#186: Wealth Through Distressed Notes: Smart Real Estate Strategies
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We hope you’ve enjoyed the long weekend! Welcome back to another episode of The Richer Geek Podcast. Today, we’re diving into the world of distressed notes with Chris Seveney, CEO and co-founder of 7e Investments. Discover how to generate passive income and potentially help homeowners facing difficulties by investing in distressed mortgages. Learn about the benefits of this alternative real estate strategy and how to get started with a minimum investment of $5,000.
In this episode, we're discussing...
Chris Seveney’s Background: From civil engineering to real estate and finally into note investing, Chris’s path was driven by a desire to create a different kind of impact in real estate.
Alternative to Traditional Real Estate Investing: Invest in mortgage notes (debt) instead of physical properties to avoid property management headaches.
Helping Borrowers & Earning Passive Income: Focus on "fixing & flipping notes" by working with borrowers facing hardship to keep them in their homes while generating cash flow.
Focus on Middle-Income Properties: Target geographically diverse middle-income properties for a balance of risk and reward.
Regulation A+ Fund: Invest in a Regulation A+ fund with a minimum investment of $5,000 for access to this niche investment strategy and potential for monthly distributions of 8-11%.
Resources from Chris
LinkedIn | Email | 7e Investments
Resources from Mike and Nichole
+ Read the transcript
Mike Stohler
Hey everybody, welcome back to another episode of The Richer Geek Podcast. Today we have Christopher Seveney, CEO and co-founder of 7e Investments. He brings over 25 years of real estate know-how, started in 2016 when he started getting into notes. Now we're going to talk a little bit about the niche that he has in buying the notes. I think you guys will like it. How are you doing, Christopher ?
Chris Seveney
Good. How are you, Michael?
Mike Stohler
Good, I can call you Chris. That's fine?
Chris Seveney
Yeah, you go by Michael or Mike?
Mike Stohler
Yeah. Mike's fine.
Okay, so give us a little bit about your history. You know, everyone loves to see what kind of background you have, you just didn't watch an HGTV episode and jump into something. So give us a little bit about background.
Chris Seveney
Yeah, sometimes I wish I had an interesting background. I've been in real estate since I graduated college in the late 90s, so I can age myself there. I went to college for civil engineering, and I was the guy in college who was like, "No, I want to design cool buildings. I want to be a structural engineer, and design buildings and bridges." And my senior year, I realized, "Man, I'm just going to sit behind a desk in front of a computer all day long." So I pivoted, still stayed civil engineering, but did construction management. And finished my degree with that, and started working for a large commercial general contract. First 15 years of my career, I was building some really cool stuff. I did the largest historic renovation in Boston. I built a courthouse for Army Legal Services, a multi-family office and an MRI suite, which MRIs are actually pretty cool machines. I could talk for hours just on that. But many people, you're working 60 hours, and you sometimes let your personal financial situation just go. And what I mean is it's like, "Oh, I'll get to it when I'm older." And also, next thing I know, I'm 40 years old, and I have a 401(k) and I start working for a real estate developer who said he laughs at me, and he's like, "Oh, you're the 40/40/40 club, 40 hours per week for 40 years, for 40% of your pay, what are you going to do about it?" And that's when I started diversifying my investments, and I started looking into mortgage notes. And for me, that's kind of like love at first sight. And I joke about that, because I love problem solving, I love numbers, and honestly, I like helping people. And we started buying default mortgages, which are ones that aren't paying. And we buy them from banks or hedge funds. We buy them at a discount to work with the borrowers to try and keep them in their homes.
Now, let's be honest, you can't keep everybody or save everybody, and some people you know, just can't afford properties, but we've been able to over 600+ loans over the last eight years. Our foreclosure rate is under 10% of the loans we go through. So, yeah, that's kind of back then to today. Now, I have left my W-2 job. I run a full time fund that is a Regulation A+ offering, so it's open to both accredited and non accredited investors to invest in our mortgage note fund and only takes us minimum investments, only $5,000 but we've tried to keep it affordable for people who don't want to drop $100,000 right off the bat, and also for people who may only have five or 10,000 sitting around.
Mike Stohler
What's the advantage and the disadvantages of we get into one train of thought that says, "Don't keep the person in there because they can't afford it now, they can't afford it six months from now."
Chris Seveney
Yeah.
Mike Stohler
What are you seeing? You know, the kind of advantage of trying to keep someone in the house?
