186: High Yield and Liquidity with Notes!

Buck: Welcome back to the show everyone. Today my guest on Wealth Formula Podcast, he’s no stranger to the show. He has been on I don’t know like four times now definitely the number one highest number appearing guest on our show. His name is Jorge Newberry and he was one of the first shows we did. He was the guy who started AHP Servicing which at the time when we first started was American Homeowner Preservation. He also has been on talking about a business venture called Debt Cleanse and he’s back again today and we’re gonna talk about it all. Jorge welcome back.

Jorge: Thanks Buck thanks for having me. I’m glad to be a be your most frequent guest. Absolutely honored.

Buck: Yeah no it was great and you know Jorge, as a disclaimer Jorge has been a sponsor of this show since the beginning and certainly I got the best of that deal early on because Jorge was you know was paying to sponsor me when the show was very small even though it was potent it was always potent because I think people resonated with the mission and certainly the business delivered for people but Jorge what is going on right now? You have been on as I mentioned before the last time you were on you were starting this this thing called Debt Cleanse maybe you could talk about that real quick and then you can talk maybe a little bit about what got you back into really becoming the quarterback of AHP services again.

Jorge: Sure so Debt Cleanse to go back in the story AHP started in 2008 we started crowdfunding in 2013 that’s roughly about when we first met and we transitioned in 2016 to regulation A+ crowdfunding which is the crowdfunding that allows anyone to invest, unaccredited and accredited investors minimum investment $100 we try to make it as accessible as possible. What we do is we crowdfund the money we use that money to purchase pools of defaulted mortgages from banks and hedge funds and we focus in the load of modern income neighborhoods so those mortgages secured by homes of let’s say worth on average around $50,000 forty to fifty thousand dollars and the reason we do that partly is because that’s where the greatest social need is that’s where most of the hedge funds don’t want to deal with it you know they figure hey you’re making you know eight five ten thousand dollars a transaction in their mind it’s not worth it in our mind if we can do that a hundred of the times it makes it worth it and also again the social impact could be significant. And to give you context to this let’s say someone owes a hundred thousand dollars and that home is now worth fifty thousand we can probably buy that mortgage you know in 2013 we could probably buy that mortgage for twenty today we can probably buy it for more like twenty five but either way it still gives us a huge amount of flexibility to offer that family either a modification would significantly reduce payment reduce principal in some cases and many a times they’re behind a year to three years and we can reduce they could owe ten twenty thousand dollars we’ll say give us two thousand dollars we’ll forgive the difference and if they don’t want to stay or it’s already vacant we give them cash they sign a deed in lieu we forgives the rest of the loan we sell the property in all cases we can earn in most cases we can generate a good return and also have a positive social impact. Now two years ago I was working unbelievable hours so the company just kept growing and growing which is good except I wasn’t the great delegator and I took on a little too much work my honor way too much work on myself and it just like never ended and I was trying to keep everything going and i came to the conclusion that needed to hire somebody else who would probably be a better delegator. Idid hire a new CEO and she took over in early 2008. Came from an institutional background.

Buck: You mean 2018.

Jorge: Yes sorry in early 2018 and that she was instrumental in institutionalizing AHP making us more of a building a foundation for growth but I think there was a bit of a disconnect when it came to the strategies that we employed again buying these more challenged mortgages and rapidly getting them to some kind of path to a resolution which would spike the returns. So in July of this year just three or four months ago I came back into CEO and what I’ve done is I’m gonna keep the CEO position I wasn’t sure of that at the beginning but I’ve decided I’m gonna stay a CEO and what I’m doing is I’m hiring the best team around me as possible the best team I can find to surround myself with and I’ve hired a president he used to work for Fannie Mae I hired a vice president he used to work for Rock Top which is a multi-billion dollar hedge fund which used to be our has historically been the number one seller blown stuff to AHP also business development person came from Rock Top and right now we hired a CEO who came from a bank which previously she worked for a very large servicer we’ve hired a number employees from a servicer that’s in our building phase servicing so we’re building this awesome team but I’m staying at the top and the goal is for me not to get to the point I have to work that the unsustainable hours as I did in the past.

