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Bonus Episode: Deep Inside The 7e Fund Structure, Plus A Market Update With Devin Elder

September 6, 2023

chrisseveney

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CWS 255 | 7e Fund Structure

 

In this ever-changing real estate landscape, you need to keep your sights on the latest and sharpen your tools. Our very own Chris Seveney keeps us abreast of what’s happening, bringing hard-earned wisdom from amazing guests. This time, he takes the hot seat opposite Devin Elder, the host of the DJE Podcast to give us an overview of the 7e Fund Structure along with some market updates. They discuss mortgage note investing, the 7e Regulation A and Regulation D funds, and how Chris builds a team at 7e Investments while running deals nationally. Chris also shares how 7e Investments still floats with the current waves of today’s economy. Check out how Chris navigates the market today and more in this bonus episode!

Watch the episode here

 

Listen to the podcast here

 

Bonus Episode: Deep Inside The 7e Fund Structure, Plus A Market Update With Devin Elder

Thanks for joining us. My guest is Chris Seveney. He is a real estate investor running a couple of things. They’ve got an evergreen fund that they are building to $150 million. They’re deploying that. Most of what we talk about is in these mortgage notes where they’re buying single-family notes that are distressed or buying notes at a discount. It has become the bank. Those are really interesting business models. Some of you guys might’ve heard of that or maybe not.

DJE, our company, does a lot of owner-financed notes on this rural land stuff we’ve been doing for a few years, but that’s different. They’re buying mortgage notes directly from the lenders. We get into all the details of that. It was a fascinating business model there and how they’ve scaled it out. They’re buying sometimes 10, 15, or 20 notes a month. He’s got a team of nine. We break out how he’s built the team, the asset management, the leadership, and the acquisition side. I like to get into the nitty-gritty of that stuff and how people have built successful real estate teams.

It’s a clinic in distressed mortgage note buying. They’ve also got a fund, too, that they’re raising quite a bit of capital. We did dive into the fund structure as well. If you’re interested in investing in funds or interested in setting up your own fund, they’ve got a Reg A component and a Reg D component. They’re working with investment advisors. There were lots of avenues that we went down there, exploring how they’ve set all that up.

It was good to talk shop with Chris about how they’ve built the company, how they’re deploying capital, what they’re seeing in the marketplace, and all that fun stuff. You’re going to enjoy the episode. We’ll have a word from our sponsors and then dive right in. If you can leave us a five-star review on Apple, that helps the reach of this show. I really appreciate it. We’ll get into the episode with Chris. Thanks.

Chris, welcome to the show. It’s good to have you. How are you?

I’m good. How are you, Devin?

I am doing great. Thanks for jumping on. I look forward to diving into some talk shop about real estate here. Let’s go big-picture for somebody reading that hasn’t met you before. How did you get into this entrepreneurial game?

I joke that my wife’s part is to blame, but also one of my employers. The reason I say that is I’ve been in real estate since 1997. I graduated college and started working for a commercial general contractor. I was the Project Manager. For people who don’t understand that, I’m the guy in the white shirt and tie. I’m the guy on the construction site who looks like we don’t do anything.

We do a lot.

We have a clipboard maybe. Back in the day, it was a clipboard, and then you got an iPad. It was a PalmPilot back in the day.

That was king for a while. What market was that in that you were doing that?

It was up in Boston, up in the Northeast. It was a heavy union market. I learned a ton. It was an awesome experience. I worked for some really smart people. The company, when I started with them, went from about $100 million up to $6 billion. It’s one of the largest contractors in the country. The owner is a smart guy. He was a madman, entrepreneur-type. I did that for 15 years, and then I got burnt out, working 6 days a week. I also, during that time, moved down to the DC area, and then I flipped. For people who work as general contractors, they call it moving to the dark side. I moved to the dark side by working for a real estate developer.

Those evil capitalists.

