great guys that started the company. But we're focused on residential.
Ash Patel: There's a lot of money in industrial and retail. You have 10 years signed corporate back leases...
Jarred Kessler: Yeah. The US housing market is the biggest asset class. I always tell my team, there's plenty of wood to chop there in all 50 states.
Ash Patel: Alright, so where does your capital come from? Do you take on investors?
Jarred Kessler: We've started with a lot of venture capital investors; we've morphed to having more institutional investors. We have a few public companies, a few pretty notable investors along the line... So that's where most of our money has come from on the operating company. And then to buy homes, we work with a bunch of lenders and balance sheet partners to buy our portfolio.
Ash Patel: Well, that being said, money's not cheap these days, and rates keep going up. How does that affect your business model?
Jarred Kessler: It definitely impacts us. Everything's getting more expensive for everyone, but at the end of the day, with scale, we get economies of scale, and in that way I think that we're doing okay. I think right now, we're doing better than most, but we're impacted. Look, on one hand, our addressable market goes up exponentially, because more and more people need money when interest rates go up... So what we lose in sort of costs we make up in volume. So that's how we look at the business. It's one of those markets, you don't know what you want.
Ash Patel: Yeah. And speaking of scaling, you've scaled this into an incredible company. What was your key to success and scaling?
Jarred Kessler: Grit. Everyone in my company is not focused on what are the snacks in the pantry, and if I could bring my dog to work. We're about winning, and we hire people that have grit and are compassionate and care about the customers, and know how to really get the job done.
Ash Patel: Do you have remote workers, or do they all come into the office?
Jarred Kessler: We have people in 31 states and four countries. So yes.
Ash Patel: They're all remote, or a handful are remote?
Jarred Kessler: Our headquarters is in New York by Penn Station, and people do come to the office. We just opened up an office in Washington DC, but other than that, everyone else is remote. So it's a hybrid culture, and it's working for us. I think it's good for people to come to the office, but if people feel like they're gonna get more work done, or if they're not feeling comfortable, I'm not going to make people come to the office. I think that will happen organically, and they'll arrive at that decision on their own.
Ash Patel: What's one of the biggest mistakes you made that kept you from scaling sooner?
Jarred Kessler: I would say when I ran equities at Cantor Fitzgerald, I always valued the hard driving, more inexperienced people. And one of the things that changed my life when we started EasyKnock - because I really saw the value of experience. I know that sounds silly, because it's a cliche... But that became abundantly clear when you're going through COVID, or interest rates are at a 40-year high, or whatever else, political or civil unrest going around the country. All these factors, people that have seen this and been through it before matter more than ever, and I think that was lost over the last 12 years, because we didn't have these situations where people needed the experience... So I would say my biggest mistake is not understanding that earlier on.
Ash Patel: Jarred, what is your best real estate investing advice ever?
Jarred Kessler: My best real estate investing advice ever... I would say that if you want to make money in real estate, one of the things I always tell my friends outside of EasyKnock is there's markets that are the next big thing, and you can triangulate where they're going to move based on migration pattern and affordability. So I'll give you an example. 10, 15 years ago Nashville, Phoenix, Miami - those were the emerging markets, where people were starting to move to, but you saw it happening, you saw it in real time, and if you weren't invested in real estate there, you would have been fine. I would say those areas have now become tapped out in terms of they're feeling a little bubbly... So what are the next markets? It's going to be places like Alabama, Ohio. So my advice would be do something you can afford, that's probably not going to move down that much, and single family rental is the best thing in the world, because it's reoccurring revenue, rent; it's the oldest subscription model in the world. So that would be my best advice I can give your audience.
Ash Patel: Jarred, are you ready for the Best Ever Lightning Round?
Jarred Kessler: Sure.
Ash Patel: Alright, what's the Best Ever book you've recently read?
Jarred Kessler: I've just read "Never split the difference" by Chris Voss and I learned about negotiation from a hostage negotiator.
Ash Patel: Jarred, what's the Best Ever way you like to give back?
Jarred Kessler: I love to get involved in charities. My wife is on the board of a charity called the Chick Mission. It helps women that are facing cancer freeze their eggs, so they can have children after they go through chemo. It's an amazing charity. So we like to get involved in those things. Success is what you give, not what you take, I always say.
Ash Patel: Jarred, how can the Best Ever listeners reach out to you?
Jarred Kessler: They can email me at hello [at] EasyKnock.com and I'll get back to every single one of them.
Ash Patel: Jarred, thank you for your time today. You showed us this incredible business model that really rewards people who have equity in their house. And I had no idea this exists, so thank you for sharing that with us today.
Jarred Kessler: You're welcome. And next week, we have a big announcement coming. I can't talk about it now, but keep an eye out for it, because it's going to be a game-changer for EasyKnock.
Ash Patel: Well, Jarred, thank you again for joining us. Best Ever listeners, thank you for joining us. If you enjoyed this episode, please leave us a five star review. Share this podcast with somebody you think can benefit from it. Also, follow, subscribe and have a Best Ever day.
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