Buck: Well it’s interesting because what you described I think is is you know we’ve talked about this before you and I shared this curse called being an entrepreneur and one of the things that happens with entrepreneurs is beyond multiple failures and you know significant stress to oneself and one’s family is that you get to a point when you build something where if you’re not there’s a point where you use a fork in the road almost where you have to say well gosh if I want to get any bigger if I want to you know if I want to scale this thing it requires skills that I don’t have and and you did that and you went out and got somebody but one of the other things that happens sometimes in that situation is that the magic of the person who’s the entrepreneur the person with the special sauce so to speak sort of gets watered down and I think for my sense is that for a year or so that’s kind of what happened obviously you know the fund never lost money or anything like that but it the ability to create that magic that high yield was really a special skill that you had developed over some time and you may have overestimated or underestimated your own contribution to that but to me what it sounds like is you have understood that you’ve come back and you’re like okay I’ll be the Rainmaker I’ll be the deal maker but I don’t need to do every last other thing I used to do because most of that stuff is just paperwork and bureaucracy and so on but what I’m really good at I’m gonna focus on is that about right?

Jorge: That’s a fair assessment yeah absolutely and I think the key is being willing up to give to be willing to give up control which is difficult from an honor you want to control everything it’s really difficult to say hey please help please do this for me and the other part is I think recognizing that there are people who have skill levels in different arenas that can perform something much better than I can and I need to get them on my team reward them appropriately and and give them free rein if they give them the gold this is what we want to do and they can help figure out the way to get there and when they need my help they asked my help other than that they’re just working towards the goal and as long as they’re making steps towards that the route they may take is not what I would have anticipated but as long as they get there that’s fantastic.

Buck: So let’s talk a little bit about so at the end of the day I mean I just wanna just for people who don’t really understand what notes are, you explained it. But in effect what you’re doing is you have mortgages that people aren’t able to pay and they might get ordinarily get foreclosed on but what what a note buyer does is you’re going in there and buying that mortgage from a lender from a bank etc at a discount and the inefficiency that Jorge identified early on was that once once those mortgages were purchased by an investor sometimes they were you know they really didn’t didn’t do things that made common sense like negotiating with the person who lived there and try to keep them in their house and still being able to make a significant profit so there’s a social aspect to this as well you found an inefficiency and he was able to capitalize on it much more efficiently than hedge funds and other buyers of these loans. Now so that is in effect what AHP has always been about. I will tell you that it’s much harder than it looks and I know this because I went out, I tried to learn this business from Jorge and went in there and you know try to figure out what was going on and there’s a lot of moving parts this is not easy he makes it look really easy the way he’s got this down but it is not. But that being said Jorge now let’s talk about the market in general because you mentioned that in 2013 you know I mean this luckily for you in some regards at the time of your scaling when you’re really getting good at this stuff you had a lot more fudge factor you had the ability you had a lot more probably some more margin of error since then what has happened in the market to make it a little bit more challenging?

Jorge: Yeah so what has happened is just like in the real estate market and in most asset classes today a lot more competition and I think as there’s been a track record developed by us and others you know that’s attracted more money into the space more money means in a lower supply you know where were 10 years after the crisis so after the crisis they’re a billion there was just a mass of this massive supply now the supply still there but it’s reduced significantly and at the same time you’re a lot of people who’ve come in with more money and what is predictable track-record people have been able to say hey I see less risk in this I’m willing to take a smaller yield and that’s you know we’re dealing yeah there’s hedge funds in this space that are willing to take a modest return you know in the single digits on these loans and that is you know when they’re willing to do that we have to find ways to buy on the edges in order to still get the returns that everyone’s accustomed to.

Buck: Yeah it’s interesting too because you know when you’re competing with you know hedge funds hedge funds and institutional money in general they have a funny way of looking at things the way we probably don’t as real estate investors. Usually their benchmark is you know what the interest rates are right like in as interest rates go down they they feel like they can accept less and less return because they’re effectively comparing it to you know what Treasuries right? And so we don’t do that but then when you get in that situation though what do you do Jorge what do you do, I mean if you had to summarize sort of like what the magic you know that you’ve brought to squeeze out more return than the hedge funds can how would you describe it?

