JF1126: Bad Things Happen – Jorge Newbery Helps Families Stay In Their Homes When They Do
If you think you’re in a tough spot, listen to Jorge’s story, or even better, read about it in his book Burn Zones. He lost it all and made a company inspired from that loss. American Homeowner Preservation buys distressed and non-performing notes, and works with the families to either stay in their homes, or get out from under them without foreclosure. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
-Founder and CEO of American Homeowner Preservation LLC
-Utilizes Regulation A+ to crowdfund the purchase of nonperforming mortgages from banks at big discounts
-Accepts both accredited and non-accredited investors, and the minimum investment is just $100
-After natural disaster in ‘04 left him $26M in debt and now helps others to rebuild after unaffordable debt
-Regular contributor to Huffington Post and Author of Burn Zones and Debt Cleanse
-Based in Chicago, Illinois
-Say hi to him at www.ahpfund.com
-Best Ever Book: Fierce Conversations
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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, Jorge Newberry. How are you doing, my friend?
Jorge Newbery: Good, good. Thanks for having me, Joe.
Joe Fairless: My pleasure, nice to have you on the show. You are an interview guest by request. One of my investors/loyal listeners – he was like “Jorge Newberry is doing some amazing things and you should interview him”, and I was like “Okay, I will.” You’ve actually been on the show before, in a roundtable, probably two and a half years ago, and I’m looking forward to having a focused conversation with you.
A little bit about Jorge – he is the founder and CEO of American Homeowner Preservation. He utilizes Regulation A+ to crowdfund the purchase of non-performing mortgages from banks at big discounts. He is based in Chicago, Illinois, and you can say hi to him at his company website, AHPFund.com. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Jorge Newbery: Sure. My background is I’ve been in real estate for 27 years. I started out working for a mortgage company; within a couple years I started my own mortgage company and I progressed into buying properties. I eventually built a portfolio of over 4,000 apartments across the country, and then an eye storm hit my biggest complex, which was 1,100 units, and it kind of triggered a freak series of events, which ended up with me losing everything and actually being 26 million dollars in debt, which I could not pay.
So it was going from tens of millions in net worth, 4,000 apartments, to essentially nothing, and even a negative. It was a humbling situation, but I tried to make the best of it by starting this company, which is American Homeowner Preservation. What we do is we purchase pools of defaulted mortgages from banks and hedge funds, and then we try to use my experience as a debtor overwhelmed with debt to craft novel strategies to reach out to these homeowners and achieve consensual solutions expeditiously, which do two things – we deliver financially transformative solutions to the families, as well as generate extraordinary returns financially for our investors. So it sounds cliché, but it’s a win/win/win, all around. The only loser, you could argue, is the bank or the hedge fund, but we’re basically paying what they would sell these loans for anyway. We’re executing strategies that recover faster than most of the other firms in this space.
Joe Fairless: I wanna focus the majority of our time on the American Homeowner Preservation company, but clearly, I have to ask about the eye storm, just to close the loop on that. An eye storm hits over a thousand of your units, that triggered a series of events where you lost everything… Will you elaborate?
Jorge Newbery: Sure. So one thing I didn’t know was that if you have a really large insurance claim, the insurance companies will do everything they can to not pay it. In fact, in this case we had to go to court to get them to pay extraordinary damages at this property. It took a lawsuit and 11 months before they settled, and when you have 1,100 units, with many home units that were barely habitable as a result of the storm (or inhabitable), resulted in the city taking action against me to try to evacuate the property and whatnot. I got a temporary restraining order against the city…
We ended up in a high profile public battle which ended up very negative. But to prevent that, first I’d started borrowing on all my buildings that were doing well. I took loans on those to try to do the rehab, but I just couldn’t borrow enough, there was so much damage. And just to give you an indication, in the end I settled for 32 million dollars, so a huge amount of money [unintelligible [00:05:07].13] “That’s great, congratulations!”, but no, it’s really the opposite, because the damages were over 45 million dollars, and I had exhausted all my resources. When I finally got the 32 million I paid back some of the contractors and what not, and even then it wasn’t enough.
