Christopher Seveney is the CEO and founder of 7e Investments, which invests in distressed mortgages. In this episode, Christopher breaks down the business plan behind distressed mortgage investments to provide investors with a safe return as well as provide borrowers with a realistic path forward for homeownership.
Christopher Seveney | Real Estate Background
- CEO & founder of 7e Investments
- 150 notes, almost exclusively single-family
- Cumulative experience of over 500 notes
- Based in: Northern Virginia
- Say hi to him at:
- Best Ever Book: How to F*** Up Your Startup by Kim Hvidkjaer
- Greatest Lesson: Set your goals and be consistent in what you do. Life is a marathon, not a sprint.
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Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed, and I'm here with Chris Seveney. Chris is joining us from Northern Virginia. He's the CEO and founder of 7E Investments. They are a mortgage note investing company. Mortgage investing is a wealth generation strategy whereby you are the lender. Their current note portfolio consists of just around 150 notes. They have a cumulative experience of over 500 notes under management. Chris, can you tell us a little bit more about your background and what you're currently focused on?
Christopher Seveney: Yeah, thanks, first of all, for having me here today, Slocomb. Right now our primary focus is we launched last year a Regulation A+ fund offering, with the opportunity to raise up to $75 million. And that's specific to investing in distressed mortgage notes. It's been our primary focus. I got into this business about six years ago, via way of - my background has been in real estate since the late '90s, after graduating college. Throughout time, I worked for large general contractors during that time period, and then real estate developers, and then last year I left the W-2 world after running several funds while working my W-2 job to launch this offering. And since that time I built a excellent team of nine employees as well, as we look to ramp up and take advantage of what we're seeing is more distress coming to the markets.
Slocomb Reed: Chris, we're recording in the second quarter of 2023. It's really interesting to hear you say that you are ramping up for distress in the mortgage market. The reason I say that - you and I were talking before the interview and you said something like 95% of your notes are on single-family residential, and the other 5% are, you know, two to four families; maybe a couple of things that are a little bit larger than that. Those are the properties that qualify for 30-year fixed rate conventional residential mortgages, that should have locked into the twos and threes back in 2021 and early 2022. I'm not a distressed note investor, Chris... So fill in the gaps for me here. Where is the opportunity coming down the pike in a space where people should all have 30-year fixed rate debt at historically low interest rates?
Christopher Seveney: Great question. And the reality of it is most people actually don't qualify for those ultra-low rates. A lot of loans that we look at buying are loans that originated back in 2012 to 2015. The weighted average coupon, which is a term of the average interest rate of all our loans, is roughly about 6.75%, to give you an idea. So while you or I may have a credit score of 750, 800 and be able to get a loan into 2% to 3%, there's a large portion of America that unfortunately doesn't qualify for those loans, and they get in distress, or go delinquent; then they can't take advantage of those lower rates in 2019, 2020, and they get caught in that snowball effect that they keep constantly getting behind... And that's where we have stepped in and bought these loans at a discount of anywhere from, call it, 40 to 60 cents on the dollar.
And one thing I'll just mention too, that a lot of people probably don't understand, is most people think that if they miss one payment, the bank's gonna come pounding at the door and basically drag them out kicking and screaming, and try and get you to foreclose. The average delinquency on the loans we buy are typically about two to three years, meaning the borrowers are two to three years or 24 to 36 payments behind. And the reason that is the case is because banks are not in the business to deal with a lot of distress, or also be real estate owners. Banks are better off dealing with a portfolio of the loans that people are paying on.
Slocomb Reed: A couple of things here, Chris... I want to make part of your sales pitch for you; tell me how I do, let me see if I can summarize... You're talking about loans that have haven't been paid on for two to four years by the time that you buy them. Natural follow-up question - how is this a safe investment? My gut tells me the answer is that you're getting a 40% to 60% discount. The principal balance of the loan should be lower than the value of the real estate, meaning that in the event that you do have to foreclose, you're in a position where you're either getting repaid at auction, or you're taking over an asset for significantly less than it ought to sell for. Is that accurate?
Christopher Seveney: That is accurate. So to dive a little bit deeper in the risk level of the investment - like every investment, there's, of course, always risk. But like you mentioned, take a $200,000 mortgage from 2014. The house at the time might have been worth 220k. That borrower has made some payments during that time. And let's say we bought that loan for $120,000... Again, just using rough numbers. Today, that house is probably worth 250k, or 300k. So we like to measure what's called investment to value, which is how much are we buying it for, versus the value of that property. And that is typically under 50%. So the value of that property would have to drop by more than 50% before it would touch, I'd say, that initial investment.