Jorge: We buy, we try to buy what everyone else does not want that means we’re buying the bigger problems the ones so for instance files that have that are missing documents sometimes missing the whole file we buy loans where they’re secured by properties that are very low value there’s litigation on some of these files so those we’re walking to problems we know they’re problems but we look to use our strategies to resolve them promptly. Whenever we can buy a problem and then no one else wants we can get a better price I mean I’ll give you an example there’s a pool of mortgage servicing rights now we’re serviced or we can buy mortgage servicing rights and it’s very A this poor we’re looking at, it’s very small. And so all the institutional buyers they want to do bigger big big big deals and so these little it’s funny you know usually you think in normal life you think okay I buy a greater volume I’m getting getting a discounted price and it’s completely the opposite it’s gone now if you buy one offs there’s local and and private investor competition but there’s this kind of mid-range between the institutions and the mom and pops and that’s a space where you know it can be a couple million bucks at a time where there’s a lot less competition then you throw in hey these loans have big problems and they look you know sometimes we can make very good deals and I’ll give you another example speed and predictability if you’re a seller that’s known to perform as promised and people can count on it when you say hey I’m gonna buy this line closed on such-and-such a date that’s huge value and about two months ago we had a servicer call and they had to they had a pool where they said hey we we need a million and half dollars we’re willing to sell these out of a securitization but you gotta close in five days and you know most most people can’t do that and even if they can do it they just don’t have the comfort level to take that risk because five days you can only do so much due diligence but A we trust in the seller and B we looked at the pool and just made sense looked like we were getting a great deal and as it turns out we got a great deal because we did perform and then this I’ll tell you this little pool of mortgage servicing rights very small 126 loans so too small for most people to look at it and then they say hey it was on this old servicing system and there’s some problems with the data so there’s some inconsistencies and so we were saying hey we’re gonna have to pay real cheap for it in the end they just said they’ll give it to you I mean you’ll get to these points where people are just like it’s time I mean we’re never gonna pay a token or they’re just gonna give it to us because it’s too much of a problem for them they don’t want they need to cut the liability and we’re gonna have to do some work to clean it up but in the end we’re gonna make some money off that and then think about this mortgage servicing rights or loans if you put in big into some homogenous packages large enough packages now you can sell them to the institutions and they’re gonna pay a premium of what you paid individually so you’re kind of I mean that’s kind of a strategy to buy these odd lots, pick out stuff that that has common characteristics that maybe they’re pre performing loans or now they’ve had a reasonable pay history recently and we can sell those to to hedge funds and then focus on the remaining ones that have more significant problems.

Buck: One of the things that that you know you have to kind of think about a little bit now you’ve had a tremendous track record in terms of delivering you know we can get specifically into the fund in a bit but what your perhaps have been over the last you know six years or so since you started and you’ve been pretty pretty well on target throughout that time but on the other hand if you think about it what exactly at this and saying well gosh you’re you’re buying non-performing debt right so as an investor how should I look at this in terms of the risk profile because that question I think is different for an investor buying a few notes compared to what you’re investing in a fund like yours right I mean what’s the difference?

Jorge: The big difference is that we are diversifying the risk so we can buy you know hundred loans or a thousand loans or thousands of loans and knowing that we will lose on some individual loans there’s no question if you’re if you’re not losing you’re not your strategy’s too conservative and your returns are gonna show it but you will if we buy a hundred loans I can expect on average we’re gonna lose on ten of them and it doesn’t mean we lose everything but we’re gonna get less than what we pay for him and that’s just that will happen but now we can absorb it and those other 90% will more than make up for the ones that we lose. Now what’s challenging is for an individual investor they may buy five loans and maybe all five work out but maybe two or three of them go don’t work out as planned and all of a sudden that investor looks hey I spread my over five loans two or three of them didn’t work out all of a sudden I lost money on this thing I’m not gonna do it again and the more loans you buy the greater the likelihood that you can spread the risk over over multiple loans but as it is like you said it is not performing debt it doesn’t mean, I mean there’s gonna be challenges so people don’t want to pay it in most cases and in some they’re just many cases they’re not paying now and you need to make it in my mind you need make it you need to create the proper incentives or to align the interests of the homeowner and the fund and the servicer for that matter.

