JF1342: How To Buy Non-Performing Notes & Keep People In Their Homes #SkillSetSunday with Jorge Newbery
Jorge owned over 4000 apartment units before losing it all. He wrote about that experience in his book, Burn Zones. Now Jorge helps people stay in their homes when they can’t afford their mortgages anymore through loan modifications. Jorge also helps other investors do the same thing as him. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Jorge Newbery Real Estate Background:
– Founder of American Homeowner Preservation LLC
– AHP utilizes Regulation A+ to crowdfund the purchase of non-performing mortgages from lenders at big discounts
– Author of Forbes Real Estate Council and amazon best-selling book Burn Zones
– Principal in mortgage, property management brokerage firms and have held real estate licenses in nine states
– Based in Chicago, Illinois
– Say hi to him at: www.notebuyerbootcamp.com
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Joe Fairless: Best Ever listeners, how are you doing? 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, Jorge?
Jorge Newberry: Hey. Good, Joe. Thanks for having me on.
Joe Fairless: My pleasure, nice to catch up with you again. I saw you in Denver at our conference a couple months ago(ish), and really enjoyed meeting you. I feel like I’d met you in person before, but if not, then I really enjoyed meeting you in person… But the reason why I felt that is because I’ve read your book, as I’ve told you before, and other people who I come across in life on a – I say this as much as I can, it is a must read for apartment investors; real estate investors in general, but really apartment investors, because it talks about pros and cons of how things can go up and things can go down with apartment investing in particular. The book is called Burn Zones, so I recommend reading that, Best Ever listeners.
Then also what Jorge does now – he is the founder of American Homeowner Preservation. American Homeowner Preservation utilizes regulation A+ to crowdfund the purchase of non-performing mortgages from lenders at big discounts, and also help homeowners stay in their homes.
Jorge has also recently been doing a program where he’s helping others – he’s training people how to do what they do to buy non-performing mortgages, so we’re gonna talk about that, and that is the focus of our conversation today… It is if you are curious about how to do what his company does for yourself, then you came to the right spot.
If you wanna hear his best ever advice, go to episode 1126, titled “Bad Things Happen. Jorge Newberry Helps Families Stay in Their Homes When They Do”, so episode 1126, you can hear more about Jorge. With that being said, Jorge, do you wanna just briefly give a background so the Best Ever listeners have some context? Then we’ll dive into the training.
Jorge Newberry: Absolutely. You touched on it, but I’ll give you the short story. About 15 years ago I owned about 4,000 apartments across the country, had a net worth in the tens of millions, and an ice storm hit my biggest holding and triggered this extraordinary sequence of events where I lost everything and ended up 26 million dollars in debt. That was more or less 2005-2006.
I was looking for a means to rebuild, and then I started hearing about the rumblings of the housing crisis and the mortgage crisis, and I thought hey, I just went through this ordeal and I survived, and now I see all these other families (millions of families in America) homeowners who are facing the same financial collapse that I did… And how can I help them? How can I use my experiences to devise strategies to buy their debt from banks and hedge funds at big discounts, and then we work that debt if they wanna stay in their home, but at much more affordable payments, reduce their delinquency… And that’s how AHP started. We started in 2008, so we’re almost 10 years old, and it’s kind of evolved over the years into an investment fund which is now people can invest online $100 and support the mission.
We buy a lot of loans. We bought more than 2,500 loans last year, over 100 million dollars in debt, at huge discounts, and that’s what we continue to do. We see there’s a big opportunity, and once the market turns the other direction, we’ll see it as an even greater opportunity.
Joe Fairless: Because the worse the market is – to put it crassly – the better your business is.
Jorge Newberry: Yeah, and it’s not like we hope people get in trouble with their mortgage, it’s just a by-product of a downturn in the market, and I guess the way to look at it is that we hope that families will need assistance at that point, and we’ll be able to assist them. And literally, when we work a mortgage, it’s not “Hey, we’re cutting your payment by a few bucks.” We can cut payments in half, we can forgive tens of thousands of dollars in delinquent payments or principal if we want.