By that point I was in a battle with the city, and – cliché to say, you can’t fight the city hall, and really I couldn’t. I used a lot of resources legally against the insurance company, then against the city, and in the end I lost. The city owns the property today. The city wanted the property, they got the property, and it was such a crazy series of events…
There’s a political theater. Once in a while you hear about somebody who’s just taking a beating in the press, and you’re thinking “What happened here?” In this case it was me. I was actually arrested, and it was pure political theater; I had no criminal record, but they arrested me, and it was front page in the media there, and it was all this kind of exercise to eventually get the property.
So the city owns the property today, it’s the largest property in the city of Columbus, and it was so crazy that I eventually wrote a book about it, because I couldn’t keep explaining… It’s a book called Burn Zones, which I should get you a copy, Joe. Actually, if any of your listeners want it, just let me know. Send me an e-mail and I’ll send you a free copy, a signed copy even.
It tells the story of how I made millions and how I lost millions, and now the burst of American Homeowner Preservation.
Joe Fairless: Wow. Is it available on Amazon as well?
Jorge Newbery: Absolutely.
Joe Fairless: Okay, I’m just gonna buy it on Amazon, I’ll do that. So one final question I do have to ask – 45 million dollars from an eye storm? What happened?!
Jorge Newbery: So here’s what happened – so you have three-story buildings… We had 122 three-story buildings. The eye storm knocked out power to 40% of the city, including all of our units, and temperatures were -8. So what happened is the power goes out, then the boilers that pump — we had radiant heat, so the boilers that pumped the hot water through all the units to keep them warm, power goes down, water stops pumping. And -8. So all the water that was in those pipes froze and then burst once it started heating up again, and then all the domestic water froze and also burst.
We had 1,100 units which had no electric and no water. There were thousands of families living there. The Red Cross even opened up a shelter across the street. It was the largest federally declared disaster in Ohio history, and we were probably one of the largest single point of damage. So it was a challenging situation, and we called in a international disaster remediation company that was recommended, and [unintelligible [00:07:49].27] they ended up running huge bills. They had hundreds of people there every day, they were pumping water out of the basement, they were trying to dry the units, they were providing temporary power, we had the power trucked in, because we were out of power for four days, and we had power trucked in from all over the North-East, these big generators. It was a disaster area, so almost half of that money went for mitigation.
In fairness, I kind of trusted them, and they kind of ran out of control in terms of running up these bills, and [unintelligible [00:08:18].12] because it was just so much money.
I was naive, I had never been in a situation like that. That was close to 20, and then the rebuilding was just a huge ordeal, 1,100 units. You divide 25 million by 1,100 units and then you start seeing “Well, actually, per unit it’s 22k”, and everything had mold, so they had to take it down… It was a really bad situation, let’s just say.
In the end, the property was demolished; the city owns it, it’s 54 acres. They have a high school on a part of it, and they’re doing some other development on it. The problem was it was a lower income property in one of the highest income areas of Columbus, so they really saw it as an opportunity to get rid of the tenants at this property, and that’s what happened. It’s all in the book.
Joe Fairless: I just purchased it. Burn Zones: Playing Life’s Bad Hands. I just bought it on Amazon. It’s arriving in two days from now, and I will read it probably in 24 hours. This is fascinating. Thank you for sharing your story about that, by the way, because there’s a lot of lessons learned, but then also perspective, because hey, this tremendous thing happened to you, and you’re still living and breathing and talking about it, and you’ve overcome it now. You’ve got American Homeowner Preservation, so now let’s focus on that.
Basically, from how I heard you describe it, you’re basically buying distressed notes and then trying to make them perform again – is that basically what you’re doing?
Jorge Newberry: That is exactly right. We make them perform again, or find some other resolution, preferably consensual, that resolves that note. So we reach out to the family and we give them three options. Number one, “If you wanna stay, here’s what your new payment will be.”
Let me give you an example. Someone owes $100,000. Maybe they bought the home 10 years ago, at the height of the last bubble. Then the property value dropped, so now it’s worth 50k. We can probably buy that loan for around 15k-20k. Now, with that kind of discount, we can go to that family and say “Hey, your old payment was $800. We can drop it to $500. You haven’t paid in three years (which is really common), so you owe $20,000 in delinquent payment. Give us $2,000 and we’ll forgive the difference.” If they wanna stay, if that’s a great deal for them, that’s what they’ll do. If they don’t wanna stay, we say “Hey, we’ll give you $1,000, we’ll forgive the loan, and then we’ll get a deed in lieu, and we will sell the property to a third-party.