Buck: I can just say like personally I bought a you know about a couple of notes and they weren’t they didn’t even look that bad but boy it’s been a struggle and just again the comparison to that versus spreading risk in a fund you know many thousands times over is I think where the value comes from in something like this. So tell us about tell us about the current fund, what’s going on with that and I know you’re you’re opening up again or you already have opened up.

Jorge: Yeah we opened it up a week ago and we are just less than a week ago and just because here’s a challenge, another challenge is when you are fund as you raise money you need to promptly deploy it if the money sits in the bank that’s gonna drag the returns even if you’re doing great on the money that’s invested do you have too much money singing the bank earning almost zero that will drag you returns and we had that issue when I came aboard there was a lot of money sitting in the bank account that had not been invested, when I came back as a CEO. So at this point that money has been deployed and I’d lined up enough deals I think that through the end of the year we can promptly deploy the money as it comes in and that is and then and and keep going forward and and that’s that’s key you can’t I mean we if the supply ran dry again we’d have to close the fund again but I think for the next through the end of the year it’s a great time to be buying people are motivated by urgency to close it by in a month I mean I started by in a year and that is something I think we’ll be able to take advantage of.

Buck: So what’s how big is this fund how long does it go?

Jorge: Sure we can raise up to 50 million dollars a year and our first year anniversary was last year and it was last week in early November and our next so we have until November of 2020 to raise another fifty million dollars I think we’re gonna do it I wouldn’t be surprised if we hit that limit by say March or April next.

Buck: Yeah and so in terms of an individual investor you mentioned a couple things I think we’re key one is unlike you know a lot of the opportunities that we certainly do in our accredited investor group this is not this is open to everybody you don’t have to be accredited the minimums are ridiculously low as I know and how low is it what’s the minimum?

Jorge: One hundred dollars.

Buck: Yeah okay so minimum investment.

Buck: This is so this is like I can’t imagine how you would actually make money taking $100 at a time in it and I suspect you probably don’t I mean just with accounting costs alone.

Jorge: Agreed on somebody who invest $100 and that’s it that probably is not a winning proposition. We look at as a marketing tool though there is a so many people invest $100 and that’s just a start and I can think of one investor who started with $100 and now they are at a million dollars but they wanted to they just tried it hey this sounds interesting $100 people think that’s you know dinner and a movies on the weekend I can I could throw that and see what happens it worked out well and a couple years later you know you people start increasing I think our average investment is around $7,000 but there’s a there’s a lot of hundred our investors and some of them that’s it but it is you know now they’re tied to it they get our you know they get our emails each month they get the they get to keep track of what’s going on in the fund and hopefully they’ll invest more got some other friends and family.

Buck: Got it and then what is the preferred return how is it distributed etc?

Jorge: Sure we pay investors the first 10% of what we earn and that is distributed monthly on the roughly of the tenth of each month you can choose in the first two years of the fund were able to reinvest that money after that we have to do the monthly distribution.

Buck: Got it and in in order to sign up for that. What is the website because there’s always there was a little confusion I think before when you transition from the last fund like how to sign up for this?

Jorge: Sure so the very the place to go right now is AHPServicing.com and that is where we have a current offering available you know the prior fund that we did that was regulation A+ is under ahpfund.com and so there was and we still have that fund up we still have that website up because people can go and and log in to see their investment history there on the prior fund and now it’s AHP Servicing at some point in the future because we expect to do another you know additional regulation a funds you know at least one more planned for next year we need to at some point to be nice to it just on one site thank you for all the fund 100% agreed

Buck: I found myself because I’ve been an investor in the previous fund and the current fund and it just created a massive amount of confusion but just for clarity I’m gonna say it again AHPServicing.com is where you need to go now correct?

Jorge: Correct.

Buck: Okay AHP Servicing and one of the key things that I think is probably one of the most unique aspects of this is the is the liquidity issue because ordinarily you know there’s funds out there that you know they may be distributing a certain amount in the note space but they don’t really have the I guess the the opportunity for liquidity can you talk about that because that’s I think one of the biggest selling points for for this fund.