In my prior life, I worked so much. I didn’t have time to do anything else. When I started working for a developer, one of the first questions my boss asked me at the time was, “What do you have for real estate? What are you going to do to retire?” I’m like, “I got my 401(k),” and he starts laughing at me, like, “Are you serious?” He was like, “You got to start owning some of your own real estate.”

I started looking at it and I’m like, “401(k).” Somebody mentioned the 40/40/40 rule, which is that you work 40 hours a week for 40 years to get 40% of your income. You can never retire. My real estate journey then started. My wife and I built our primary residence. We acted as a GC. It was almost 2013. We’re down in the DC area. We’re eight miles from DC. We have a one-acre lot. It was a prime piece of real estate. We had the contractors, the subs, begging for work because it was still slow at the time when they were trying to make payroll and still pay the bills.

What year was this?

2003. It was several years ago. We built it, and when we were done, we had probably about 40% equity because of piecing it ourselves. Plus, the market at that time started to ramp up. We bought the property in 2012. We lived in it for a year, designed it, and did all that fun stuff. With that equity, we started buying some rentals that we could rehab in the Washington DC area. Unfortunately, like most major markets, we were both working W-2s. It was way too competitive. After two deals, we had two kids at the time as well, which we still do. My wife’s like, “We can’t do this anymore.”

I stumbled upon mortgage note investing, which is what I do. Most people don’t even know this exists. People hear about private lending or seller finance. Mortgage note investing is when you’re buying those loans on the secondary market that you’re not originating. You’re buying them 5 or 10 years down the road. We focus a lot on the distressed side of the market. We started getting into that in 2016. I bought my first loan in 2017 and grew that. I started doing some small syndications with that. I left my job in 2022. We’re raising $150 million. It is go big or go home to raise money in a mortgage note fund.

That’s awesome. There’s so much I want to dive into there. You’re doing a fund, an evergreen fund, with a $150 million cap, or what are you guys doing on the fund side?

It’s an evergreen fund. We have two conduits to get into the fund, which is also very unusual. We did a Regulation A offering, which most people may not be familiar with. Most people hear the Reg D. On Regulation A, you get qualified by the SEC, so you have to go through a lot of hoops. It’s much more expensive than a Reg D. It’s probably 10X the cost.

You’re talking about the sponsor?

Yes.

It takes some time, too. How long does it take to get the Reg A done?

It’s not as slow as people think. It takes about three months to get qualified by the SEC. To give you an idea, we started planning it in November 2022. We got qualified in July 2023. It does take longer, but the benefit of that is you can raise money from anybody over the age of eighteen, whether they are accredited or non-accredited.

Relationship or no relationship.

That’s the benefit. On a mortgage note fund, for example, we don’t take on debt. We don’t have leverage because we are the bank. If you’re doing a multifamily deal and you’re saying, “We’re going to get 65% leverage on this deal and a 5-year exit at a 15% or 18% IRR,” we can’t compete on that level because we’re not taking on debt.

It’s a different risk profile too.

Exactly. By the same token, a lot of accredited real estate investors are chasing that yield. Some want that stability of lower risk. Also, there are a lot of other people, which I’ll the normal Americans, who are working a 9:00 to 5:00 that when you tell them 17%, a lot of them are like, “There’s no way you could get that on a real estate deal.” We offer 8% to 11% returns. Some people, at that point in time, still say, “You’re out to launch. There’s no way you can meet that.”

That’s interesting. A 10% return on real estate to me, especially within a no-debt position, that is fantastic. It’s achievable, too.

You have some people who will laugh at it and say, “I don’t get out of bed for X amount.” You have some people say, “There’s no way you could provide that type of return.”

That’s so fascinating. You and I might go on shows and talk about this stuff all day and do it every day, but we’re still addressing the tiniest fraction of the addressable investor market. We’re still dealing with this alternative asset class where you might have to explain a 10% return to somebody. That’s crazy, but that’s the reality of it.

For us, we also have to explain not only a return but what it is we do because most people think, “You’re buying the property.” We’re like, “We’re not.” I’m going to use Wells Fargo as an example. You pay Wells Fargo every month. Instead of paying Wells Fargo, you’re paying 7e. We’re stepping in on that lender profile. By doing that Reg A, it did allow us a much greater audience where you can raise $75 million a year. We also do have a Reg D component as well that has some different terms.

