Introduction to Mortgage Note Investing

Q&A from the Webinar:

Q. Do sellers only sell “bad notes”, meaning ones that cannot make money?

This is one of the misnomers of note investing. Sellers sell notes for many reasons, including but not limited to:

1. Asset is not in their “buy-box”, meaning it could be in a state they do not invest in, or a value they do not typically manage. This occurs when a lender buys a large pool, which typically includes assets they will sell off.
2. Lender is looking for cash for other investments
3. Lender does not wish to pursue legal action

We remind investors, it costs the same to manage a $1M note as it does a $10,000 note – and if a fund buys a large pool, they may not have the staff to manage the lower dollar assets and thus sell them off.

Q. Do you own the home when buying a note?

No, we do not own the home. We are the lender of the home and have a security interest in the property. Therefore, if something breaks, we do not get the call to fix it like a landlord.

Q. Where do you buy your notes from?

We buy our notes from other real estate funds and larger institutions we have built relationships with over the past 6+ years.

Q. How do you make money when you buy a note where the borrower is not paying?

Revenue can be derived from one of two ways. The first is from the borrower, getting them to begin paying the loan again. The second is if the borrower does not make payments, per the terms of the mortgage, we may have the property sold and the funds from the sale would go to paying the loan off.

Q. How do you collect on a note? Do you collect the payments directly from the borrower?

We at 7E believe in engaging companies who are experts in their trade. Regarding payments, we engage 3^rd party licensed servicing companies. These companies are where the borrower sends payments and the servicers are trained to work with borrowers who are in default.

Q. Where do you invest (states)?

We have a diverse portfolio across the US. We have held assets in 42 of the 50 states. Those states we have not invested in are due to those being rare to see notes in those states (Alaska, The Dakotas etc). While we invest in most states, we understand states have a different risk profile and take this into consideration when looking to acquire assets.

Q. If the current mortgage rate is 6% how can you pay your investors 8% and make a profit?

We acquire loans at a significant discount. Non-performing loans are typically purchased at 40-50% discount. By purchasing at a discount, we have more flexibility in modifying the loan and working on new payment plans with the borrower. During this period we are collecting payments and then receive a lump sum at exit. By purchasing at a discount it allows us to target 8% to investors.

Q. Can you explain the liquidity of the investments?

The fund has a lockup period of four years for investors. The shares are currently not listed on an over the counter exchange for trading. The investor could transfer the shares to another individual. The full terms can be found in our offering statement.

Q. How do rising interest rates affect your acquisition strategy?

Interest rate hikes have significant impacts on the overall economy. Higher interest rates have led to inflation. With the cost of goods increasing and 65% of Americans living paycheck to paycheck, there is a greater chance for loan defaults. During these periods, unemployment also rises, which is another factor in making a mortgage payment. We are always adapting to the change in our economy with our underwriting criteria when evaluating a loan, which during these times makes us more selective on these assets.