In this episode Cliff and Martin Saenz discuss Managing Risk In The Secondary Mortgage Market.
Martin Saenz is Managing Partner at BeQuest Funds, and a best-selling author. Martin brings, social good, into smart investing. Renowned as a thought leader, in the mortgage note investment industry, throughout an extensive and accomplished career, Martin has demonstrated a proven ability to grow asset values, income, and knowledge not just for his company, but for his investors, borrows, proteges, and readers as well.
Listen to Cliff and martin talk about:
- Note investing,
- The risks of note investing.
- Martin’s process of finding or identifying investment opportunities..
- The percentage of risk that is imposed by foreclosure.
- What happens if, the economy turns down.
- . Running startups in this sector.
Cliff Locks 0:02
Welcome to the private equity profits podcast. I’m Cliff locks your hosts and with me today is Martin signs, Managing Partner bequests funds and a best selling author. Martin brings social good into Smart Investing are renowned as a thought leader in the mortgage note investment industry. throughout an extensive and accomplished career, Martin has demonstrated a proven ability to grow asset values, income knowledge, and not just for his company, but for his investors, borrowers protegees and readers as well. Welcome Morton, thank you so much for taking time to talk with me. Let’s start at the beginning. Tell me how you got started and what attracted you to private equity?
Martin Saenz 0:41
Sure, it kind of all started when I got out of business school with my MBA 2001. So I landed a corporate job in consulting, I was in corporate America for a few years, until I got fired. And that was probably the best thing that ever happened to me, because it made me realize that that the corporate America was not for me, it wasn’t what I thought it was, it never resonated with me. So from there, through a series of reading business books and trying to figure out what type of business to launch, I started a small business, which is how most people come in to the to the business community, they launched a small business for my wife and myself that small business was a federal government contracting company that provided museum exhibit display displays. For the federal government nationwide, what I learned from business ownership over the years was that it’s brutal. And, you know, making payroll, the day of, you know, paying bills late, you know, just trying to survive, and while working 100 hour weeks was it’s just it weighs on you. So I didn’t find that freedom that I was looking for. So I turned to landlording. And my wife and I, we started accumulating properties in oh eight commercial and residential, what I found with landlording, and we still own the properties and manage them today. But what I found is, it’s a great annuity play, it’s great as you’re paying down the mortgages, with the rents that are being paid. And you’ll ultimately have a property you can sell with seller financing and make all these great creative moves on the back end. But in terms of cash flow, that sustainable is meet one’s financial aspirations. It wasn’t there, the connection wasn’t made. So from there in 2013, my wife and I, we sold our company kept our properties and I made a decision, I became more spiritual, I became connected with God, I went on a mission to say I need to, I need to create a business opportunity that focuses on servicing others so enough like about chasing the dollar, making x, y, z, and you know, having this material possessions, it was just about Let me serve the most amount of people and something good is gonna come out as a result of that financially and otherwise. And so that’s how I stumbled upon the mortgage note industry. I started learning about it because I did have a real estate background. So I learned about the mortgage side, which is the flip side of the real estate coin, I started acquiring distressed mortgage notes on properties whereby the borrower had not made a payment in four or five plus years. These are mortgages. And yes, these mortgages exist, more than most people know in the secondary mortgage market space. And I just started acquiring these mortgage loans and learning about how to work them out. I’d say Initially, the first lesson I learned is that is when you buy a mortgage loan that’s distressed, you know, the borrower hasn’t made the payment, you’re exiting two ways. Either you’re exiting through the property, and you are going through foreclosure taking possession of the property, or working out a deed in lieu whereby the borrower sent signs over the property ownership rights to you. Or you’re exiting through the bar in the form of a loan modification or reinstatement or pay off something to that effect. I learned early on that it was more in line with what my principles were to exit through the bar, whereby I would work with the borrower and create solutions that help keep them in their homes while making a profit for myself. And that’s really how it launched.
Cliff Locks 4:39
I’m proud of you know, non performing assets are a challenge, you know, Ario the banks. At this point you’re stepping in as a benevolent, but business person to help that individual borrower at that point to find a solution, a long t erm solution for them and their family at this point. Tell me about bequest funds.