The final one is “If you wanna do a lump sum settlement, you owe 100k, it’s worth 50k – we’ll take 45k and forgive the difference and release the mortgage.”
Most of the people do the first two – they wanna stay, they’ll do a modification. If they don’t wanna stay, they’ll do a deed in lieu and take the cash. And we’re indifferent, we don’t push — I think a lot of people get in trouble in this business because they come in saying “Hey, I need to do one of two things. I wanna get everyone to reperform. I wanna get everybody to get kicked out of their home and sell the REO”, and you can’t really mandate to the families.
I think how we’re so successful is two ways. How we separate ourselves from the pack is that we’re indifferent. We’ll give them the options, the numbers are there, and the numbers are all formulaic. If a home is worth $50,000, then if it’s in California [unintelligible [00:11:35].17] or Kansas, everybody is gonna get the same terms.
The first day we talk to the family we’re gonna give them “Here are the real numbers in terms of what you can do, and if you wanna go ahead, you’ll have the document the next day. It’s going to go very fast. And if you’re leaving, then we’ll have a mobile notary there within a couple days with a check you signed, you get the check and it’s done.”
We try to make it very fast, very easy, and that’s what really works. It’s not aggressive, it’s not trying to squeeze the most money you can out of them; we just try and buy a lot of loans, run them through the formula and try to make it work.
Joe Fairless: I’ve got the first two written down… I was trying to capture the third solution that you offer – what was it again?
Jorge Newberry: The third one is a lump sum settlement. Sometimes someone owes 100k and the house is worth 50k. We’ll say “Hey, we’ll take 45k”, and once in a while, people between and friends and family members they cobble together the cash, or they have maybe an adult child who wasn’t on the original loan, and can now qualify for new financing to buy the home from their parents, as an example.
In today’s low rates, it’s gotta be a fantastic deal – the family stays in the home, the adult child lives there, and that has worked out really well in those circumstances online. This is all a result of — when I had 26 million dollars in debt, creditors would come to me and they’d do one of two things. I said, “Hey, I wanna work out a payment plan.” They would send me an application, I’d have to send all these documents back, tax returns, paycheck stubs and what not, and they determine based on that what they could squeeze out of me, and they’d try to get the highest payment possible that they thought I could afford without making it unaffordable. It was also a long back-and-forth.
When somebody would say “Hey, you owe us a million bucks. We know you don’t have it, but you can come up with 100k and we’ll forgive the difference.” Someone came to me with that deal. Okay, well now I know kind of what I’m working with, so let me see if I can find a way to make that work. Based on those lessons – that’s what we do here. I give them the numbers and they say “We’re going.” Sometimes people say “Hey, that payment works for me, I’ll do it”, and sometimes they say “Hey, that payment is much cheaper; I could really easily afford that. I really could afford twice.” I don’t want the extra money; save it, because the 500 is gonna make us a great return, so we’re happy with it.
So we’re trying to make it super simple, super transparent, and I think that’s what’s really working for us.
Joe Fairless: So it’s not based on their financial circumstances, it’s strictly based on what numbers make sense for you based on the acquisition price that you have.
Jorge Newberry: Yeah, which is a factor of the value of the property. Everything is a formula based on the value of the property. It’s always going to be something that the family will almost look at as being too good to be true. But despite that, it’s still gonna generate pretty extraordinary returns for us and our investors.
Joe Fairless: A big piece of the puzzle is getting the enough equity on the front-end in order to have the negotiating leeway to make it a win/win for everyone involved.
Jorge Newberry: You’re absolutely right. We make our money when we buy the loan. If we pay too much, that’s going to negatively impact our returns. If we buy right, then we made our money, we just now have to execute the strategies.
Joe Fairless: Is that your biggest challenge in this business, to get enough deals or loans that have the value there?
