JF2294: How to Buy PreREOs With Jorge Newbery #SkillsetSunday

Jorge is a returned guest who was previously on episode JF1342. Jorge owned about 4000 apartments across the country and a natural disaster happened and caused him to lose everything he had and put him millions of dollars in debt. Then in 2008 when he saw that many Americans were losing their homes he decided to create a company that could help them by buying mortgages from banks in pools. Today he will share what a PreREO is and why he focuses on this.

Jorge Newbery Real Estate Background:

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Best Ever Tweet:

“Local investors have advantages because they can see the work that is needed and typically have a local team they know and trust” – Jorge Newbery

TRANSCRIPTION

Theo Hicks: Hello Best Ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today I’ll be speaking with Jorge Newbery. Jorge, how are you doing today?

Theo Hicks: Good, thank you. Thanks, Theo, for having me on the show.

Theo Hicks: Absolutely, thanks for joining us again. So Jorge a repeat guest; make sure you check out his other episode, which is Episode 1342. So today is Sunday; we’ll be doing a skillset Sunday where we’ll talk about a specific skill set that our guest has, and as you can tell by the title, we’re talking about how to buy pre-REO’s, not REOs but pre-REO’s on the internet. So Jorge, can you tell us, first of all, what pre-REO’s are and then how you can buy those from your house on the internet?

Before we get into that, Jorge’s background… So he is a CEO of pre-REO, as well as AHP Servicing, and is a partner in Activist Legal. He has 30 years of real estate experience, a portfolio of 10,000 purchased defaulted mortgages, he has also owned over 4,000 multi-family units, and brokered thousands of deals. He is based in Chicago, Illinois and the website is prereo.com. So Jorge, do you mind telling us just a little bit more about your background and what you’re focused on today?

Theo Hicks: Sure, I’ll give you a brief history. About 16 years ago I owned about 4,000 apartments across the country, a natural disaster devastated my largest holding which was 11,000 units in Columbus, Ohio, and it gutted me financially; I ended up losing everything, and over 26 million dollars in debt. That story created a huge amount of challenges for me at that time of my life; actually, enough that I wrote a book about it called Burn Zones.

But I rebuilt myself through a company called American Homeowner Preservation, and this was 2008 when the financial crisis was devastating America and millions of families were at risk of losing their homes… And I saw that many of these families were going through the same things that I was going through. So I started a company called American Homeowner Preservation. And what we started doing was purchasing the defaulted mortgages at big discounts from banks and other lenders, and when we could, we would share those discounts with the families in the form of affordable modifications so they could stay in their homes. So that’s what American Home and Preservation has done. We bought over 10,000 mortgages in the last decade.

But when we bought from banks, we’d often buy pools, and those pools will include some that are occupied and some of them were vacant. Sometimes we got lucky on the vacant ones; we could find the homeowner and we’d pay them cash for a deed in lieu and we’d sell the property. So that’s great. But other times we could not find the family; maybe the homeowner was deceased, or was divorced, and no one could agree on what to do, and we would end up having the fore-close on a vacant home. So we’re the mortgage holder, there’s a property owner, but they’re not living in the home, and it’s sitting there vacant.

Now, in many cases there are great challenges; the returns often on that component of the population and often times was not that good, and I’ll tell you why… As a mortgage holder, if the property owner is not taking care of the property, the mortgage holder needs to, and that  includes anything from cutting the grass to shoveling the snow, to boarding up the property… And sometimes code enforcement, the local city will go out there and say “Hey you need to bring everything up to code. The roof is leaking.” So we have to do it; we don’t own the property, but we’d have to pay for that work.

And then in extreme cases like where I am in Chicago, if the property became a nuisance because people kept breaking in there and whatnot, then the city would actually require that we posted a night watchman. So every night we’d have to pay for a security guard to guard the property. And obviously, that becomes extremely expensive. And we’re still just sitting on a vacant property that’s losing value, in many cases, because it is deteriorating.

So in my mind I was saying “How do we rectify this? We have homes that could be rented out and generating income, but we don’t own the property, so what can we do?” And I guess the opportunity and the challenge is that the situation I described for AHP is the same for all the other hedge funds and mortgage investors across the country that do this nationally; they all have similar situations with a portion of their vacant properties.

