Real Estate Mortgage Investing Book

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Real Estate Mortgage Investing Book

  1. 1. Mortgage InvestingPage 2 BUILDING COMMUNITIES
  2. 2. DisclaimerTHIS BOOK IS AN EDUCATIONAL TOOL FOR INVESTORS INTERESTED INMORTGAGE INVESTING, LEARNING ABOUT THE REAL ESTATEDEVELOPMENT INDUSTRY, AND THE ENZO GROUP OF COMPANIES.WHILE INFORMATION IN THIS BOOK IS BELIEVED TO BE ACCURATE AT THETIME OF PRINTING, THE COMPANY RESERVES THE RIGHT TO MAKECHANGES AT ANY TIME FOR ANY REASON AND WITHOUT NOTICE. THEREADER SHOULD RELY ON THEIR OWN DUE DILIGENCE AND ENLIST THESERVICES OF COMPETENT PROFESSIONALS WHEN MAKING INVESTMENTDECISIONS.THIS BOOK IS NOT INTENDED TO BE AN OFFERING OF SECURITIES NOR ASOLICITATION TO PURCHASE SECURITIES. OFFERS OF SECURITIES CANONLY BE MADE PURSUANT TO AN OFFERING MEMORANDUM DELIVEREDTO QUALIFIED OFFEREES. INTERESTED PARTIES SHOULD DIRECTINQUIRIES TO:Enzo Financial Group2109 – 4TH Avenue SE (PO Box 5561)High River, Alberta403.668.7720info@enzofinancial.com Page 3
  3. 3. Mortgage Investing PART ONE MORTGAGE INVESTING Preface Knowledge is Power After reading this book, you will have a clear understanding of what mortgage-based real estate investments are, what the advantages are to owning them through Real estate investment in a fund, and what methods are employed to protect the investment. backed This knowledge will inspire confidence in a sound investment product with high mortgages returns and minimal risk. consistentlyprovide some of Purpose of This Book the highest This book is written in a quick-reference format that will help you as you are returns contemplating the inclusion of mortgage-backed real estate investments as part offrom one of the your investment portfolio. It is designed to give you an easy-to-read overview of the safest Enzo Mortgage Investment Fund business model, including its altruistic side investments regarding its target market of borrowers. It should be read with the understanding available that it is not a complete treatise on real estate, but raises issues, good and bad, that in the investor commonly occur with the purchase of mortgage-based real estate investments. marketplace The Fundamentals today. The fundamentals of mortgage investments begin with a discussion of what a mortgage is, described in the sections "Mortgage Investments" and "Mechanics of a Mortgage", then discusses the advantages of mortgages in the sections "Advantages of Owning Mortgages" and "Why Mortgages Pay a High Rate of Return". Security is discussed in the chapter "Loan-to-Value." Increased Yield and Safety The section "The Magic of the Wraparound Mortgage" details the use of the wraparound mortgage to improve yield and safety in mortgage investments and provide the means of achieving high yields. Mortgage Provider The sections "Direct Participation Mortgage Programs" and "Investor Relations" point out the advantages of making an investment in a fund designed to be secured by a portfolio of many mortgages, rather than an individual investing in single mortgages. Investment Considerations The details involved with contemplating mortgage investments are discussed in the sections "Loan Underwriting” and "Loan Servicing and Collection". Enzo Fund Management Services Inc. is responsible for all mortgage lending details. Page 4 BUILDING COMMUNITIES
  4. 4. Mortgage InvestingWouldn’t it be great if . . .You could invest in stocks at sixty, seventy, or even eighty percent of their marketvalue? Would you feel like you had some breathing room if the company didn’tperform as planned? Of course you would. You could quickly sell your shares atcurrent market value without taking a loss. Fantastic!Unfortunately, that’s not the way the system works. You buy into the stock at 100%of market value. Any gains you might achieve along the way can quickly evaporatebefore you know what hit you. Where is the cushion if things go wrong? And whatabout your initial investment, the principal? That’s certainly at risk, too!For some investors the stock market is too volatile and risky so they go the oppositeway and forego the possibility of high returns for a safe investment in GIC’s, CanadaSavings Bonds, insured savings accounts, etc. The problem is the interest rates arenot very attractive and they get taxed on the earnings to boot! Obviously, themarketplace offers many alternatives for the investor’s dollars. The differences lie inthe level of risk and reward with each investment vehicle.Now for the good news . . .There is an alternative for your investment dollars that is both safe and profitable.Many investors have discovered the advantages of making short-term real estatemortgage loans, just like a bank or mortgage company. (Do you think a bank woulddo it if it wasn’t profitable and safe?)Real estate-backed mortgages consistently provide some of the highest returns fromone of the safest investments available in the investor marketplace. For some investors theHigh Rate of Return stock market isIn addition to the security of real property, there is also the advantage of higher too volatile andreturns for the mortgage investor. The reason for this higher rate of return is that risky so they gomany borrowers are willing to pay a higher-than-normal interest rate in exchange the opposite wayfor the flexibility and speed of private loans. Private investors are not limited by the and forego thetraditional rules of bank-made loans and, therefore, loans can be made quickly and possibility of highefficiently. returns for a safeLoan-to-Value investment inMortgages are safe investments because borrowers are typically good risks for a GIC’s, Canadacouple of reasons. One, they could lose their property if they default on the loan. Savings Bonds,Two, if the proper research has been performed by the lender, the investment will insured savingshave a more than adequate loan-to-value ratio, or LTV, meaning the loan amount is accounts.exceeded by the value of the property.MortgagesA mortgage is used to secure a loan on property. Foreclosure is a highly efficient wayto enforce the terms of a mortgage secured by real estate. The borrower has noredemption rights once the foreclosure has occurred. Page 5
  5. 5. Mortgage Investing Secure Investment As the examples in this book show, mortgages provide a simple and efficient foreclosure process by which to recover investment dollars, while generally being secure. Although foreclosure is unlikely, the possibility gives a borrower great incentive to quickly and fully pay monies that are due. If the lender does have to resort to foreclosure, they will usually profit from the process. Advantages of Owning Mortgages Mortgage ownership is one of the most misunderstood and safest investments in the marketplace today. Many investors are under the misconception that only banks and other institutional lenders are allowed to make a mortgage loan. Actually, anyone can make a loan on property, secured by a private mortgage (meaning the mortgage is owned by a non-institutional lender). There are a myriad of investments being offered in the marketplace for the investors dollars. Mortgages should be included in every serious investors diversified portfolio. They may not have the sizzle associated with the volatile stock market but they are safe, stable and yield steady, above-market income. Other advantages include: 1. Mortgages establish a passive income stream through interest payments received from the borrower. 