We buy these at such discounts we have huge flexibility in terms of what we can do to make it. What you really wanna do is provide a solution so that the homeowner is saying “Hey, this is a great deal. I wanna pay you each month, because my payment is half of what I used to pay”, and you’re delivering a financial transformation, which also ends up yielding you a good return, because these things are sold at such great discounts often times.
Joe Fairless: And do you take accreditted and non-accreditted investors?
Jorge Newberry: Yeah, that’s what’s really exciting in our current fund – we accept both accreditted and non-acreditted investors.
Joe Fairless: And what type of returns have you historically achieved?
Jorge Newberry: We pay our first 12% to investors, and historically we’ve been paying that. And the actual returns, what do we generate – we’ve been generating 20% to 30%; our audit financials for 2016 we were I think 39.7%, so very high returns. It’s gonna drop down; the first year is usually the highest, but it’s still gonna be in the 20s and 30s.
Joe Fairless: And you said first 12% to investors, so is that 12% to investors and then the difference to your company, or is it split? Is there some sort of other performance hurdle?
Jorge Newberry: No, the difference goes to our company. We basically get everything over the 12%, but we don’t get it right away. What we do is in the first years of the fund we reinvest any money that’s over the 12%. That just gets reinvested in new mortgages, so if there’s a downturn, if for whatever reason our returns get low for a moment, then we haven’t just distributed to ourselves; it just stays in the fund and there’s more and more assets in the fund.
The goal is at the end of five years all investors are paid back both their investment capital and their 12% return, and whatever is left is ours. I know the number from mid-2017, it’s accumulated profits… So in our first year of operation in this particular fund we generated around a million and a half in accumulated profits; so that’s profit over and above what we paid to investors, so that money was utilized to repurchase mortgages, and eventually if we were to liquidate the fund today, then that money would go to us.
Joe Fairless: And is that 12% annualized return?
Jorge Newberry: It’s 12% annual return and we distributed it at 1%/month.
Joe Fairless: Sweet. Alright. So now let’s talk about training people – and by people, I mean me and everyone listening, the Best Ever listenters that are listening – how we can buy a non-performing mortgage at the discount where we’re able to then cut the mortgage payment in half to the owner?
Jorge Newberry: I’m gonna tell you two stories which will probably help illustrate this business. The first one is how difficult it is to get into this business. If anybody out there has tried and has not been successful, I sympathize, because when we started… You don’t just call CitiBank and say “Hey, get me to your department that sells your non-performing mortgages.” They’re just like, “Hey, we don’t have that department.” So I could not figure it out, and finally what I did was I read a news story about [unintelligible [00:08:01].13] They were purchased by Bank of America and they laid off the CEO… So I said “Well, that guy probably knows the guy who I need to talk to.” So I reached out to him on LinkedIn, and he accepted my connection, and I sent him a message saying “Hey, can you help introduce me to the people that can sell me defaulted mortgages?” Thankfully, he replied and he made me a proposal, I should say.
Again, he was unemployed at the time, so he said “Wire me $4,000 and then fly to New York and I’ll spend a day with you and I’ll take you to all the sellers I know.” At first I was thinking “This sounds kind of weird”, but he was a real guy; I’d read news stories about him, so I said “Let me do it.” I sent the $4,000, and I flew to New York…
Joe Fairless: Any paperwork?
Jorge Newberry: No paperwork, all LinkedIn messages. That was the extent of our paperwork. I guess it was pretty — well, it was $4,000… So what we did was we ended up flying to New York and he took me around to Bank of America, he took me around to all these different lenders, and it ended up being a highly productive day. We went to a number of big hedge funds, and again, Bank of America, and a month later we were buying loans.
At that point in the market – it was a point where the banks and hedge funds would sell to just about anybody who was willing to buy, because there was such an oversupply of loans.