Martin Saenz 4:59
bequest funds is a 506 c reg D Income Fund that houses a portfolio of seasoned performing mortgages through that we receive borrower payments in on a monthly basis. And we in turn pay our investors on a monthly basis. So it’s an income fun. But prior to explaining bequest, or even just touching on it, it’s really important, I believe, for the audience to understand the roots like how I worked up to taking on requests and launching that in March of last year, through the course of the years I had acquired and personally worked out whereby I talked to the bars I created loan agreements, you know, I worked out short sales and or discounted pay offs and everything else with over 1000 loans. So for myself, it’s on the fix and flip side someone said Well, I I fixed and flipped 1000 homes. So it’s really through the course of of that growth, and really kind of going through and really ironing out my due diligence process. I got to a point and I’m still a large buyer of distress paper. Don’t Don’t get me like we purchased 25 million in distress paper in the past 18 months, so we’re still a large buyer of it. With that said, my roots come from helping people that need to be helped stay in their homes, while making a profit for myself. Now, bequest funds is on the other side of the fence, we have a portfolio of bars that are making their payments on a monthly basis. We only purchase performing mortgages that go into the Income Fund. So it’s more of a management and daily monitoring process. So that we can be reactive if we have to do any outreach and connect with with folks and help them if there have any special occurrences that’s that’s really what bequests funds is about. So it really touches on the risk side, my background touch touches on how we mitigate risk on the bequest fund side because I’m used to the rough side of the fence so to speak.
Cliff Locks 7:20
Note investing can mean different things. Tell me what it means to you.
Martin Saenz 7:25
Sure, what’s important is to talk about the secondary mortgage market space when you’re talking about note investing, someone just pictures, a person that wants to go buy a home, become a homeowner go into a bank or some lending institution, and they apply for a mortgage. And that mortgage application goes through an underwriting process. And from that a promissory note and a deed of trust or mortgage is drafted upon approval, of course. And so the promissory note says ay ay ay so and so Joe Smith promised to borrow this money and pay it back given this certain set of terms. And the deed of trust or mortgage is the document that ties that promise to the property in the form of collateral collateralizing that that promise and so what happens is, after that mortgages originated,
there’s a pool of them that will sit with that originator or will sit with some company they sell it to and a portion of those those loans in the pool will become defaulted. Something happens in a borrower’s life.
That is typically deals with love a divorce happens, loss of job underemployment or health. Those are really what we hear a lot what we hear most often. So something happens in someone’s life a hiccup and they stop paying their mortgage. And so what the bank does, or lending institution, they will bundle those defaulted mortgage loans into a tranche and they’ll sell it into the secondary mortgage market space, which is similar to a flea market, whereby you have hedge funds and lenders in that are buying and selling these distressed mortgage loans. Now there’s also performing mortgage loans that the same things occurring but in this case, we’re just focusing on the distress distress mortgage when you take a hedge fund that will buy a pool of these defaulted mortgage loans, they will make contact with the bar. Now mind you, it may be a few years later, the person got remarried, the health got better, they got their job back and something happened on the positive side. And they they got reestablished the bar got reestablished. So if the hedge fund has a good operation, then they will work out payment terms with the bar because they bought it at a discount, mind you they may have paid 20 cents 40 cents on the dollar.
For this paper, so there’s room to be creative and to be compassionate. If a hedge fund operates as such, then they can create a payment plan that works with the disposable income at the bar. And borrowers will actually be appreciative based on the relationship and based on the understanding that they’ll make their payments on time. Once those payments become seasoned over time, a company like mine, which is bequest funds, will go out and buy those performing mortgages in a performing state and place them in our fund. Which, which is why we consider bequest funds, a low risk, high yield fund.
Cliff Locks 10:43
That leads me to my next question is how risky is note investing?
Martin Saenz 10:49
it? Gosh, I mean, I could answer that a few ways. But I’ll say it is as risky as someone’s knowledge level. what’s what’s fascinating, and I’ll clarify that in just a second. But what’s fascinating is that the mortgage note industry
deals with money. I deal with money all day long, 10, big calculator, you know, calculator here, Excel spreadsheet, there is numbers all day long. However, that’s actually probably, if there’s if there’s a list of 10, things that are critical and the mortgage note space for success. That’s probably number eight. There’s so many other factors. The first and this was in my, in my book that I wrote two years ago, note investing fundamentals, where I where I stated deal flow is king. in this industry, I can’t speak for other industries, I can only speak for the industry that kind of bleed for and that is deal flow is critical. So relationships with sellers and having a thorough underwriting process by which you vet assets, having a professionalized acquisition process where, where you’re taking down deals, and you’re doing what you say 100% of the time, and then having a compassionate, yet very thorough Asset Management Division, where they’re making contact, and they’re making, you know, striking deals and arrangements with the bars, so that cash flows created. So the more someone has a business setup, the more they mitigate risk. And the less they have it set up to that extent, the more that there’s risky scenarios that will take place.
