Apr 24, 2023
Today’s guest is Chris Seveney
Chris left his cozy top floor corner office in 2022, after 25 years working in real estate development and construction. Chris has managed over $1B in new construction during his career and has grown his note business to acquire over 500 notes. Join Sam and Chris in today’s episode.
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[0:00] Intro
[0:54] The 3 questions
[4:09] Scaling mortgage note investments
[8:10] Reg A vs Reg D
[11:59] Terms, issues, and mistakes
[15:58] State of the market
[19:07] What type of distressed debt are you buying?
[19:54] Return profile
[21:02] Closing
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Connect with Chris:
Linktree: https://linktr.ee/creatingwealthsimplified
Website: https://7einvestments.com/
Connect with Sam:
I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
Facebook: https://www.facebook.com/HowtoscaleCRE/
LinkedIn: https://www.linkedin.com/in/samwilsonhowtoscalecre/
Email me → sam@brickeninvestmentgroup.com
SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson
Apple Podcasts: https://podcasts.apple.com/us/podcast/how-to-scale-commercial-real-estate/id1539979234
Spotify: https://open.spotify.com/show/4m0NWYzSvznEIjRBFtCgEL?si=e10d8e039b99475f
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Want to read the full show notes of the episode? Check it out below:
0:00:00:11 - 00:00:22:14
Chris Seveney
On multifamily deals is an example. You'll see an acquisition fee, an asset management fee, a management fee and disposition fees. And you have all these fees. The way we structured it was so simple where I have a staff of nine people right now that work for me and myself. Now we don't have fees or ratios. We're all salaried employees who take a salary.
00:00:23:01 - 00:00:48:16
Intro
Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big.
Sam Wilson
Chris left his cozy top floor corner office in 2022 after 25 years of working in real estate development and instruction. He managed over $1,000,000,000 in new construction, and he's now grown his note business to over 500 notes.
00:00:48:23 - 00:00:50:10
Sam Wilson
Chris, welcome to the show.
00:00:51:13 - 00:00:54:15
Chris Seveney
Sam Thanks for having me today. Glad appreciate being here.
00:00:54:21 - 00:01:03:03
Sam Wilson
Absolutely. Chris The pleasure's mine. There are three questions I ask every guest who comes on the show in 90 seconds or less. Can you tell me where did you start? Where you are now and how did you get there?
00:01:04:18 - 00:01:26:07
Chris Seveney
So where I started, I've always been in real estate, but the tipping point for me to kind of starting my own path was when we, my wife and I went to go build our primary residence because we acted as a contractor. We see that out ourselves and that gave us a lot of equity to then pull some of that equity out to go start doing some more of our real estate components.
00:01:26:15 - 00:01:42:21
Chris Seveney
So that's kind of how we got started. What was the second part of that? Where are you now? So where are we now? Like you mentioned, last year, we launched a regulation A-plus fund to raise $75 million to focus primarily on investing in distressed mortgage notes.
00:01:44:06 - 00:01:54:01
Sam Wilson
That's fantastic. Okay, so you started when you did that first GC Your own home, was that before you launched in your development career or was that after?
00:01:55:03 - 00:02:15:09
Chris Seveney
So it was when I was working for a developer is right after I started working for a developer. When I worked for GC, you know, you were working six days a week, 60 plus hours. You had no time for managing construction projects. Do your own thing. Then when you go to a development side, it's kind of like, you know, the the cozy side of things where all you do is scream at the GC all day long.
00:02:15:19 - 00:02:35:04
Chris Seveney
And my boss at the time, super smart guy, you know, comes to me one day he goes, What are you doing for retirement? And I said, I got my 41k. And he laughed at me. He goes, Why don't you own real estate? You've been in it for 15 years. That's point time. And he had a he had five or six rentals that he had probably a portfolio at that point in time of like $5 million.
00:02:35:15 - 00:02:42:08
Chris Seveney
And that gave me kind of the, you know, the start to want to go build my own real estate career.
