663: Finding Opportunities in Adversity with Real Estate Investing

SHOW NOTES FOR EPISODE 663: FINDING OPPORTUNITIES IN ADVERSITY WITH REAL ESTATE INVESTING

From punk rock producer to owner of the largest apartment complex in America, Jorge Newbery has experienced both extremes of success and failure.  In today’s podcast, you’ll hear how he lost 10s of millions of dollars and how he recovered and prospered!

What You Will Learn

• How Jorge grew his real estate portfolio from a fourplex to the largest apartment complex in America
• Why Jorge had 38 criminal charges filed against him for owning an apartment building
• How buying distressed apartments that no one else wants, located in dangerous areas, can be profitable
• Creative methods to reduce crime in an apartment complex and build-up renters pride
• How you can make big profits while still helping out people in distress
• Why you shouldn’t be confident just because you are well insured on a property

About Our Guest

Jorge Newbery

Jorge Newbery is Founder and CEO of American Homeowner Preservation Inc., parent company of AHP Servicing, a nationwide mortgage servicer; preREO, the nation’s leading online marketplace for the sale of non-performing mortgages from institutions to real estate investors; AHP Mortgage Direct, a nationwide mortgage originator; and AHP Title Insurance Inc. a title insurance company. He is also Partner in Activist Legal, a law firm facilitating default legal services nationwide. He also authored Burn Zones: Playing Life’s Bad Hands, which chronicles his financial rise, collapse, and resurgence.

More About Jorge

• Jorge grew up in Los Angeles (there for 37 years)
• Didn’t go to college
• Got a GED
• He started a record company in his parent’s garage
  • Produced 8 albums of Southern California punk bands in the early 80s
  • One of the songs they produced ended up on a Netflix movie a couple of months ago
• In 1984, when Los Angeles hosted the Olympics, Jorge was inspired by the bike racing and wanted to become a professional racer in 1988
  • He got in the Olympic trials
  • He was on a trade team that raced around the country
• But he needed to get a “real job”
  • One of his biking teammate’s girlfriend help him get a job as a mortgage loan originator in 1990
  • He was 25 at the time
  • He rose through the ranks and eventually started his own mortgage companies
• In the early 90s, there was an economic downturn in California that spurred his interest in real estate and real estate investing

Becoming a Real Estate Investor

• In the early 90s, he purchased a fourplex
• Then, he bought a 19-unit apartment
• Then, he bought a 60-unit apartment
• He would buy the “most challenging” apartments he could find
  • The ones with the most opportunity to add value
  • He thought, “If I can turn them around, I could do very well!”
• He did this for years

Buying A Majorly Distressed Apartment Building

• The last big properties he bought while living in California was a 298-unit apartment on Skid Row in Los Angeles for $850,000
  • The building had sold 6 years before for $4.5 million
  • It was in such bad condition that it had been targeted by the “Slum Housing Task Force” and the owner was thrown in jail
    • The owner ended up selling it for $2.5 million
    • The new owner that bought it for $2.5 million ended up in jail too
    • He ended up selling it for $2 million to the guy that Jorge bought it from
    • That guy ended up in jail too
    • The property was aggressively marketed at $850,000 but no one would touch it – except Jorge
    • When Jorge had inspectors check out the building before he purchased it, the inspectors told him not to buy the building
    • He bought it anyway
  • When he bought it, he was given 6 months to turn the building around and if it wasn’t turned around, he would end up in jail like the other previous owners
    • Each month inspectors would come by the building to see how he was progressing
    • Jorge was there every day overseeing the workers who were helping to improve the building
    • He thought he was doing very well
  • On December 31, 1998, a friend of Jorge called and said, “You’re in the paper!”
    • 38 criminal charges were filed against him
    • He called his attorney and couldn’t reach him (it was New Year’s Eve)
    • He finally reached him on Monday
    • His attorney called the City Attorney
      • The City Attorney said Jorge was making great progress, however, they can selectively prosecute so, they are open to a plea bargain:
        • Pay $10,000 fine
        • Then, you go on 3 year’s probation
          • It was summary probation, which means, if he finishes the building and doesn’t get into any more trouble, then, after 3 years, the probation is over
  • It took him 11 more months and, a few days before Thanksgiving 1999, all of the inspectors went through the property
    • They found no violations!
  • It was a big success
  • He made over $1 million
  • The whole experience encouraged him so much that he wanted to do this across the country
    • He went on a buying spree across the country buying the biggest and most challenging properties he could find

A Big Win!

