Buck: Welcome back to the show everyone. Today my guests are, well one of them is going to be very very familiar to you. He has set multiple records in terms of appearances on Wealth Formula Podcast. Jorge Newbery the founder of initially what was American Homeowner Preservation, now AHP Servicing. And we also have Barry Owens. Barry is the president of PreREO which is another company that Jorge actually started and this is a very interesting model and we’re gonna talk about how this all works together. Guys welcome to the show. Welcome back Jorge and welcome to the show, Barry.
Jorge: Thanks, Buck. I’m trying to stay ahead of the pack.
Buck: Very good, very good, yes you are I have actually lost count and how many times you’ve been on the show but I can tell you for sure that you’re A-OK number one.
Jorge: I’d like to see standings.
Buck: Yeah oh yeah definitely. You’ve always got the latest in you know latest and greatest stuff you know the newest stuff and different stuff going on so hey guys so let’s start out with this okay because obviously you are in the real estate world and you’re seeing particularly you’re in the real estate world with a first-row seat to any potential distress. So as it stands today and now we’re talking about you know first week in July as we speak or well second week let’s take a step back and discuss what’s happening in the single-family home market nationally. Are we starting to see some distress yet what’s going on out there?
Jorge: Definitely distress. I think the uncertainty is causing a lot of the distress you know Covid has now is currently researching in States and some states are actually backtracking on their reopening so it creates a lot of uncertainty for investors for lenders for servicers and you know currently today you know we have a problem in such a challenge in some states as a mortgage holder in terms of the ability to foreclose. There’s foreclosure moratoria across the country and in many states where you cannot proceed with a foreclosure in some cases or you cannot proceed with certain steps of a foreclosure and that’s fine I mean we want to protect the homeowners but in some cases you know the homes are bacon or the families passed away and it the homes just sitting there vacant so that’s a problem. But amongst the other problems I mean there’s many families who are relying on getting back to work in order to pay their mortgage and it’s a question mark as to when they’ll get back to work and if when they’re everything’s clear to go back to work is if there’ll be jobs to go back to in some of the situations so it’s tough I mean it’s tough I think I’m precedent in time in our country and I think we’re gonna be feeling the after-effects of this for years to come.
Buck: Yeah and the challenge right now is you know it’s almost kind of a sort of anticipation of what’s gonna happen in the next you know next couple of quarters right is the potential for some of these safety nets going away, that’s potentially when we’re going to you know see a lot more distress in that single-family market do you agree with that?
Jorge: Definitely agree with it. There’s been the stimulus there’s been you know the boost to unemployment so I think that’s helped get people survived the first few months. I think there’s gonna be more of that. So I last go-round in 2008 the government did step up and supported some modification programs a lot of states provided a state different state-administered homeowner assistance and we’re already starting to see that. Illinois just unveiled their program in the last couple of days, Montana has already released their program, I’ve only aware of two states that are providing direct home and/or assistance but that’s starting to happen I think we’re gonna see that across the country soon you know this is government assistance which props things up for a short period. There’s always the theory that you know we just need to get through the next three months to the next six months but you know what happened in 2008 is there was this kind of vision of a bridge to you know the other side and yeah the other side never really materialized in terms of it just kept getting for a few years just kept getting worse and worse and you know by the time you know they bought three months here 6 months there you know then with HAMP it was five years but in yeah even after five years from many situations people’s situations hadn’t improved.
Buck: You know as long as you’re here and I know we’re gonna talk about PreREO’s but I’m curious you know from my understanding, listening to investors of AHP service saying I mean certainly you know the people are still getting their payments like clockwork every month etc. Are you feeling any you know difficulty in collecting those kinds of you know those mortgage payments from people right now? Because it seems like you’re withstanding it pretty well on the AHP servicing side.
Jorge: We’re withstanding it reasonably well you know there are homeowners who are on forbearance plans there’s other types of payment arrangements that were making with families who are in distress, but I think you know big chunk of our revenue comes from the ultimate disposition of the property which in lots of cases the sale of an REO.
Buck: And we can’t do that.
