284: Jorge Newbery on the State of the Real Estate Market!

Catch the full episode: https://www.wealthformula.com/podcast/284-jorge-newberry-on-the-state-of-the-real-estate-market/

Buck: Welcome back to the show everyone. Today, my guest on Wealth Formula Podcast is Jorge Newbery. You’ve probably heard of Jorge before he’s been on the show. I don’t know how many times. Certainly a record for the number of appearances on Wealth Formula Podcast. He’s been a supporter of Wealth Formula Podcast since the beginning, even when we only had five or six listeners. Of course, he didn’t know that at the time, so it didn’t hurt him. Jorge, welcome back to the show.

Jorge: Thanks, Buck. It’s a pleasure to be back. I’m trying to put my distance between myself and the second place I guess in terms of number of appearances on your show,

Buck: I don’t even know who that would be. Honestly, it’s probably me at second place. But How’s it going? Obviously, Jorge, we know you as the founder of probably most well known to everybody is the founder of American Homeowner Preservation, which became AHP Servicing, then Pre REO. So you are in, of course, the business of ultimately non performing notes, non performing properties and all that stuff. So let me just ask you what the heck is going on right now? We just came off the pandemic and all this stuff. What’s going on in the real estate market?

Jorge: Yeah. It’s fascinating to me when COVID first started. I think at that point before it had started, people were thinking, hey, we’re at the end of a long upcycle. The market had been going up since 2011, 2012, 2013, and it was right for a reason to go the other direction and prices to decline. And instead, the complete opposite happened. That’s not news to anybody. But the market’s been on file for the last year and a half, and property values have gone up by and large, some players and almost like all areas, all properties, it’s been just an extraordinary situation and that’s been helpful. The reality has been helpful to our companies. The beginning of Covid was challenging, as it was probably for everybody. But I have to say, I’m growing increasingly concerned that there will be a downturn. This has to end and the fact that it’s gone up so high, I think there’s a significant disruption in our future. How soon? I don’t know. The economy is so fragile, it’s likely the interest rates stay low for an extended period, but at some point this has to change. And I think probably the most risk buyers are probably those buying today, especially on those properties that have appreciated the greatest in the last 18 months.

Buck: Is it the same across the board in the country, or is it mostly in certain areas?

Jorge: No, we see it. I mean, it’s almost across the board in almost all areas of the country and also all price ranges. There’s just been this extraordinary demand and also extraordinarily cheap money, federal money, stimulus money, PPP, other kinds of monies that have flooded the system. I think all contributed to the phenomenon that we’re seeing today.

Buck: It is interesting if I remember, I think last time we had you on, which wasn’t that long ago, it was more sort of in the heart of the pandemic. But I think you were anticipating sort of the opposite, right. You were anticipating then because of historical precedents that we would have a lot more REOs, a lot more distress in the market.

Jorge: Yeah. Well, I still anticipate that happening. It’s just I’ll be right. It’s just we’re not sure when, but one day you’ll say I was right. I probably called it too early. But I mean, foreclosure more terms are still in place in many parts of the country. They have started lifting in some States, but that is kind of calling back inventory and keeping creating scarcity, which drives values up, demand and values up. So there’s a lot of unknowns. I think for everybody, it’s hard to predict a market where there’s I would almost say artificial factors in play: these extremely low interest rates, foreclosure moratoriums, things that usually aren’t weaved into the equation. Or now you have to kind of weave them in. And even when these foreclosure moratoriums end, it’s going to be interesting to see. I don’t think there’s an unfairness. Some of them have already ended, but we have not seen a mass start of foreclosures. I think there’s huge pressure. And rightfully so, there’s huge pressure from regulators and our governments to do everything we can. Even once the foreclosure moratorium is lifted, we do everything we can to keep families in their homes. And I think there’s already a decent amount of federal money that’s earmarked to support those efforts and maybe help families catch up on some of their payments or do other things, to incentives, to services, I think these are tools that are likely to come into play. And even once all the moratoriums are lifted and foreclosures could all start en mass, I don’t think we’ll see that happening. So that could extend this for another six to twelve months, even once there’s no barriers to foreclosure.

