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297: Another Look at the Real Estate Market with Jorge Newbery

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Buck: Welcome back to the show, everyone. Today, my guest on Wealth Formula Podcast again holds a record for the most appearances on Wealth Formula Podcast. But you know what? We don’t even keep track of it anymore. There’s been so many times, and he’s actually the only sponsor that we allow on the show anymore as well. I don’t know if you knew that either, Jorge. 

Jorge: I didn’t know that. 

Buck: But of course it is. Jorge Newbery, our old friend, our oldest friend to the show. And he is, if you don’t know by now, you probably haven’t listened for very long, but he is originally the founder and CEO of American Homeowner Preservation, which became, AHP, there’s so many different layers to this, but I’ll let Jorge explain that. So Jorge, welcome back to Wealth Formula Podcast. So why don’t you take us where you’ve been here and where you’re going? That is a story in and of itself. 

Jorge: Hey, I appreciate that, Buck, and I’m glad that you have me back. And I’m pleasantly surprised. I didn’t know that we’re the sole sponsor right now. So that’s great. 

Buck: We just stopped doing sponsorships, and so we get a lot of people interested. But the problem is it’s all about quality control from the podcast side. I just don’t really trust a lot of things that are out there on the people wanting to do sponsorships. But we have a long story relationship between your businesses and Wealth Formula. So it’s the one sponsorship we feel very comfortable with, and I feel constantly comfortable continuing to support. 

Jorge: I appreciate that. And I know I was first to get on your podcast. It was a long time ago, and I think your listenership has grown dramatically. So Congratulations on that. 

Buck: Yeah. I think the first time you arrived, those ten people that were listening, they were enthusiastic. You might have gotten five investors. 

Jorge: Yeah, it’s literally been at least seven or eight years. So it’s been a while. 

Buck: By the way, we’re up to about 35,000 downloads a month now. Better than the ten you were getting. 

Jorge: That’s fantastic. Congrats on all that. So I’ll give you an update on AHP and where we are today, where we’ve been and where we are going. So AHP started out as American Homeowner Preservation in 2008, originally a nonprofit with a mission of helping families at risk of foreclosure stay in their homes. We have thousands of families come to us, and we would advocate on their behalf with services and banks. And we didn’t get great results. And so we changed our approach. And we started buying defaulted mortgages, primarily in low and moderate neighborhoods across the country. And we could buy these at big discounts, and we would be able to both positively impact these families many times they wanted to stay. We’re able to give them a modification where we cut principal, cut their payment, forgive some of the delinquency, and at the same time generate good returns for our investors. So that was the beginning of the for profit version of AHP. And in the last decade, we bought more than 10,000 mortgages, and as you shared, it’s evolved into AHP is now not just a fund buying mortgages, but we also AHP servicing a National Mortgage service, or AHP Title, which we’re about to talk about is a title insurance company, which we intend to take from one state to a national title insurance company, as well as a handful of other related ancillary businesses that all kind of serve the same mission and I’ll tell you, I don’t know if I’ve shared this with. Our longer term goal is right now, I’m 56. As you know, I have two young children at home. They’re 50 month twin boys. And my goal is by the time I’m 62,025 is to roll up all these companies, there’s nine different companies, roll them all up and get them listed on the New York Stock Exchange. And that’s my goal for when I turn 60. And we expect that between now and 2025 that there will be a significant downturn in the economy and particularly in the real estate market. And the demand for our businesses will spike significantly during that period, we will be able to gain market share, increase our revenue, and then be prepared for taking the company fully public in 2025. So that is the goal. There’s nine different entities. There are nine different presidents. I’m the CEO of all, and basically, I provide strategy and vision, and each President is responsible for the day to day operations of the companies. This is our 9th fund. The AHP Title is our night fund. And of those, the first five funds, the investors are fully paid off. There’s two regulation A funds, 2015 A+ and AHP servicing, which we are closed, and we’re now redeeming investors. And then the two new funds are pre REO. And the one we’re talking about today, AHP Title, which is the title insurance company. 