Doing that Reg A did allow us a much greater audience. Click To Tweet

506(c)?

Yes. We also broke it up because we have been working with broker-dealer RAs and investment advisors. All their clients are accredited. For purposes of less risk for them, they’ll have their credit investors invest in the Reg D for due diligence and other purposes that they don’t want to take a non-accredited investor and then reference something. God forbid it ever goes bad, then they might get a complaint against them or whatever that might be.

The broker-dealers feel a different level of comfort with a 506(c) or Reg C offering.

It depends. Some like the Reg A and some like the Reg D, it’s weird. It’s also that divide between old school versus new school.

That’s interesting. The younger guys prefer which?

Reg A.

It’s newer. It’s a newer legislation. That’s interesting.

It’s a newer product. It’s still understanding laws, the regulations behind them, and the risk profile.

I’ve been raising capital for about a decade. I have always 506(c), 506(b), and direct-to-investor. I have not done any big family office or big check writers. I have not done any equity partners. I have not done any broker-dealer stuff. What’s been your experience working with those guys? Is it a net positive? There are tradeoffs, I’m sure, but how’s that been for your team?

We started the process in January 2023. It’s not like you can flip a switch. There is a long vetting process that they have to do. It is a lot more in-depth. For example, on the due diligence side, they will tell you, “You got to go get a third-party company to do a report on you.” There are three companies, which are Buttonwood, FactRight, and Mick Law. You, as a sponsor, pay for this report, which is $25,000. It isn’t cheap.

This is intense. Is this for the credit and criminal?

No. They send you a twenty-page questionnaire of everything from criminal, all the background checks on you, and the company. Do you have a succession plan? Do you have audited financials? How much of your portfolio is bought from some of your other portfolios? What’s your investor profile? What’s your risk profile? Are you all in one asset? Are you diversified?

They will take a look at your proforma and pick it apart. Let’s say you were doing a rental property. They’d’ be like, “Why did you assume absorption of X amount of units per month? Why did you assume you could get an extra $100 per month?” For us on the notes, it’s, “How did you assume how quickly you can get the money out the door? How did you assume your return profiles on performing versus non-performing?”

We started in March 2023, and we got the report in June 2023. They have three people almost working full-time, and they’re firing questions back at you. The reason they do this is it is good for a sponsor to understand what they are looking for. You know what a PPM looks like in a subscription agreement and everything else.

CWS 255 | 7e Fund Structure

7e Fund Structure: As a sponsor, it’s good to fire questions to understand what you are looking for.

 

It’s monstrous.

Think of a family office. How many PPMs do you think they get thrown on their desks every day?

It is 100 or 1,000.

They want somebody to do the first scrub. If somebody’s going to spend $25,000 to get a scrub, they’re like, “This person at least did it.” They’ll put a report that has the pros and cons of the offering. They don’t tell you whether or not you should invest. They say, “Here are the risks involved. Here are some of the pros that are involved with it.” At least, it is like your Reader’s Digest summary of the offering. They can at least do that first round of checks before they start diving deeper and want to get meetings with you. It’s much like dating, the process.

A lot of investors pull the trigger pretty quickly. You might talk to an investor who will look to invest. When you’re dealing with that RIA investment advisor-type group, it will take 3 to 6 months of dating before they get behind you. They are like, “I’ll start seeing if some of my people who work with me are considering investing.”

That makes sense. It’s a different model. I appreciate you breaking that down. That’s a different track. There is an unlimited amount of capital out there for these deals. It is figuring out how you’re going to connect the dots. We started big-picture on the fund, and I appreciate you breaking down Reg A and how you guys are approaching Reg D and the investment advisors and working with them.