Jorge: And that’s a challenge because in some cases a we can’t foreclose in other cases we have foreclosed I mean I can think of one property, in particular, we foreclosed in January we still don’t have the deed to the property because the sheriff’s office has been closed since March and so we hoping that changes in some places we do have a deed but the recorder’s office is closed or is has reopened but is very far behind. So there’s a lot of factors which are really impacting or drawing out our revenue so right now and you know it’s created a challenge not of distributions we’ve been able to cover those but on redemptions you know a lot of people with Covid it had needed their money or requested their investment back because they’re facing you unexpected challenges of their own and we’re doing those in the order received but it’s used to be but within 30 days and that’s just been tough to keep up with I just because the increased volume and then you know couple that with the decreased revenue because it things are still shut and we thought it would be you know at the beginning we thought out of 30 days you know this will be back to quasi-normal and here in his you know four months later and it’s not back to normal and though and probably the worst part of it is we don’t even know when it’ll be back to normal so it’s definitely a challenge. That said all this kind of this all these challenges create opportunity and we are trying to find means to help homeowners as well as you’ll maximize our investment returns. I would expect that this the second half of the year will be very rewarding for AHP and AHP Servicing it’s just a matter of shifting making pivots as needed to you know the new reality and I think as a servicer we are a small nimble national servicer whereas a lot of the big you know big behemoth servicers it’d be tougher for there than to pivot so I think we’re trying to be nimble and take advantage of situations that we see come up.
Buck: So you talk about opportunities kind of coming up you know when you have issues you find inefficiencies etc and you’ve been sort of a master of that over the years and so this has led to of course the latest company PreREO and you know to understand that efficiency and where this comes up, let’s review if you would the sequence of events that occur after the person you know defaults on their loan and then kind of come back and talk about where PreREO comes in.
Barry: So the process of a standard foreclosure action which is everything that’s in PreREO is going to be in that status. The differentiator for PreREO versus just a regular foreclosure action is that we’re dealing with many properties that are vacant. The PreREO product has been abandoned the homeowner is nowhere to be found or if they are they’ve just decided for whatever reason to vacate and move to another residence. So in that foreclosure process historically that’s a very difficult asset to sell a vacant property note for a variety of reasons because the investor is straddled with all the cost of maintenance, potential vacant property registrations taxes etc. So it’s a very cumbersome asset to hold in your portfolio. What we’ve done with PreREO is move that asset from basically some people refer to it as dead money because you have to complete the foreclosure action before you can recoup your funds we’ve been able to monetize that asset during the foreclosure process through the receivership program that we have in place. So now by simply appointing a receiver, we are able to obtain the investors are able to obtain access to the property, repair it to any degree necessary, and obviously you’d asset to asset that can vary greatly. Once they have those repairs completed they can put a tenant into the property, start collecting rents. So you’re collecting rents you’ve now turned that basically dead money asset into a monetized asset where you are collecting revenue during the foreclosure process until the foreclosure action is completed. So it’s completely flipped the model on its head from where it was a year ago and throughout the history. So it’s a very dynamic opportunity and something that nobody’s done before and we are seeing investors get very nice returns on their money on assets again a year ago that was dead money you just had to sit and wait didn’t matter if it was three months or three years for foreclosure action to happen we’ve been able to put investors in touch with that property and take possession of it and start turning that Dead Money asset into literally a performing asset for them.
Buck: So let me just kind of step back and you know go step by step for you know those I guess to say sort of dumb it down for everyone including myself which is how I best think in very simple terms. So I go to PreREO which I’ve gone on to the site it’s what PreREO.com and I look on there and there’s there are houses and it’s interesting because it’s not just you know the thirty, forty thousand dollar houses that you usually see in these kinds of situations but there’s, for example, there’s a house for over a million dollars listed there in Los Gatos which is nice you know fancy part of Northern California in San Francisco. So now as I understand it correct me if I’m wrong what I’m looking at is you know the cost of buying that mortgage, buying that note so far am I correct?
Jorge: You are correct.