Buck: That’s good stuff, man. So I’ve said it before, but Jorge’s, oh, man, if I’m an entrepreneur and I consider myself sort of a raging entrepreneur, but Jorge is sort of at the next level. He’s already on fire. He’s already burned. He’s just vapor at this point. Look at it. It’s fantastic, man. So tell us about. Okay, let’s start with this. So obviously, some of your moves on the business side, if not all of them are dictated by where we are in the economy and what you foresee. So tell me about how what’s happening right now is affecting what you’re doing, if it is or not. 

Jorge: Yes. Great question. We have bought very little in 2021. The market has been so I mean, it’s not news to anybody that the real estate market has been red hot the whole year 2020, the year that Covid hit in the second half of that year, we bought over $100 million and we entered into agreements and actually bought over $100 million worth of defaulted mortgages. That was a time where there was still uncertainty about the future. And there were a lot of funds that were actively selling loans at favorable discounts. So we were a very active buyer today. We are a very active seller. Our goal is to have those two funds that are closed, have a lot of loans and other assets in there. We are actively pushing resolution of those assets in order to pay back investors in those funds because I’m nervous. We’ve gained a lot from the appreciation of the last 18 months plus. But at some point, this turns. And when it turns, I don’t want to be sitting on 100 plus million dollars worth of assets. The market turns. And now I’m saying only I sold six months ago. I could have sold these for 25% more than I may be able to sell that time. So we are acting with urgency. There’s a lot of competing opinions. And when this market turns and certainly there are reasons to feel robust, I hear people say, no, this time it’s different. People always say that it’s not. 

Buck: Remember, the quote is the four most dangerous words in investing are “this time it’s different”. And that was the Sir John Templeton quote from which I brought up in the show several times now. But on that note, though, a lot of people think it might be different because what we’re seeing is very different from a behavioral standpoint of the Fed’s fiscal stimulus that’s on the horizon. What do you make of that? Because one of the problems that I’ve had with economists on the show, the macro people that we talk to all the time, is there’s always the caveat that, yeah, this is obviously super hot. And the next stage would be this. But there’s some crazy things happening in this economy, and all of a sudden you’ve got Omicron as a wild card. And does Omicron end up with shutdowns and then a massive stimulus package on top of that and does that create you know what I mean? There’s so many variables out there. And at the end of the day, let me ask you this question. Is there a way that this could go on in perpetuity because the rules of the game have changed? 

Jorge: I don’t think so. I think you look at history and there is an expansion and a contraction expansion and contraction that’s been going on going back for centuries. And then in recent history, you can go back for the last century and just see it repeats, expand, contract, expand, contract. And the larger the expansion, typically, the larger the contraction. And I think it’s healthy. I mean, that’s the way an economy functions, it can’t always go up and certainly can’t always go down. I think it keeps things in check and rebounds things on a periodic basis. And I think there were people if you go back to 2007, there were a lot of very smart people on Wall Street economists who are saying, no, this is sustainable. There may be a Plateau, but it’s going to keep going up after that. And people were investing based on that advice. And we all know what eventually happened. And maybe that was even a little bit early 2007 or 2006 that they were making those predictions. But there were a lot of analysts whose models told us a much different story than what actually happened, which, I mean, we all know was just a catastrophic collapse of the real estate market. And it’s hard to say there is a contraction in our future. And you just look back this era of Koba, this 18 months where there’s been many markets have appreciated 30% in 18 months, on top of the maybe 20% plus gains that they were experiencing that we’ve experienced since the depths of the it’s probably even more since the depths of the Great Recession. You put all that on top of each other. That’s a lot of gains to get back if we just went back to March of 2020, when Covid started, if pricing just reverted back to that, there’d be a massive number of homeowners who are significantly underwater. And I think the families who are at greatest risk. And it’s unfortunate the families who are at greatest risk are probably those who are buying today, especially in places like where you are in California. That market is Southern. All of California has just been on fire, literally, too, at some points, but figuratively, sorry all the time. No, but the market, the real estate market there has just been extraordinary. But you can look back. I think there are signs already of the rate of appreciation slowing. So things are still going up at a slower rate. And I think most people will concede to that. Now, if you look at what happened last go round 2006 seven, you started seeing the rate of appreciation starting to drop, and so it was still going up at a slower rate. But there was a point which was probably in late 2007 where things aren’t just going up at a slow rate at a lower rate. Now they’re going down, it’s depreciation. And then it was just a sharp drop. So I think we’re on that part of where the appreciation slows and then eventually it turns into depreciation. I think that’s where we are now. We still have a ways to go. I think people are right, that it’s still a reason to be rosy. And you’re right. All the government stimulus and the low interest rates, cheap money, these are all fueling. It’s extraordinary. What’s happened is fueling this market. But I do think there is a reckoning coming and hopefully people are not blindsided by it. In our mind. I exit. I’m a seller now, and we’re being very careful with what we purchase to make sure that it’s either something that we can get in and out of fairly promptly, or it’s something that is like we’re doing with AHP Title is we’re buying government backed loans. So to the extent that there is a downturn now we have a government backing to help protect against losses. 

