Fund That Flip is a real estate fintech that focuses on originating short-term residential rehab loans to housing developers — and we offer investors the opportunity to invest in fractional shares of those loans in the form of notes.
Currently, Fund That Flip offers two types of notes — borrower-dependent notes (BDNs) and Series Notes (RBNF and PFNF). It’s important to understand both the notes and the typical profile of the residential developers on the underlying mortgages.
(As an aside, if this is the first time you’ve joined us, you may want to check out earlier articles in the Fund That Flip investing series: We’ve covered what makes Fund That Flip a reliable, trusted platform for many investors, as well as the nuances of crowdfunded real estate investing.)
Understanding Requirements for Our Residential Developers
Before lending to a real estate developer, our team of Real Estate Analysts reviews their experience and qualifications to better understand who we’re partnering with. The main qualifications we examine are:
- Real estate experience. The developer team must have relevant real estate experience in the respective market. We prefer the team to have completed at least two similar projects in the last 12 months.
- Financial behavior. We run a background and credit check on each borrower team. We look for a history of responsible financial behavior.
- Personal finances. We do a review of the borrower’s personal finances, ensuring they have resources to meet capital requirements for completing the project and servicing debt.
- Personal guarantee. The majority members of the borrower’s team must sign a personal guarantee.
- LLCs or S-Corps. Our borrowers must be businesses, either an LLC or S-Corp.
- Occupancy. Properties are not permitted to be owner-occupied.
If the borrower or borrower team meets the above criteria, we determine pricing. After all costs, we underwrite for no less than a 10% profit in the project. We do this in the event of a lower sales price, increased rehab budget, extended time, etc. to ensure we have adequate downside protection.
Our analyst teams use internal datasets and proprietary risk grading to determine our own internal valuations. In addition, we also 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.
- Valuations on a majority of projects are confirmed by third-party appraisal services.
- Construction draws are managed by Fund That Flip to ensure our position in the loan is less than the value and cost of the project.
- The borrowers' themselves. Our Account Teams are dedicated to building relationships with our borrowers, understanding their goals, and what they need to get there.
Fund That Flip Entities
Before we dive into the different notes and funds you can invest in on our platform, we'll quickly introduce the different Fund That Flip entities that are at play. Fund That Flip, Inc. (sometimes 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 Fund That Flip, Inc. and manages the Residential Bridge Note Fund, LLC. Residential Bridge Note Fund, LLC is a wholly-owned subsidiary of Fund That Flip, Inc., and is managed by FTF Fund Management, LLC. Its primary function is to purchase whole loans from FTF Lending and BDNs on the Fund That Flip platform. It generates capital to purchase these whole loans and BDNs by selling six-, nine-, and 12-month note offerings.
How to Invest in Fund That Flip via BDNs
The first way to invest with Fund That Flip is through a borrower-dependent note (BDN). When you invest in a specific deal on our platform you’re investing in a BDN. The performance of the BDN correlates directly with the performance of the 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 you purchase is unsecured, the terms of your note give 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.
Investing Through Series Notes
The other 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, investors can also invest in a portfolio of whole mortgages and BDNs. Occasionally, 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, LLC 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 this Pre-Funding Note Fund (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 PFNF issues is used by FTF Lending, LLC to originate loans prior to syndicating them on the online platform or selling the loans 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.
Reducing Risk and Handling Loan Defaults
With investing always comes risk. Still, we’re proud to have returned 99.6% of principal to our investors as of April 2022. If a loan does go into default, the Fund That Flip Servicing team 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.
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. We make significant efforts to not only keep investors up-to-date on the status of each of their investments, especially when it is in default, but also to reduce the risk of default in the first place. However, due to the inherent risks of real estate investing, a project may go into default and investors may lose their entire investment.
Such loss mitigation activities may require Fund That Flip to incur expenses. Upon sale of the asset, we 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 BDN and Private Placement Memorandum, which we encourage you to review with your financial advisor or an investment professional.
Fund That Flip has historically returned more than 10% annualized yield to its investors. Start earning income from real estate without ever picking up a hammer.