00:02:42:24 - 00:02:58:07
Sam Wilson
Got it. Got it. And so it sounds like the starting your own real estate career didn't go the traditional route. You've now since launched a reggae fund. You guys are buying distressed mortgage notes. I mean, was that the next step for you and how did you get into it?
00:02:58:12 - 00:03:19:18
Chris Seveney
So yeah. So the next step actually was we were doing some fixing, I'll call it the bigger pockets BR strategy. We're buying some properties to renovate, rehab, refinance and then rent out. And we did two properties in the Washington, D.C. area where we're located and we had two little kids at the time and we were managing all this work.
00:03:19:18 - 00:03:47:05
Chris Seveney
So my wife, after the second one, says, we're done. You know, it was it was just too much. And she was right. I mean, I was putting a lot of strain on us. But me being, you know, everyone calls me the squirrel and I can find anything on the Internet, you know, looking at what else I could invest in, in the challenge I was finding was, you know, the problem is trying to solve is what can I invest in that I don't have to be there within 15 minutes of getting a phone call to put an offer in on something.
00:03:48:06 - 00:04:08:24
Chris Seveney
So traditional real estate kind of went out the door. So what I found was mortgage note investing. And when I found it, it actually ticked me off because I knew of private lending, but I didn't actually know you could buy distressed notes on a secondary market. So when I found out about it, I was actually a little upset, but actually drove me to want to learn more and get involved.
00:04:09:18 - 00:04:30:23
Sam Wilson
Got it. I love that. It's one of those things, you know, we hear people and I hate to say this, but when someone tells me, okay, I'm a distressed mortgage note investor, I'm a note investor, I think if someone that my you know, kind of the mom and pop version of note investing, they buy, you know, five, six, seven notes a year and they hold them and, you know, parcel amount, do whatever they're going to do with those.
00:04:30:23 - 00:04:49:08
Sam Wilson
You know, the various things you can do with notes. You've taken this to a very a much larger scale. I mean, launching a $75 million reggae fund is not buying 5 to 7 notes a year. So tell me, I guess when you when you mapped out your plan for this business, how did you I mean, in doing this at scale takes work?
00:04:49:08 - 00:05:04:21
Sam Wilson
Because you correct me if I'm wrong, but I would think you have to have the right industry contacts. You have to have the right people that are selling those distressed notes to you, obviously bidding on probably pools of notes. Tell me just how you kind of wrap your head around that educated yourself and then said this is how we're going to go big.
00:05:05:19 - 00:05:28:06
Chris Seveney
Yeah. So very unconventional of how I did this. I started out using my own money, which is conventional. I would say, or recommend. I started buying a few notes and you know, that continued to grow. And few things that I did differently were I'd be in some of these groups or membership classes and just like any aspect of real estate.
00:05:28:07 - 00:05:47:16
Chris Seveney
90% of people who are, you know, say, sitting at the table with you are window shopping. They're not even going to do it. They're just kind of wanting to see what they could do. So after I started getting a little momentum behind me, I was reaching out to those people and say, Hey, look, if this isn't something you want to do, come joint, venture with me, fund the deal.
00:05:47:16 - 00:06:04:04
Chris Seveney
And you know, most people would get 5050 profits. I was giving 6040. So I was giving a little bit more. So I started to do a lot of those deals which for one on one joint ventures till I grew to a point where I, you know, wanted to do it within a fund model of a five or six.
00:06:04:20 - 00:06:26:01
Chris Seveney
The first one was B, but when I said unconventional, what was unconventional about it is I knew real estate and I knew a lot of this aspect and I had some finance background. I actually went back to college, got a masters in finance and real estate and wrote my thesis in 2020 on how to raise $50 million to do a note fund.
00:06:26:11 - 00:06:49:22
Chris Seveney
In my professors were private equity managers and everybody else who managed billion dollar funds. So I'm basically paying $3,000 for my you know, each class was around $3,000. So I paid 30 plus thousand dollars for my masters. But I was getting the education from people who have far exceeded, you know, anything I probably could get from somebody online.