Buck: Okay so now I can buy that and before I may not want to about that because whereas I might make a profit on the back end by fixing this thing up and then you know selling it after foreclosure, I’ve got no opportunity really to make money so I don’t know you know if my returns are just gonna get killed by time right? So instead what PreREO is saying is okay once you buy this and then you know to fix it up and rent it out and now you can make money while you’re renting it out and then you can foreclose you know and then you’ve got the additional pop on the backend now that you know you normally would but in the meantime, you’re also getting rent. Is that the key efficiency element?
Jorge: That is the key efficiency and bear in mind that ordinarily a mortgage company some investor in a mortgage does not have access to repair and rent out a home, that they don’t own the home they simply own the mortgage on it. But what we’re doing what we’ve added is a receivership process and typically a receivership is used on a big apartment bill there or an office building or some larger complex and there’s often significant cost associated with appointing a receiver, but we’ve kind of made it this streamlined receivership appointment, we’re using local real estate agents or property managers as the as a receivers and they’re looking for simply a property management fee, maybe ten percent of the rents collected and then on the back end they’re looking for a listing if the if the investor wants to sell it and that’s all they’re looking for and so it makes it cost effective to do this and do it on a on a routine and repeatable basis which is what we’re doing with PreREO so you know as Barry referenced the Dead Money all of a sudden you know you’re sitting two years or a year or however long it takes to foreclose on a home depending on the state and you would not only are you not collecting rent or any money typically you’re paying money for taxes, you know maintenance, grass-cutting, city registration, city fines all that stuff so all that stuff either ends are significantly mitigated by the rent that is collected. So it really kind of turns it for these vacant its first mortgages secured by vacant homes for that type of asset it really is a means, a program that maximizes the returns from that asset.
Barry: Buck just as a quick side note to that too, that can be even though it sounds a little bit cumbersome we have the complete infrastructure built out. So even for a passive investor that can oftentimes work because you’re just engaging with the local contractor you can pass off the you know the repair project to, you’re dealing with the local real estate agent that can handle the all of the marketing aspect and the rent collection and all of those things. So even though it might sound a little bit you know intensive as far as participation, it can be very limited to the investor just because of the structure that we have in place to support it.
Buck: And when you say structures it just sort of you know you’ve got some partnerships or you help kind of find the real estate agent you know or the contractor that can do these kinds of things or what?
Jorge: I would say it’s the partners. So many times we’ve we’re assigning real estate agents in many cases to the properties while we’re marketing a PreREO so that’s your built-in property manager built-in coordinator, the local contractors and then you know built-in person at the back end to sell the property, plus you know I think this these are really important components we have a one law firm that handles the foreclosures and the receiverships nationwide. So it’s not like you have to go to a local attorney to explain what this is we’ll give you one single point of contact no matter where the property is in the United States they’ll be able to assist. And then the one other factor is that in the United States the vast majority of the states require that a licensed service or services the mortgage so AHP Servicing you know as is here to fulfill that function and so we cover all the bases and it makes it so that it is something where a local investor instead of kind of putting together a team, they can plug into our existing team.
Buck: The other component that I should make sure to mention is that you have built-in leverage as well because for each given property AHP is going to do you know essentially a loan and so you don’t have to bring you know if you were looking at that million-dollar house you don’t have to bring a million dollars to the table. How does that work?
Jorge: So these are participations is how we’ve structured it. So the local investor puts up 25% and then AHP will put up 75% and that is we cap our return we’re earning a twelve percent return so whenever we repaid which could be after one day or after two years or even three years is it’s basically a two-year term with a one-year extension but can be repaid at any time so we’re basically getting a twelve percent return. Everything over that you have the whole is the situation works out extraordinarily well and the local partner makes a hundred percent return or 50 percent return, we get 12 that’s it they get all the difference.
Buck: So you’re gonna have to in this situation obviously if you’re gonna use the leverage your returns going to need to be better than 12 percent. What I know it’s very difficult for these kinds of things to say what kind of returns, but you know if you do some rough numbers, what would you expect if you’re an investor and you’re in this kind of business, what kind of you know what kind of returns would you think would be realistic if you did this kind of stuff?