2. The ROI rate earned is much higher than rates paid by institutional products such as CDs, money market accounts, or government notes. 3. Mortgages are liquid and relatively easy to sell. 4. Mortgages can be traded. 5. A lender can use their mortgages as security for another loan. This is called collateralizing or hypothecating. 6. In the case of a discounted mortgage, the financial statement shows the full face value of the mortgage, not the discounted amount. The investor is, therefore, automatically worth more unless there is a reason to write down the mortgage due to questions as to collectability. 7. As a lender, there is no upkeep, repair, maintenance, painting, gardening, or plumbing, as is the case with property ownership. 8. A lenders protection increases each month if the loan amount is being lowered through amortization. 9. Many mortgages do not carry to full term. This is because the notes have an acceleration clause which requires them to be paid in full if they or the collateral property are sold. 10. In general, the longer a mortgage is held the safer and more valuable it becomes. This occurs because the equity builds as the property increases in value because value is added to the land (engineering, design, architecture, land use zoning, etc.) and the principal is paid down (amortization). The borrower has an increasing incentive to protect his property. In cases where the investorPage 6 BUILDING COMMUNITIES
  6. 6. sells the mortgage, the price may not have to be discounted as much because the length of steady payments, equity, and reduced payoff time have made it more valuable than less seasoned loans.Wraparound MortgageThe wraparound mortgage is an investment vehicle that can generate high returnswith minimal additional risk to the lender. It is one of the best methods available toobtain high yields on investment. A wraparound mortgage is subordinate (junior) tothe existing first mortgage on a property, just like a second mortgage. This type ofloan will "wrap around" the current debt and will include any new funds advanced.The following example illustrates the mechanics of the wrap loan.Wrap Borrowers PositionThe owner of a property valued at $700,000 is in need of a quick $100,000 secondmortgage loan. There is an existing first mortgage of $400,000 on the property at7% interest. Rather than refinancing $500,000 or obtaining a second mortgagethrough an institutional lender (which can easily take many weeks or months withconsiderable red tape), the borrower finds a private lender willing to extend the$100,000 he needs. However, because the private lender will be in a subordinateposition, he wants assurance the payments on the first mortgage are being made in atimely manner. He also is looking for an above-market yield on his investment. Toaccomplish both, the lender insists on holding a wraparound mortgage of $500,000at 9% interest, and advances the needed $100,000 when the borrower agrees.In a wrap mortgage the borrower makes only one monthly payment to the wraplender, which includes the payment due on the first mortgage. The wrap lender willthen make the payment to the first mortgage holder. This way the wrap lenderknows the first is being paid on time every month. If the borrower defaults, the wraplender can make the payments on the first mortgage to protect its interest, and moveto foreclose on the property.Wrap Lenders PositionThere are strong financial benefits for an investor when taking the wrap mortgageposition. In this example, the wrap lender is only advancing $100,000 of "new"money, and is also receiving the 2% interest rate "point spread" (the differencebetween 7% on the existing first mortgage and 9% on the wrap mortgage) on the$400,000 first mortgage. The interest received on the wrap loan is $45,000 per year(9% of $500,000) and the payments made on the first loan is $28,000 per year (7%of $400,000). This $17,000 difference is the yield on the $100,000 of new moneyadvanced. Dividing the $17,000 by $100,000 translates to a 17% annual yield on thenew money.A property owner is willing to do this when he needs the money fast, is in financialtrouble or is having difficulty qualifying for conventional financing. The reasonscould be one of many. For instance, he may be unable to prove income because he is Page 7
  7. 7. Mortgage Investing self-employed, has a low credit score or needs to bail out of possible foreclosure. Or, if he is an investor, he may need the money fast to take advantage of a great opportunity. In any case, the transaction looks like this: Existing 1st Loan $400,000 Interest Rate 7% Annual Interest Payments $ 28,000 Existing 1st Loan $400,000 The wraparound New Money $100,000 mortgage lender Wrap Mortgage Balance $500,000has the advantage Interest Rate on Wrap 9% of the point Annual Int. Pmts. Received on Wrap $ 45,000 spread between the interest Less Annual Payments Made on 1st Loan $ 28,000 charged on the Difference in Payments $ 17,000underlying senior Annual Effective Yield on New Money 17% debt and the Since the new money advanced is wrapping around the existing first mortgage loan, interest charged the wrap lender will also enjoy the benefit of principal reduction as the first loan is under the wrap. paid down through amortization. Using a wrap mortgage is a great way to reduce the risk while maximizing yield. If the borrower fails to make the payment on the wrap, foreclosure ensues. The wrap lender can continue to make payments on the first mortgage loan while foreclosing the wrap loan. The wrap lender can also pay off the first loan, thereby automatically moving the wrap mortgage into first position. T he Power of Leverage The principle benefits of a wraparound mortgage for the Fund’s investors are: Increased Security The loan is very safe because the combined senior and junior debt on the property is under 65% LTV. Also, the senior lien cannot default without the wrap holders knowledge. Increased Yield The wraparound mortgage lender has the advantage of the point spread between the interest charged on the underlying senior debt and the interest charged under the wrap. When combined with the point spread on the 1st mortgage, the yield on the new money climbs from 9% interest to 17% interest, nearly doubling. By using the leverage structure of a wrap mortgage, the small amount of new money relative to the overall debt earns much higher returns. Also, in addition to the closing costs incurred when making the loan, the wrap lender will charge the borrower points and fees on the wrap mortgage amount for advancing the new money. Now, thats some powerful leverage! Page 8 BUILDING COMMUNITIES
