What happens to my investment if the real estate market softens?
In the event of a market decline, investors in the Fund will continue to get their interest payments according to schedule. The Fund’s borrowers have invested successfully in real estate in every kind of market- during a decline the Fund doesn’t expect any of them to have trouble making payments or paying off loans. The recession of 2008 was the worst in recent history for real estate investments. Many lending institutions incurred significant losses- but not those that were making hard money loans to HomeVestors of America Franchisees. The HomeVestors network had over $88,000,000 in loans out when the recession hit- every one of those loans was paid and the lenders recouped their money. In fact, several of those same lenders still loan money to HomeVestors Franchisees at better rates than before 2008. The Bedrock Fund’s typical loan has an equity position of 25% or more, so even after a recession these loans can be paid off with the sale of most properties. And in the unlikely event that Fund clients have loans that can’t be covered by the sale of the assets, the loans should be paid anyway, because of the integrity of the borrowers in the Fund’s pool. These HomeVestors Franchisees have very well-established businesses, and likely would not risk losing credibility by defaulting on a loan (in fact, not paying loans could be a default of the HomeVestors’ Franchise Agreement, putting their entire businesses in jeopardy). And even if a client did default on a loan, the Fund team members know additional HomeVestors Franchisees in every market it services, who could take possession of a property and get it sold to pay back the loan. Having these in-market relationships are a condition of any Bedrock Fund loan and are a big reason the Fund loans are safer than those of other lenders, who don’t have these “boots on the ground” across the country.
Suppose I want my investment back – what’s the process for that?
Members who have been invested in the Fund for at least twelve (12) months may request withdrawal from the Fund in writing and need to give the Fund at least ninety (90) days’ notice to distribute the money. The notice date shall be effective upon the date of receipt of the member’s withdrawal request. The Fund will likely pay the entire amount requested within 90 days of the notice date, subject to the Funds loan asset balance and future loan commitments. If necessary, given that Fund loans typically range from one month to one year in length, the Fund may elect to pay the investment back at the rate of 25% per quarter for 4 quarters, depending on cash flow of the Fund. Please see the Private Placement Memorandum for more details.
There are a lot of lenders out there. What gives the Fund a competitive edge?
There are plenty of residential mortgage lenders- for the individual consumers who are buying top-condition houses they want to live in. There are relatively few lenders like The Bedrock Fund who cater to the investor market- funding the purchase of houses that are bought at deep discounts and need repairs. Within the asset-backed bridge loan industry, Bedrock Loans is in a very unique ‘perfect storm’ position:
- Britt Jennings’ expertise is in knowing how to manage money and having relationships in the world of finance and accounting. He has a 20-year history with some of the Bedrock Fund team members and could do the accounting for many of its borrowers, resulting in knowledge of the financial condition of the clients.
- Bedrock Fund principals, employees, appraisers and contractors have been both borrowers and lenders of asset-backed bridge loans for many years- with no defaults. The approval committee members for The Bedrock Fund loans are professionals who already perform that role for a living for other national commercial lenders like HomeVestors.
- The Fund’s borrowers are a very select part of HomeVestors, the biggest national home buying company (“We Buy Ugly Houses”). The Fund will loan money to less than 5 percent of that network- the best of the best. Fund borrowers have years of history borrowing money for purchase and rehab with no defaults. These borrowers use the Fund because its team members are also part of the HomeVestors network and have established credibility with them. Currently the Fund has more demand than supply of money. In fact, the Fund could readily deploy tens of millions of dollars shortly upon receipt, given the demand from our select customer base.
- Through HomeVestors, the Fund has access to a vast network of professional real estate investors who can help mitigate risk by being available to secure, repair and sell any home the Fund has to take by foreclosure, as unlikely as that may be. By the rules of Fund underwriting, one or more of these professional investors has to be willing to work with the Fund in every market where it will originate a loan. This network gives the Fund a significant competitive advantage over other lending companies, none of which has this vast “boots on the ground” network.
- The Fund is originating commercial fix and flip loans that pay a higher interest rate than conventional mortgages, so the Fund can pay 7% to investors and still cover the costs of managing the Fund. Even at 9% and 2 points for a 6-month fix and flip loan, the Fund is on the low end of market prices.