• He bought a property on the Court House steps for $1.6 million
• It fit his “most challenging” profile
  • There were 8 murders on the property in the prior year
• He renovated it, leased it up and applied for refinancing
• The bank appraised it at $8.5 million
• They gave him a loan for $5 million
  • He got all his money back and then some
• He was pumped up and ready to do more of these properties

His Biggest Challenge

• He bought the largest apartment complex in the U.S.
• It was called Woodland Meadows
• It was 1,100 units, 54 acres, 122 buildings
• It was like a mini-city
• It was in Columbus, Ohio, near the airport and near one of the highest income areas in the city of Columbus
• It was a low income housing project
• It’s nickname was “Uzi Alley”
• Completely out-of-control
  • Gangs
  • Drugs
  • Prostitutes
  • Was in the news constantly because of all the problems
• The media was following this property very closely
• He decided to move into the property
  • This got some media
• The tenants were predominantly minority – Hispanic and African-American
• The building had a 12-man security force (all white)
  • It seemed like they were hurting more than helping
  • The security office had it’s own jail cell
    • They would make citizen’s arrests and then call the regular police to pick-up the people
  • He made a move he wasn’t totally confident of:
    • He laid off all the security guys
      • The media predicted absolute bedlam
    • Jorge, his manager and a couple of tenants started a community patrol
      • They started patrolling the property on their own – unarmed!
      • They tried to keep order
      • Later, a few more residents joined them
      • It was “an interesting social experiment”
    • The majority of the tenants just wanted a safe, secure place to live
    • Unfortunately, there was a handful of tenants causing all the problems
      • So, they had to evict the trouble-makers
    • There were also large groups of people (most young African-American men) gathering in hallways, etc. that made tenants uneasy
      • His group had to go ask those people to please move
      • But the people would only move somewhere else on the property
      • Often, some of the people in the loitering group would ask for a job
        • He didn’t really acknowledge their request but later he thought, “Why don’t we give them jobs?”
          • They were spending millions of dollars on renovations in the property and contractors were always there
            • So, he set up a training program in their apartment Community Center and said if you showed up every day for 2 weeks, you would be guaranteed a job
            • Contractors would come and talk about different trades and teach them
              • 5 people went through the program and they all got jobs
              • They were like apprentices on the job sites
              • But later, as people heard it was really working, more came, they were getting 50 people in every class
              • And, by and large, the people who went through the program were doing pretty good work
              • The majority of the program was successful
              • 200 people ended up getting jobs
              • Not all were construction jobs
                • Some became leasing agents, maintenance, landscaping – jobs around the apartment complex
              • Some people started their own businesses
                • Some have been around over 20 years
    • With the changes, there was a drop of crime at the facility more than 50% on the property

Transformation and Disaster

• After about 2 years, the renovations were done, lease-up completed and the property was truly transformed
• There was even a flight attendant from the local airport who leased an apartment
  • That would never have happened when it was Uzi Alley
• Unfortunately, a couple of months after the lease-up was completed, Christmas Eve 2004, the property got hit with an ice storm – the largest federally declared disaster in Ohio history
  • It devastated the property
  • It also triggered an extraordinary sequence of events in which he lost everything and ended up $26 million dollars in debt
• Fortunately, he was well-insured with over $50 million of insurance on the property
  • He filed a claim and the insurance company promptly denied the claim
    • He said this is a common strategy many insurance companies follow
    • They do this so that you have to sue them and they will eventually settle at a big discount
      • So Jorge sued the insurance company
      • Unfortunately, the lawsuit cost him so much money that