Buck: Yeah, it’s a tricky thing, I’ll tell you, even from the investing side, I think multifamily and apartment buildings are a little bit different because we’re valuing it based on net operating income in many cases, and that’s being driven by rents and inflation with 6% on inflation right now. So it’s a tricky thing, because if you think of it from the standpoint of an investor, what’s the smart thing to do if you don’t invest? If you’re not buying things right now and being careful, I’m not saying over leverage. But if you’re not buying things now and as the prices continue to go up, you’re losing 67% a year, right. What’s your alternative to gas and for a couple of years and lose 14%, 20% value of your money? What’s the alternative? Do you see what I mean?

Jorge: No, I get that. But there’s so many people who probably had different elements to the thinking. But in 2006, they buy and it’s still better to lose 6% or 7% than people are losing everything or all their investment in many cases. And you mention multi family. I agree right now the prices on multifamily are extremely strong, which is derived from the very low interest rates. Those interest rates, I was going to say have to. There’s logic that at some point they pick up, which will impact values. I mean, you’re right. There’s a lot of different elements here. But I think every time there’s an expansion, they are extraordinary. There’s different elements. You still have the same historical cycle. I mean, last time with these subprime loans, it was almost free money because people were getting loans no matter what they were qualified for. 

Buck: But the banks were in really bad shape then, too. They were now. They’re not now. And savings rates in people are at very significantly high levels compared to the last few decades. So I’m not saying that. I think it’s a party forever. I’m just saying that it’s interesting to think about it because there are other variables and so it’s hard to like. I mean, I can see recession at some point. It’s inevitable, of course. But the question is, what does that recession look like? Is it the recession that used to happen when I was in middle school when you heard about a recession happening and, oh, recession happened. And you heard about it on the news, like, three months later or not. Every recession has to be 2008

Jorge: Agree. Yeah. So they could be much milder and much more relatively mild. So, yeah, it’s going to be an RCI, but the government can’t propose that forever, because that’s what’s fueling this and has fueled a great part of it. 

Buck: I just think that part of the tricky thing here is always like, just from a plain devil’s advocate here, of course, is the debt, the painting of money and everything and the rates. This is like heroin, right. This is heroin, right? They’re not stopping. It feels good. They’re going to keep going. They keep going with this. Right. And before there was like, this sense that you have to pay some attention. No one’s even talking about debt anymore. 

Jorge: Yeah. The national debt used to be a big focus, and people get elected on prudent management. And now they’re cheered on because if you’re getting stimulus checks, keep the same guys in office that are getting these stimulus checks, and that’s probably fueling some of you to get those stimulus checks and they put them in the bank. They invest them. Who knows what? But there’s definitely a lot of that money that has just floated into the economy. And long term, we’ll see, history can tell us a lot. 