Jorge Newberry: At this very moment the answer is yes. The market is very heated. Just like the real estate market, it’s gotten very hot; so is the non-performing note market. There’s a lot of competition and that’s driven the prices up, so what we’ve ended up doing, and we’ve been fortunate so far this year – we have found some decent-sized pools where there’ve been a lot of extraordinary circumstances which has made it so we’ve been able to buy them without much competition, and we bought 1,300 loans in the last 90 days, which is probably double what we bought last year, and we bought them extremely cheap.
One was from a bankrupt lender, they were a bankruptcy trustee sale, and the other was the court ordered sale. That’s going to keep us busy all year, and we bought those exceptionally well. Our returns last year was 39.7%, and that’s based on an audit that’s filed with the SEC. This year we’re shooting to do even better.
Joe Fairless: Are you market-specific or does it not matter? My question was gonna be “How do you pick the market?” but does it not matter to you?
Jorge Newberry: It doesn’t matter to us, and that’s why I think sellers like us, because we’ll buy everywhere. If they have a loan — we bought in every state of the union except for Wyoming and North Dakota, and hopefully we will buy there eventually. We bought in Alaska, in Hawaii, and even in Puerto Rico. So a lender can come to us and say — the last pool was 799 loans; they can come to us and say “Hey, here are 799 loans scattered (they were in 39 different states, plus Puerto Rico) and we want you to buy them all.” For lenders lots of times it’s a hassle when people say “Oh, just give me California” or “Just give me New York.” Once they decided to sell, they wanna sell everything, and it’s much easier to just do one sale to one buyer. So we really fill that niche.
Even if the loan is some kind of crazy litigation situation or the property has been demolished by the city, we’ll still buy that loan. We may pay a dollar for it, which we buy a lot of loans for one dollar, but we’re gonna move it off their servicing platform and onto hours, and it’s gone. So we’ll buy every single loan they have. That gives us a considerable advantage over a lot of other lenders who maybe don’t have the flexibility to take on some of the stuff we do.
Joe Fairless: I understand the business model for how the overall operation makes money. You have investors who invest alongside in these opportunities, correct?
Jorge Newberry: Correct.
Joe Fairless: Okay, so how does your company make money? What fees do you charge?
Jorge Newberry: Sure. We charge a 2% annual management fee, which really basically offsets operations. Our big money is on the back-end. Here’s how the revenue flows – first, each month’s expenses are paid, management fees paid, and then we pay the first 12% to investors, basically 1%/month. Any extra money is used to buy more mortgages. The fund’s always five years, so the first 2-3 years of the fund we’ll reinvest in additional mortgages, but sometime in the third year we’ll stop doing that, and over the second half of the fund, each month the investors will receive their 1% on their outstanding investment, plus any extra money we’ll return it to them with the goal that at the end of the 5th year all investors have received their 12% plus all their capital back. Whatever is left is ours.
If we continue to do 39%, then that pie at the end will be pretty significant, and all our investors are paid back, they’re happy they have their 12%, so everyone — cliché, once again, but win/win/win, everybody’s happy. But ours is back-loaded. I don’t like Wall-Street where lots of times some of their compensation is front-loaded. We wanna earn the money, give them back their money, and if we do that and there’s a big reward and if there’s some big disruption which for whatever reason our returns sink, then we still wanna give the investors back their money and their returns, and then we just end up with a shrunken pie at the end.
Joe Fairless: Based on your experience in over 27 years of real estate, what is your best real estate investing advice ever?
Jorge Newberry: Be patient. The markets are cyclical. Never believe that you’re in a market like today, that this is going to be sustainable. At this moment in time right now there’s a lot of people who feel the money is easy, they feel compelled to buy properties or buy notes, and they lose a little bit of discipline. Then the market cycle goes the other direction, and all of a sudden they’re like “What happened? What happened?” and they’re trying to cut their losses or what not.
Right now we’re not competing in bids, and I’m okay on the sidelines more or less, and I’ll be there for the next six months or the next year, just buying opportunistically, and if that means I don’t buy that much, that’s fine. Because when there’s disruption in the market, that’s when I wanna be liquid, that’s when I wanna be nimble, and that’s where all the opportunities present themselves.