  8. 8. High Rate of ReturnWhy would anyone pay a private mortgage lender an interest rate that is higher thanconventional rates when they can go to a bank for a lower rate? There are severalreasons: • Banks take too much time to commit to a loan • The loan sought is not the type of loan typically made by a bank. • Some borrowers do not wish to be scrutinized by the bank loan process or provide the substantial amount of paperwork requested. • The borrower may not qualify for traditional bank financing.The Private Mortgage Lender is Protected by a Low Loan-to-Value (LTV) RatioThe reason a private lender will make such a loan is because the concerns of privatemortgage investors are not usually the same concerns that banks have. LTV is themost important factor to private lenders. It may not matter what the borrowerscredit history may be since the principal is well secured by the property. The loan isprimarily based on the value of the property. If a person does not have stellar creditbut has a great deal of equity in his property, he will usually find a way to make themonthly payments. Of course, this does not guarantee that a borrower will notdefault, but in that instance EFG is designed to address defaults throughforeclosure, which is intended to have sufficient underlying equity to enable theFund to be made whole (absent a significant decline in the value of the property).Quick Loans Cost More A private mortgageTime is also a consideration. Banks and their government regulators have created rules, lender can usuallypolicies and ratios that make lending on real property difficult and slow. Common sense and make a loan in acustomer service are not always pervasive in the lending industry. week or two, orA private mortgage lender can usually make a loan in a week or two, or even in a few days if even in a few days ifnecessary, rather than the months it often takes through a bank. This speedy process is necessary, ratherattractive to a borrower who is willing to pay a premium through up-front fees and higher than the months itinterest rates. often takes through a bank. This speedyLoan-to-Value process is attractiveThis is one of the most important sections of this book and investors need a clear to a borrower whounderstanding of its implications. is willing to pay a premium throughMortgage lending is one of the safest ways to invest while earning a high yield with up-front fees andgood security. The reason for this security is the principle of loan-to-value (LTV). higher interestLoan-to-Value means to loan an amount of money that is less than the actual value rates.of the property. This is the most important facet of lending on real estate. With anadequate LTV, the original investment is protected and a cushion of equity remainsto pay any unexpected costs, absent a meaningful decline in the value of theproperty. Page 9
  9. 9. Mortgage Investing In the game of Monopoly, the most sought after piece of property is Boardwalk because of its high value and high rent. To purchase this dark blue card, the cost is $400. However, to mortgage this card a player receives only $200 from the banker. The loan was $200 and the value $400. The LTV is $200 divided by $400, or 50%. To illustrate through a common experience: a homeowner is seeking a home loan secured by his residence. His property is worth $500,000 and he would like to borrow $300,000, secured by a new mortgage. The ratio is $300,000 (loan) to $500,000 (value) or 60%. This is a safe loan for a lender because the loan only has a 60% LTV and the borrower still has $200,000 (40%) equity in the property. LTV at 65% As a lender, the goal is to try to keep the loan-to-value at the lowest possible number. The LTV should usually not exceed 65%, which would include a combination of all financing on the property. For instance, there may be an existing first mortgage on the property of 50% of its value, leaving 15% equity which can be safely used as collateral for a new second mortgage or "wraparound" (all-inclusive) mortgage loan. The graphic illustrates the safety margin due to the equity cushion remaining after placing a low loan-to-value mortgage loan on the property. There is still an adequate equity cushion, or safety margin, in the property to assure the lender(s) will receive a return of principal and interest if it becomes necessary to foreclose on the property. This is why it is vital that an accurate, independent appraisal is obtained before closing so that the proper LTV is calculated. The primary goal of the mortgage lender should be to preserve their principal, safeguarded by a low LTV. Risk is greatly reduced when the mortgage lender loans less than the full value of the collateral real estate. The LTV ratio should be low enough for the lender to know their principal is well covered by the borrowers remaining equity, insuring it against falling real estate values and unforeseen problems. EFMS usually caps the loan amount at 65% of value and will go over that amount only if there are special circumstances that warrant such an increase. Loan Underwriting The most important aspect of mortgage investing is the underwriting discipline of the lender. Underwriting is the process the lender goes through to qualify a borrower for a loan and to ensure the loan is structured and documented correctly. The most important part of the underwriting process is determining the loan-to- value ratio. The LTV is usually determined by comparing the loan amount to the appraised value of the collateral securing the loan.Page 10 BUILDING COMMUNITIES
  10. 10. Equity Protects the LenderWhen loans are properly underwritten, there tend to be fewer problems for theduration of the transaction. If there are problems, borrowers are motivated to fixthem in order to protect their equity in the property. Most problems can be solved;it is usually just a matter of cost. Should the borrower fail to solve the problems, themargin of equity in the property allows the lender to absorb the cost of solvingwhatever problems there may be.When there are underwriting weaknesses, however, there is a higher likelihood ofproblems. The borrower is less likely to solve the problem, which then becomes thelenders problem. Multiple problems tend to have a compounding effect, makingcollection of the loan in full even more difficult.A simple example should illustrate the point. If someone is lent $500,000 on aproperty that is worth $400,000 (125% LTV) and encounters financial difficulties, itis less likely he will find a way to make the payments than if he borrowed $200,000(50% LTV) on that same property. The options available in the second case includeselling the property or refinancing with another lender. These options are availablebecause the borrower is motivated to protect his $200,000 equity in the property.These options are much less attractive, or even impossible, in the first examplewhere there is no equity.Appraisals Determine LTV RatiosMost lenders rely on appraisals to determine LTV in analyzing a loan situation.Lenders should employ a formal process of ordering and reviewing appraisals forloan underwriting purposes.Many lenders have an in-house appraisal review department. Licensed appraisersare required to pass certain tests and meet educational and experiencerequirements. An appraisal is not an absolute guarantee of value for a particularpiece of real estate, nor a guarantee that a property will continue to hold its valuewith time, but it is an important tool for the lender when assessing risk.Appraisals generally look at value using three different approaches. They are theincome approach, the replacement cost approach and the sales comparisonapproach. The income approach looks at the value of real estate based on theincome stream the property can generate. This is generally used for commercialproperties such as apartment buildings and shopping centers. The cost approachlooks at the hard costs it would take to replace the property, including a developersprofit. This approach can be used for any improved property. The sales comparisonapproach looks at the prices for which similar properties have sold. The value ofresidential property is determined primarily by sales comparisons.The appraisal summarizes each of these three approaches or explains why one ormore is not relevant for the situation (e.g., the income and replacement approachesare not valid approaches for raw land). The appraiser then makes a finalreconciliation of value in which each approach is considered and reconciled for a Page 11