00:06:50:03 - 00:06:56:04
Chris Seveney
And most people pay that same amount in some of these training courses were a lot less a shorter period of time.
00:06:57:16 - 00:07:13:13
Sam Wilson
And so you had these professors that were in the business, which is rare, I think, in the education sphere, to see these people that are practicing what they're preaching. But these these professors that you had to look at your plan and say, hey, here's how you can do it better. Were they kind of catalysts that help you refine it?
00:07:13:18 - 00:07:14:22
Sam Wilson
What was that process like?
00:07:16:04 - 00:07:49:11
Chris Seveney
Yeah, really helped me refine it in regards to, you know, as an there's a big difference from, like you said, the mom and pops and buying a few and getting to that scale of where you need to get to to get more of like an institution on to two fronts. One is buying the assets because once you hit, I'd say like a $10 million threshold of capital, that opens up like a completely different realm for you from the type of people who will want to invest with you.
00:07:49:11 - 00:08:09:21
Chris Seveney
You a million or $2 million check. But if you only have $1,000,000, nobody wants to be 50% of your funding partner. A large part, people like to be a small component, but also from US asset acquisition. You see a lot more deals when you're telling people, Hey, I want to go buy two or $3 million right now versus somebody who, Hey, I want to buy 50,000.
00:08:10:23 - 00:08:27:06
Sam Wilson
Right, right. Okay. So you guys said, look, we're going to launch a reggae fund. Let's get let's get into that. Why reggae versus reggae D? How did you end up deciding to do this particular model? And what are some of the challenges maybe that you faced along the way?
00:08:28:07 - 00:09:05:20
Chris Seveney
Yeah. So the first challenge with not investing is you are the lender, so you're not taking on any debt. So it's good because your risk profile is very different than, say, a multifamily investor. And a lot of our investors came from investing in multifamily or other self-storage, other types of deals. That challenge is, you know, they can go get it that time, you know, getting 15, 18%, you know, in ERs on these other deals because they're levered, you can leverage it in 3% in 65% leverage to enhance those returns.
00:09:06:12 - 00:09:29:01
Chris Seveney
Note investing you can't compete with that. If anybody, you know, saying, I'm going to get you as a note fund 18%, I'd be interested to see the types of assets you're buying because your risk profile is so high, because you know the investor money is your leverage. So what the reason and to answer the question of the regulation A is regulation A does get qualified by the SCC.
00:09:29:08 - 00:09:59:10
Chris Seveney
So it's a much higher cost. You know, I'd say to get qualified is call it $125,000 compared to a five or six C, which you can get done for 1020 grand. But when you look at your audience, who are you marketing to when you're doing A five or six C and in real estate, you're typically marketing to other real estate investors who are accredited, which is, you know, 1% to 2% of the population pick a number of regulation a year.
00:09:59:16 - 00:10:18:12
Chris Seveney
You know, you're fishing in the entire ocean because all you have to do is be above 18. You know, our minimum investment is 20 $500. You know, name A five or six C that you can get in the door for 20 $500. You can't. So, you know, we want to open up that pool significantly to other investors.
00:10:18:12 - 00:10:47:19
Sam Wilson
Got it. So you said, all right, look, we're going to plop down 125 grand. We're going to launch a regulation, a fund. When you did that and I know you had some relevant industry experience up to that point in time, joint venture ing, buying, some notes, maybe buying I don't know how many at a time, but what do you do to really I guess there's a be the wrong term for it, but maybe just be the right one to give your investors confidence, especially your large check investors in a fund like this that, hey, we can do this at scale and we know what we're doing.
00:10:49:01 - 00:11:09:09
Chris Seveney
Yeah. So prior to writing the regulation, A had actually done five other funds. Okay. And, but those funds, the way we did them were, you know, a lot of people just want to go out and say, okay, I want to go raise $20 million into a fund. You know, I'm an engineer. So, you know, I like the, you know, test improve different theories and so forth.