Cliff Locks 12:35
What is your process of finding and identifying inves tment opportunities,
Martin Saenz 12:39
I say with humility today, I’m going to speak to how it was a few years ago. But how it is today is that we have relationships that are so close to hedge funds that are so close to major lending institutions that were fed on a regular basis. So we receive in distressed debt on a regular basis on that side of the fence we receive in opportunities for performing assets. Now, that may change, nobody’s taking it for granted. We’re very respectful and thankful for that relationship, however, all speak for for individuals that may not be at that point, because that’s kind of best foot put in and
I wrote about this. And note investing made easier, which was my first book, and I’m not trying to plug my books, I’m just, it’s just what’s coming to mind. But I wrote about a sourcing lifecycle that needs to occur within the node space. First part of that source lifecycle phase deals with identity creation. When people come in our space, and I see it quite often, they go right to, Hey, I got a million dollars in the bank, you know, I’m a big real estate buying whole guy, I’m just going to go delve into notes, because I just probably have to shift a few gears and then I’ll be rocking and rolling. No identity is so critically important. Yet, it’s so often overlooked, you need to be seen in the space, as someone who is low risk, so meone who’s very competent, and someone who’s going to perform because if you don’t, then you’re risky to me, I’m not going to do business with you, if you’re going to go out and do something foolish or do something, you know, because you don’t know. And then you’re going to go catch me up in a bad way, some way down the road. So I have to know that you have a good process in place that you are fully focused on this industry and you know what you’re doing. So identity is about how you come off to other people how that’s perceived. And from that point, it goes into a whole marketing and branding effort. Because you have the identity now you have to go and portray that amplify that that message to the world to the note world. And from there. There’s a daily outreach, outreach math method that that I that we employ here, deals with CRM system, we have an outreach matrix.
W hich gives us metrics around our outreach approach. So there’s a daily sourcing effort that needs to occur when you first come in this space, and probably just needs to occur in general throughout your longevity in the space. The ultimate result is you’ll see deal flow, you have to transact on the deal flow, because none of it matters if you’re not transacting, because the industry is so small and tight knit, that if you’re not transacting, then you’re dead in the water. So from from a from a business perspective, there’s someone that comes to mind came in the business. He had $10 million liquid, he thought, you know, hey, I’m a big gorilla. I got money in the bank, I had the successful business, sent the message to the world, show me your deals, number of players showed them deals, he started nitpicking because he didn’t really know he didn’t have a good process set up. So he just turned people off. Nobody cares that you have $10 million in the bank money is so abundant in our into so much about your identity and so much about how professional you are from from a sourcing perspective. I like the word professionalism as what you bring into the industry. What percentage of risk is imposed by foreclosure foreclosure, it’s really on a state by state basis at this point. So COVID hit and moratoriums got issued around the country, and then the cares act got put in put into effect by the Senate. So if you just take the cares act, you know, from from a high level perspective, it sets measures in place for borrowers being able to obtain forbearance agreements with the lenders, however, what’s not was not stated is that the cares act is specific to government backed mortgages. So when you buy mortgages in the secondary space, they’re privately owned. So they’re not government backed. So actually, the care were exempt, as in it as a industry as a sector from the cares act. Now, with that said, We’re extremely conscious of what you know, what the cares act mandating expectations, you know, the whole PR end of it. So with that said, when a borrower calls in to us, and they say, Hey, we need we need based on COVID, we’re going to ask them a series of questions, ask them to provide documentation, because we can we found through COVID was that our our collectability percentage with our performing assets all over all our entities, was has been about a steady 92%. So 92% and $92 of every $100 is collected on a monthly basis. Now mind you, you know, we purchase these at a discount our collective portfolio and request sits at a 61% investment to value we have coverage, what when COVID hit, we anticipated that 92% to go down to 75%. We were like, you know, let’s plan for it. We went went from like a daily monitoring of our assets to like, hourly, we were like on everything Code Red. We were like, okay, we’re gonna get to 75. But how do we minimize how do we make it 80% which would be a victory, what we found is we were having communications with bars, and we were asking for documentation, we found that a majority of the bars didn’t have a COVID related need for forbearance. So it was just they heard it in the news.