Now, fast-forward to today, now it’s tough for us to buy from some of those same banks that were willing to sell to us in our first few months. The reason is there’s a lot more competition; just like in the real estate market and the note market, there’s a huge amount of competition for these mortgages, so now they won’t sell them a few hundred thousands or a million at a time, they’re selling them at a hundred million dollar pools, so when we call and say “Hey, we have 10 million bucks or 5 million bucks”, they’re like “I can’t help you.”
But anyways, that was our start. But that is not a scalable, a repeatable start, so what I wanna do is provide that. The other part of your question was “How do these work in terms of buying these, and selling, and then discounts, and providing these extraordinary solutions to families?” I’ll give you an example – we bought a loan… And this is a very common situation. We bought a loan on which the family had refinanced in 2008. Obviously, not a great time to refinance. The property at that point was appraised at $200,000, and they refinanced at $164,000. This is in Maywood, which is just outside of Chicago, and shortly after the crisis in 2009-2010, the breadwinner in the family was laid off from his 20-year job with Culligan water, basically delivering water to offices; he was laid off, so he didn’t have money to pay the mortgage, he fell behind. The payment was more than $1,000/month, and the loan was serviced by Ocwen, so he applied for a mortgage modification; he told us his story – it went for months, and that turned into over a year, and finally they denied his modification, and they scheduled a foreclosure sale on his house.
Now, the good news is the hedge fund that owned that mortgage offered a whole pool of mortgages to us, which included this gentleman’s home. What we did is we did a broker price opinion, which is kind of like a mini-appraisal on the home, and it came back at $33,000. So we offered 30%, $9,600. So just so your listeners understand that, the debt was — unpaid principal balance on this mortgage was $164,000. He hadn’t paid in several years. There were tens of thousands of dollars in delinquencies, and his payment was over $1,000/month. The home was worth $33,000, and we bought the mortgage for $9,600.
Joe Fairless: So the bank loses in that scenario, right?
Jorge Newberry: Well, somebody loses, clearly, because somebody loaned this gentleman $164,000 and now they’re taking $9,600 for their position, so the bank or the Wall-Street-backed investment fund probably took a big hit at that point, but they’re probably thinking “Hey, this home is worth $33,000. If we complete the foreclosure, we’re gonna have to evict him”, and they’re gonna have to sell the property and pay brokerage… The recovery may be 20k, but there’s still a lot more work, so it makes sense to take the $9,600 offer. I’m sure they thought ti was in their best interest to do it, and that’s what they did. But when we contacted the gentleman and we said “Here’s what we can do – if you wanna stay, we’re gonna drop your monthly payment (again, it was over $1,000) to $320.” So he is like, “Well, that sounds too good to be true. Maybe it’s a scam”, but he checked us out and discovered we really did own his mortgage.
We also gave two other options – “Hey, do you wanna settle this in one lump sum? We’ll take 29k (10% less than what it was currently worth). Or if you don’t want the house anymore, we’ll give you $1,000. So you owe us all this money but we’re gonna forgive the debt and give you $1,000 if you sign the deed to us.”
Those are basically the options, and the way that we’ve had a lot of success is by just giving the options to the family, and they get to decide what’s in our best interest, what makes sense for us to do. Do we wanna pay money and keep the house, or do we wanna get paid and just give up the house and get the debt forgiven? In this case, the family said “No, we wanna stay.” So again, we dropped the payment to $3,200; they owed over–
Joe Fairless: $320, right?
Jorge Newberry: $320 from over $1,000.
Joe Fairless: Alright. You said $3,200, just wanted to make sure…
Jorge Newberry: Oh… That would be not good.
Joe Fairless: “We tripled it!”
Jorge Newberry: Yeah, “We tripled it!” No, we went from over $1,000 to $320. They hadn’t paid in several years, so they owed over $20,000 in delinquent payments, and we took $2,000 and we forgave the difference. And the $320 payment was now gonna be the same payment for the remaining term of the loan, which is almost 20 years. So for them it was like “Oh my goodness, this is cheaper than rent, it’s great deal”, but for us – look at the numbers… We recieved $2,000, and then we got in that first year 10 payments of $320, so another $3,200. So $5,200 on $9,600 investment, so over 50% in the first year.