00:11:10:11 - 00:11:35:24
Chris Seveney
So we did several different ones and we changed the terms. You know, we had one fund that was like a 5050 split with no preferred return, no management fee. We did one with a preferred return with a management fee and some split. So we did. We did one two years, we did one three years, you know, so we did these to gauge, okay, what is the best for both the investor and the sponsor?
00:11:36:09 - 00:11:54:12
Chris Seveney
Because what you don't want to do is go raise $50 million or a large sum of money and have the wrong terms. You know, that can be catastrophic. So we did several different, you know, theories and how we were testing things. And each one of those funds, you know, again, past performance is in a future indicator of success.
00:11:54:18 - 00:11:58:14
Chris Seveney
But each one, you know, we met or exceeded what we were looking to deliver to our investors.
00:11:59:09 - 00:12:18:21
Sam Wilson
Right. Right. And that makes that makes a lot of sense. Let's talk about those terms a little bit, because if someone actually was reading a book here recently and they were at one point that the author made, was that as a new fund manager, that a lot of times what he would see is that the sponsors would end up not paying themselves enough.
00:12:18:21 - 00:12:39:06
Sam Wilson
They do one or two things. Either it was either, you know, incorrectly weighted to the sponsor and or incorrectly weighted to the investor to where if you raised a $30 million fund, maybe the sponsor didn't build in enough really fees in there and things to make it worth them staying the course and or you know, it just it just was.
00:12:39:07 - 00:12:48:13
Sam Wilson
So tell me how you've kind of thought through that and what what you found were the right the right terms and the wrong terms along the way? What were some of the things you did? Well, some things you that maybe you've corrected.
00:12:49:17 - 00:13:12:16
Chris Seveney
Yeah. So one thing that is weird, you know, doing these other funds, there was one offering that we gave to have a pref and had too low of a management fee. So I essentially was managing this fund for two and a half years for pretty much nothing till the end, which, you know, I used to work, I was still working W2 at the at the time, but it was a lesson learned.
00:13:12:16 - 00:13:36:04
Chris Seveney
Did I complain about it? Nope. That I, you know, change any of the terms. Now, it was a lesson learned. So I knew on the next one on the regulation offering, you know, I took what I learned from those other ones, but I also kept things extremely simple. You know, a multifamily deals is an example. You'll see an acquisition fee, an asset management fee, a management fee, a disposition fees.
00:13:36:04 - 00:14:00:05
Chris Seveney
And you have all these fees. The way we structured it was, you know, so simple where I have a staff of nine people right now that work for me and myself. Now we don't have these ratios. We're all salaried employees to take a salary. So that's an expense that, you know, is the font, you know, we want the fund knows, hey, here's the expense that way.
00:14:00:12 - 00:14:21:00
Chris Seveney
You know, the people who work for the company myself, okay, you know, we have to get paid somehow. Nobody should do anything for free. If they do, you have to be careful because if things go wrong, they may just want to walk because they're not making any money anyways. You know, for us we have a preferred return to the investors and then on the back end, that's where we get, you know, the back end side of things.
00:14:21:00 - 00:14:36:18
Chris Seveney
So that's our incentive to want to do very well on the offering. And the same token, hey, look, you know, we're still getting paid that salary, which again keeps it very simple to make sure, oh, did I underestimate fees that I overestimate fees? You know, I don't have to worry about that.
00:14:37:02 - 00:14:59:01
Sam Wilson
Right. Right now. That makes a lot of sense. I like that. Yeah. And that's something that we also have been working on here recently and even deals I'm involved in as a passive investor, it gets really confusing and I understand this where it's like, Oh, okay, well, we've got a, you know, a 7030 split and then up to a 15 IRR and then beyond that it goes down to 60, 42, at 89, it goes to 5050 and that's it, this extra hurdle.