You know, cousin told them Whatever the case, and so they just continued pain based on that. We maintained, you know, where the 96% collected today, we were about 93% all of last year. So we were above our 92% 90% the industry average industry standard rather, we’re we’ve been fine from a collectability standpoint. Now with that said there’s certain states that there are still foreclosure moratoriums in place. We have to be mindful of that. However, I’m going to say this and because if you’re going to if you would ask me Hey, what do you what are you most proud of this would probably be that nugget. We foreclose on our distressed debt side, less than 2% of our portfolio. I’m talking mortgages that have not paid in four or five years.
We foreclose so we’d go through the foreclosure take the take the property to auction, sell it to a third party or take it back Oreo less than 2% of the time. That is insane.
That is insane. It and that speaks to how conscious we are in diligent we are with our team members to go and work out arrangements with the bars to keep in line with our mission of keeping them in their homes. That is how significant it is to us as a company.
And I’l l tell you this too. I know I’m like soapbox, right? I’m gonna say this because this is like very passionate about this, it is sometimes more profitable to take back the property.
Because you get instant cash flow instant capital gains. And there’s equity in the property and you know, equity spikes in the country. So on, we are here for the cash flow, and we’re here to the for the cash flow being paid by the bar that are helping the community. I mean, that’s really important.
Cliff Locks 20:33
What happens if the economy turns down? I mean, you COVID was definitely an example of that. How do you handle that?
Martin Saenz 20:42
So when the economy when there’s a downturn, it generally means there’s more supply of inventory, and prices go down? Now, that’s not to be say, like, Well, let me be naive. Let me you know, pray for a downturn, any of that. But the fact of the matter is, our end secondary space increases with inventory, based on a market turned down. So right now we’re seeing a shortage of product in our industry shortage of product in prices have skyrocketed, but that’s everywhere, right. That’s across all asset lines, probably. But yeah, that’s that’s the anticipation the downturn occurs, and they’ll just be more more debt to be purchased.
Cliff Locks 21:29
What’s your advice for people investing in this sector? And what do you tell them to do before they make an investment,
Martin Saenz 21:36
it depends on the investment. So if they’re going to invest in themselves, start a note business and to create a better life or to create supplemental income or something to that effect, then they need to learn the fundamentals, they need to spend more time on education, there’s heavy compliance in our industry, there is there’s a lot of nuances, a lot of pitfalls, a lot of compliance, I’ll just say it deserves saying a second time, you know, one needs to be set up as a no business. It’s, it used to be when I started, where you could be a solopreneur, and be a one person show and do it all.
But those days are no more because there’s too much complexity with it. There’s licensed services you’re using, there’s compliance, there’s licensing involved, there’s debt collection, courses, there’s just a whole plethora of activity that’s going on. And you’ll never scale. And when you don’t scale your burn up and die from a perspective of someone that wants to just invest, set it and forget it, then be quest funds. We have, we pay, we have a few classes. Actually, as of today, we are attorney blessed the new ppm with two class additional classes. So I’m really stoked before we just had an 8% return paid monthly with a one year lock in period. Now we have that plus a 9% return with a four year lock in period and a 6% return with a six month lock in period. So we have more more options for individuals, you can go park your money, and just receive monthly income or let it compound at an increased interest rate. So there’s a few different ways that one can invest. There’s also joint venturing that goes on. But you have to be very careful because with sec laws, I mean to be a passive investor investing with an active investor, you know if sec could consider that a security. So that’s being sold to that passive investor. So you just have to be mindful of that and have attorneys review all documents, especially as it relates to joint venturing. Compliance is key.
Cliff Locks 23:52
Do you have any advice for people that are running startups in the sector?