His Biggest Mistake

• When the insurance company denied the claim, he went and met with an attorney
• The attorney said, “They will eventually pay this but they are going to make you sue.”
• Within weeks of the storm, they filed a lawsuit against the insurance company
• He was encouraged that he would get the money eventually so he took out loans on his other properties (he had over 4,000 units around the country) and use that money to fix up Woodland Meadows and, when the insurance company pays, he would pay off the other loans
• By the summer, he was out of money and he couldn’t borrow any more
  • The property was no where near completed
• Then, the Mayor’s office summoned him to City Hall
  • They asked him to bring financials (rent rolls, etc. on the property)
  • When he got there, they said they would support him in vacating the property and moving the tax credits and section 8 contract to any other property they could find in the City of Columbus – then, the city would take over the property
    • He said, no, he had made a big impact on this property and he wanted to make it work
      • Looking back, he saw that that was the wrong answer
    • The city followed up in a few months with 3-day evacuation notices for all the tenants
      • They said they did that because they had “discovered a construction defect from a prior owner” which had rendered all buildings subject to eminent collapse
        • Jorge went to his attorney and they filed temporary restraining orders against the city from executing on their evacuation
        • In court, Jorge had an engineer that he hired to testify that the buildings were not “subject to eminent collapse”
          • The restraining orders were granted
          • The court said that it would put together a 6 month plan to get everything fixed up and they would appointed a monitor that would go to the construction meetings and every week to monitor the progress and report back to the court
        • Jorge called his attorney to call the insurance company to settle – they settled for $32 million
          • Unfortunately, the damage far-exceeded $32 million
          • Nonetheless, he took the money and hired 200 people to work on the property
          • The city, however, was not done…
            • They had a meeting with HUD and HUD came out to the property a few weeks later, said there was damage to the property and said you had 30 days to fix it!
              • And they said, if you don’t fix it, they would terminate his HUD contracts
                • Jorge contacted HUD and said, “Here is the plan we worked out with the city that gave is 6 months to fix the problems.  There’s no way we can fix things in 30 days!”
                  • They were unresponsive so Jorge went before the judge and said, “We’re doing the work.  We’re ahead of schedule but HUD is saying we only have 30 days!”
                  • The judge then summoned HUD to the court
                  • HUD responded with a statement that said they are a federal agency and are not subject to a municipal court and will not show up!
                  • 30 days later, HUD shows up at the property and 30 minutes later said, “You’re not done.”  He said, “I know I’m not done.”
                  • HUD issued a notice terminating their contract and that was the end!
                  • Jorge continued with his work for 6 months but, by then, the property was completely vacant.  He was the last person to move out of the property.
                  • Jorge ended up losing Woodland Meadows to the city and he lost everything else as well!
                  • In the past, Jorge always persisted and generally came out well in the final results.  This time, things were different.
                  • He made some bad choices but it was too late to recover
                  • He was humbled.  He felt he failed.  He was ashamed.  He felt feelings of regret and despair.
                  • He wanted to rebuild and repair the property but, by this time, his credit was destroyed.  He had millions of dollars in judgements against him.
                  • No one would finance him or partner with him.
                  • It was the end of a successful run and a total failure
                  • This was 2006 and, while everyone else was doing great in real estate, he was not doing well