Buck: Single family houses are a lot harder to understand for me, because you don’t really deal with cap rates and all that. I mean, it’s really what people anticipate they’re worth. So it’s challenging, but certainly one of the things that I think you mentioned this, it’s driving the market here is really, really cheap money, really low interest rates. Right. The challenge to me is trying to understand, like, I don’t really see interest rates going higher for some time. And so with that in mind, you know, you mentioned, obviously you’ve got the moratoriums and all that, but you also have a lot of interested investors, a lot of free money flowing out there. This thing could last a lot longer than we anticipate.

Jorge: Yeah, it could. But investors are also a lot of what drives it, this emotion and people get nervous or get scared and viceversa get very comfortable. Like many people are today, some people who just invest in the last few years maybe thinking this is easy. I just buy something and it goes up in value. I sell it or refinance it. And that’s easy. But it’s not. It’s not always that way. At some point, there will be a downturn where just as easy to make money and become just as easy to lose money. Although I don’t see the factors like the interest rates, it’s very difficult to raise them when the economy is as challenged as it still is, or at least many sectors are agreed on that. But it may be something different. It may be something that I can kind of came and most people didn’t anticipate something like that. And I don’t think anyone anticipate the extent of it. What’s next?

Buck: China Everglades?

Jorge: Yeah, I know. You’re right. That story. I’ve only had a few people share that with me. But you go, wow, I should say not that many people are talking about it, but those that are it’s pretty extraordinary. And so let’s see what’s the trigger event is. The inciting incident that turns is down, and it won’t be something that necessarily that’s a reasonable thing. It’s something that comes out. And all of a sudden everybody says, Wait, wait. This doesn’t make sense because the reality is the price says that some buyers are paying today don’t make sense. You can only justify with the cheap money. So the payments may make sense. But the problem is, we’ll see what happened in last downturn, where you had some strategic defaults. I won’t say a lot. But you had a decent percentage strategic defaults. People could afford to pay their payment, but shows not to because in their mind, they’re saying, hey, why am I paying on a $500,000 mortgage when my property is only worth $300? And that situation is likely return and it’s not going to return to the state. But it’s like a pyramid scheme of sorts. The real estate market where everybody wins wins. But the last group of people, the last buyers in are the ones that take the hit. It all tumbles down. They started over. And you could argue that there’s been a history of this up and down cycle where the last people in are the ones that take the hit. In fairness, some of those people, they can hold on, they do well in time. You held on to your home through the 2008 crisis. Chances are it’s probably regain all of its value and then some today. But that’s a long stretch. That’s a good 13 years since 2008.

Buck: Right. The interesting thing to me is that we talk about this in normal times. I just listen. I would listen to what you’re saying. Yeah, that’s just that’s the cycle. He’s looking at the cycles, but we live in really unusual times in terms of fiscal monetary policies, and things aren’t doing what they would normally do. We just got through what should have been an absolutely devastating economy with the pandemic yet artificial money, all of these creative means of keeping the economy afloat. Are you convinced that we’re not in a place like that where we’re just I guess Marin Kata, for example, would call this sort of a modern monetary theory where you just don’t even worry about debt anymore. You just keep pumping money, money, money, money into the economy and keeping it float. Are you convinced that we aren’t in different times now and that this follows historical precedence?