Martin Saenz 23:56
Yes, you should only invest in assets or start businesses that produce cash flow, and that you have control over and I learned it from doing the opposite control. I’ll give you an example. My wife and I, when we started our federal government contracting company, we were an ant. I mean, we probably weren’t at when we sold the company to later, bigger and however that end customer, ie the Pentagon and other places we sold to they were our customer. Now it took us years to get there and we bled out to get the customers. They were our customers. We had control over the customer request funds. We get asked every week to be on someone’s platform. Oh let me get you set up on fidelity’s platform, let me get you set up on this platform. No thank you. We will build our own sales team and we will get to where we need to go that customer is going to be our customer. And that’s very important to us. Because once you just start playing with the margins and paying fees here and there that thatcreates risk within our fund. And we’re operating on a nice margin, where we’re very comfortable. And we’re able to recapitalize and purchase assets upon payoffs and whatnot. And so we don’t want to jeopardize the safety of our fund. The other thing is that it’s got to produce cash flow. So many people invest in assets, for appreciation, and that’s nice. But appreciation doesn’t pay for groceries, it doesn’t pay the m ortgage.
Cliff Locks 25:27
Well, so I appreciate where you’re coming from them. For your fund, what’s your investment thesis? what exactly you’re looking for?
Martin Saenz 25:36
I wrote another shameless plug, I My apologies, Cliff, I wrote a book last year during the pandemic called cash flow dojo, build your home on multiple streams of income, the whole the whole point of inspiration. And this is coming from someone you know, I have, I have several books out, I get royalties, I get I mentor, some people, I have hundreds of performing notes that pay me every month. So I’m coming from a place that receives hundreds of streams of income per month. My whole thesis was for the book is that yes, I people will say you can’t live off a single income, that’s outdated, right? That’s 1970s, the husband works and the wife stays home. I’m saying that you can’t live off dual income. Now. That’s dangerous. It’s not that it’s not a secret for the wealthy to say, hey, you need dozen streams of income, it’s mandatory for the middle class, in today’s market, today’s world that you need, if you are going to provide for your family, husband, wife, whomever, you need to ensure that multiple streams of income are coming into your household. And that’s the whole book. And that’s what I believe with request from the bottom of my heart. It is it is something I have my own money in there. I have my partner Sean has his own money. And so we launched it, we put our money, because who am I to tell you come to request when I haven’t put a penny Sean and I put a million bucks in, I mean, we to kick it off. So we have money and we have skin in the game. And so that would be the other thing. Don’t don’t invest, anybody who asks you to invest, ask them how much they’ve invested themselves, I think that’s critic, the whole idea of of one needs, one can u se a fun like bequest to bring additional streams of income to themselves.
Cliff Locks 27:27
I think you’ve got a very, very good message, you know, I’m impressed the idea of the multi streams of income, it’s something I share with my clients on a global level, I hope our youth will look at what you’re sharing at this point, because they have time value that can advance what they’re looking to do, buy your books and learn, you know, from the knowledge, you paid your dues. You’ve scaled a few companies at this point in time and you bring forth a very easy program in place, you know, through your funds, to be able to take that knowledge that’s already been perfected, and actually earn a very handsome return. So I want to compliment you on that.
Martin Saenz 28:04
Cliff Locks 28:05
What are some of the challenges you face
Martin Saenz 28:09
noise the noise out there it’s it’s brutal. I mean, I’m here in Sarasota, Florida, I’m in a in a skies building right across street from the Marina, it’s, it’s the most beautiful, it’s probably the most beautiful place you could ever see. I mean, I’ve water in every direction, in this buildings full with financial planners in financial firms. And, and I’m not knocking anyone, everyone has their own angle and their own their own thing going on. However, I’m competing against so much noise in this industry. And I believe in the heart, my heart of hearts that you know, we have a good product that can help deliver cash flow to to anybody who’s willing to invest with us. And so I have to fight through the Apple stock. Is that this the bitcoins at that? Yeah, it’s tough.
Cliff Locks 29:04
When you bring something that’s unique, it’s consistent cash flow on a month to month basis, backed by real assets.
Martin Saenz 29:11
Someone told me this week, someone told me this week, it’s boring, and I wanted to kiss them on the cheek.That’s, I’m like I am that’s us, we are boring.
Cliff Locks 29:24
How or why is keeping homeowners in their home the most profitable scenario?
