It’s a lot harder to be a mortgage note investor these days. With all the mortgage compliance, you really have to work closely with your borrowers. Join your host Sam Wilson as he sits down with Martin Saenz in a discussion about the state of mortgage note investing today. Martin is an entrepreneur, investor, advisor, and industry speaker on cash flow investing who brings social good into smart investing. Learn why building a relationship with the homeowner is so important in this industry and everything you need to know about the space today!
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The State Of The Mortgage Note Industry With Martin Saenz
Martin Saenz brings social good into smart investing. He is the Managing Partner of BeQuest Funds. He is also renowned as a thought leader in the mortgage note investment industry. He is also passionate about creating a better world through a profitable business. He works hard to share and spread his success. Martin, welcome to the show.
Thanks for having me on, Sam.
The pleasure is mine. It’s the same three questions I ask every guest who comes on the show. Can you tell us where did you start? Where are you now? How did you get there?
I started with reading Rich Dad Poor Dad in 2004 after leaving a corporate job and figuring out what to do next. That was the starting point. I went into small business ownership as the first step. Where we are now is I operate a hedge fund that has about $35 million in there with the assets under management. It’s privately held with my partner and me. We also have a $50 million income fund that’s a 506(c) Reg D. We entertain accredited investors into that income fund. I have a portfolio of commercial and residential properties that I self-manage.
You got a lot of things going on there. The transition from small business to running a hedge fund, can you give us some quick, intermediate steps on that and how you got to where you are now.
At the starting point in 2004 and 2005, the end game was always to build passive income in my own life and my family’s lives. What was interesting is I went into small business ownership because that was almost the guidance. You need to have ongoing cashflow in order to have money to invest in real estate and start building a portfolio of buy-and-hold properties. We did that. My wife and I founded a government contracting company where we sold goods and services to the federal government.
In the course of doing so, we ended up purchasing a building that we operated the company out of in 2009. We bought the neighboring building a month later and then we started buying more properties. However, what I realized is the property play was great and it did spit off some passive income but it didn’t meet my financial aspirations. We sold the federal contracting company in 2013 and I found mortgage note investing at that time. The clouds parted at that point.
Once you get into mortgage note investing, a lot of people will get in and they will start buying one-offs but you have taken this to a very institutional level. What was that iteration? How did those iterations play out?
It started off slow. I bought ten mortgage notes out of the gate, not knowing what I was doing. It started with being low on the learning curve and taking a lot of lessons financially as well as physically getting the operation off the ground. I did it with my own money. That’s the good news to it all. I stuck to it. I realized two things. One, my objective with mortgage note investing was to build long-term streams of income for myself. I had to do that by purchasing distressed mortgage papers at discounts from lending institutions and other hedge funds.
I had to work closely with the borrower, whoever that was, to create payment plans, i.e. loan modifications to help them remain in their homes. In doing so, I would create 20 or 30 streams of income and it would help not displace individuals, which was key. That was the first lesson. The other one was I had to build systems out. I took inventory of every new task I was doing. I organized it later and built out SOPs right from the very beginning, which helped me reach scalability at a later point.
It’s my understanding that you can’t service your own notes. Did you open two separate companies? How does that work?
Being successful in mortgage notes it to be on the learning curve and take many financial lessons.
For the most part, we use a licensed servicer to collect our payments and send out monthly statements and year-end tax forms. There are some states that require servicing licensing, mortgage lender licensing and some that require no licensing. It’s on a state-by-state basis in terms of what you can and cannot do but we do use a licensed servicer. It makes it easier.
I was thinking about early on how you were able to figure those parts of this out. Let’s talk a little bit about compliance. This is one of those things for those of us raising money, which you’re dealing with this on two fronts. You’re raising money for your fund, which is a compliance nightmare in and of itself. You’re also dealing with compliance on loan servicing, mortgages and moratoriums. There is a lot to keep up with there. Talk to us about the challenges your industry faces and how you guys work around that.