Chris Seveney
Yeah. One of the things we see, because we get to see the entire autopsy of the loan. Excuse the phrase, but every lender has a servicing company who is the one who deals with the borrower, who keeps a diary or a journal of all the conversations. So when we go to buy a loan, we can be very selective and look at the loans we want to acquire. And okay, if the person's filed bankruptcy five times, not alone, we want to work with somebody. But most people just don't wake up one morning and be like, "You know what? I'm not going to pay my mortgage this month." Most people have some type of hardship of death, divorce, job loss, or health, medical and when we get to evaluate that situation, now we can underwrite and say, "Okay, is this somebody who we think we can work with or not work with?" And in most instances, especially over the last few years, because of covid pandemic, we had a lot of people had lower reduction in pay, or something happened that they got caught behind. But now they're back on their feet and they can start making payments. The issue is banks are like, "Oh, your payments $1,000 a month and you're 12 months behind. You gotta cut me a check for $12,000." And they're like, "Well, I don't have $12,000 and the bank." It just keeps snowballing where we can step in and say, "Okay, because we're buying it again at a discount, can you give us $4,000?" And then can you pay $1,200 a month and put them on a payment plan that if they make those payments, then we'll adjust the balance, we'll recast the loan to work with them, to give the new, basically updated payment schedule. And what that does is, just give people a simple example: let's say we bought a $100,000 loan for $60,000 and then we get them paying, and recast that loan, and then sell it. Now that loan might be worth $80,000 so we get the payments, plus we can sell it for a premium, because it's quote, unquote better paper, it's clean, or the person starting to make payments. And there's people out there who might have an IRA, who like to buy notes individually, who want that cash flow in their portfolio. So that is really how we like to use a phrase my business partner Lauren always will say, "We like to fix and flip notes which is, but we're not fixing the property. We're fixing the borrower."
Mike Stohler
And that's good, because I know some people, and I've done this myself, more of like the rent to own, we come in, but then they get the house back in seven years whenever, they can then apply for a new mortgage. How's it working with yours now you flipped it? Are they now lifelong renters, you know, to the new person, or is it something, some type of program where they get it's more like a mortgage?
Chris Seveney
Yeah, it is a mortgage, and it's always in their name. So instead of you getting a mortgage from Chase, and I'm just using Chase's, everyone probably knows I buy the loan from Chase, so I'm just stepping in Chase's shoes. I don't own the property. You don't call me if your toilet block, so you don't call me if the roof leaks, because I'm just your bank. You just send me your monthly payments, and we tip, and we rarely, if ever will take possession of that property, we will act as just that lender in the situation. Now, I know what you're referring to. There's other people out there who will kind of step in and rent it back, take property and rent it back to them. I've owned property, I've built property. I don't want to be their landlord. I want to be their bank so they're not calling me on Sunday telling me the toilet broke. I have nothing to do with it. We just on the first of the month, did the payment come or did it not come?
Mike Stohler
Yeah. I don't call Chase if my water heater goes out, right?
Chris Seveney
If you do, it's going to take 20 minutes to get to somebody, and then you're not going to know what to do, right?
Mike Stohler
And they'll transfer you to someone else and another. It goes again. Regulation wise, was there anything that some people talk about the Dodd-Frank Act. There's some other different things like that. If people kind of know what that is, and people are like, going, "Well, wait a minute, can Chris do this because he's not an official bank." What are some of the regulations? What have you thought about those types of things that I think Obama passed?
Chris Seveney
Yeah, so the Dodd-Frank, great question, because there's tons of regulations. And to be frank, Dodd-Frank, we get licenses in states we're required to, I will say that the government really hasn't caught up yet on the fact that banks would sell loans to individual investors or to funds, there's an underwriting process of how to deal with a borrower, but the whole asset sales side of things is kind of like they haven't caught up. But it's not to say it's the Wild West, where we have to be extremely careful if we will not talk to the borrower.
We're not the ones picking up the phone, calling them, asking them if they're making their payment. We use a third party license, servicer, and the reason that is so important is they are, call it the gatekeeper. They're the ones tracking the payments. They're the ones saying, "Oh, here's what, how much interest is owed." So it's not big brother watching the hen house saying, "Well, here's what you owe an interest. And I'm just pulling out of my back pocket." You know, they have to be licensed. They get audited. They have states coming in to make sure they're calculating things properly. So for us, thinking about the best situation is to think about owning a piece of real estate and hiring a property manager that's very similar. Where we're the lender hiring a note. I don't want to call them a manager, because they don't manage the loan for us, but they're the ones who keep the books for us.