Martin Saenz 29:30
Well, for one, it’ll, we never modify alone. And we never purchase a loan that’s not fully amortized. So that goes to the core of my belief that the homeowner should always have an opportunity to fully pay off their home and have it owned free and clear for themselves so they could have better retirement for themselves down the road. So for one, it’s just the right thing to do. I mean, we saw that oh, you know, mid 2000s. All the nonsense. The Ninja loans and you know, arms adjust after a one year and all this nonsense in which is what created a lot of you know where we are today financially from the borrower’s perspective. So the more that we are concerned or we are more, we are more considerate to what what our borrowers up against, We treat our borrower as a customer. That’s, that’s our mantra here. So so they’re treated like gold, because they’re paying us cash flow, they’re letting us ring the register. So we need to treat them with the utmost respect. So having that focus in what is in their best interest paying off that mortgage. Now, what happens as a result of helping them pay off their home and having a free and clear monthly streams of income for decades, perfect.I get this no other way to put it.
Cliff Locks 30:53
What are the benefits of individual notes versus a pooled note investments.
Martin Saenz 30:59
So it’s a portfolio game, you know, you’re gonna buy, it’s kind of different. When when you’re talking about performing mortgages, you’re talking about request funds, you know, we can we can do a one off, it uses our whole acquisition process and team to buy one loan. So we’re having you know, economies of scale when we buy pools. So from that perspective, we always want to buy pools, we could use our system to buy one note. But it’s more advantageous to focus on buying 15 notes at a time, which is, which is normal for us is like 30 to 70 loans performing mortgages at a time now from a distressed debt standpoint, you never know how the end results gonna play out. So you buy that you haven’t spoken to the homeowner for five years, you don’t know what it is they you know, are they going to drag you down a long road that’s going to be costly? Or are they going to go and refi you out in your cash out at par? You know, you just don’t know till it plays out. So buying and pools is almost mandatory from a non performing purchase perspective.
Cliff Locks 32:09
The COVID cause the note buying industry to contract.
Martin Saenz 32:17
No, no, it’s um, I mean, when you’re when you reference the mortgage note industry, my thought goes to supply and profitability. So from a supply standpoint, supply has been dwindling consistently over the past five years. So we’re still good we have access to deal flow. But on the retail side, they they have they have bear the brunt of all this the most there’s a shortage from retail buyers that buy the one offs, the mom and pop investors, that kind of thing. So So from a supply standpoint, COVID probably accelerated it, because you probably had more hedge funds that said, Well, let me sit on the paper and not sell it as a fire sale. And just see how it plays out plus equity spikes. payoffs are more prevalent in today’s world. Now from a profitability standpoint, you’re paying more for the asset. However, it’s you have more equity coverage back in the asset. So risk is minimized. So you’re paying, you’re paying more, but you’re also getting more value. So I’d say that profitability still there. However, what COVID has done, if any, has just allowed for hedge funds to maintain deal flow upstream, and not let it trickle down at the rates they did in the past. What are you most proud of what will be your legacy? To have, you know, bequest funds is a legacy play. We launched this as an evergreen fund. So to have something I can pass down to my children.
Cliff Locks 33:54
I think that’s important. Are you mentoring anyone in the office at this point? young people?
Martin Saenz 34:00
Yes, we have a marketing assistant and investor relations person. Connor who’s Investor Relations, he’s 21. And, and Sophie who works marketing is 22. So I’m mentoring both and actually just had a our weekly meeting this morning, we roleplay for our meetings. And And so yeah, we do role playing exercises and on top of a lot of other different training exercises,
Cliff Locks 34:28
That’s nice to get back and look after our youth and I look at it where we have a fiduciary responsibilities as our leaders to come in and put time and effort and look for opportunities to hire either new graduates, interns, and share with them, you know, our values and what our business does and hopefully hire you know, some brilliant young people to join the team and flourish right along with us, Martin, can I share your contact information with our listeners?
Martin Saenz 34:56
Absolutely. Martin’s email is at Martin
Cliff Locks 35:00
Add BBQ funds.com which is spelled ma AR ti firstname.lastname@example.org and their website is at B q funds.com. I want to thank our listeners. I look forward to being back with you shortly for another episode of the private equities profits podcast The show has been produced by Market Domination, LLC.
Transcribed by https://otter.ai