  11. 11. Mortgage Investing final value estimate. All of these valuation methods and the underlying assumptions must be scrutinized. The sales comparisons for a property must be looked at carefully to assure that they are truly comparable. To be a true comparable, a property should be zoned the same as the subject property, of similar size, and have similar features such as waterfront location. The appraiser then makes value adjustments for the differences. The cost approach should be based on development of a similar project or construction of a similar building. Most important in new construction, a review of An individual the appraisal comparing the costs used by the appraiser to the costs proposed by the looking for borrower should reveal whether there are any deficiencies in the appraisal that need investment to be taken into consideration. opportunities Whenever the income approach is used, a key assumption is the rent or lease should carefully income the project may generate compared to similar properties with similar consider all the amenities. The income approach is used for income-producing properties such as elements of warehouses, apartment buildings, offices and shopping centers. This approach is investor usually not used for single family residential property, unless the property is rented. relationships before making an Borrower Qualificationsinvestment choice. An important consideration in the underwriting process is how the borrower plans to refinance the property within the term of the loan. The lender should take a close look at the likelihood that a borrower will perform the obligations as stated in the terms of the note, and be aware that the likelihood can be affected by the structure of the loan. Loan Servicing And Collection Although any lender can look after their own loan servicing and collection, the process can be arduous, expensive, and time consuming. Loan servicing and collection is one of the biggest reasons why mortgage lenders make their mortgage investments through Participation Mortgage Programs. Discussion of loan servicing and collection can be found in the next section: Participation Mortgage Programs. Foreclosure: Investment Recovery Mortgage investing is a lucrative and relatively safe vehicle by which to obtain what can be a great return on the investment dollar. But what happens when the borrower defaults on his debt? The process is called foreclosure. In general, it is the process by which the property is sold to satisfy the debt owed. Whether investing in mortgages or loaning money on real property as security, the documents to secure an investment are the same: the promissory note and mortgage. The note will show the original amount owed with the terms and conditions for repayment of the mortgage. The mortgage secures the repayment of monies owed under the terms of the note and becomes a lien on the property. The parties on the loan documents are the borrower (mortgagor) and the lender Page 12 BUILDING COMMUNITIES
  12. 12. (mortgagee).Reasons for ForeclosureForeclosure can be initiated for a variety of reasons, monetary or non-monetary.The monetary defaults include:1. Nonpayment of a monthly amount due.2. Nonpayment of a balloon payment when due.3. Advancements per the provisions of the mortgage for taxes or insurance.4. Advancements per the provisions of the mortgage for nonpayment of a senior lien that would jeopardize the position of the foreclosing mortgage .A non-monetary default could include the acceleration clause due to the borrowertransferring title or encumbering the property in violation of the provisions of themortgage or the borrower destroying the property by not keeping it in goodcondition and repair, or by removing or demolishing buildings.The fund’s manager is responsible for handling all foreclosure actions and any otherproblems that may arise. The funds investors should never be involved.Weathering BankruptcyWhen lending on real estate, the lender should consider the possibility the borrowerwill file for bankruptcy in an attempt to discharge his mortgage debt. As a rule, theamount of equity over the mortgage will determine if a lenders loan and securedposition in that loan will weather bankruptcy. This excess value also increases thelenders chances of recovering accrued interest, collection costs, advances, and legalfees. The most There are many problems involving a borrowers bankruptcy that can be avoided by important part ofthe careful drafting of the note and mortgage deed in the beginning. It is necessary the underwritingto enlist the help of an experienced, persistent attorney who will eventually prevail process isin recovering the property. determining the loan-to-valueConclusion ratio. The LTV isToday, mortgage investing remains one of the safest and most secure ways usually determined byto increase wealth and/or contribute to a retirement portfolio. Mortgage comparing theinvesting is designed to provide an excellent return on investment without loan amount tothe volatility experienced in the stock market or the low yield realized by the appraisedconventional banking investments such as CDs and Money Market value of theaccounts. collateral securing the loan. Page 13
  13. 13. Mortgage Investing PART TWO P ARTICIPATION M ORTGAGE P ROGRAMS There are alternatives available to an individual interested in mortgage-backed real estate investments. One such alternative is to purchase an interest in a participation mortgage program (referred to in this book as a "fund") that invests in mortgages. Generally, these funds are structured as flow-through entities either in the form of a limited partnership or trust. All profits or losses for tax purposes are passed directly through to the funds investors. The purpose of a fund is to allow the individual investor to purchase an interest in the fund rather than invest in a single mortgage. In essence, as a result of an investment in the fund the investor owns a small piece of each mortgage in which the fund has invested. A primary factor when considering a fund is to review the funds investment objectives and the diversity of the funds loan portfolio. The principal objective should be to produce revenue from the interest income on the loans, to provide monthly cash distributions to the investor and to preserve and return the investors capital contribution. Diversity and Safety Mortgage investors who loan their money on a single piece of property run a greater risk to their principal if a problem develops. Their money can possibly be tied up for many months without payments if a default occurs. A fund comprised of a number of individual loans will barely notice the impact of a single loan that falls into trouble. The funds management will be responsible to take proper corrective action on behalf of the fund and the individual investor will not have to deal with the problem. Disclosure In a funds offering memorandum there must be disclosures as to the types of loans that can be made, lending practices, suitability of investors, and the rights and obligations of its investors. The fund manager has a fiduciary duty to the fund for the safekeeping and use of the funds money and assets. In looking at various funds, it is important to determine the fees the manager will receive for overseeing and administering the fund. The percentage of capital invested in mortgages should be substantial, with adequate reserves set aside for unforeseen events. The fees the manager receives from the fund reduce the return to the investor and, as such, the investor should look for a fund with minimal fees. In addition, the investor should determine whether a promotional fee is being received by the manager. A promotional fee is a percentage of the fund being received by the manager for the services being performed. Yield is generally enhanced to the extent promotional fees are minimized. Evaluating a Fund When evaluating a fund, an investor should review the factors used for selecting loans and the quality control guidelines to be followed. Each mortgage loan shouldPage 14 BUILDING COMMUNITIES