Jorge: I’m not convinced. I think I’m not convinced that this is anything different. So every time we hit this high point and people look back and say, Well, history has always done this, but this time it’s different. And here’s why in the list of number of reasons why and people in 2008, we’re arguing this time is different here’s. Why and it really wasn’t. And there were a lot of and I’ll actually say 2007, but there was a lot of right some of the brightest people in the country, a lot of people on some of the Wall Street banks were analysts were creating my I was saying, no, this is going to sustain itself. And I think it’s just unreasonable to say that this time will be different. I think it’s the same story, and there’s definitely some different ingredients today, some different storylines. Kobe is an extraordinary one. The flood of cash, the ultra low interest rates for closure, moratoriums, all these things meant, some of which will probably see once in our lifetime, have been put in place. And I think that will delay the inevitable downturn in the market. I think that not only will delay, they have delayed the inevitable downturn in the market. And I think the cycle will go back down. And I don’t think this is different. And I think people should prepare that this isn’t different. If you’re making investments, be cautious and think short term, I would think because the longer term is there will be significant disruption in what’s happening today. And if you think short term, if you can get in and out fairly soon, that works. If you’re if anyone starting a long term construction project, that’s going to take three years today, I’d be concerned that at some point in that three years, the market changes and all of a sudden, whatever you’re projecting for the exit is going to be tough to achieve. And we’re doing this. I’ll tell you our strategy over the next three months through the end of the year for AHP Servicing in 2015. Eight plus, they both have benefited substantially from what’s happened in the market over the last 18 months. We are trying to exit our positions. Our goal is to sell, dispose of all our assets into a very favorable market. So they’re re performing loan. We’re selling those if we have an REO, obviously, those are hard to keep on the shelves. They’re selling very fast and then the non performing loans. If we see that it’s going to take longer than the end of the year to exit, we’re considering selling those as well, because I think the values and I may be calling the market early, but the values that we see and I expect will still be here for the remaining of the year. I don’t know if they’ll be here throughout next year. And so for us to exit those positions now and sell those assets and take our gains and move on to the next two funds, which is what we’re doing right now in the next two funds of strategies that are built for what we anticipate entering that at some point in the funds, life will enter into a downturn.

Buck: And how long are those funds?

Jorge: They’re both five year funds. And I’ll tell you, the two strategies, because it’s what we think is the appropriate thing to do right now. So Pre REO is a marketplace for defaulted mortgages. And one of the big features of it is that we offer the finance investors acquisition of defaulted mortgages with the investor putting 25% down pre re financing 75. And that’s what we do that’s the majority of the money that we’re raising through our Pre REO crowdfunding offering is to do just that. So think about this. The property value 75,000. I’m sorry. The property value is 100,000. That’s the case. In all likelihood, the local investor can buy that loan at 75,000, which is a 25% discount off what it’s currently worth for reo investors very, very attractive. And then they put down 25% of the 75,000, which leaves us investing 56,000. Ordinarily we would be the one investing around 75,000. But now we’re investing 56,000. So even at that 100 drops to 98. 75, we remain in what we believe will be a secure position that will weather whatever the next downturn is that’s our strategy on Pre REO, one feature.

Buck: If I can just stop you. Because that’s one product and that’s at PreREO.com. And so the idea is from the investor side is that you’ve got a platform there. So these are properties that are in foreclosure or these are properties, and you basically you have them on sale. And you’re saying you put down 25% will put up 75%, right. What are the terms typically on the debt there?

Jorge: Sure. We charge 12%. So investors pay as 12%. It’s paid monthly. And then they get all the upside. And we’ve been had pre are for just over a year. And a lot of people have made a lot of money buying loans, and the values have kept going up. So when they’ve exited, generally, they have done extraordinarily well on a single reo on a single Pre REO one investor shared. It was the best single investment he’s ever made in his life. He made more than $1 million on one single Pre REO.

Buck: So are you buying the mortgage?

Jorge: Buying the mortgage? And I’ll give you the numbers on that one because it’s kind of extraordinary. It was about a $2.5 million mortgage, which he bought for 1.8 million in Florida. So very nice area. And he thought it was worth about 2.5 when he bought it. And he bought the mortgage in October 2020. But a few months later, he called me and said, hey, it was tenant occupied. He was completing the foreclosure, and he said, hey, the broker thinks I can sell this for $3 million. He was excited about that. A few months later, he the tenant. He paid 25,000 to the tenant to move out. He did a little some repair work to the property. And he said, hey, the broker thinks that could sell for 3.5. And this is this market that’s occurred over the last 18 months by the time he put on the market at 3.5 and multiple offers, including one all cash at over $3.8 million. And that’s what he sold it for. So by the time deducting all his costs and expenses made over a million dollars in less than a year on a single asset. That’s extraordinary. And a lot of other people have made put down $25,000 for their 25% down and then double their money. We said stories like over and over this stuff and that’s great that people are making money on it. But it’s also, I think a direct factor of the extraordinary real estate market that we’ve been in. So they bought in six months later, the value has gone up ten to 15%, and that has contributed a lot to this to this. I think the risk is when it goes to the other direction and people could be facing, people need to factor in. Hey, there’s a chance that value to the other direction. What’s exciting to me about Pre Ario is right now today the majority of the assets are being sold by third parties. So we have third parties that are coming to our site. And there’s some large Wall Street back hedge funds that are now putting assets on the site. And we simply earn a fee in the middle for being the platform, a program fee. And we also earn the interest when we finance and 95% of the people finance it’s very high number only a few people pay cash because they like the leverage and leverage is very uncommon in the note world. So that’s what we’ve worked out in it. I think for investors, we charge 12%, we pay out investors 7%. So you can see how we make money. We make money on that spread, which covers the expenses, also gets here.