So the solution that we came up with is pre-REO. And people say “What is a pre-REO?”. A pre-REO is a first mortgage that’s in default, that is secured by a vacant property; and actually, it could also be secured by a tenant-occupied property, but by and large, is by a vacant property. So what we offer is for hedge funds and other holders of these mortgages to put them on pre-REO, the local investors can bid to buy an interest in that mortgage, and that interest will allow them to follow a strategy that we’ve come up with, which is to work with our law firm Activist Legal to continue the foreclosure, number 1, so they can eventually get title to the property, but also to appoint a receiver, which is typically a local real estate agent who can repair and rent the property while it’s in foreclosure.

So it’s not yet owned, but the court will allow it, because it has been abandoned in many cases, to appoint a receiver to repair and rent the property and start generating income while the foreclosure is continuing. So that is the strategy that we’ve come up with, and so far we are getting a good reception.

Right now we have hundreds of properties on the platform, I anticipate by the end of the year we’ll have thousands. So it’s just a huge demand from lenders, and now we’re trying to reach out. One of the reasons I’m on the show is to let buyers know about the opportunity. It’s in many cases a fantastic opportunity for local investors to buy these at significant discounts to what they would buy REO’s.

Theo Hicks: So from your perspective, the deals that are on there are notes that your company owns, as well as other companies that do the same thing, that have the same issue with a portion of the vacant deal. So someone already owns these notes already, right?

Theo Hicks: Correct.

Theo Hicks: Okay. So from my perspective as a client, as a person who wants to buy these, I go to your website — I went to your website and saw that info on there. What types of things do I need to do in order to figure out how much I should pay for these things, if it’s worth paying for this…? What’s the due diligence that I need to do on my end?

Theo Hicks: Sure. Because it’s vacant, it is truly destined to be an REO in almost all cases. It would be rare that a homeowner would pop back up and say “Hey, you know, I want to pay off my mortgage, or re-instate”, or something like that. So in time, there’s a high likelihood that these will become REO. So I think investors should look at it as “What do I really think this property is worth as an REO?” And as is, where is.

And our guidance to sellers is to price it at 75% of the REO value. So they think the property is worth 200k, offer it at 150k. So there’s a $50,000 equity that’s there to be captured by going through this process. And the sellers – the sale to them is “Hey, you get your money a year or more early, you’re going to save all the legal fees, all the taxes, insurance, boarding up cost, night watchman, all that stuff is gone.” And for the local investor, they’re going to put a tenant in there who could be paying them, call it a thousand a month or something like that during that year, so they pick up $12,000, plus they do the repairs while it’s still being foreclosed upon. And when it’s foreclosed upon, they can choose to either sell it as an REO or to keep renting it.

Theo Hicks: So that offer is to you and these hedge funds, right?

Theo Hicks: Correct. Right now the offers all go to us, and then we share them with the hedge funds. But ultimately, they’re making the decision on “Hey do we accept it? Do we counter it? And how do we respond to this?” So to be clear, all the asking prices on there are simply just that – they’re asking prices; you can offer more, you can offer less, and we do see both of those. We see people who are offering full price, people where there are maybe five or six bids, but they’re all 10% or 20% low, which means that maybe the hedge fund opinion of values may be higher than it should be, and vice versa. There are some times that somebody is selling for a little bit more than what the asking prices are. So pay what you think is fair, offer that. Right now, we’re highly attentive to trying to get these things sold to prove out the models. So we’re trying to broker… In some cases, in the end we’re almost on the phone between the buyer and seller to try and bridge the gap to a price that makes sense.

Theo Hicks: Okay. So if I submit my offer, you mentioned that your company, for the pre-REO, has a system that I can use. So that system is up to the actual foreclosure; then it’s in my hands, right? So you’re saying that you help the second I take over that note to the foreclosure, and then the main thing in between there is appointing the receiver.

Theo Hicks: Appointing the receiver. You, for instance, could choose “Hey I know a friend who is a real estate agent. They are really reliable, I want them to be the receiver.” That’s fine. But the court will have the attorney propose to the court that that agent is appointed as a receiver.

Theo Hicks: Why aren’t the hedge funds appointed the receiver?