The other component to that I just want to mention - because a lot of people invest in traditional real estate, and own property; because we're the lender, we don't take on any debt. We're not borrowing money to leverage that loan; we are the lender. So back to that comment of - most instances, the amount of money we have invested compared to what's owed on that balance, like I said, is usually less than 50%.
Slocomb Reed: I don't want to confuse your risk mitigation and the safety of your investment with your actual business plan and your strategy... So let me ask here - you find a note that you want to buy, or you find a portfolio of notes that you want to buy. First of all, why is it that you want those notes? And second, after you acquire them, what is the actual business plan?
Christopher Seveney: When we go to acquire loans, we typically put like a 3D perspective in reviewing the asset. The first thing we look at is the property itself - is the property in a decent area? Is the property upkept? And what is the value of that property?
The second thing we analyze is the person. What is that person's background? Have they filed bankruptcy five different times? Have they been in numerous lawsuits with prior lenders? And the third thing we check into is their predicament. Most of the loans we buy typically fall into one of three things: divorce, a death, or a temporary job loss. And we get that information from the current lender within the notes that paint that picture of what is going on. Then when we look at that, we make that final evaluation whether or not we want to move forward. And typically, when it falls into one of those three categories, after we buy it, our business plan is to keep these borrowers in their homes. And that doesn't have a negative impact at all on our investors; the way we model our returns, it actually provides better returns to keep the borrowers in their home, to get them on a new payment plan, cash flow coming in the door. Then after they've been able to make consistent payments, we can then take that loan and sell it back on the secondary market. I know a lot of people are used to flipping houses; we almost like to call it flipping a loan. We take a distressed borrower, we get them basically reperforming, so we get it back to renovated like a property, and then we turn around and liquidate that back on the market. Or depending on the interest rate, have them work with a new lender to get them back into an FHA style loan, and maybe get them a lower rate to get us cashed out.
Slocomb Reed: Over-simplifying here, Chris - you identify the notes that give you an opportunity to work with the borrower, and then you figure out how best to work with the borrower to either get back to performing on the note so that it can be resold for more than you paid for it, or so that they can refinance you out of your current note. Is that the case?
Christopher Seveney: Yes, that's a nice, simplified method of what we're trying to do and work with that borrower.
Slocomb Reed: Note investing is often shared or explained as frankly fairly dry, passive, emotionless, peopleless asset class. That's not what you're really describing here, Chris. This is much more of a people business, that you're trying to identify lenders experiencing distress, who need to sell for a discount, and borrowers that you think you can work with to increase the value of the distressed note that you're purchasing from a distressed lender. Is that a fair way to put it?
Christopher Seveney: That's a very fair way to put it, and there's a lot of - I like to call the myths out there about the passivity of note investing. Now, if you're doing a private lending, where you're lending to somebody - a lot of people do that, for example, with their self-directed IRA; that can be very passive. But the moment you cross that line and step into working on distressed debt, it's a whole new ballgame where it takes management experience, and it's very intense, regarding rolling up your sleeves and really managing the loan and working it with all the different options. Almost like a chess match with the borrowers to come to a resolution.
Slocomb Reed: Looking for a point of comparison to other real estate investment strategies and asset classes, Chris, with over 500 notes of experience, with the 150 that you currently have in the portfolio... How do you gauge the return that you make when a note sells? What's your metric?
Christopher Seveney: Yeah, we usually use internal rate of return, an IRR metric. So when we look to acquire loans, we run them through a financial calculator to map out a performer for each individual loan, and then we consistently update that as we're managing the loan, and the loan continues to be under our asset management, because we may have run the proforma based off of one scenario, and if it starts going down another path, we're constantly looking at updating those numbers to see at the end of the day the type of yield that it can return.
Slocomb Reed: Two follow-up questions here, speaking on past experience; so not the notes that you're holding, but the notes that you've been able to sell. What does your IRR typically look like on those loans, and how long do you have to hold them on average before you sell?
Christopher Seveney: Great question. I'll start with the latter, which is how long loans are typically held. The average loan is about a 18 to 24-month hold period. By that point in time, you've either worked something out with the border to get them repaying and then get that loan liquidated, or if there's not some type of workout, you go through the legal process, which takes about that 18 to 24-month period, depending on the state that is involved.
Now, back to answer the question on an annual return profile - a non-performing loan typically gets modeled in the low 20% annual return...
Slocomb Reed: For IRR
Christopher Seveney: For IRR, yup. And then on a performing loan, you're typically looking in the low double digits. 10%, 12%. And a lot of those performing loans were at one point probably non-performing, so we consider them re-performing, where they've had two years of pay history. So 10 to 12, and then 20+ is the numbers that we model for.
Slocomb Reed: And you focus on non-performing loans?