Buck: You have a lot. I mean, listen, at some point, everybody has to start to make decisions based on what’s happening in the economy, where there is their own risk in there. You know, you’re carrying a lot of paper that has been rehabilitated. So I think there’s additional risk to not buying that kind of stuff right now, too. Those notes might be at higher risk than some of the other stuff as well. Right. That all plays into your strategy. 

Jorge: I’ll tell you today and tomorrow, the last days of the year, we are closing massive numbers of reperforming loans. So think about this. We buy these loans, we modify them. The people get to stay in their homes once they make six or twelve payments on time, we can sell those as reperforming loans and those reperforming loans. Maybe in the past, we buy loans at $0.50 of the debt, and then we’d exit at maybe 70 $0.75. And we thought, well, that’s a good business. Now, today we are exiting literally. Today we’re closing some trades. The average pricing is in the mid 90s on these reperforming loans, and some of them are selling it like 105 points over what is owed on the loan. The homeowner could come in and pay us 100 grand to pay off the loan. Some Wall Street back hedge funds are paying 105,000 for that loan. It’s just incredible pricing. So with that market, we’re like, modify as fast as possible, sell as fast as possible. And if the homeowner wants to stay and they’re willing to do that, that’s a great exit for us, because these loans, I mean, they have no mortgage insurance generally. So there’s an exit that is extremely healthy. I don’t think that will last forever. It’s because there’s so much money. There’s so much cheap money. If our loans pay 5% or 6% and they have a record of paying. And some of these Wall Street back funds have cost of capital, that’s in the low single digits, they’re making a spread. I understand why they’re buying them, but that wasn’t always there, and it won’t always be there. 

Buck: Yeah. And I think what you’re talking about, too, is sort of highlights the idea that there are different parts of the real estate sector as well. Right. So when you talk about re performing notes, if you believe that we are approaching a period of time where there could be some corrections could be a big correction. Who knows the last thing you want to probably be doing right now is buying reperforming notes, right? I mean, it’s like it’s already strike one with these notes. So if you’re able to sell them now, sell, sell. That absolutely makes sense. So tell me about this next project, because I think part of what you’ve alluded to is that if you can buy notes that have mortgage insurance associated with them in this environment that might actually protect you significantly in terms of your downside, your blind side, so to speak. And then at the same time, it sort of stays with your messaging as well, which is trying to do good. And so talk a little bit about how that works. 

Jorge: Sure. So in the past, we typically bought loans that had no government backing, and those were the loans that were the cheapest. We could buy them at big discounts. We always heard about these loans that are backed by FHA or BA or USDA. They’re available, but they always wanted a higher price, and we didn’t feel that it made sense to pay the higher price. We could make more money and have a better, more social impact buying the uninsured loans. But now that’s changing. Now. I’m very concerned about the market at some point in the next couple of years entering a downturn. And at that point, if I’m sitting on $100 million worth of loans and now the market depreciates just to the beginning of COVID, I am going to be in me, and investors will not be in great shape. So we changed our strategy. And with AHP Title, our focus is to buy government back loans. So these are our loans again backed by USDA, BA and FHA. And our focus is BA loans. These loans carry a 25% guarantee. So to give you an example, if someone today gets a loan for $200,000 a VA loan, the VA agrees to guarantee 50,000 of it, so there’s a loss of up to 50,000. The VA will step in, you make a claim and they’ll pay you, however much is lost. So we can buy these VA loans once they get into default at maybe a 15% discount. So if it’s a $200,000 loan and they’ve fallen behind six months on their payments, I can buy that loan. We can buy that loan for probably somewhere around $170,000. Now, if we can reach out to the homeowner and modify that loan and get them to pay several months on time, we can resell that loan with the government guarantee in place, and we can probably resell that loan at $200,000, so we can pick up a $30,000 gain. And now it’s a reperforming loan that still has the VA guarantee. Now, if they don’t pay and they don’t make a deal or we end up foreclosing and we end up only collecting $160,000, let’s say, from the sale of the home and the markets decline. And whatnot now we can make a claim for that $40,000. That was, “lost”. Now we only paid $170,000 for the loan, but that doesn’t matter. When we go and file the claim, they’re going to pay it off the balance. So that would be the $40,000, quote, unquote loss. So now we’ve ended up getting 40,000 from the VA. We’ve gained 30. That’s the model. That’s what we’re doing with AHP Title. With an insurance company. For the insurance company to get credit and holding these in reserve, they have to be governed back. The insurance regulators, they have unbacked loans, uninsured loans. We can’t carry on the insurance company’s balance sheet, but we can carry these federally backed loans. So that is our model going forward. We think the timing is appropriate because in the past you buy one with a VA guarantee, and probably there weren’t so many losses because the market kept appreciating. But now that there’s risk of the market going down, we think it’s a Prudent investment to get from here to the other side. Once in the midst of the downturn, we’ll probably change our strategy to buying all the uninsured loans that now have significantly declined in value, and we can buy them cheap. But today and for the foreseeable future, we think the Prudent strategy is to buy government backed loans. 