Jorge: I’m thinking 15 to 30 percent will be what the local investor should target and you know it’s gonna vary by property but it’s also gonna vary by you know some of those million-dollar homes are probably going to be less on a return side there may be more backend you know they may be able to make up greater markup on the backend but their rent, you know as is typical the rent on a low-value home often seems disproportionate to the value of the property and vice versa, so I think it that that’s the cause for the rise ride range.
Barry: Yeah Buck we’re already starting to see payoffs come in from some of our very early adopters you know some are very early customers that came in you know we’ve only been up and running for a few months but they came in, we’re already getting payoffs from them and they are in their next phase of purchasing other properties so I don’t have the analytics that we can advertise yet or talk about that but there they wouldn’t be coming back if if they had taken a loss or you know did not profit from this situation. So that’s one of the most telling things that we’ve seen but like I said I don’t know the analytics for it right now but we are trying to get some vanilla numbers together that we can kind of show people actual returns.
Buck: Yeah and just to be clear and don’t want to scare anybody away by saying it’s only you know do we keep referencing this house in Los Gatos that was 1.3 million or something like that but there is the full gamut you know you do have those smaller $40,000 homes on there as well so you’ve got you know if somebody wants to dip in and try this on a smaller scale and see if it works or whatever that would certainly be something that you could do as well. Obviously you don’t need to be an accredited investor here either because you’re buying assets you’re not participating as some sort of limited partner etc. One other thing that it occurred to me when you’re looking particularly at sort of the higher end homes Jorge and you and I discussed this a little bit you know there’s also this element of what if you’re looking for a house and you don’t live in a house right? To look at this you know say you live you know near Los Gatos and I mean this could actually be something that you do for owning a house as well and buying something in a pretty significant discount, right?
Jorge: Yes we already have that happening so people investors especially on some of the higher-end homes they’re looking hey that’s a home I’d like to live in and I can buy it at a big discount if I go through this program so they so that’s possible now to be clear though when during the receivership here in the foreclosure period that needs to be rented to a third party renter can’t be rented to the investor so bear that in mind that would that be challenging but once it’s foreclosed upon then the investor is welcome or the local investors welcome to you know sell it or sell it to themselves. Bear in mind when we foreclose their foreclosed in the name of our US Bank Trust as trustee for American Homeowner Preservation Trust. So that’s how the asset is held through the foreclosure process so now that it’s foreclosed it goes into that name and the investor simply has to pay the other 75% will deed it to them or they can go on and get financing and they can use that financing to make the purchase into their name and when they do that you know they could you know potentially get most if not all their money back because you know the if the property values increase then they could get a return to the money and hold it as a rental hold it isn’t all you know to keep it as a place to live whatever they wanted to do.
Buck: Yeah. What do you see as the potential you know realistic kind of things to be concerned about I mean obviously any kind of endeavor especially one where you’re you’re looking at potentially getting twenty-five you know thirty percent returns or better whatever, you have to look and say okay well what are the risks here and so while you talk a little bit about that.