00:14:59:01 - 00:15:11:23
Sam Wilson
And you're like, okay, just tell me when there's an AC H please. In my account and I'll just trust you're doing the right thing because I know I just, I turn it off.
00:15:11:23 - 00:15:33:21
Chris Seveney
So that's, you know, that's a great point because a few things with note investing. One is a lot of people don't understand the process of what you do. So there's an education component. And then when we're raising money, we can't take a multifamily apartment building, say, boom, here it is on marketing brochure. This is what you're investing in now.
00:15:34:01 - 00:15:54:12
Chris Seveney
You're we're investing in blind pools, meaning we go raise the money, turn around and then invest it. So the investors basically really have to know their sponsor and trust us to do the right thing. So if we made it with all these other hurdles and everything, it would you know, it would be impossible. So we kept it simple of, hey, monthly distribution, monthly dividend.
00:15:54:17 - 00:15:58:03
Chris Seveney
Here it is every month based off of, you know, this annual interest rate.
00:15:58:14 - 00:16:17:24
Sam Wilson
Right. That makes a lot of sense. Let's let's talk a little bit maybe about that. The pool that you that these these pools of notes that you guys are going out and buying what is the what's what's the temperature of the water? I know it's probably changed in the last ten years, you know, from from one extreme to the other.
00:16:17:24 - 00:16:23:05
Sam Wilson
But like what? What's that look like right now?
00:16:23:05 - 00:16:51:21
Chris Seveney
Similar to real estate, you know, I started buying notes and Dow 20, I think end of 2016, I believe I was losers, you know, same thing. Real estate. If I could have bought a lot more back then, I would have, you know, based on pricing over the last several years has gone up significantly, many different factors. One is now properties now have a lot more equity in them than they did previously.
00:16:51:21 - 00:17:17:00
Chris Seveney
So that reduces your potential risk, which and then of course, you know, impacts returns and valuations. There's been a lot less product. We are at historic lows for the amount of distressed debt around the country, mainly because of two things. One is the equity, the jobs market and of course, you know, government intervention, which, you know, besides just having loan programs to help those in need.
00:17:17:00 - 00:17:27:02
Chris Seveney
Also during COVID, you know, a significant expenditure by the government to, you know, keep people who couldn't work to keep them employed or keep money flowing to them.
00:17:27:23 - 00:17:34:07
Sam Wilson
Right. Do you expect that deal flow to increase? Decrease? What are you guys gearing up for?
00:17:35:18 - 00:17:59:19
Chris Seveney
Yeah. So we have seen in quarter four and quarter one of quarter for 2022 and quarter one of 23. We were seeing about, I want to say roughly about $300 million of assets come across our desk each quarter. We've already seen in the first three weeks of quarter two of this year, almost that amount come across our desk.
00:18:00:16 - 00:18:09:04
Sam Wilson
Wow. So in that is that is that is strictly distressed debt or that is a combination of distressed and performing and all the other stuff that goes into that.
00:18:09:16 - 00:18:48:09
Chris Seveney
It's a combination, but it's been a combination. What we are absolutely seeing upticks in are the short term, you know, bridge debt financing that was either fixed and flip lenders. DC And there's we're seeing office loans of course because those are coming to maturity that can't get refinanced residential. What we're also seeing a lot of and what's making a comeback is the last several years there have been no call it secondary position lines which are typically lines of credit because not many people were getting them or whatnot.
00:18:48:19 - 00:19:06:17
Chris Seveney
What we are seeing is an abundance of recently is people who took money out during 2020 or 2021, took lines of credit out to pay those credit card bills, and now they're back in default on the line of credit because they racked up that credit card debt again.
00:19:07:08 - 00:19:22:02
Sam Wilson
Right? Yeah. That's that's really interesting. And I guess this brings up one more question that we haven't clarified yet in this fund. What is the type of distressed debt you're buying? Is it commercial? Is it residential? What are you guys focusing on?