Mike Stohler
They service it.
Chris Seveney
Yeah, exactly. To people who are listening, if you own a home, you know you don't pay the lender, you pay their servicer, and a lot of times you'll get a letter in the mail saying, "Now, make your payments. XYZ." The reason it happens is your loan was sold, another bank bought it, and they're just switching servicers. So if you're non-performing it could be to somebody like us. Most people don't even know who actually owns their loan because they're sending payment to that servicer.
Mike Stohler
Yeah, that makes a lot of sense. And you know, I just wanted to kind of clear that up, because some people are like, "Yeah, you know, who knows?" Because the government loves to regulate, and there's just all these different things.
Chris Seveney
I will add, though, that's what gives us a competitive advantage, because there is a lot of regulation that people don't want to get involved in because you need license bonds, audited financials. There's lots of things that are needed, that are cumbersome. Let's be honest, people don't like the door.
Mike Stohler
Yeah. Well, it's our nature. So yeah, everybody, this is Chris Seveney of 7e Investments. So let's talk about the website. People say, "Okay, you know what? We'll get into this." Go to the website. Is there documentation? Is there a knowledge center? How can people sign up? What is the process once someone hits your website?
Chris Seveney
Yeah, So for us, we try to keep it extremely simple. We have a knowledge center on everything that we do. We have all the webinars that share our story, what we do, what we invest in, people who we show case studies, and then for people who want to invest, we have a link on our website that goes through a third party escrow company. So again, because our offerings, what's considered a Regulation A+, which is different from the 506(c)'s, we have to have a specific portal that people go through so somebody can go in, fill in their information, and invest right online. And then that money would get, whether if they ACH, it would go directly into an escrow company, or if they wire, they get to wire instructions. And then once that money hits, and we actually have a broker dealer who will perform what's called an anti-money laundering check on the person, which I thought was comical, until we had somebody who was in the drug industry wanting to invest $20 million that got nixed. Believe it or not, it's "Oh, man, the stories we could share." But yeah, it's a simple process that can be done online in under five minutes, and then you get confirmation, and then our Investor Relations team will reach out, get you set up in our portal, and get the shares. Because our company, you invest in our company, which you're your shareholder within the company that owns, call it 100 assets. So it's somebody not just buying one asset. You own a part of the company.
Mike Stohler
What is your niche inside of the field within the notes? Is it Class C properties? Is it all over the place? Do you stick to a regional type of thing, or a certain neighborhood?
Chris Seveney
Oh that's a great question, and that's something any are looking to invest should always ask that question like, where do you invest in? What type of properties? Yeah, for us, we target what I like to deem middle-income residences. So that could be, in certain states, a $100,000-$250,000 home. It could be a $900,000 home. We don't like the Class D property. When I got started, honestly, I used to buy a bunch of those, and they're challenging. Borrowers are more challenging. The properties are more challenging. Valuations are more challenging. Once you get into that middle income niche, the properties, because we again, can't see the inside of the properties. As a lender, we put eyes on the outside. Can get a pretty good idea of what that exterior looks like compared to the interior, where on those Class D properties. The outside could look good, but there might not be anything on the inside. Yeah. So we like to say we target middle income properties. We have invested in over 40 states. We typically shy away from what I like to say the two northern tips, the northeast and the northwest. Reason being is foreclosure laws there and timelines are very restrictive. For example, New York can take five to six years to foreclose, where the average is typically 12 to 18 months.
Mike Stohler
We do the same with our investing. It's like we stay away from the coast, basically. And it is because you're either pro-business or not within the states and also, Covid kind of switched things. And I don't know if it did, it's like, all of a sudden, it's like, "Wow, I was going to invest in this area. But because of how the state handled Covid, I may want to stay away from it a little bit." Have you seen that? And it may not, because you're not commercial like I am, where it's like, a lot of my friends were forced to shut down.
Chris Seveney
Yeah.
Mike Stohler
You can't do that with the home really.