Let’s get down a little more tactical to mortgage note investing. We hold a ton of landowner finance notes. I like that model. We originate them and hold them forever. We’ve got some experience there. Buying a season note on a secondary market is cool. That’s interesting. I’d love to learn more about that. I also want to understand what your triggers are. You said distress. Is there some kind of a trigger for a late payment or a default? I want to dive in on that. I haven’t explored that world at all, so I’m curious to see how that works.

When people think of distress, this is always what blows people’s minds. Most people think you missed one payment and it is like, “They’re going to come banging on my door and foreclose my house.” The loans that we see, at average delinquency, let’s say it is about five years. You got some that are 10 and some that are 2.

Fully delinquent for five years?

Yes.

What kind of assets are these?

Most are single-family residential. We’ve got one that they haven’t made a payment in eleven years. They have so many loans that a lot of times, they stick them in a drawer and don’t do anything. They’re like, “We’re not going to spend any more money on this,” or whatever the case may be, or, “We’re going to put it out for sale.” The moment somebody puts it out for sale, they stop doing everything on it.

It’s a lost cause at that point.

I always start with that because usually, people are like, “How can people go years without paying their mortgage?” They can. It blows people’s minds. The next question is, “Why would you buy something like that?” It’s because we can buy it at a significant discount. We always like to use the equivalent of buying a property that is dilapidated and needs a lot of work. You’re not paying the market rate for that property. You’re going to buy the property, try and rehab it, fix it up, and resell it.

A mortgage note is very similar. The only difference is you’re not rehabbing the property. You’re rehabbing the borrower. What we mean by that is we’re trying to get them on a new payment plan. We’re trying to get them to come to the table. You also buy it at a steep discount. You have more flexibility enabled to work some of the numbers.

Let me ask you a question. Let’s say you’ve got a note that originated at $100,000 on a single-family home. If it’s 5 or 10 years old, these are amortizing, so maybe it’s paid down. Maybe it’s $75,000. If the outstanding mortgage balance is $75,000, what is a substantial discount? Is it 80%? Is it half? Is it less? Is it a huge range? What are you looking for there?

It’s a range by the state. To keep it even simpler, let’s say it started at $125,000, and then $100,000. We would pay anywhere from $30,000 to $70,000 for that note.

It’s a big range.

It depends on the state.

What is the state dictating there?

Foreclosure timelines. There are two types of states. One is judicial, which means you have to go through the court system which means time, or non-judicial, which means you file in the newspaper and you can redeem your rights. For example, in New York or Hawaii, it could take five years to foreclose in those states.

By law, every house in the state.

Some people, what they’ll do is they’ll go through the federal court, which can get it done in eighteen months, but there are other ramifications. You go to other states like Georgia or Texas, those states take 3 to 4 months.

That sounds about right.

Most states are around one year. Up the East Coast in Florida, Carolinas, Maryland, and Virginia is a little quicker, but in the mid-central part of the country, usually, about a year is what it typically will take to foreclose on a property.

That’s interesting. That’s a mix of judicial and non-judicial states. It’s about a year. You guys are looking at a note for sale by the time the fund, bank, or whatever puts it up for sale. They’re done with it. What are your criteria to say, “That’s something we’re going to take a risk on and bite off on?” Is there a ton of due diligence or are there some easy check boxes that you guys can look at to say, “That’s something we pursue?” What’s an average note purchase here? Is it $100,000? Is it $500,000? If you’re looking to deploy $150 million, that’s a lot of volume, right?

Yes, it is. Our average note is a little over $100,000. The property value behind it is roughly about $300,000. When you talk about risk, we’ve got plenty of equity in the values of these properties.

CWS 255 | 7e Fund Structure

7e Fund Structure: When you talk about risk, we’ve got plenty of equity in today’s values in these properties.

 

You have a first lien mortgage that you’re taking ownership of on an asset that is 40% loan-to-value.

We like buying loans that are 10 years old because what was the value of the house 10 years ago compared to now? There are loans that people bought, we’re not a big fan of because there’s no equity in a lot of those deals. Typically, for our buy box, the property value is over $100,000. We’ve invested in 40 states. We typically won’t buy in New York. It is very rare unless it’s part of a large pool that we’ll buy in. We look at three things. We look at the property, the property value, and the predicament or what caused them. Usually, it’s death, divorce, or job loss. Sometimes, people stop paying. It’s rare, but it happens.