  14. 14. require the fund to obtain an independent appraisal and suitable insurance. Themortgage loan investments should be diversified over many properties so that thedefault of one particular loan will not have an untenable impact.Types of LoansThe investor should review the offering memorandum to determine the types ofloans that are permitted by the fund and should look for a fund that emphasizesloans with a low loan-to-value. The fund should be well diversified with loans onseveral different properties. An important key to safely investing in a fund is widediversification of the collateral securing the loans made by the fund.The investor should take a hard look at funds that invest in loans “away from home”since the laws of each jurisdiction may vary significantly and may affect thecollateral securing the loan..Customer ServiceAn individual looking for investment opportunities should carefully consider all theelements of investor relationships before making an investment choice. Wheninvesting with a fund, customer service ranks high on an investors list of workingrelationship qualities. Clear, honest and timely communication is usually at the topof the list of the investors concerns. Management should treat the relationship as along-term commitment and understand that investors will have myriad concernsand questions when it comes to their money. Management dedicated to customerservice will make it imperative to ensure a pleasant and rewarding investmentexperience.The second element of customer service involves the product and services providedby the fund. The investor should have a clear understanding of the funds businessmodel and strategies, what the investment entails, a thorough assessment of therisks and rewards involved, and what to expect by way of regular communicationwith management in terms of written materials. Investors should always be able totalk directly with a member of management that has the authority to address theinvestors concerns.Management should always be ready to answer honestly and completely anyquestions the investor will pose. Most of the questions will focus on the security oftheir investment, always of primary concern. Investors need to be assured withstraight answers regarding diversification of quality mortgage loans, defaultpossibilities and any other concerns involving the loans the fund will make.A primary concern is interest or cash distributions to be paid on the investment. Theamount to be paid is determined by the interest income from the borrowers of thefunds money. The rewards should be in line with the real or perceived risks of theinvestment and the payment of interest should be made at least quarterly.Questions on interest rates and distributions are followed by questions regarding adelay in posting the investors cheque because of the time necessary for the chequeto clear. Cheques should be posted immediately and earnings should commence the Page 15
  15. 15. Mortgage Investing first day of the month immediately following receipt of the cheque. In summary, when it comes to investor relations, a quality fund should offer the following: • experienced and successful management team • high priority placed on customer service • clear communication regarding the funds business model and strategies • diversity of the mortgage loans to protect against loss • open discussion of risks • immediate credit on investment funds • timely commencement of interest payments Mortgage • payment of interest made monthly or quarterly investing is a lucrative and Loan Servicing and Collection relatively safe Loan servicing is a great service to individual investors. It is an efficient means of vehicle by which collecting on a note and mortgage on behalf of the investor by a mortgage manager. to obtain what Loan servicing is provided by a funds mortgage manager and is paid for by the can be a great borrower so there is no cost to the fund or its investors. The success of a real estate return on the loan is greatly enhanced if a mortgage manager offers a strong and streamlined loaninvestment dollar. servicing department. Not only does this simplify the process for the investor but it sends a strong signal that the lender and its collection and servicing department will vigilantly protect the interest of the investors. It is the fund managers responsibility to provide excellent loan servicing through the mortgage manager. The responsibility of the mortgage manager is to enforce the terms of the loan agreement with respect to timely and proper performance by the borrower. It is best to have an experienced third party collect on a loan, especially when dealing with a problem borrower. The fund investor is far removed from the collection process and interaction with the borrower. A fast and sure response to delinquent payments makes borrowers understand that the mortgage manager will not tolerate non-performance. Foreclosure action should commence very quickly following a default on a loan. Knowing this, most borrowers will make every effort to avoid foreclosure because it is costly to them and could damage their credit. Reliable payment and performance are greatly enhanced by strict, consistent, and sure enforcement by the mortgage manager. Fund investors are completely insulated from the process of collection of the borrowers monthly payments, or with any other problem that may develop. Summary The goal of management is to recognize the investors needs, which always include protecting the funds assets. Management must continually measure the level of customer service through direct feedback from investors. Regular written communications are an important aspect of customer service. After all, the investor has his money at risk and wants to stay up to date on the condition of the fund. The doors to top management should be always open and fund investors can expect to be supplied with phone numbers of management to insure those lines of communication. Page 16 BUILDING COMMUNITIES