Then we continue to get $320 times 12 – almost $4,000/year for the remaining 20 years of the loan. So in the first year over 50% return, and then a 30%+ return for the next 19 years. We have all our money back within three years, and then we just have cashflow for the rest of the term.
That’s basically in a nutshell what we do, and I know Wall-Street looks at what we do and they say “Okay, on paper you’re getting these big returns, 20%-30%+, but really Jorge, you’re making like $5,000-$10,000 a deal”, and that’s what it is, $5,000-$10,000 a deal, and for Wall-Street that’s not something that’s worth their while, which creates the opportunity, but here’s where we’ve created a business – we bought $2,500 loans last year, so we make $5,000-$10,000 on all 2,500 loans, so we have a pretty decent business.
Joe Fairless: What is that math? 2,500 loans… How much do you make per deal on average?
Jorge Newberry: About $5,000.
Joe Fairless: About $5,000, got it. So that’s 12.5 million, and you said “make”, so that’s profit after all expenses.
Jorge Newberry: Agreed. It’s just a matter of how soon you make it, but yeah, there’s a lot of money to be made on these things, there really is.
Joe Fairless: Now help us learn how to do this, please.
Jorge Newberry: So this is the challenge – how do you get started? The first thing is to figure out how to buy the loans, and there continues to be a very opaque market, but there are a number of hedge funds, smaller funds that will work with buyers who are wanting to buy just a handful of loans at a time.
A real kind of caution sign is when you’re new it’s very easy to overpay. You can use that situation that I described and said “Hey, the home is worth $32,000. If I get it for 20k, that’s a 12k discount. That’s pretty good.” I might have even thought that 15 years ago, but it’s not very good. You really need a significant discount; you wanna get into the 50% range or less of what the property is currently worth, because if they don’t pay or you don’t come to a resolution, now you’re paying for an attorney to go to the foreclosure procedure, and that can take a long period of time, and your returns as time passes will generally diminish.
So unlike real estate, the longer you hold a non-performing loan, the value will tend to drop, and the reason is the taxes are going up and the property is potentially deteriorating, and just the duration of your investment is extending, so there’s all kinds of reasons you wanna get to a fast consensual solution.
So there’s funds out there, and I can name a few – there’s Granite, there’s Condor, even us, AHP, will occasionally sell loans in one, or two, or three, or four, or five at a time… So I think that’s a place to start. And as you get bigger, if you say “Hey, I can do 50 or 100 of these”, then you definitely go up the food chain and there’s hedge funds and then even banks that will sell to you even in today’s competitive market.
I think the strategy woudl be to maybe learn this while the market is competitive, get your bearings in terms of how all the pieces work, because when this market collapses again – which there’s always a cycle; up, down, up down, boom, bust… And eventually there’s gonna be another bust in the cycle, and that’s where there’s just immense opportunities. But if you decide, “Hey, I wanna buy loans” when all the opportunities are there, it’s gonna take you a little bit of time to figure out what you’re doing.
So I would think it’s a wise time, and it’s the reason why we’re doing this – we’re starting a servicer, which basically — every loan needs to have a mortgage service, so we’re starting a servicer and we’re showing other people how to do this… Because when this crash happens, then there’s no way we’re gonna buy all the loans. We’re not naive, thinking we’re gonna buy every loan that becomes available. We wanna show other people who can find even other sources and other opportunities and do this in a social, responsible manner, which also coincindetally generally maximizes the financial returns.
Joe Fairless: In order to find the non-performing mortgages now, you gave three places: Granite, Condor and your company, AHP.
Jorge Newberry: And I can think of more. I can think of Security National Servicing (SN), they regularly sell loans. Basically, what happens is you’ll call them up… We’re setting up this program called Note Buyer Bootcamp and we’ll add all the resources onto the site. Once you contact these groups, they’ll send out periodic lists of loans. “Hey, we have this one loan available” or “We have these 100 loans available”, and you can bid. Typically, even when it’s 100 loans, they’ll let you bid on one or all 100. Those are a handful, and NoteBuyerBootcamp.com – we’ll put up a list of other sellers in the market and update that as people come and go, which inevitably happens.