Once they read this episode, they know it’s not paid for ten years. That’s crazy.

We also look at, for example, if somebody’s filed bankruptcy five times, we’re not buying that note. For example, Georgia of Texas. If the person hasn’t paid in seven years in Georgia or Texas, a red light goes off in our heads. They’ve been able to game the system somehow because that property should have been foreclosed upon by now.

That’s interesting.

The same property in Florida, and it was two years old, it takes longer in Florida. They may contest the foreclosure, and that happens a lot. Those are some of the initial red flags.

The fund, which is evergreen that’s getting to $150 million, what does the team look like? It’s probably pretty heavy on the transaction side. Is there an acquisitions manager running through this? Give me an idea of what kind of volume you need to do to make it work for you guys on the purchase side.

We have a team of nine overall, but we have also outsourced a lot of components. For example, we don’t speak to borrowers. We use a licensed servicing company. I know you hold some loans. I don’t know if you collect the payments.

Not at all. Third party and they pay for it.

For us, we have to pay for it on single-family. We can’t make the borrower. We have companies who do all that tax reporting for the borrowers, like 1098s and stuff. We use that servicer. I and another person led up acquisitions. We’re buying about $2 million to $3 million a month. That is what we’re buying in loans.

That might be twenty-plus notes in a month.

It’s 10 to 20. As the fund has grown, the average price has grown. When we started out and we were raising a few million dollars, we were buying lower balance assets. As we’ve grown, we’ve been able to increase the size as well. There are 2 of us on the acquisitions, and then we have 2 people on the asset management side of things who manage the assets through that period of time. They’re the ones managing the servicers and the attorneys.

Software is critical. Having good software that can track all this for you to let you know when you have to do all your follow-ups saves a significant amount of people. We have an accountant. We have three people on investor relations and marketing for raising the fund side of things. It’s interesting that some companies like ours outsource a lot of that asset management. We go by the philosophy of nobody manages their money or their assets better than themselves, so we like to keep it all in-house.

Nobody manages their money or their assets better than themselves. Click To Tweet

It seems like what you’re doing is the real work. You’ve got some process on the acquisition side identifying it, but then, doing the workouts, I imagine, is pretty involved. If you’re trying to restructure payments, that seems like the bulk of the work from what I’m hearing.

It is. It’s interesting though because we have proforma calculators that we’re like, “We bought this loan at $50,000. They owe $100,000. Their payment was $900 a month. Can we do $700 a month?” Green means go. If it meets a specific IRR we’re targeting, then we can make that number work. Typically, we like to be at the forefront of providing the options to the borrower of, “Here’s what it is.”

We also get a lot of information from them. They call it a shock package, which is like applying for a loan. We’re like, “Give me your tax return and your pay stubs and we’ll pull credit on you. We’ll work with you to try and see what you can afford.” They think we’re adversarial because it’s a conflict-oriented business and that we’re trying to screw them when we’re not. We’re trying to help them because if I wanted their property, I would be out there buying real estate.

A borrower called me. He got my number. They’re in Wisconsin. I was joking with him. I said, “I’m in Virginia. Do you think I want a property up in Wisconsin at this point in time? I want you to pay your mortgage. I don’t need a $125,000 house in Wisconsin. What am I going to do with it? I want you to keep your house, grow some equity in it, and then, at some point in time, sell it and keep that money.”

That makes sense. I wanted to ask about that. Let’s say you have a house with a market value of $300,000. Maybe you’ve got some repairs and exit costs that put it at $250,000, to give you a wide margin. You’ve got a note for $100,000. On your balance sheet, you’re in it for $100,000. You get potentially $150,000 there of equity that you could capture in that first lien by forcing a foreclosure. Even then, you’re still saying, “Different market, rehabs, repairs, and exit, the headache is not worth it,” pretty much all the time.