Christopher Seveney: Yeah, our funds typically have about on average 70% non-performing; we do have about 30% performing to balance the risk profile of any portfolio, as well as provide some cash flow coming in the door... Because on non-performing loans you have no money coming in on those loans typically. So we like to balance that profile and also take some of the risk and balance that out.
Slocomb Reed: Have you gone full-cycle on any of these funds, where every note that was acquired has now been sold?
Christopher Seveney: Yeah, we've had four funds go full-cycle since we've started doing funds. A typical fund that we would do in the past was a closed-end fund, which was typically around 30 to 36 months.
Slocomb Reed: How many notes per fund?
Christopher Seveney: It varied. Some funds had 20 to 50. The largest fund had a little over 100 assets in that fund.
Slocomb Reed: Around 100 notes per fund. A cumulative portfolio of over 500 notes. How often do your notes lose money? Like, how many out of every 100 are going to lose money?
Christopher Seveney: I would pencil in anywhere from 2% to 5%.
Slocomb Reed: 2% to 5%. That's a pretty high success rate. For a lack of a better way to ask, how bad are those losses?
Christopher Seveney: Actually, not that bad. The main area where you can really lose is - it really comes down to property value. We had one, for example, in one of our funds that we purchased the loan for about $100,000, we thought the property was worth about $150,000. The loan balance was right around 150k. But it was in Texas, which is a very fast foreclosure state. You can be in and out of Texas in 90 days on a foreclosure. But after we went to foreclose on the property, nobody bid at auction, we took it back, and the inside was completely trashed and gutted after we had to evict a borrower. So we ended up selling that property at the end of the day for around $80,000. So we took about a 25k or 30k hit on that one loan. So call it 25% on that one, but... That was probably the biggest loss that we've had. Other losses, we've had 5k or 10k here or there i typically what we'll see on these loans, which may be a 10% or 15% loss.
Slocomb Reed: Chris, I want to ask you about the returns that you've delivered for investors. Let's focus on the past and your funds that have closed out. We were talking global IRRs originally, but when you have in the past raised capital for these funds, what were the returns that you were offering or floating at the beginning to potential investors, and what ended up getting delivered to them?
Christopher Seveney: Great question. I do have to mention, because we have a current fund, past performance isn't an indicator of future success.
Slocomb Reed: Thank you. Thank you.
Christopher Seveney: I just have to state that. I don't want the SEC knocking on my door. But in our PPMs we would target returns of 10% to 15% for investors.
Slocomb Reed: IRR.
Christopher Seveney: IRR, yes. Annual IRR of 10% to 15%. And every time we've delivered on that metric, on two of those occasions we've exceeded that 15%... But within the other ones, they're around 12% to 14%, in that range.
Slocomb Reed: And that's in a 36-month, a three year time period.
Christopher Seveney: Correct. And that's annual IRR, not over the three.
Slocomb Reed: Yes. And you're looking at delivering to investors 12 to 14, and then above 15 a couple of times, but you're looking at a global IRR of 20%. So my follow-up question is gonna be how do I do what you do, Chris? But what have the returns looked like for you and your general partnership?
Christopher Seveney: We've structured our funds, when we were starting out, in several different fashions. One fund was we did a preferred return to investors plus some upside, and other funds we treated it as just a 50/50 split, almost like a JV deal, where there was no preferred return or management fee. It was just splitting those 50% profit numbers. So that's between the different ones.
One of our early funds, we've had a great opportunity to take down about 90 assets that were extremely distressed, and that fund realized overall 28% IRR, so that was a significant win for everybody as part of that team, and the investors got a good portion of that. Typically for us, we're looking at about 10% at the end of the day. So we like to work with our investment --
Slocomb Reed: 10% of what? Typically, 10% of the investment raised is what we look for on an annual basis, outside of any fees that we may have. So if we had a $5 million fund, as an example, we would look outside of fees approximately about a half million dollars per year.
Christopher Seveney: One thing to note before I start asking other questions - when you're thinking about this as a passive investor interested in this type of investment, when there's a higher margin for the general partnership, it does make it easier for the GP to honor returns. Not promised, again, because the SEC is listening, but honor the returns that were expected for investors on the frontend; if there's more meat on the bone for the general partnership, it means that if things go south, there's more that can be shared with or delivered to the LPs, instead of kept by the GPs, to make sure that expectations are met.
Chris, my follow-up question for earlier - hypothetical scenario; I want to do what you're doing currently, I want to start 8E Investments. Where do you think I should start? What are the most important things for me to learn, and what are the most important things for me to do?