Buck: Okay. Well, cool. That’s at PreREO.com. That’s certainly an interesting thing. And then you have something else you’re doing?

Jorge: Sure. So we’re also buying a title insurance company. So it’s called AHP Title. It’s another crowdfunding offering similar situation where we’re paying for 7% to investors. Hundred dollar mineral investment kind of very similar to some of our required funds and almost identical to pre route two primary uses of the money. One is we’re buying title insurance company, so not a title agents, but actually the insurance company. And then we’re buying a title insurance company, which is in one state. We’re going to expand it nationwide. That’s the number one strategy. Number two is we’re buying defaulted mortgage loans. So very similar to AHP Servicing, where we started a national mortgage service. And we also bought defaulted mortgages. But one big difference here, the default of mortgages that are will be purchased by HP. Title will all be backed by our federal government in the form of FHA, VA or USDA. So again, protecting for a potential downturn to the extent there are losses on a loan that we buy. Then there is the ability to file a claim with FHA VA USDA and get reimbursed for all or part of that loss. It is something which we see is repeatable and scalable and more predictable. Now, bear in mind, we buy these loans at discounts just like we have always done. But we buy these at smaller discounts because the discounts are smaller because there’s this federal backing which covers all or part of any potential losses and some of the losses even like, hey, we buy a loan for $0.85. We buy $100,000 loan for 85,000. We may only recover 90. Then we’ve gotten $5,000 profit. Plus there’s $10,000 that we can file a claim on.

Buck: Got it. Very cool. And that product is not quite out yet.

Jorge: No. Well, by the time you hear this, it’s going live the last day of August. And I’ll tell you, the big reason we’re going for the government back loans or a big driving reason is as an insurance company, we can become a member that we’re eligible to become a member of the Federal Reserve Bank, and this will allow us to this will probably divide us. Access to extraordinarily inexpensive leverage today would be less than half a percent, but they won’t take our just a regular non performing loan as collateral. But they will take at least the Federal Home Loan Bank of Boston. And did I say Federal Reserve? It’s a Federal home loan bank is the one that we’re eligible to be a members of. And we’re planned to apply for membership in the Federal Home Loan Bank of Boston, and we expect that they will at some point allows to pledge our mortgages, which have the federal government backing and lever those to some extent. And again, that’s very inexpensive leverage are married with the 7% crowdfunding equity that we raise. I should make us very, very competitive in terms of our cost of capital to buy these mortgages.

Buck: Good stuff. You are a raging entrepreneur, my friend. I’m always just impressed every time I think I’m an entrepreneur gone wild. It’s like Jorge on and I’m like, I am tame. I’m a very tame individual compared to you.

Jorge: The good news is these companies are all complementary. So pre are people that buy these mortgages are mortgages that are purchased by AHP title. They all get serviced at AHP Servicing. So everything kind of interconnects, and that’s what we’re trying to build is something that everything’s compliments and supports each other company.

Buck: Fantastic. Well, Jorge, I want to thank you for being on Wealth Formula Podcast again and again. Right now we’ve got PreREO.com that’s live people should check that out. It looks like we’re a really good opportunity to get involved with really nice properties, too, right? I mean, obviously you’re talking about multi million dollar properties. You’re not just talking about junkie stuff, so maybe you’ll even find a place to live on PreREO.com if you want. But Jorge, as always, a pleasure and I’m sure we will have you on again in the near future.

Jorge: I look forward to it. Thanks.

Buck: We’ll be right back.