Here’s one of the things that we have to educate people on. A foreclosure is a sale of the property. It gets sold. If the property sells at auction for $250,000 and we’re owed $150,000, we get the $150,000. Any junior lien holders or the homeowner gets that extra money. That’s where we’ve seen a lot of assets. We’ve had assets in the past that we bid $100,000 at auction, nobody bid on it, and then all of a sudden, we get an agent. We finally can get inside that property. We may have to evict the person. We get in there, and then they’re like, “You can sell this for $160,000 or $170,000.” We’re like, “That’s great. Thank you.” There are times we can recapture it, but that’s not something that was part of our proforma that we anticipated.

That makes sense. Thanks for clarifying that. Are you guys solely focused on this asset class? It sounds like the team is pretty much purpose-built on executing here with this one.

We left the fund some wiggle room so that we can invest in some single-families, some small multifamilies, or other types of asset classes. The reason why is if the market dries up completely and we have this money, we need to put it to use. We’re very cognizant of being strategic in that. I have a background, from my past life, in development, single-family, and multifamily. I have that background, but I’m not going to, all of a sudden, turn and go to oil and gas, as an example. I see some people sometimes with their funds that when one thing dries up, they’re chasing the next big thing.

I’ve seen it.

For us, we want to be the best at what we do. That’s why our primary focus is on first-position mortgage notes.

That makes sense. We launched a fund in late 2022, but I resisted it for years because it was like, “I don’t want to have $10 million or $20 million of capital accruing a distribution where I can’t deploy it.” Finally, we’re at the scale where I feel comfortable deploying it, so we did it and it’s great. A huge concern as a fund operator is like, “We’ve got to be able to deploy this thing.” You’ve got to be able to have some other avenues. The market changes. I have a couple of questions about the market, but I do want to dive in a little bit more on the fund. If somebody brings $100,000 and says, “I want to deploy $100,000 in your fund,” what does that person expect? Is it accruing on day one? What’s the process? What’s the lockup and all that stuff?

In the Reg A, it’s a four-year lockup within the fund. It starts accruing on the first day of the following month. We’re in July 2023. On August 1st, 2023, it would start accruing. On September 1st, 2023, you would get your distribution for that month.

You invest on the fifteenth and next month, you’re getting a payout.

You get your payout. Depending on the investment, it’s fixed between 8 and 11. The higher the investment, the higher the rate you get. We give what’s called bonus shares. We’re selling shares of a company that you’re buying. It is $10 a share, so for $100,000, you’re getting 10,000 shares. As part of that, you get specific bonus shares with that, which I honestly, off the top of my head, can’t recall what it is on the bonus share side, but it enhances the return.

At the end of four years, when you cash out your shares, you get over $100,000 plus those other bonus shares. You get the money from those as well. Those during that time are also accruing that distribution. We try to keep it very simple. We don’t have a drip, which is direct reinvestment. That is because then, you start getting in the partial shares, and the SEC isn’t a big fan of it.

People have asked about that in our fund and our stuff. The accounting requirement there from an operator’s side is a non-starter. Why does the SEC frown on it?

It’s more because the SEC wants everybody to be on level playing fields. We tried to only give bonus shares to the first $10 million or $20 million of investments. They’re like, “You can’t do that.” Some people do it, but the accounting side of it is a nightmare in regards to who’s in, who’s out, what percent, and especially if there’s any type of equity ownership or equity percentages. You’ll have your accountants probably wanting to pull their hair out.

CWS 255 | 7e Fund Structure

7e Fund Structure: The SEC essentially wants everybody to be on level playing fields.

 

We’ll hire four more people.

Keep it simple. I did a drip once in one of my old 50(c)s. My CPA wanted to kill me. The bookkeeper and the software we use could calculate all of it, but it’s extremely challenging.

There are so many moving pieces. What is a minimum investment in the fund? Are you guys doing $50,000 or $100,000?

It is $5,000.