Chris Seveney
Yeah. But what's interesting is, because I'm going to pick two states that if people were to guess which one was easier, friendlier, I know which way everyone would lean. And then there's California and Florida. You know, if I told you, one takes 12 to 18 months or foreclose, and the other one takes three to four months of foreclose. I bet if you asked 100 people, 99 would say Florida is three to four months, and California is 12 to 18. It's actually the opposite, believe it or not, and Florida is what's called the judicial state that has to go through the courts in California is nonjudicial now.
Let's be honest, evicting in California is going to be a burden, but to take possession of that property, if you have to, is different. So you know, it really varies depending on the state. And I think the reason why, and I'm just using Florida's example is 2008 they had huge price declines and massive amounts of foreclosures, especially when you look at the age of borrowers in Florida, so elderly, and let's be honest, I think people were getting taken advantage of. So Florida put in some pretty strict consumer protection laws to protect the borrowers in that state. To answer your question, yeah, there's certain states that it's not that we will 100% avoid except pretty much New York, but how you price an asset will vary greatly. If I move one state north to Georgia, the same asset, I'll just say $100,000 asset in Georgia or loan I might pay $75,000 for the asset. If it was Georgia, I'd probably pay $55Kto $60K if it was Florida. Just to give you an idea, it was the same property, same value. Only difference is the mailing address, because Georgia is a state that is faster in regards to resolution if you did have to go through a foreclosure process.
Mike Stohler
You see, everybody, this is why. And I harp on it every episode, is why you use a professional? Why don't you just, "Oh, I'll just go out and buy notes on my own. Why do I need 7e Investments?" Well, it's because Chris and his company's taking the time to look at the state regulations and do all the work for you. All you have to do is ACH the funds and you become an LP to take the headache away from it.
Now, another good question I'd like to ask you is, why do you think that you went towards notes? We went on a little bit, you don't want to be the landlord.
Chris Seveney
Yeah.
Mike Stohler
But what is it about the note that just makes it a little bit easier? Because you think there's like, well, now I'm someone's bank. Why is that process? And then the second part is, how long do you hold it for? Because maybe in the flip process, you don't have to worry about the longevity of what's going to happen with that note.
Chris Seveney
Yeah. Both great questions. So to start with the why notes? I got into notes because, again, I was a real estate investor. I built my primary residence. We took equity, we bought some rehab, we rehabbed rentals, and did that. I'm in the Washington, DC area, and also try to work a W-2 at the time. Competition was so fierce that if I wanted anything, or I wanted to invest in real estate. You had to be at that property that day and have a wife, two kids, a job. There was no time. And I stumbled upon honestly, notes. And realize the interesting thing with notes is a seller will send me a list of 100 assets and say, "Yeah, just give me bids by Friday, because it's not a first come, first serve. I'm going to evaluate them all at once, and then pick one, pick 100 and pick your cup of tea."
So from that perspective, you can do it from anywhere on the planet, as long as you have internet access, realistically and at that timing and it allowed the other thing I really liked about it was diversification, and I could buy a $300,000 note, but the property is worth a million dollars. For example, so I'm not outflowing off, okay? I'm bidding against a property to turn it into a tenant, manage it, and then worry about appreciation and some of those aspects of it. I'm the lender. Here's what I'm buying. So it's more of a for me. I look at it as more of a controlled risk, believe it or not, even on the non performing side. And I'm not going to sit here and say there's no risk. Every investment has significant risk.
It's really how you manage that risk that's very important. So that's kind of really why? And then when I started getting involved in this, the other aspect I liked about it is, again, when you raise funds, it's "Oh, I could go buy rentals. I could go buy a multi-family and syndicate one deal." And for me, I looked at whether I could go buy 100 notes and diversify and let people come in, come out, and I didn't have to wait till a property got liquidated to get everyone their money. We have a four year hold period, but after four years, it's like, "Hey, give me my money back." And now we have reserves. But if not, "Okay, I go sell that asset and return, you know, return the investment."
Mike Stohler
When someone invests with you, where are they looking at? Because it's a fund, it's not a syndication. Some people may not know the difference, because with the syndication they're looking at, okay, it's a three-year hold, a five year hold, and they get two extra money, and they get a preferred return. People are kind of used to that. What is it with, how's it work with 7e Investments? What's a typical investor?
Chris Seveney
Yeah. We are a true income play, where investors will invest, they will get a monthly distribution which ranges from eight to 11%. We don't have acquisition, disposition, management fees or any of that. I get paid a salary. So I'm collecting a salary. I'm working, I have a team as well. There's 10 of us total that manage the company, work the notes, and then investors get that preferred equity in the company, essentially an employee until all the investors are paid.