It’s a very tough time to be a mortgage note investor on the mom-and-pop level because you need in-house compliance efforts, as well as using outside counsel as needed to ensure you’re in compliance within each state that you operate in. That’s first and foremost. It wasn’t like that when I first started in 2013. There was a lot less compliance and restrictions but to operate in today’s world, you do need to have a whole operation supporting your efforts on compliance. Also, in the collateral review, there is a lot with the statute of limitations. There are a lot of other restrictions that could catch someone in this business badly if they don’t adhere to certain aspects during the underwriting phase of acquisitions.
Talk to us about the moratoriums. How did that affect the note servicing side?
On our hedge fund, we buy a lot of distressed mortgage debt. These are mortgages that are bank originated. The homeowner, for some reason, stopped paying at some period in time and now they are in a delinquent state. Most likely, it’s due to a divorce some health occurrence or loss of a job that results in a defaulted state. These are good borrowers. They got a good rate from a major lending institution at some point. With that said, we’re buying these at discounts. We’re working with the homeowner in a compassionate way to figure out what they can pay now to help them remain in their home.
We have to be mindful in terms of what we can and cannot do from an asset management perspective. We use a licensed servicer to make sure that we cover a lot of the licensing requirements we have on a state-by-state basis. At the end of the day, we hold a mantra within our company to treat the homeowner like gold and have every action towards the homeowner be one where we’re working with them in a compassionate, transparent and helpful way.
When we give them options, we usually give three options to the homeowner. That way, they can have some empowerment and they can choose. How we look at it is if we ever ran into litigation with one of the mortgage notes, we can go before a judge and say, “This is the chain of communication. In every aspect of communication, we have been compassionate. We have been trying to be helpful and work with the homeowner to help them stay in their home.”
In the end, I would imagine it’s best for both parties. If you keep a borrower there, you turn a non-paying borrower into a reperforming note. That’s good for you and it’s also good for them. It’s less expensive for you than turning it into foreclosure or something else. It’s better for them to stay in their house. Whoever it is that’s selling these notes, why do they sell them as distressed as opposed to foreclosing on the property and going that route?
Let me give the second part because I didn’t fully answer your question regarding the moratorium because I was leading up to it. The whole idea is to build deep-rooted relationships with these homeowners so that there’s a level of communication and respect that’s going on in the relationship. With that said, that’s no different than tenant-landlord relationships. The better your relationship is with the tenants, the more they are going to pay on time and communicate if they had some life occurrence that is catching them the wrong way and so on. You can plan accordingly as a landlord.
Going into COVID and having these moratoriums issued, we found that we refined our approach with the homeowner in that we were doing more outreach. We’re being more compassionate and understanding in terms of what people’s situations were. We escalated our level of compassion. We enhanced our KPIs, Key Performance Indicators, where we were looking at certain metrics on a weekly basis. We started looking at it on a daily basis. We professionalized our whole metrics control approach.
We learned what we could and could not do on a state-by-state basis based on moratoriums in place. We try to minimize our legal effort anyway because we try to focus on the relationship aspect of it. As far as buying paper and why a lender sells the paper, they are good at one thing and that’s taking deposits in and lending out money. They don’t want to be stuck with toxic assets on their books for very long. I can’t speak to internal bank operations but I know they are doing charge-offs and other reworkings of line items amongst themselves.
At some point, they get to the point where they are like, “Let’s liquidate this pool of defaulted paper.” Sometimes it’s for PR reasons. They don’t want to start foreclosure on a pool of mortgages. Given COVID or whatever time period we’re in, there’s always some political time period that we’re in where it’s not advantageous to start foreclosure on a bulk of your defaulted paper. They sell it often. They cut bait and sell it to a hedge fund.
In mortgage note investing, you have to treat the homeowner like gold.
What is interesting in our space now and this also goes hand in hand with why it’s hard for the mom-and-pops operating. I was a mom-and-pop for a while so I get that. It’s because hedge funds and other lending institutions are much more selective now who they sell to because there’s a whole risk factor if they sell it to someone that doesn’t know how to underwrite these loans, perform asset management within compliance and be in compliance in general. That could have repercussions to the seller of that paper. It bodes well for the people that have their game tight.