Buck: So tell us from the investor standpoint what that looks like? 

Jorge: Sure. So we crowdfund these so anyone can invest, not accredited and accredited investors. Minimum investment is $100. We make it very accessible to just about anybody. It’s $100. But people invest $100. We have one person who invested 100 just to check it out. And six months later, they put in a million. So there’s a lot of investors everywhere. From the whole wide range of investment amounts, our average investment is around $7,000, so they can go to AHPtitle.com. They can choose how much they want to invest and they can invest. And we pay out up to 7% return. It’s distributed on a monthly basis. Typically, the money goes straight to the investors bank account, and that is it. It’s a five year fund. All our funds are five years. The goal is to return the money at the end of the five years. And in the meantime, we use it to hear we’re building a national title insurance company and buying defaulted loans. And that is the strategy which we think will take us from here to the next downturn. And then we may change your strategy, but this is one that I can feel comfortable with. I think going forward.

Buck: Liquidity on this, is it the same concept? 

Jorge: Yeah, sure. So we offer best efforts liquidity. You can request your investment back at any time, and we will undertake our best efforts to return that money to you to the investor within 30 days. The caveat to that is, if it’s redeemed in the first year, the return goes from seven to five and the second year goes from seven to six. The money stays in for two years. The investor gets to keep the full 7% return. And that is a feature that actually you helped us implement several years ago, and we used it up to Cobid. We were always able to redeem within 30 days. Cobid was we had a massive number of redemptions and we got behind. But other than that, we’ve been able to keep it within the 30 days. 

Buck: In terms of this, you kind of alluded to it before, but I think it’s helpful to know because people have invested with your various funds at times have had different returns. And this one’s 7%. Do you feel like there’s a difference in terms of the risk profile right now? That justifies a slightly lower return. 

Jorge: Yeah, sure I do. Thanks for bringing that up. Yes. I think buying the government back loans really mitigates risk significantly, especially with the potential for a downturn. So I do think that as a result, the returns are lower. Plus, we’re in a lower interest rate environment. In the past, refunds have been at higher rates, but also the interest rates in the market were at higher rates. So I think it’s indicative of both of those. Yes. That makes a lot of sense. 

Buck: Okay, Jorge. So remind us again, if we want to invest, what do we do? 

Jorge: Go to AHPTitle.com and you can invest right there. There’s an Invest Now button or give us a call or email us all the contact information on the site, and we’d love to talk to you and answer any questions. 

Buck: Jorge Newbery and his 500th appearance on Wealth Formula Podcast. Jorge, thanks for being on the show, and I’m sure we’ll talk to you in the next few months again. 

Jorge: All right. I appreciate you having me on. Thanks, Buck. 

Buck: We’ll be right back.