Joe Fairless: And once you buy the note, is it just a cash transaction and then you now own the notes? So you’ve gotta pick up the phone and call the people living there?
Jorge Newberry: That’s what you would like to do, but only part of that is true. So it is a cash transaction, so you’re generally wiring the money, you sign a purchase contract… Somewhat similar to real estate purchase contracts, except now you’re buying a note. Then you wire the money to the seller, and they will then send you the documents. What you’re really buying is the note, the mortgage, the title insurance policy and whatever origination documents they maybe have for enforcing this laon – those are shipped to you, those originals, and they’ll also transfer the servicing. Let’s say it’s serviced at Ocwen, and they’re gonna say “Where do you wanna transfer it?” There’s a number of servicers SN Servicing, FCI, BSI, ClearSpring… I think the number one choice should be AHP Servicing, but that’s up to your listeners.
Then you’d like to call the homeowners, but you can’t. In most states, they require that if you’re doing any type of debt collections, particularly on a mortgage, that needs to be done by somebody who has whatever license that state requires. So that means that you usually have to take the loan to a servicer and have them call. This is where you end up kind of having this middle man – somewhat similar to a real estate agent – where they’re the conduit for the interaction with the homeowner, but you can tell them what you wanna do. It’s very simple. You can say “This homeowner wants to stay (just like the family in Maywood). We’ll take a monthly payment of $320. They owe us $20,000 in delinquencies, but we’ll take $2,000. And if they don’t wanna stay, we’ll give them $1,000.”
You can do that, tell the servicer, and that’s basically what they are communicating with the family. The ways they reach out is they can do phone calls, they can send letters, and ultimately they can send people and knock on the door. It starts with phone calls and letters, and then knocks on the door. If the home is vacant, they do a skip trace and they try to find where the people are… And think about it like this – people left, so they probably don’t want the home, but now you’re trying to track them down and say “Hey, I wanna give you $1,000 to find the deed and forgive the loan, so we don’t need to foreclose.” If you can do that and get the deed, and the homeowner is like “Hey, I didn’t want the home anymore and I owe $200,000, so it doesn’t make sense for me to keep it”, but you bought it for $9,600, that’s a big return, and if you can do that in a short period of time, your returns are through the roof… Because the alternative is to go through the long, tedious foreclosure process, which will take time and money, and you’ll still probably make an okay return, but where the returns become extraordinary is where you can reach out to the family and make a deal.
Joe Fairless: I know we talked high-level about this and there are many bullet points underneath each of these, but for the purposes of this conversation, anything else that is a larger point that we should talk about as it relates to buying these mortgages at a discount?
Jorge Newberry: Those are nuts and bolts. It’s so similar to buying a home that is broken in terms of it needs a lot of rehab, it needs a lot of fix-up, or a multifamily property that is in disrepair, has management issues… And then working out a solution in order to fix that house, fix that multifamily, or fix that loan. If you can generate a solution that works for the family, that’s always gonna be your best resolution.
Joe Fairless: How can the Best Ever listeners get in touch with you or your company?
Jorge Newberry: Sure. If they’re interested in purchasing notes, go to NoteBuyerBootcamp.com and you’ll learn about the training program that we offer, which is basically online, and we have some free resources on there as well. You can reach out to that e-mail on there as well, firstname.lastname@example.org.
Joe Fairless: Awesome. Jorge, thanks again for being on the show and talking about buying non-performing mortgages and notes, and how you got into it – fascinating story, about the LinkedIn trust that you had with that gentleman, and it turns out to be a very successful relationship… Definitely you, and he got $4,000, so I’m sure him too.
Jorge Newberry: It was the best $4,000 we’ve spent.
Joe Fairless: Yeah, absolutely… And then just talking about the overall process. Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Jorge Newberry: Alright, thanks, Joe.