00:19:23:09 - 00:19:53:10
Chris Seveney
Yeah, great question. Primarily it's residential. We have the ability to do some small commercial, you know, some small multi-family as well. But we like to balance our portfolio to be about 70% non-performing, 30% performing a to give some cash flow coming in the door on some of those assets. And then the nonperforming, of course, also, you know, is our bread and butter, but typically, you know, the loans are single family residential.
00:19:54:01 - 00:20:07:22
Sam Wilson
Got it. Very, very cool. And I got one last question. Maybe you can and maybe you can't answer this on the air. I don't know. But what's an expected return profile for a fund like this? Investing in distressed debt? Like, what's that look like for the for the average investor?
00:20:08:15 - 00:20:35:02
Chris Seveney
You. Yeah yeah we can. So right now for our investors, you know, our target returns for them are 8 to 11% for the investor and that's out you know that is to the investor now returns on notes are slightly higher but when you again have to factor in, you know, your fees and everything that you know, salaries, payroll, you know, all that stuff, you know, that's and again, it goes back to that comment of no leverage.
00:20:35:02 - 00:20:56:08
Chris Seveney
That's the, you know, the main driver of that fund. And when people look at some real estate, investors may say, oh, my God, that's you know, I won't get out of bed for 15%. You know, for us, we look back at, you know, you have to always look at and this is what I always tell people. You have to always look at the risk involved with the return that's being provided.
00:20:56:16 - 00:21:02:10
Chris Seveney
You know, it's not just look at the number for what they say they're going to get. What type of risk are you taking by investing in that deal?
00:21:02:20 - 00:21:37:01
Sam Wilson
Right. Yeah, absolutely. Absolutely. You know, and I hear a lot of investor sentiment and and for good cause and it makes me happy and it kind of speaks to my heart, which is, you know, more of the focus on capital preservation moving into that stuff that continues to produce and then gotten away from the I think investors while we've had a good run and everybody has had a great not and I can't speak for the whole every investor profile type but certainly seeing that shift more towards all right, batten down the hatches, let's find stuff that just plods along versus looking for that, looking for that home run deal.
00:21:37:01 - 00:21:58:02
Sam Wilson
So that's very, very cool. Chris, I've learned a lot from you here today, everything from the challenges and the benefits of raising a reggae fund, the type of deals you guys are buying, how you guys are keeping deals, simple. Just kind of what your history was and how you actually got into this space. I think it's absolutely cool if our listeners want to get in touch with you and learn more about you, what is the best way to do that?
00:21:58:21 - 00:22:17:20
Chris Seveney
Yeah. So they can go to our website seven E Investments, which is the number seven, then the letter E Investments dot com. Or they can email me Chris at seven E investments dot com. You can find me on LinkedIn, Facebook, my last name is which I'm sure will be in the show notes is not a very common last name.
00:22:17:20 - 00:22:27:24
Chris Seveney
So you Google me. I, I'm one of two people and they have the same name. I have a cousin in Houston, but he's in a completely different asset class in business. So I'm the only one in real estate.
00:22:28:10 - 00:22:39:24
Sam Wilson
Fantastic. And for those of you who are just listening that listening, that is seven and why so Chris 70. That's how you spell his name and then it is seven E, the number seven, the letter E investments dot com. Is that right.
00:22:40:20 - 00:22:41:05
Chris Seveney
Correct.
00:22:41:11 - 00:22:46:14
Sam Wilson
Cool. Well, make sure all that is there in the show notes. Chris, thank you again for coming on the show today. I certainly appreciate it.
00:22:47:15 - 00:22:48:12
Chris Seveney
Thank you for having me.
00:22:48:24 - 00:23:10:09
Sam Wilson
Hey, thanks for listening to the How to Scale Commercial Real Estate Podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts or whatever platform it is you use to listen. If you can do that for us, that would be a fantasy tech help to the show. It helps us both attract new listeners as well as rank higher on those directories.
00:23:10:09 - 00:23:14:11
Sam Wilson
So appreciate you listening. Thanks so much and hope to catch you on the next episode.