In the first installments of A Guide to Investing with Fund That Flip, you learned the basics of real estate crowdfunding and why Fund That Flip may be the right platform for you to invest with. In this article, we'll explain what exactly it is that you will be investing in if you choose to invest with Fund That Flip.
Fund That Flip focuses on originating short term mortgages to residential developers and offering opportunities to investors in the form of notes. At this time, Fund That Flip offers two types of notes - Borrower Dependent Notes (BDNs) and Series Notes. While understanding these note offerings is important it is also important to understand the typical profile of our borrowers on the underlying mortgages.
Before lending to a borrowing team, our team looks at various aspects of who it is we are working with. Here are a few of the main qualifications that are examined:
- Team must have relevant Real Estate experience in the respective market. We prefer the team to have completed 2+ similar projects in the last 12 months.
- Background and Credit are run on each borrower. We look for a history of responsible financial behavior.
- We do a review of personal financials, ensuring the borrower has resources to meet capital requirements for completing project and servicing debt.
- Majority members of the borrower’s team must sign a personal guarantee.
- Our borrowers are businesses (LLC or S-Corp)
- Properties are not permitted to be owner-occupied.
If the borrower meets the listed criteria, we then determine pricing. After all costs, we underwrite for no less than a 10% profit margin in the project. We stress test this for lower sales price, increased rehab budget, extended time, etc. to ensure we have adequate downside protection. Here are a few other things that we consider:
- Loan-to-cost at origination is 85% or less, ensuring the borrower has “skin in the game.”
- Loan-to-ARV is 70% or less, so we have 30% or more equity in the project once complete.
- We have internal datasets and proprietary risk grading that we use to develop our own internal valuations.
- We use 3rd party Appraisal services to confirm valuations on a majority of the projects.
- We manage construction draws to ensure our position in the loan is less than the value and cost of the project.
Now that you understand what you are investing in, you are probably wondering how you invest. The first way is through a Borrower Dependent Note (BDN). When you invest in a specific project on Fund That Flip you are investing in a BDN. The performance of the BDN correlates directly with the performance of a note that Fund That Flip invests in with the redeveloper of the project you've chosen. The underlying note is typically a first-position mortgage or similar security. While the note that you purchase is unsecured, the terms of your note gives you rights to the proceeds generated from the underlying note that is securing the real estate — hence the name "Borrower Dependent."
A Borrower Dependent Note is a promissory note that entitles the investor to a fixed rate of interest and principal at maturity with payments to the holder of the BDN being dependent on payments received from the underlying loan between Fund That Flip and the property redeveloper. Per the note terms, we use the proceeds from the BDN to invest in a mortgage note for the project you have selected. The name "Borrower Dependent" sums it all up in the sense that the performance of the BDN is directly correlated to the performance of the underlying borrower note. Your investment will perform in accordance to how the underlying investment performs.
The next way you can invest is through series notes. Series notes come in two forms, both introduced in 2020: the Residential Bridge Note Fund (RBNF) and the Pre-Funding Note Fund (PFNF) (learn how the two differ). Through the purchase of notes issued by the Residential Bridge Note Fund, LLC, Investors can also invest in a portfolio of whole mortgages and Borrower Dependent Notes (BDNs). From time-to-time, RBNF may also extend a line of credit to FTF Lending, LLC to pre-fund mortgages. The mortgages and BDNs that RBNF will hold are expected to be a representative set of the book of business FTF Lending originates. Investors will no longer have to check the platform daily to see which mortgages are available to purchase via a BDN but can instead invest across our entire book with one investment.
Through the purchase of notes issued by the Residential Bridge Note Fund, LLC, Investors can also invest in a portfolio of whole mortgages and Borrower Dependent Notes.
Through the purchase of notes issued by this Pre-Funding Note Fund, LLC (PFNF), Investors can now invest in a line of credit used to pre-fund first-position mortgages originated by FTF Lending, LLC. The line of credit that PFNF issues is used by FTF Lending to originate loans prior to syndicating them on the online platform or selling to institutional whole loan buyers. Investors have the opportunity to gain exposure to a pool of loans that are held on the line for a short duration prior to being sold.
Another question we often get is what our different entities mean. Fund That Flip, Inc. (FTF, Inc.) is our parent entity that employs our staff, owns our intellectual property, operates our platform, earns all revenues, incurs all operating expenses, and owns all subsidiaries. FTF Lending, LLC is a wholly-owned subsidiary of FTF Inc. Its primary function is to originate loans and issue Borrower Dependent Notes (BDNs). Its assets/liabilities are limited to first-lien mortgages and corresponding BDNs. This entity, via an Indentured Trustee, provides a bankruptcy remote structure to Lenders who invest in the BDNs.
FTF Fund Management, LLC is a wholly-owned subsidiary of FTF, Inc. and manages the Residential Bridge Note Fund, LLC. Residential Bridge Note Fund, LLC is a wholly-owned subsidiary of FTF, Inc., and is managed by FTF Fund Management, LLC. Its primary function is to purchase whole loans from FTF Lending and BDN’s on the FTF Platform. It generates capital to purchase these whole loans and BDNs by selling 6, 9 and 12-month note offerings.
With investing always comes risk. Still, we’re proud to have returned 98.88% of principal to our investors as of July 18, 2020. If a loan does goes bad, Fund That Flip will work with the borrower and pursue action based on the particular circumstances of the default, condition of the property, general real estate market conditions, and other factors in order to effectively mitigate loss. Fund That Flip makes significant effort to reduce the risk of default, however, due to the inherent risks of real estate investing, a project may go into default, and investors may lose their entire investment.
We’re proud to have returned 98.88% of principal to our investors as of July 18, 2020.
Should a borrower default, Fund That Flip will work with the borrower and pursue action based on the particular circumstances of the default, condition of the property, general real estate market conditions, and other factors in order to most effectively mitigate any loss. Such actions may include selling or restructuring the non-performing note, selling the subject property 'as-is' to another buyer, completing any in-progress rehabilitation and then selling the subject property, or some other commercially viable option including foreclosure. During this time, investors may not receive monthly interest payments and the maturity date of the investment may be extended.
Such loss mitigation activities may require Fund That Flip to incur expenses. Upon sale of the asset, Fund That Flip will be reimbursed for any expenses with the remaining funds to be distributed to investors on a pro-rata basis. Details of how this will be handled are further outlined in the Borrower Dependent Note and Private Placement Memorandum which we encourage you to review with an investment professional.
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