Could you imagine doing reinvestments of $5,000 across 1,000 investors’ positions?

Our initial investment when we started our Reg A was $500.

Was your investor relations team poking their eyes out at that point?

Yes. People would ask, “For $500, what does my return look like?” We’re like, “$6 a month.” They’re like, “That’s nothing.” It is like, “That’s because you’re only investing $500.” This is when we got to $5,000. Where it’s nice is on these evergreen funds, without having that $100,000 or $50,000 min, people are like, “I can risk $5,000 to see how things go.”

We’ve had investors start with $5,000 and then cut us a check for $250,000. They want to see who you are and how you operate. That low barrier to entry gives people a little more confidence. If I was investing with you at $50,000, I’d be like, “I’m confident, but also, I’m nervous.” If you say I can get in with $5,000 and add more later, it adds a lot more comfort.

It’s interesting. There’s this inverse relationship a lot of times, not as a rule, between the investment amount and the client quality. The $5,000 investor might be concerned about it, and a $100,000 or a $250,000 investor might write the check and forget about it. There are different classes of investors. We have a $50,000 minimum. We don’t have a super low barrier to entry, but as these things go, it’s relatively low. We’ve kept it there to test it out for the lower amount and see how it goes. Do a year on a project and then do more if you’re comfortable with it.

We don’t do any marketing outside of shows and some social media stuff, but if you get those people in and show them a great experience, then it grows organically there. I would imagine having a lower barrier to entry, although that entails, I’m sure, a lot of extra work for your team, you’re connecting with so many more folks who potentially have the wherewithal to refer people to grow their own investments with you. That’s huge.

There are two parts. You hit the nail on the head there. One is people growing and referring to others. There are people being also like, “I have an IRA that’s only got $7,000 in it,” or, “I have an HSA,” or, “I have this,” whatever it is. It could be other types of accounts that they can invest in that they might not have the $50,000 or that minimum that they can. We see a lot of people like that that also invest as well.

It makes sense. I want to ask you about market conditions. We’re talking in the second half of 2023. We’re on the heels of ten consecutive rate hikes. We’re seeing all impacts out there in the economy and especially in real estate with rates in the 7s, 8s, and things like that. How’s that impacting you guys? You’re looking at loans that originated sometime years ago, but what’s going on with the market climate? What’s that doing to you guys? What are you seeing out there?

The first interesting thing is our business gets better when the economy gets worse because there’s more default, typically.

There is more distress.

Interest rates don’t have as much an impact on us because we do not originate loans. We’ll call it Silicon Valley Bank. If they’re like, “I have this loan at 4%,” and all of a sudden, the market is at 7%, we’re buying at a discount to hit a certain yield in double digits. What we’re seeing in the market is a lot of tightening on the lending side of things. We’re usually at the forefront. If you’re investing in multifamily, we’re seeing the defaults come away or the amount of loans for sale. That’s something we’ve seen a ton of.

For the first quarter of 2023, to give people an idea, we probably were seeing about $100 million a month in loans come across our desks. For the second quarter, we were seeing about $400 million to $500 million. We saw a significant uptick in the number of loans for sale. That’s performing and non-performing. A lot of them are loans that were, let’s use the term scratch and dent, where they try and sell them to Fannie or Freddie and they are not qualifying. All of a sudden, these companies are stuck with them. In 2022, those types of loans were selling at $0.90 something on the dollar. They’re down in the 70s and 80s.

We’re starting to see things sell. I am more of a gloom-and-doom type of person, to be upfront. I see things getting worse before they get better. Real estate is a slow play where things take a while to happen. With the amount of credit card debt, people were taking out home equity lines of credit to pay off their credit cards and they maxed those out. We’re seeing a lot of those on the market for sale.

On the investment side of things, it was so easy. People were buying rental properties or Airbnb properties and basing everything on 2021 numbers or whatever the case may be. The people who don’t have to move are not moving. I have a 3% rate on my house. I love my house anyway, but even if I didn’t, I would never go anywhere because of that uptick. The only properties we’re going to see on the market are probably ones that may be in distress until it tilts a little bit more to people forced to sell.