  16. 16. PART THREE ENZO G ROUP OF C OMPANIESThis book has been written both as a primer for the new investor wishing to learnmore about the process of mortgage or equity fund investing, and as a reference forthe experienced investor as well. While this text represents an outline for themortgage lending process, it is by no means a substitute for the prudentunderwriting and review of each and every investment contemplated. With theinformation contained in this book, an investor will know what should be expectedfrom their mortgage loan investments and can make informed decisions about themortgage fund in which they wish to place their money.We take this opportunity to introduce you to our group of companies with ahighlight on Enzo Financial Group which provides investor relations services to theEnzo Mortgage Investment Fund, a Western Canadian open-end investment trustthat provides land development and construction financing to real estatedevelopments in Western Canada. Enzo Financial Group (EFG) is the group ofassociated companies required to ensure the success of EMIF. EFG is based inAlberta, with Associates across Western Canada. Our team is made up ofmanagement professionals, expert mortgage underwriters, and senior developers,all of whom bring extensive knowledge and expertise to the table. **********Enzo Mortgage Investment FundEnzo Mortgage Investment Fund (the "Fund") was formed for the purpose of Today, mortgageacquiring and holding mortgages on real estate property primarily in Western investing remainsCanada. The Fund is a mortgage pool of capital funded by the contributions of many one of the safestinvestors. The head office of the Fund is in High River, Alberta. and most secureThe Fund is especially appealing to investors who take comfort in having their ways to increaseinvestment dollars work responsibly while seeking safety, high monthly income, low wealth and/ormanagement fees and diversification within their investment portfolios. The Fund’s contribute to aexperienced management team is readily available to its investors and is mindful of retirementtheir interests while helping them reach their financial goals. portfolio.General Fund Information • Distributions are made quarterly • Distributions can be reinvested • Investors receive a quarterly newsletter featuring general interest articles, upcoming events, market information, and updates on financed projects • Minimum investment is $500. Additional investments may be made in increments of $100 • Investments will soon be RRSP and TFSA eligible through Self-Directed RRSP Programs Page 17
  17. 17. Mortgage Investing Mortgage Investment Criteria/Strategy • Each mortgage loan meets the necessary guidelines designed to mitigate as much risk as possible, while maintaining high yields. • Sufficient equity in collateral property. Loan-to-value is limited to 65% of the property’s value • Appraisals and independent value confirmation • Loans are short term, ranging from 6 to 30 months with no prepayment penalty • Collateral is land having a large equity cushion and upside potential • Loans are underwritten at 12%-15% interest The Fund is especially The investment strategy is to focus on the following market segments of the appealing to mortgage industry: investors who • Development Mortgages, including land acquisition, pre-development and infrastructure mortgages take comfort in • Construction Mortgage for the construction of multi-family residential or having their commercial developments investment • Term Financing Mortgages allowing the owner of completed or substantially dollars work completed revenue property to defer arranging long term financing untilresponsibly while conditions are favourable. seeking safety, high monthly Features and Benefits for Investors income, low Safetymanagement fees Mortgages are structured to minimize risk by limiting loans to 65% loan-to-valueand diversification ratio of the property. Risk is greatly minimized when there is sufficient equity within their remaining above all financing placed on the collateral property. investment portfolios. Diversification Investments are made in many different mortgages on many different properties in many different locations. Quarterly Payments & Investor Communications Distribution cheques are mailed quarterly, with newsletters reporting interesting related news and a calculation of the annualized return on investment. Quarterly and annual reports detail the financial condition and investment activities for the period. Low Volatility Mortgage investing is safe, predictable and dependable since the value of the mortgage and the interest received is fixed and not subject to wild market swings. Minimum Investment The minimum investment is $500 and there is no maximum. Investment may be increased at any time. No Hold - No Float The investment is eligible to receive distributions the first business day of the month following receipt of the paperwork and cheque. Page 18 BUILDING COMMUNITIES
  18. 18. Low Management FeesEnzo Financial Group, manager of the Limited Partnership, is paid an annualmanagement fee. All other fees earned by EFG are paid by the borrower.Investment Vehicles Other than CashSelf-directed traditional RRSPs and TFSAs will soon be able to invest.Experienced Management and Track RecordThe management team has a broad range of construction, finance, and investorrelations experience spanning over thirty years of real estate investing.The Fund ManagerThe Fund is managed by Enzo Financial Group Ltd. (EFG), the General Partner ofthe Enzo Mortgage Limited Partnership. EFG (an Alberta corporation) receives a feefor managing all of the business of the Fund and the limited partnership.Mortgages are managed by Enzo Fund Management Services Ltd. (EFMS), theMortgage Manager. All compensation paid to EFMS comes from the borrowers,except in connection with the disposition of properties, if any, acquired throughforeclosure.What Investors ReceiveInvestors receive Units the Fund. Investors receive cash distribution payments on aquarterly basis.Reserve and Investment DollarsEFMS is mindful of the need for reserves. An interest bearing cash reserve accounthas been established to deposit 4% of all investor capital; the reserve may be drawnon to pay for unforeseen events and emergency expenses that may arise as well as tofund start-up costs. The remaining 96% of the investment capital is scheduled to godirectly into making mortgage loans.ManagementThe Trustees and management the Enzo Financial Group and its affiliates havespecialized in Alberta and BC residential, recreational, and commercial propertyinvestments, including land development and construction. They have beenresponsible for the acquisition, funding, and development of over $32 million ofproperties.The Private Mortgage AdvantageMortgage loans are made to borrowers who are in need of a quick closing and whoare willing to pay a premium for the service. Conventional financing at times can betoo slow and cumbersome, with its red tape and regulations, and many great dealswould be lost without the speed and versatility of the private mortgage investor. Forthis speed and flexibility, certain borrowers are happy to pay interest that is three orfour points over rates charged by more conventional sources. Page 19