So that is the way we looked at creating a win-win for the investors, is giving them a monthly distribution for that investor that again, at the four-year mark, they can keep investing at that point in time, or they want to liquidate their holdings, it's completely up to their call. It's not up to a single asset that, "Oh, we had the refinance and now the DSCR is not there so in cap, rates have gone up. So if I sell it, it's not the right type of thing." I'm sure you're well aware of all that stuff. No people that kind of are in that so for us, we want to offer that income to individuals.
Mike Stohler
Yeah, that makes a lot of sense. And ladies and gentlemen, that gives you a little bit all these different aspects and all these different avenues for diversification. Before we leave, can you talk about anything that you have open now? Are you currently the funds going, and you're accepting investors right now?
Chris Seveney
Yeah, it's an evergreen fund. It's open, and we keep it open so investors can come in. So if somebody invested today, it is, middle or early June. If somebody invested before the end of the month, their shares would be issued July 1, August 1, they would receive their first distribution. You know, right off the bat, one of the great things about notes and our specialty is, it's not a blind pool. So we already have assets. But as assets come in, the money comes in the door, we can easily deploy that money out to new assets, and we're not chasing a $20 million deal or $40 million deal. Now our average loan is roughly, I think right now, about $200,000 balance. The average investor we have right now, I believe it's over 700 investors. The average investment is right around $35,000.
Mike Stohler
Very good. Now, given today's economy, the interest rates, does it work in your favor? I would think that there's a lot of probably 4% loans out there, 3% loans that may be coming. They're behind, and you're like, wow, you know, I can get this worked in your favor or not?
Chris Seveney
Not yet, and the interest rates don't have a direct correlation, because we buy to target a yield, and the interest rate when that loan was written is fixed. So it's not like the loans are variable. When rates during covid dropped significantly, I had a uh-oh moment of, is everyone just going to stop paying and not have to pay?
Mike Stohler
Yeah.
Chris Seveney
Thankfully, we didn't. And what actually happened was we had so many people refinancing. So you think about we bought a $100,000 loan at $70,000 next thing you know, we're getting a check for $100,000 because they refinanced. It's like, "Whoa, this is great." So that was kind of during the Covid scene. The reason I also say not yet is increased interest rates, increased credit card rates, auto loan rates. Wages are not keeping up with inflation because of Covid. We're at a false sense of security, of where the mortgage market is, where it all time lows for defaults. But when the government pumped, I don't know how many trillions into the economy and gave people check after check pay their mortgage, or whatever the case may be, or give the banks leniency, we're at all time lows, we're starting to see significant increase in defaults, which we'll probably get back to the norm, which, to give people an idea, you know, mortgage, it's a $16 trillion industry.
There's usually a three to 5% default, which is really low, but when you do the math, it's $500 billion we're raising $75 million with a little speck of grain of sand on the whole map of the industry. It's similar to multi-family syndication saying, "Hey, I want to go one by one building across the country. You'll find a building. It's for us." We'll find, we don't have an issue finding the mortgages. We are very selective. And then we see around $200 million a week and loans come across our desk. Wow, that is performing and non performing. It's a mix of both, but it's still a huge number of loans.
Mike Stohler
Well, it's amazing. Chris, before we let you go, is there anything else that I forgot to mention? Something else that you'd like to tell our listeners before you go?
Chris Seveney
I'll just say, if people want to reach out to us or learn more, they can go to our website, the number 7 and the letter E, 7einvestments.com or email us at invest@7einvestments.com.
Mike Stohler
Sounds great, Chris. Thank you so much for coming on The Richer Geek Podcast. Everybody, It's Chris Seveney at 7einvestments.com. Thanks a lot for coming on The Richer Geek Podcast.
Chris Seveney
Thanks for having me, Mike.
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ABOUT CHRIS SEVENEY
Christopher Seveney, CEO & Co-founder of 7e Investments, has over 25 years of real estate experience. Since founding 7e in 2016, Chris has built a portfolio of 500+ mortgage notes worth over $25 million across multiple states. Before focusing on notes, he managed property projects totaling $150 million and oversaw $750 million in new construction. Known for his integrity and leadership, Chris has led award-winning teams and set high industry standards. Outside of work, he’s a dedicated father and Boston sports enthusiast.