Everybody knows what’s going on in commercial multifamily. That does have an impact on residential. I’m not predicting the world is going to end. I’m not predicting a 2008, but for people who are continuing to bank on 5% rent increases and 5% appreciation, I would not be doing that. I would either anticipate being it flat or coming back down to earth depending on your market. I know certain markets erupted.

I was in a group where somebody had a $400,000 house that was worth $900,000. It’s in a market that I don’t see it being sustainable. It’s a beautiful area, but there’s not enough jobs or employment to be in those areas like 2008. Certain areas that ramped up a lot got crushed in those major metropolitan areas. They grew, but they didn’t grow at absurd rates where when they did take the hit, they didn’t take as big a fall. The more you rise, the harder the fall. That’s the way I look at it.

I remember in ’08, I was talking to a guy at a conference. This is years ago. His house was a $100,000 house in Las Vegas and got up to $500,000. After the crash, it was back under $100,000. It’s these wild swings. It’s interesting. I appreciate your feedback. It does take a while for these things to work through the system.

It’s been a while since we had that kind of hike over such a short period. As we’re talking, inflation numbers seem to be getting where they like them if you believe the numbers. I always love to talk to different operators who are doing different things, especially you guys all around the country. I appreciate that feedback. Looking ahead, what do you see for the rest of the year for the team? What do you guys want to accomplish for the second half of 2023 here?

For us, to continue to grow the company. We are very focused on what our plan is and what our mission is. We follow, and maybe people have heard of this, EOS and those types of systems.

I was going to ask if you were part of any mentorship groups or subscribed to anything. EOS is a great system that a lot of people might know about.

EOS is what we subscribe to. The big focus for us on EOS is the accountability chart of your vision. I am creating the roadmap so everybody is on the same page where the company wants to go. I worked for two companies that were identical. One had a vision and one didn’t, and the company culture was completely different from one to the other.

Create a roadmap so everybody is on the same page where the company wants to go. Click To Tweet

That’s so fascinating.

Everybody had buy-in on the one that had the vision. The one that didn’t have an annual review and would say, “What are your goals?” I’m like, “I have no idea. What do you want me to do?” The company doesn’t have goals. It was a lot more infighting of diverse departments whereas when there’s a vision, everyone works together.

On the accountability side, what we noticed was, and we call ourselves a startup because we had been doing note funds for years, but in the past, we had a lot less people where we had nine. We’d have so many people dipping their hands in different roles. It is like, “Who’s responsible for that?” Since I’m the CEO, I may assist you with something. You’re accountable, but I’m reporting to you on that task. Some people find that mind-blowing. For example, we have an acquisitions woman who runs our acquisitions team. I help and make the final decision, but getting to that point, she does a lot of the due diligence on those assets. She puts together a sheet for me and gives it to me. That’s what we found to be the most impactful.

I love it. Thanks for sharing that. I appreciate it. It was awesome to meet you and awesome to learn about your business. This is a really cool model that’s different from what I’ve done. I appreciate getting to learn about that and share it with the audience. If somebody wants to connect with you and the team, how can they do that?

They can email me at Chris@7EIinvestments.com or on our website, which is 7EInvestments.com.

It was awesome to learn from you and get to meet you. I wish you guys continued success. Thanks so much for joining. I appreciate it.

Thanks for having me.

We’ll see you. Take care.

Take care. Thanks.

 

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About Devin Elder

CWS 255 | 7e Fund StructureDevin Elder is Founder & CEO of DJE Texas Management Group, a vertically integrated multifamily investment firm based in San Antonio, Texas. Since 2012, the firm has completed hundreds of successful investment projects including many full cycle multlifamily investments. Devin has been a Principal in over 5,000 doors of multifamily. Devin is a Pilot, Podcast host and owner of Real Estate consulting firm, a brokerage, and the DJE Foundation, a 501(c)(3) non-profit supporting disadvantaged children in Texas and the Philippines.

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