  19. 19. Mortgage Investing Property Profile EFG invests in mortgages secured by land. Investments are made in acquisition and development (A&D) loans to developers for new construction, or bridge loans for investors who need quick cash to take advantage of a great deal. These are loans to businesses which at times are secured personally by the principals. In addition to earning interest, the Fund may participate in the profits of borrowers projects. An A&D loan is used to provide equity for the purchase of property and pre- construction costs of development such as architectural, engineering, professional fees, permitting fees, etc., in preparation of obtaining a construction loan. A bridge loan is used between the termination of one loan and the expected beginning of another. Investors use bridge loans as a temporary fix to acquire property while obtaining permanent, low-cost financing. The Fund only makes mortgage loans and does not directly own property unless it is taken as a result of foreclosure. The Underwriting Process The screening process employed by EFG is designed for investors to have confidence in its solid investment security. Properties are appraised and a maximum loan-to- value is determined that will protect the Fund if the market turns down. Prior to closing, the properties are thoroughly inspected. After inspection of the property, the loan goes before the loan committee, which is made up of Trustees and senior officers of the company. Property values and loan viability are reviewed through comparable market analysis performed by third party experts, and contemplates a worst-case scenario before a loan amount is calculated. This is important because it is critical to loan the correct amount relative to the value of the collateral and other factors affecting the property. Any issues with the borrowers will also be taken into account. By lending conservatively, the committee attempts to increase the margin of safety. Loans may be made up to 65% of a propertys value and will include all financing on the property, unless there are extenuating circumstances that dictate otherwise. A 65% LTV is usually more than adequate to ensure a return of all principal, interest and costs, and even a profit, in the event of a problem developing. Each loan is thoroughly documented by both staff and outside professionals. In the process, a title search and report is obtained and reviewed on each property and, at closing, a promissory note and mortgage is executed by the borrower. The mortgage is promptly recorded at Land Titles so that the world is put on notice that the Fund has a security interest in the property. It is the mandate of EFG to assemble many satisfied investors. Expertise and experience are used to lower risk to a minimum with the same eye toward prudence and safety that has made its principals and affiliates a success. The Mechanics The specifics of the loan are written in a promissory note and a mortgage which is a pledge of real property that serves as the security or collateral for the loan. ThePage 20 BUILDING COMMUNITIES
  20. 20. mortgage is recorded at Land Titles so that anyone checking the title to the propertywill see that it has been pledged as security for a loan.The borrower (mortgagor) signs the note and mortgage, which is then recorded.Possession of the property is retained by the borrower, with the right to use it,encumber it, or sell it. EFG (mortgagee, lender) holds the mortgage to the propertywith the power of sale until all the conditions of the loan are fulfilled. If theborrower has fulfilled his obligations, the lien is removed from the property. Themortgage lien is the legally recognized hold or claim of the investor on the propertyuntil the loan is repaid. If the borrower defaults on the loan, a foreclosure isinstituted by the lender.Once the loan is repaid in full, EFG issues a Satisfaction of Mortgage as proof thatthe loan has been repaid.Enzo Fund Management Services Ltd.Mortgage ManagerAs Mortgage Manager, Enzo Fund Management Services Ltd. will source mortgageseither directly or through intermediaries such as mortgage brokerages, banks, trustcompanies, lawyers, and accountants. The Mortgage Manager’s experience in thebusiness of sourcing and underwriting mortgages enables the Mortgage Manager tomake prudent investment decisions and identify sound investment opportunities.Enzo Financial Group Ltd.General Partner, Enzo Mortgage Limited PartnershipThe Fund is managed by Enzo Financial Group Ltd. This is the company thathandles the administration of the fund including accounting, tax reporting and legalconsiderations. Enzo Financial Group is responsible for developing crucial resourcesin the areas of finance, investor relations and networking, joint venturepartnerships, management, and marketing expertise all geared toward futureexpansion. Our short-term activities are supportive of The Enzo Group ofCompanies long-term vision of growth and profitability. Our collective goal is tocontinue building on a solid foundation that will ensure a future of prosperity andgrowth for ourselves, our investors, partners, and the communities we serve andimprove. http://www.enzofinancial.comEnzo Developments Inc.DeveloperEnzo Developments is a privately owned real estate development company. Aprimary component of the Fund’s success will be the synergies developed byutilizing Enzo Development’s expertise to source and manage projects. EDI hasbeen active in the ownership and development of Western Canadian residential,commercial, and recreational property since 2002. The company is well established Page 21
  21. 21. Mortgage Investing as a knowledgeable and creative real estate developer. A major component of every Enzo project is to make sure each one serves a strategic purpose such as gaining a foothold in a new market, enhancing its portfolio or strengthening a bond with a joint venture partner. EDI is committed to rock-solid, steady and long term growth through carefully selected alliances with companies that complement its investment model of acquiring and developing value-added projects. EDI provides in-house project management, asset management, and construction Enzo Financial services for all of its projects. Management believes that nobody takes better care of Group is an asset than the owner, and attention to detail regarding all aspects of real estate responsible for investment and development is best kept close to home.developing crucial Our business model is straightforward. To qualify for acquisition, properties resources in the (including land) must have significant upgrading possibilities and superior location areas of finance, in a strong, growing market area. EDI upgrades and adds value to these propertiesinvestor relations and in doing so significantly increases their market value. and networking, joint venture Investment Strategies partnerships,management, and Growth and Market Opportunity marketing EDI has positioned itself to take advantage of the many opportunities being expertise all presented in the marketplace due to the current recession/depression in the real geared toward estate industry. Much the same as the real estate recessions of the 1990’s and againfuture expansion. at the turn of the century, the timing is right to invest contrary to impatient and scared money currently exiting out of real estate. Like the earlier real estate recessions, it is times like these when fortunes are made. Creative Solutions for Complex Problems: Distressed Properties, Distressed Sellers Enzo Developments is an opportunistic investor, focusing on acquiring land or existing properties that is undervalued or is distressed due to mismanagement or mismarketing. Owners may be experiencing issues such as retirement, adverse health or family matters, or financial pressures due to negative cash flow, bankruptcy, taxes, etc. EDI uses its collective problem solving expertise to take advantage of such situations, while offering the seller a solution to the problem. Circumstances like these create opportunities. Enzo Developments is a streamlined real estate development company that has positioned itself to take advantage of such situations. EDI can move with great speed to take a problem property off a grateful owner’s hands. EDI has the experience to recognize opportunities and specializes in creative problem solving, resulting in a win-win transaction. Risk/Reward Factor Enzo Developments Inc. is an operating company. The properties we purchase are assigned to a separate, wholly-owned affiliate, which insulates each of them from liability the others may incur. More importantly, and to further mitigate risk and reap the greatest rewards, Enzo Developments seeks out and purchases recreational, industrial, and commercial properties in superior locations at prices below market Page 22 BUILDING COMMUNITIES