Jorge: Absolutely so we offer best reference liquidity basically that means that an investor can ask us to redeem all or part of their investment and we will undertake our best efforts to do that within 30 days. Historically we’ve done that within 30 days under my management under the prior management there were few times where it took longer and I apologize for that since I’ve been back on board we’ve been able to get everything done within 30 days.

Buck: Yeah and let’s just one last thing I want to ask you about because you know we’ve talked about sort of the frothiness of the real estate market that sort of spilled over into into into the note market as well. Now how do you if there’s a correction in the market is it actually good for what you’re doing as opposed to you know we should be worried about it.

Jorge: No good. Disruption is good downturn is good for us in terms of fun performance I mean we don’t want to hope for challenges that people will struggle because that’s not what we want to have happen but inevitably there is a cycle to this and right now there’s many people many pundits believe that we are at the tail end of a very long up cycle which will result in a downturn at some point and that will impact both the real estate markets and certainly by extension the distress mortgage market and what happens in that situation is the value of our current holdings will probably go down but that will be mitigated by the fact that the majority of what we buy is secured by lower value homes which should not fall as much as the higher value homes but also it will increase our purchasing opportunities significantly right now as we talked you know there’s a lot of money flowing into the space there’s a lot of predictability and as soon as there’s a downturn that’s disruption there’s uncertainty unpredictability that money some of that’s gonna go to the sidelines hey wait let’s see what’s gonna happen here and when the and then the supply increases then there’s more more loans for sales that’s always good the best market to buy in and in any type of situation again real estate notes businesses debt any time when the supply exceeds the demand prices will drop and opportunities will rise.

Buck: Yeah I mean the reason I bring that up is because I think that in some regards what you’re doing right now is does provide some if you think about it a sort of hedge against setbacks in the economy because effectively you know you’re you know you’re buying right now you’re performing if even if there’s a situation where you know you may have to go back to some of those previous properties the opportunity to go in and buy other things at a discount if there is some sort of additional you know setback or recessionary activity gives you an opportunity to almost volume average you know what’s going on in a day to day basis does that seem about right?

Jorge: That does seem about right yeah I mean it will be we were there when we first started we were in our in our formative stages and we were buying some the biggest banks in the country and the only reason they were selling us is because there were so few buyers and we were a very small buyer at the time but Citibank Banco Popular FDIC big big big hedge funds and banks were selling to us and that was a reflection of the times now six years later some of those banks won’t sell to us all right not because they don’t like us but because we don’t have a hundred million dollars which other people are able to put together by these hundred million are pools and we just can’t do that and I don’t think I want to do that because they’re gonna get better pricing when they sell to the guys who can do 100 million dollar trades and what happens though is those hedge funds that buy those hundred million are trades then they end up selling selling to us but take those out of the picture we’re back buying directly to the banks and I see that happening during the next disruption.

Buck: So I’ll just say this much is think for me personally having Jorge Newberry back in you know and in the pilot seat at AHP Servicing is huge i think for anybody who’s interested in sort of a cash flow fund where you literally I mean it’s literally it’s what cash flow is right I mean it is a monthly distribution based on a fixed number in this case typically I think we have 10% now and you know that opportunity if you’re looking for that with Jorge and charge I think it’s one of the better opportunities in my opinion to to go out there and consider especially with the liquidity option because effectively it becomes almost like a you know extremely high interest bearing account where you can you know you can access money at any time. Jorge anything else that I left out that you think is important for us to know?

Jorge: Liquidity and I agree it’s it’s been attractive and what happens is a lot of investors who may be buying resale homes or apartment buildings will come out of their investment they parked the money of the bank and they get almost nothing they can invest it with us and then they find another opportunity they can redeem it and that’s worked well for I think a lot of people but do add that if they the caveat that is they do redeem it in the first year that 10% drops to 8% and in the second year drops from 10% to 9% so just be aware of that for your listeners.

Buck: Got it. Again that is AHPServicing.com everyone Jorge’s always it is a pleasure and we’re looking forward to working with you again in the Wealth Formula community.

Jorge: Likewise thanks again for having me on Buck.

Buck: We’ll be right back.