Theo Hicks: Because this is very local; we’re in Chicago, so when we’re having to pay for these repairs on properties I know we’re not getting in best prices. The local person will maybe have their own crew or have their own relationships and contacts where they can get stuff done at a better price, done faster; they can also be there watching “Hey this is what the work is, and you’re getting the bid for this.” That makes sense. And besides, we’re a thousand miles away from the bid and we don’t really know; we get photos and sometimes people — they always think it’s a bank or a hedge fund,
“They’re not going know the difference whether it’s 2000 or 3000, so bill them 3000.” We got this clean-up bids sometimes for like $3,000 and $4,000. I’m thinking, if I had a small crew, I’d be out there with the dumpster and get it all done for 500 bucks. And then they say “We’re bonded, we’re insured, and that’s why we’re $4,000.” Sure, that’s important, but the local investor can always do these things better. Also, selecting tenants, making sure they pay…

So I think what pre-REO is trying to bridge is the local investors absolutely, in this case, have the advantage. They know the market, they can watch the work get done, so they are doing that portion of the work and they’re adding value because they have transactions as a result. The hedge funds can never compete with a local investor in that regard.

Theo Hicks: Yeah. Plus, they’re not real estate investors either.

Theo Hicks: They’re not. We got offers on our REO’s, there are always people sending us the photos of like the worst thing in the house, making it look as bad as possible… And again, we are thousands of miles away sometimes so we don’t really know the difference. So local guys can say “Hey this thing is worth $300,000.” Or it’s worth whatever the number is, and if somebody is crying about a little repair that needs need to be done, hey I’ll get that done and they should be paying full price.

Theo Hicks: I’m not very familiar with this. So appointing a receiver – is that something that always happens? There’s no risk of the court say “Well no, you can’t do this, from my perspective.” Who are the receivers?

Theo Hicks: Sure. So that typical receiver is appointed on an office building, a hotel, a property that’s generating revenue, and if they’re not paying the mortgage or the other debt then, the lender can request that court to appoint a receiver to collect the rent, pay the expenses on that type of property; even they put him at sometimes retail stores or whatnot. But those receivers are often times attorneys or other high-priced professionals, and it would not work to use that type of receiver for a single-family residence.

So we were like struggling with who do we use, and who’s going to make sense here… And the receivership is very much akin to property management, with a couple of extra reporting steps with the court; so a local real estate agent makes a ton of sense. And they are doing it — maybe collecting rent, maybe 10% of the rent collected, and that’s okay, but I think what the agents are really looking for is hopefully some of these ends up being listed once they are foreclosed, they’re going to want to sell it, and then I’ll get the listing; so they’re building a pipeline of future listings. In turn, the receivership is usually high cost; we’ve made it affordable for this segment of the market, single-family residences and other small properties.

And then the other part is if real estate investors just call the local attorneys and say “Hey, appoint a receiver on a single-family”, it’s going to be “I’ve never heard of that.” So we have one firm [unintelligible [00:14:35].17] which I’m a partner in, which facilitates default services nationwide; so all of these we recommend that you go through Activist Legal, and Activist Legal will co-counsel with the local attorney in their network to complete the foreclosure and to get the receivership appointed.

And you’ll think “Well, how much is the receivership?” To appoint a receiver, estimated hours maybe a thousand dollars in legal fees. When the receivership is completed, maybe a couple of hours and maybe $500. And your question, which is a good one, “Is this definitely going to work? Is the court definitely going to appoint a receiver?” And the answer is we expect that they will, but we don’t know. There may be some judge who just says “I don’t get this. It doesn’t make sense to me. I’ve never seen it before.” We haven’t run into that yet; we’ve been able to so far convince judges that this makes sense. And the reality is if a judge is going to look at it from a public policy point of view and say “Is it better to leave a home vacant for a year, or better to appoint a receiver and have a tenant in there? Which is better?” It’s clearly to have it occupied; if it’s vacant it either is or could be of blight on the community, so it’s just so much better to have it occupied. The neighbors would appreciate it. So it does make sense, but we do anticipate at one point or another we may have [unintelligible [00:15:41].18] We’ve had this concern enough as we keep going to different jurisdictions to prove out the concept; if a receiver  could not be appointed, our fund would buy the asset from the pre-REO buyer. We expect that to happen one in a hundred times; it hasn’t happen yet. And if it does, then we simply know that in a jurisdiction we can’t do it, and we’ll keep trying. It makes sense, so we expect at some point the judges will all be on board with this.

Theo Hicks: Another question I have from a very limited knowledge of the foreclosure process – I know it’s usually not always the exact same length from when it is initiated to when it’s actually completed, so how do I know when looking at a deal what spot in the process we are at?

Theo Hicks: That’s a good question, because if there’s a sale date next month and you already have a judgment, then you’re just going to say “Skip the receiver, I’m going to get the deed to this thing in a month or two.” So we are trying to provide information on our site; it’s not where we want. Sellers – it always seems like they have to go to the servicer, go to the attorney and get the current updates. So we are trying to improve that. If a property is of interest, and you think of bidding on it and that’s important to you, which it should be, then before you bid, say “Hey, what’s the status of the foreclosure?” And someone will get you that information.