This isn’t a business where you have to do a deal a month or 20 deals. If you can do a deal that just makes a lot of money and you maximize the return on that, look for those opportunities and be ready. In any kind of competition or any kind of game, you wait, wait, wait, and when the opportunity is there, you run and you take it. But you can’t try to say “Hey, this year I’m gonna put out 50 million dollars, because I don’t know if I’m gonna have the opportunities to do so. So be patient, and when the opportunity is there and the market is disrupted and everybody is running one direction, that’s the time you wanna have the capital to be running the other direction, against the crowd, buying when everyone is selling… So I’m looking forward to that.
I think the market is still hot right now, but that downward portion of the cycle isn’t far off, and that should be a great time. I think we’ve set ourselves up. We raise money online – $100 minimum investment, you can invest in a couple of minutes. So we’ve really streamlined it [unintelligible [00:20:31].28] we have some good technology… I think we’re really primed for when this disruption happens that we can really turn this up and expand significantly. Anyone out there, that’s what I would do. It’s not just specific to this portion of the cycle… Just be there. Don’t feel you have to buy. Be disciplined, know what your strategy is, and when the opportunities present themselves, get them.
People always get bogged down with a whole bunch of stuff where there’s kind of really modest returns. Look for those big opportunities. Sometimes you have to take risk to get them. I used to buy the worst properties across the country and turn them around. So I took big risks, but I did the work to make them pay off, and generally – barring the eye storm – they did.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Jorge Newberry: Yeah, let’s do it.
Joe Fairless: Alright. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve read?
Jorge Newberry: Best ever book I’ve read… You’re stomping me, Joe… You’re stomping me. But I would say there’s a really good book that I’m reading right now which is called Fierce Conversations. I would say that’s a great book, so that’s top of my list right now.
Joe Fairless: Best ever deal you’ve done?
Jorge Newberry: Short-term memory – the 799, we stole it. Was 799 mortgages, we paid under three million dollars for it – we paid 2.875 for over 40 million dollars in debt. That was a steal. And again, odd circumstances lead to that, but it worked out. So that was my best ever deal that I can think of right now.
Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about?
Jorge Newberry: I made a lot of mistakes, and you just try to learn from them. I’m trying to think about a specific one where I said “Oh, I really went out on a limb and that one didn’t work.”
Joe Fairless: If nothing comes to mind, we’ve thoroughly covered one of them already, so that’s okay.
Jorge Newberry: Yeah, [unintelligible [00:23:12].17] that’s my biggest mistake in my life. How I responded to it – it’s not so much the eye storm happened, but I wasn’t nimble. I had just what I described, I can get tunnel vision, “I’m gonna rebuild this.” I should have really closed the property, taken the insurance settlement and just wash my hands and walked away, and paid off all my investors, and it would have been much easier. In the end, that’s kind of settled me for the last decade. So be nimble. When chaos presents itself, take a wide view. I didn’t do that.
Joe Fairless: What’s the best ever way you like to give back?
Jorge Newberry: Keep families in their homes. Really, I know what it feels to be overburdened with debt, so if anyone calls me with advice, like “I can’t afford my mortgage, I can’t afford my credit cards, I can’t afford my student loans, my kid can’t afford their student loans”, I can tell them what to do to settle that loan at a discount and get rid of that on affordable debt. That’s a huge thing for me. I think the majority of Americans are overburdened with debt, and that needs to stop.
Joe Fairless: How can the Best Ever listeners get in touch with you?
Jorge Newberry: The website is AHPFun.com. You can simply e-mail firstname.lastname@example.org and ask me, and [unintelligible [00:24:15].27]
Joe Fairless: Well, clearly, a big lesson learned on the frontend, and then how you responded – not only immediately after what was happening, where you just talked about having the wide view, but building the company that you have now, American Homeowner Preservation, and the type of approach that you take, helping families stay in their homes because you’re purchasing these at a discount, or giving them one other option to make things work.
I appreciate you talking about that, and also talking about how your business makes money, how you structure it with investors; that’s always a point of curiosity for the Best Ever listeners. Thanks for being on the show, thanks for having a candid conversation with us about what you’ve been through and what you’re currently focused on.
I hope you have a best ever day, and we’ll talk to you soon.
Jorge Newberry: Alright, thanks, Joe.