Turning Things Around

• In 2007, he was hearing about the forecast of families across the country struggling with foreclosures
• He realized that the experience he had just gone through was not too dissimilar (but on a larger scale) to what families were about to encounter
• He realized he could use his experience as an overwhelmed debtor to help these families
• Jorge decided to form a nonprofit organization in 2008 called American Homeowner Preservation
  • The mission of the nonprofit was to help families at risk of foreclosure
  • He opened a tiny office in Cincinnati that consisted of himself and 2 other people
  • Thousands of families came to them for help
  • They thought they could advocate for these families with servicers and mortgage holders to create consensual solutions that were mutually beneficial
    • However, unfortunately, they were not well-received by the lenders and servicers repeatedly
      • The lenders refused offers that would have helped the families stay in their homes
      • Most of the families owed $100,000 on homes that had dropped in value to $50,000
      • The lenders would just foreclose and kick the families out
        • The homes would often be vandalized and stripped of anything of value (copper pipes, etc.)
        • The lender would end up selling the home for $25,000
      • Jorge’s organization would go back and forth with the lenders sometimes as long as a year and the lender would still end up selling the home for cheap
      • His organization could help only 10% of the families that came to them
      • So, they came up with another plan:
        • They pivoted
        • He formed a “for profit” company
        • They were going to buy defaulted mortgages from banks
        • They could buy the notes/loans for as low as $20K
        • They started buying the loans in bulk
        • Once they owned the notes/loans, they could do whatever they wanted with it:
          • Modify it
          • Reduce the principal
          • Forgive some of the delinquency
          • Reduce the payment
        • The bought the loans so cheap that they could share the discount difference with the family and still make a good return for their investors
        • That was a model that really worked
        • So they now could work with the families to help them keep their homes and, at the same time, make a great profit
        • This is what he has been doing for more than a decade

American Homeowner Preservation Evolves

• The company has evolved over the years
• As they got further away from the financial crisis, there were less opportunities to buy the defaulted mortgages at attractive prices
• So, they have evolved into a:
  • National mortgage servicer
  • Title company
  • PreREO (a platform where institutions can sell defaulted notes on a one-off basis to investors)
  • National mortgage originator which focuses on loans as low as $5,000 to provide mortgage capital that is affordable in some of the most challenged neighborhoods in our country
• Everything still has a social component to it but it is now for-profit

Personal Perspective

• He used to like owning buildings across the country and being very hands-on but now he enjoys just sitting behind a desk, while still making an impact but he doesn’t have to travel to properties much any more
• As he has surpassed 50 years of age (he’s 56), his priorities have changed
• He now is married and has twin sons turning 2 years old
• His life was kind of postponed by his financial challenges
• He still invests in real estate but instead of buying buildings he’s buying notes, which require less field work

Opportunities for Investors

• There are two ways for real estate investors to invest in his company:
  • PreREO – A platform where they sell notes (that come straight from institutions) to investors on a one-off basis
    • You can buy notes
    • You can also invest in Regulation A+ Fund
      • Available to Accredited an non-accredited investors
      • The minimum investment is $100
      • This Fund helps families in need
      • First 9% goes to investors
      • Funds are tied up for up to 5 years but there are options for early redemption
  • AHP Title
    • You can also be an investor

Advice for Old Dawgs Looking at Real Estate Investing to Help Them in Their Retirement Years

• How would you advise our 50plus audience to get started in real estate investing and how can it work out well for one’s retirement years?

Current Business

• He used to be a micro-manager, wanting to do everything himself
• But as he has grown older, he sees the importance of surrounding himself with talented people as part of a team
• He currently has 120 employees
  • A number of the employees work remote as a result of Covid
    • This has allowed him to find higher-quality employees
• He has key people in key roles that take the load off of him
• He’s still very involved in operations but his hope is that, over time, he can become less and less involved in the day-to-day stuff and be more part of just the strategic aspects
• He believes a downturn is coming
  • It will present an extraordinary opportunity for his businesses to grow and to see an increase in need for the services they offer – to increase market share
  • And a great opportunity to help more people in need

Daddy Time

• By the time he is 60 (October 2025), his vision is to roll-up all the companies, take them public, and get them listed on the NYSE
  • If he does it by his birthday, his boys will just be starting kindergarten
    • He will then be able to walk them to school every day and be more a part of their lives
      • It’s been transformative to have his boys in his life
      • His priorities have changed
      • His business is still important but his family is definitely now on the top of his list
    • He loves spending time with his sons and guiding them when they grow up

How to Get His Book

• Get the book here: Burn Zones: Playing Life’s Bad Hands

How to Reach Jorge

• Website: preREO.com
• Website: AHPfund.com

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