I have commonly heard that the last quarter of the year is the selling or buying season in the mortgage note industry. You were saying that there are still some deal flow constraints. Is that on the distressed side or across the board?
We have been actively purchasing. Everything that I’m mentioning here, anybody on the real estate side can relate to this. This whole mom-and-pop, scalability, systems and relationship-building with your tenants are all applicable on that other side of the coin. What happened is there has been a lot less deal flow trickling down to the mom-and-pop levels of note investors because what is happening are two things. We have property valuation spikes across the country. We have had low-interest rates historically.
People are refinancing out this debt whether it’s on the performing side or nonperforming side, at record levels. Hedge funds are holding onto this paper. They are getting favorable workouts as a result of this paper so they are not as inclined to do any reselling even if they purchase some of the pool outside their buy box. There are deal flow constraints on the mom-and-pop level and not as much on the mid-market level.
What have been some challenges for you as you have scaled your business?
We have a team of fourteen individuals here that work for us. We learned early on that we had to train a lot of individuals because you want people with good habits and people to do things the way that you believe is the best way. We want collaboration but at the end of the day, we feel like we have a good system in place. We feel aligned with our motto of helping homeowners stay in their homes and all these other things that created a social good. We want to hire people that have integrity, compassion and are hardworking and then we can train them on the rest. With that said, we need to have training manuals and SLPs. We need to be organized so we can bring people in and train them in a consistent, efficient manner.
The challenge of every business is getting that lined out. Without it, it’s ten times harder. Thanks for sharing that. Martin, let’s jump here into the final four questions. What is one tool or resource you find you can’t live without?
It’s my overall financial statement. I keep that up to date. I look at all my accounts on a daily basis. I try to keep focused and I did that when I didn’t have any money. It was a good habit looking over all my financials, the good, bad and ugly. I do recommend anyone to do that. Even if they don’t have any money or they haven’t nearly met their aspirations, they should be aware of where they are at any given time financially because you want to try to start building that mindset.
If you could help our readers avoid one mistake in real estate, what would it be? How would you avoid it?
Avoid investing for appreciation. I see that and there’s so much emotion behind it. I know there’s a whole wealth effect going on in the country. Everyone feels wealthy because property valuations are inflated and the true inflationary numbers are hidden. I get it. Everyone is feeling good but this isn’t going to last. One should always focus on cashflow, “What is coming into your bank account on a monthly basis in a consistent manner?” Think of investing in terms of that.
When it comes to investing in the world, what is one thing you’re doing now to make the world a better place?
We’re helping homeowners avoid losing their homes. That’s first and foremost. On the BeQuest fund side, it’s an income fund whereby we bring on investors and they get to participate in the profits and all the good that we’re doing. We only buy seasoned performing mortgages in that fund. It’s a very conservative fund and it pays out 9% annually. We make our payments to our investors on a monthly basis. We’re doing a good thing for our investors.
If our readers want to get in touch with you and learn more about you or any of your funds, how do they do that?
They can send me an email at Martin@BQFunds.com. It doesn’t even have to be an investment-related question. If you have a question on the mortgage industry in general, I would be more than happy to answer anybody who has questions.
Martin, thank you so much for your time. I learned a lot about what you guys do. This was fascinating hearing how you had grown your business. I learned a lot about the mortgage note industry. I do appreciate it.
Thanks, Sam. Keep up the good work.
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About Martin Saenz
Martin has founded and sold a Government Contracting company that produced 14MM in federal contracts, purchased and managed 10MM in commercial & residential properties, co-founded a 35MM hedge fund that that has helped save over 1000 homeowners from foreclosure, and has co-founded a 50MM Income Fund that manages a portfolio of performing mortgage notes.
Martin is the author of five books…4 on investing and 1 on Government Contracting.
He speaks at investment conferences around the country and is a frequent guest on investment related podcasts.