Bear in mind though, the way we’ve structured pre-REO is accepting the ones that are towards the end of foreclosure. If it’s kind of mid or earlier, then it’s going to be months if not years in some cases, so it does make sense to appoint a receiver. And the passage of time, which usually negatively impacts the returns of a mortgage holder using pre-REO, where you’re generating rent during the term for the foreclosure, then the passage of time is no longer a negative drag on your returns.

Theo Hicks: So if I have a receiver, and I get fixed up, I can put someone in for rent before? That makes sense. I was kind of confused. I saw on there in your website, that you could do loans on this as well.

Theo Hicks: Yup.

Theo Hicks: So I put the down payment, obviously I’m paying that loan, because I’ve got an outgoing payment, but with a receiver, I fix it up, I put a tenant in it, the tenant could pay me before I actually own the property.

Theo Hicks: Correct. Now, a big asterisk to all that. The receiver needs to coordinate the work, so the court’s going to allow the receiver to do the work, and they can hire contractors. So you couldn’t actually do the work yourself; you could coordinate it through the receiver. You could tell the receiver “Hey, I recommend that you use this contractor.” Ultimately, you’re the one funding the work. And the rents that are collected would need to go to the receiver, they need to go to the servicer, and then they come back to you. That way it’s fully documented for the court and there’s always a record if they ever ask. In the end, we accomplish what you’re just describing.

Theo Hicks: So you said that rents go to receiver, and then who is this servicer? Is that you?

Theo Hicks: Yeah. But that’s the AHP servicing.

Theo Hicks: Okay.

Theo Hicks: So almost all the states in this country require that a licensed servicer is the one that usually collects the mortgages, interfaces with the bar, facilitates foreclosures… So AHP servicing is a national servicer; we can fill that role. In fact, in pre-REO you can say “Hey, it’s a great way to generate business for AHP servicing, [unintelligible [00:18:29].07] and you’re right. But also, without those two components, it would be very difficult to replicate. Because otherwise, you’d have to go to a servicer, go to a law firm and try to put these pieces together, and that I think would create a challenge. So here I’ve created the roadmap, and the companies and resources that you can utilize along the way, so you just follow the steps for the particular pre-REO that you’re working on.

Theo Hicks: So you say this is pretty passive compared to other strategies. Is that like entirely passive? But it sounds like it’s passive, because a lot of the steps – kind of communicating with the receiver, it sounds like once you’ve bought the deal and then sending the money out for the loan… So those are passive?

Theo Hicks: Yeah. I don’t know if I’d say very passive. You still have to be the quarterback, maximize your success. You want to be very involved [unintelligible [00:19:13].24] you’re right, you’re having to work through others to help execute the strategy.

Theo Hicks: Alright, Jorge. This is very fascinating stuff. It’s from the perspective of buying this, but also just from your perspective in identifying this need and starting a business. Of course, we couldn’t focus on it that much, but I think we did get a lot out. Is there anything else that you want to mention about buying pre-REO’s on the internet, or anything else before we wrap up?

Theo Hicks: No. I think we’ve covered most bases. You mentioned the financing – we provide 75% of the money, so the local investor just needs to come up with 25%. We’ve tried to make it as similar to doing a normal real estate transaction, except here you’re just buying earlier in the process, at a greater discount. So I think we covered all the bases. I appreciate the question, and thanks for having me on today.

Theo Hicks: Absolutely. Thanks for joining us and talking about how to buy pre-REO’s on the internet. So if you want to look at actual live deals, prereo.com. And there you can kind of click and see some details about those deals.

Overall, just to summarize what the process is, you are buying the first mortgage that’s in default, as secured by a vacant property, from a hedge fund or some other company that’s already bought that. And then you being the local investor will be able to add more value to that deal than the company that’s thousands of miles away.

Once you buy the note, which you said that the starting offer price would be 75% of whatever that value is, then you request that the court appoints a receiver, and then this receiver, which your company helps find, will be the person who can coordinate the renovations on that vacant property, putting a tenant in that vacant property, so you are able to make money before you actually foreclose on the property. That sounds like the overall strategy. Obviously, there’s a lot more that goes into it than that, but that’s the overall strategy.

Jorge, thanks again for joining me. It was great talking to you. Best Ever listeners, as always, thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.

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