No other lender in our space has this combination of experience with these types of loans, as both borrowers and lenders, and also a captive audience of the best borrowers anyone could want. The Bedrock Fund is a very unique opportunity for passive investors who want a strong monthly return to invest in this real estate space with minimal risk.
What kind of loans will the fund make?
The Fund originates commercial residential loans on properties that are valued around the median in a market, which tend to be the least volatile sectors with the best rents relative to cost. The Fund loans are secure since they are required to be less than 75% of the value of the properties, with a first mortgage position. The loans the Fund originates will typically be 6-month terms, and occasionally will be as short as 30 days or as long as one year. If a borrower defaults on a loan, the Fund can secure the property and sell it without incurring a significant, if any, loss. The Fund’s national network of investors can help with this if necessary. The Fund will only do loans where there are experienced HomeVestors Franchisees who can take control of a house and sell it if needed.
Why have I not heard much about these types of loans?
Most consumers have never heard of asset-backed bridge loans because those lenders only make loans to companies that purchase and rehab houses, not to individual consumers. However, the industry is very well established and known among those in that niche of real estate. Wall Street plays heavily in this arena- Goldman Sachs bought out one of the biggest asset-back bridge lenders, Genesis Capital, within the past year. Blackstone, Colony, Fortress and many other funds have fix and flip lending models in their portfolio. Even Silicon Valley players, like the company Lending Home based in San Francisco, are in the game. In addition, nearly every asset-backed bridge lender sells the loans it originates to Wall Street.
It seems the 7% return will be payable to investors only if the Fund earns a net return of 7% or more after all fees and expenses. How are we sure the Fund can pay its investors and still cover operating costs?
The Fund loans earn the equivalent of 10-15% per year (depending on length of loans). Therefore, the Fund makes 3-8% per year, or $30,000-80,000 per million dollars loaned per year, AFTER paying investors 7%. Operating expenses are expected to be less than $20,000 per million, so there is ample financial cushion in the model. In addition, the way the PPM is written, all income, beyond the 1% origination fee that goes to Bedrock Loans (the Fund manager), must go to the Fund and be used to pay interest to the investors first, before the management company takes any further income (see the PPM for further details).
Residential mortgages do not pay 7%, unless they are on very low-quality properties or are construction loans which have special risks. So, aren’t Bedrock’s loans going to be high risk?
No, The Bedrock Fund does not make high risk loans. The Fund typically makes loans in the safest segment of real estate- houses with a value at or just under the median prices in the markets. These house prices experience the lease amount of variation when the market goes up or down, making loans on them safe and predictable. It is correct that residential mortgages do not pay 7%; however, the Fund isn’t making those types of loans. Commercial loans for fix and flip usually pay significantly more than 7%, plus they’re much shorter term and have better asset protection than new construction loans. The Fund’s current rate of 9% and 2 points for a 6-month loan is on the lower end of rates in the industry. Conventional banks don’t often make loans on houses that need repairs- that’s why the Fund has an opportunity to start with. Fund loans can be approved in less than two weeks based on the equity in the houses and the strength of the borrower as a proven investor. From an underwriting perspective these loans are actually safer than residential mortgage loans which are usually at a much higher loan to value- 80-95%, whereas the Funds loans are 75% or less.
Don’t banks avoid these loans because they are high risk?
Banks avoid these loans because they can’t deal with properties that need repairs. Banks deem these as high risks because they don’t have the means to handle these assets like the Fund’s team members do- after all, they’re already in the business of buying and fixing houses. Look at their history – thousands of loans over many years – no defaults. That’s not to say that no one defaults in the fix and flip space, just that the Fund’s borrowers don’t. They’re the best of the best. In addition, the Fund has boots on the ground in every market where it makes loans – experienced real estate investors who can take possession of properties and get loans paid back. Concerning recession- the Fund team is looking forward to that because purchase prices relative to value will go down, making for even better loans. The Fund’s inventory of loans when a recession occurs (and it will) will have a starting equity position of at least 25%. Any recession, no matter how dramatic, shouldn’t erase that much equity (the last one was exaggerated because the residential mortgage industry collapsed- that won’t happen this time around, so the impact will be shorter and less severe). But even if the equity evaporates, Fund borrowers will pay their loans- their business livelihoods depend on it. Remember that Fund borrowers are very well established- many lived through the last recession without defaulting on any loans.