Christopher Seveney: When I got started in this business, the biggest challenge I had to get the understanding was the title side of things. Most people who get in this business already have some type of real estate background, where they've owned rentals, they understand how to value property. So using that as a given, you should be able to understand how to go pull comps on an area. The biggest challenge, which - in today's world there's so much content on YouTube and podcasts. Note investing isn't something where you really can take a college class or any type of class on understanding note investing, so it's really amongst the peers or the groups of people who either run funds, or have memberships, or partake in providing free content, like something we do; we provide a lot of content through our podcasts and on YouTube... To understand rolling up the sleeves. And really, it's about understanding title. Because most real estate investors sometimes struggle with title. And then the other component is understanding the financial side of things, because it takes a little bit more financial acumen. And here's a perfect example - a loan that is a $100,000 loan and a 6% interest rate, versus a $100,000 loan at a 3% interest rate, those monthly payments can be lower on the 3%. How to model that to get a yield. And then when you also factor in time, where the 6% may have been over 10 years, and the 3% over 30 years. Those numbers are really going to start to sway. So you can't just take a arbitrary percentage and say "These loans are 70 cents or 50 cents." You really have to understand the financial model, and the risks involved with that.
The last thing I'll mention about getting into this space is you have to be very careful when you get into this space in regards to state laws. Most states, it's like, "Okay, I own a rental." The property manager handles things for you. But states are very specific in regards to mortgage foreclosure and defaults. A loan in Georgia compared to a loan in New York have two completely different ways that that is looked at. So understanding all of that, as well as licensing requirements; you might have to get licensed to be able to buy debt. So there's a lot more involved on the front end of getting a business set up to make sure you operate it properly as you get into this space.
Slocomb Reed: Very helpful advice, Chris. Thank you. Are you ready for the Best Ever Lightning Round?
Christopher Seveney: Yes, I am.
Slocomb Reed: What is the Best Ever book you've recently read?
Christopher Seveney: The Best Ever book I recently read is "How to-" the next word starts with an F, "-your startup." It's a recent book that came out, that was written about case studies of companies as they're getting going and starting up, and the mistakes that are made.
Slocomb Reed: Who's the author?
Christopher Seveney: It's Kim, and the last name I think is Norwegian, it starts with an H, and it's got a red cover with black and white letters on it. And I learn more by hearing what people do wrong, so it's great book on mistakes that people have made.
Slocomb Reed: Chris, what's your best ever way to give back?
Christopher Seveney: For us really trying to work with the borrowers, and create a win win situation. I know this is the Lightning Round, but I'd like to share their story where I had a loan that I owned in my personal portfolio, the borrower was a former vet, and had some grandparents and stuff who were in the military... And he had lost his wife and couldn't afford the property anymore, but he had no family. And what we ended up doing is working out a deal where basically we took the property back from him, but rented it back to him as a ground lease at $1 per year to perpetuity, until functionally he passes. So we try and create win/wins, and also give back... I have a family scholarship in my father and uncle's name, who are in the school systems, and my uncle passed away in Vietnam... But we also like to give back in that to get college scholarships.
Slocomb Reed: Chris, thus far in building your note investing business, what is the biggest mistake you've made, and the Best Ever lesson that resulted from it?
Christopher Seveney: The biggest mistake I made was thinking I could do everything myself. I was working a W-2 job, managing some funds, and I was doing very well. But as part of that, I wasn't growing. I was staying stable, and you get comfortable in a position of, "Okay, I'm good right now." But you need to make yourself a little uncomfortable. And I brought on a business partner several years ago to work with me on the assets, and also raising money. And ever since that happened, our company has continually just been on a nice vertical trend. So I think that's probably the biggest mistake I made, was not bringing on people who are experts at what they do, and thinking I could be an expert in everything.
Slocomb Reed: On that note, Chris, what is your Best Ever advice?
Christopher Seveney: My Best Ever advice is for people listening, especially if you're an entrepreneur - the road is always going to have many bumps and take you off that road. Set your goals, and then set mini-goals, and be consistent in what you do. A perfect example is everyone always knows people always are trying to lose weight. Basically, set that schedule and put it in your calendar, whatever you need to do to make sure you're consistently doing the little things every day, because the results take a long time. Life is a marathon, not a sprint.
Slocomb Reed: Excellent advice. Last question. Where can people get in touch with you?
Christopher Seveney: You can go to our website, it's 7einvestments.com. You can email me at Chris [at] 7einvestments.com. I'm also on Twitter, Facebook. My last name is not very common. It's spelled like the number seven, with an E and a Y after it. So if you just google me, you will be able to find me.
Slocomb Reed: Those links are in the show notes. Chris, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show. Leave us a five star review and share this episode with a friend you know we can add value to through our conversation about note investing today. Thank you, and have a Best Ever day.
Christopher Seveney: Slocomb, thank you for having me today. It's been a pleasure.
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