  22. 22. rate. When EDI buys and improves the land/property, it substantially increasesequity values.The speed and flexibility of EDIs quick access to capital to move a project from startto sale or refinance in the shortest time possible acts to further minimize the riskinherent in taking an unnecessarily protracted period of time to complete a project.In the event of refinance, conservative leverage (low loan-to-value, LTV) is used tokeep debt service to a minimum and cash flow to a maximum. When these strategiesare strictly adhered to, risk is reduced to acceptable levels.Joint Ventures & PartnershipsEnzo Developments seeks to partner with equity investors on some of its projects.EDI will provide acquisition and management expertise, arrange financing andcontribute its own cash to close the deal. Keeping debt to a minimum helps to makethe most of cash flow and enhances the propertys security.Market Cycles and Counter-cyclical PurchasingThe real estate market is cyclical, with periods of growth and contraction. The fourdistinct phases of the cycle are Recession, Recovery, Expansion and Contraction,and they move in that order. If you know where we are in the current cycle, andwhere weve been, you can accurately predict where we are headed. While themarket is now in the Recession Phase of the current cycle, the timing is perfect toreap big profits down the road, in the expansion and contraction phase. One thing iscertain, cycles will repeat – that’s why they are called cycles. Those with thediscipline to invest contrarian, like Enzo Developments, will reap the rewards.When the market is down, what is the direction it is most likely to go? Likewise, Enzo when the market is up, what is the direction Developments is it is most likely to go? an opportunistic Value-added Investing investor, focusing EDI searches for possible acquisitions only on acquiring land in situations where values can be greatly or existing enhanced by creative project planning, properties that is zoning changes, engineering, etc. or making undervalued or is changes to the existing project’s physical distressed due to structures, management or marketing. This mismanagement is known as value-added investing. or mismarketing.Business PrinciplesEnzo Developments expects and delivers the highest levels of performance in all ofits dealings, whether with individuals or corporate entities. Our basic principles are:Commitment to IntegrityAt Enzo Developments we take seriously our responsibilities of honest dealings,fairness and integrity. Our reputation of offering a fair, open and honest personaland corporate culture is the key to our success, and it will continue to be the bedrockof our future growth. Page 23
  23. 23. Mortgage Investing Highest and Best Use of Assets EDI’s management constantly reviews and analyzes our assets and resources, whether company owned, affiliate owned or joint ventured. Periodic scrutiny of the properties in our control assures they will achieve their highest and best use. EDI makes a point to stay abreast of current and future market trends, which allows us to make the highest and best use of our assets. Maximization of Returns Every property/project is carefully analyzed before purchase to create a post-closing plan to reduce risks, make the best use of resources and maximize future returns. A carefully planned exit strategy is an essential ingredient of each property we decide to develop. Agility and Flexibility Agility and preparation pave the way for the quick response necessary to take advantage of the best opportunities as they appear. EDI is prepared to quickly analyze a possible transaction and make a go, no-go determination. This is a necessary attribute in a fiercely competitive and unforgiving business environment. We know from experience that flexibility is key to overcoming obstacles. Life often deals a hand that forces us to look at situations in a different light. EDI has the creativity to parry its way to suitable outcomes, resolving problems as they arise. Open-door Communication Enzo Development’s management has an open-door policy with employees, investors and other business contacts. All opinions are valued – everyone is encouraged to offer their insight and no topic is off limits. Management understands that innovation and a fresh look can provide the seeds for healthy growth. ********** What have your investments done for you recently? Have you built your nest egg? Have you been able to live your life? With the ups and downs of the stock market and poorly paying GICs, have your savings taken you where you really want to go? Enzo Financial Group may provide the solution to the problem. Our Unitholders earn substantial returns paid out in cash every three months, providing them with an alternative income stream they can enjoy … now. Request more information … complete the next page ——> To express interest in the Enzo Mortgage Investment Fund (EMIF), please complete and email or mail the following page. We will send you a Subscription Agreement and the Offering Memorandum for your review ... any questions you have will be answered prior to subscribing. We encourage you to read the agreements thoroughly. To save you time, we will send you the forms pre- completed with the information you supply here.Page 24 BUILDING COMMUNITIES
  24. 24. 1. Name: _______________________________________ 2. Referred by: _______________________________3. I wish to use ___RRSP ___non-RRSP ___TFSA funds ___ Cash for this investment.4. Number of dollars (rounded to nearest $100 you wish to reserve for EMIF units: $ _____________Legal name of individual(s) or corporate entity that you wish to appear on the Unitholder records. This information willbe used to generate a customized subscription form ready for your approval. SIN number will be kept on record togenerate a tax slip. 5. First Name: First Name: Corporate Name: 6. Last Name: Last Name: 7. Title: Title: 8. SIN: SIN: BIN: 9. Date of Birth: Date of Birth:10. Address: Address: Address:11. City: City: City:12. Prov: Postal Code: Prov: Postal Code: Prov: Postal Code: Please circle your daytime phone number13. Home Phone: Home Phone: Phone:14. Business Phone: Business Phone15. Cell: Cell: Cell:16. Fax: Fax: Fax:17. Email: Email: Email:18. I ___have ___have not read the EFG Mortgage Investing Booklet completely.19. ___ I would like to speak with someone from Enzo Mortgage Investment Fund. Please contact me at: _ ___20. Email Expression of Interest form to: diane@enzofinancial.com OR Mail to: Enzo Mortgage Investment Fund, PO Box 5561, High River, AB T1V 1M6

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