Jorge: So to be clear this will require involvement I won’t call it, it’s not a completely passive investment. It’s something where somebody is going to have to actively manage it even though they could be actively managing it from behind their computer screen by working with a number of different partners, but it is something where they do need to follow up with the receiver with the service or with the attorney at least get the reports and stay on top of what’s going on in order to make sure that everyone’s doing what they’re doing. They and maybe the agent can help them be the quarterback but recognize it’s not just where something where you know you put in X amount of dollars that comes back. There’s gonna be some active management. So I think that’s one the other part is and this is less, I know it’s going to people’s minds. I’m going to answer it before people ask and is that what if the homeowner comes back and says hey you know I’m putting paying on the back payments I want to catch up on my loan or I want to pay off my loan what happens then? So the reality is that homeowner has the ability to do that they would have to pay up all the back payments, pay the painting late charges, they’d also have to pay any little legal fees and any renovation costs have been expended by the investor and or a receiver would need to be paid as well but it is conceivable. Snd what we saw, we saw this just last week is that we had an investor interested in one of the properties that was with one of the mortgages that was listed on PreREO and then the homeowner did reinstate and they paid the loan up today and so the the the institution that owns that loan actually pulled it off the site. Now if that happened the day after the investor had bought it the good news is the investor would have probably bought it at 75% of what was due seventy-five percent of value whatever the number was and they would have you know the investor has to reinstate at a hundred percent no discount so they would have made money even if the homeowner did reinstate so keep that in mind, you know the further goal is in terms of now renovations are being done you know at some point it just doesn’t make sense for the for the original bar to reinstate even at the outset most these are significantly underwater by the time they come to us there’s no equity most so they’re being sold at a big discount and it just doesn’t make financial sense for them to come back in but that is you know I’d say that is a concern and then you know I guess the good news is we’re taking the passage of time off the table and that’s a big risk usually having a first mortgage secured by vacant property the biggest risk is the passage of time and what can happen in that time period because your return just goes you know you’re generating no money in most cases and the longer it goes you’re returns just shrinks and shrinks and shrinks. So here we’re mitigating that by having the ability to put a tenant in and rent it during the foreclosure process that’s you know that that’s the big novelty here you know. I guess the other question the other unknowns are you know with Covid which is in some respects creating the opportunity here yeah how long is this gonna go, you know at least for foreclosure moratoriums going to last you know a year, two years and you know they shouldn’t. The reality is a state should make a difference between hey this property is vacant there’s no homeowner that we’re protecting here so they should allow you to foreclose and in some states, you can foreclose on a vacant property but in other states, it’s just blanket foreclosure no foreclosures are happening. So that’s a you know even though you’re collecting rent it may take a little longer to get to the final disposition of these assets. And then I guess the big the other big unknown is what’s going to happen to the housing market, you know the I think you know right now the housing market you know we sell REOs, we’re putting a lot under contract they’re not are closing because of Covid, but putting a lot are in the contract extra numbers so people are still paying good prices. So we haven’t seen the big you know big downturn in the pricing, but you know that’s today, how is it going to be in six months or a year or two years when we’re still digging out from this? I think the big thing that’s helping the housing market and will probably continue to do so. It’s low-interest rates these interest rates are so low that you know homeowner looking to buy a home is looking at the payment and saying I’m okay with this price because it’s just so cheap you know these monthly payments and I think they on that respect the good news is the economy is so weak right now that you know those interest rates are probably low for a long time and that’ll help keep the housing market propped up. Long term, who knows.
Buck: Yeah absolutely. Well, certainly an interesting concept and as you said it as you were saying it I was thinking wow this is you know this is what an entrepreneur does right, I mean you’re literally in the situation where you can’t foreclose, so what do you do with your vacant properties? Well, you try to collect some rent on those properties that you couldn’t rent so it’s you know finding the opportunities and you built a business around it so another good illustration from the Jorge Newbery entrepreneurial school there. Where can we learn more?
Barry: Go into our website, PreREO.com. Our phone number’s out there 800 555 1055. There’s a way to message us through the platform but we certainly highly encourage people to call, remember this is a partnership, we’re going into this, you know with participation agreement, we’re invested just like the local investor is going to be invested so we want to make sure that everybody is you know completely comfortable and knowledgeable on what the process is going to look like you know what the timelines are going to look like for the foreclosure process to the receivership. So again we have the complete infrastructure we want to engage this isn’t just take go to our website find an asset and put in an offer you certainly can do that we we have people to do that but most of them are people that have done it already so they come back and we don’t really have a whole lot of engagement with them maybe a little bit back and forth on a couple items but you know certainly call us, ask the questions you have, you know build your confidence level in it like I said we want to make sure that the investors the local investors that were working with are fully up to speed on what’s ahead of them and I’d mention we try to make it as passive as possible but there’s definitely some engagement that’s going to be needed we can engage as you know and some be as supportive as possible but there’s definitely some engagement that’s going to be necessary on behalf of the investor but again we can walk through all of those tangibles and hopefully find you an investment that’s going to give you a nice return in a fairly short period of time.
Buck: Sounds great guys. So it’s PreREO.com and you guys are live now with this new business. I want to thank you both for being on the show and wish you the best of luck.
Jorge: We appreciate it, Buck.
Barry: Thank you Buck.
Buck: We’ll be right back