Dec 11, 2019
BE SURE TO SEE THE SHOWNOTES AND LISTEN TO THIS EPISODE HERE.
Eve Picker: Hey, everyone, this is Eve Picker, and if you listen to this podcast series, you're going to learn how to make some change.
Eve Picker: Hi, there. Thanks so much for joining me today for the latest episode of Impact Real Estate Investing.
Eve Picker: My guest today is Jorge Newbery, founder and CEO of American Home Owner Preservation and AHP Servicing. Jorge is also CEO of Debt Cleanse Group Legal Services. AHP crowdfunds the purchase of non-performing mortgages from banks at big discounts, then shares the discounts with struggling homeowners. Jorge is on a mission to help Americans crushed by unaffordable debts.
Eve Picker: A 2004 natural disaster triggered the financial collapse of Jorge's former business, leaving him with $26 million in debts he could not pay. Jorge rebuilt himself through AHP, sharing what he learned from his own challenges to help families at risk of foreclosure stay in their homes. Jorge has also found the time to write a few books, Burn Zones, Playing Life's Bad Hands, Debt Cleanse, How to Settle Your Unaffordable Debts for Pennies on the Dollar, and Stories of the Indebted.
Eve Picker: Be sure to go to EvePicker.com to find out more about Jorge on the Shownotes page for this episode and be sure to sign up for my newsletter so you can access information about impact real estate investing and get the latest news about the exciting projects on my crowdfunding platform, Small Change.
Eve Picker: Welcome, Jorge. Thanks very much for joining me. It's really nice to reconnect.
Jorge Newbery: Likewise, Eve. Always a pleasure.
Eve Picker: Yeah, we haven't talked for a while, but still, I know that you're a man with a mission, and the mission that I know about is to help keep Americans in their homes. I think a more recent one is to help Americans crushed by unaffordable debt. I'd love to talk to you about how you're tackling these two missions.
Jorge Newbery: Sure. They're very interrelated. I'll go back a little bit in history, about 15 years ago; 15 years ago, next month, was a day that kind of changed my life. At the time, I owned about 4,000 apartments across the country, had a very significant net worth. A ice storm hit my largest holding on Christmas Eve 2004. That holding was 1,100 units in Columbus, Ohio. It was just devastated by this natural disaster, and it triggered this extraordinary sequence of events in which I lost everything and ended up $26 million in debt.
Eve Picker: Whoa! That's a really big number.
Jorge Newbery: Yeah. It created some extraordinary challenges, as you can imagine. As I regained- came back to life, I realized that I'd become good at one thing through that experience. I never filed bankruptcy, but instead, I was able to work with my creditors, or somehow, sometimes, go on the offensive against my creditors, in order to settle those debts at significant discounts and, in some cases, not pay them at all.
Jorge Newbery: By 2008, I realized millions of families across our country are suffering the same experience. They're at risk of losing everything. They're ending up losing their homes, losing whatever property they had, and in significant debt, and maybe my experience could be put to good use to help them. So, I started American Homeowner Preservation in 2008, and the goal was- the mission was, and still is, to keep families at risk of foreclosure in their homes.
Jorge Newbery: Originally, we were a nonprofit. We were able to get our 501(c)(3) designation from the IRS. But over time, we realized that we could be a lot more effective as a for-profit, and we started buying defaulted mortgages from banks at big discounts. Then, once we owned the mortgage, we could do whatever we wanted with it, which could include cutting principal, forgiving delinquency, and reducing payments in order to keep these families in their homes.
Eve Picker: So, the second mission ... I think you started a second company recently, right?
Jorge Newbery: I did. What would happen is, over the years, we would help a family, and they would say, "Wow, this is ..." Oftentimes, people say this is too good to be true. They owe $100,000, and the home is only worth $50,000. They hadn't paid in three years. They owed $20,000 to the bank. Here we come along, and buy the mortgage, and say, "Hey, give us $2,000. We'll forgive the delinquency, so you're up to date. Your payment was $800; now it's $500." They say, "Great!" They'd tell their friends and family, and the friends and family will call us and say, "Hey, you helped my cousin with his mortgage, my co-workers on their mortgage. Can you buy my mortgage?"
Jorge Newbery: The reality is, I can't go to Chase, or Wells, or any of the big banks, or other lenders, and say, "Hey, sell me this one mortgage." They basically decide what loans they want to sell, and I can't make special requests. Neither can anybody. So, what do we tell these people? We started giving them some tips as to what they could do to maximize the likelihood that they could stay in their home an extended period, and somebody would buy their loan at a discount and give them a more favorable deal. That eventually became a book, which is called Debt Cleanse - How to Settle Your Unaffordable Debts for Pennies on the Dollar.
Jorge Newbery: Through life, you find that, as you solve one problem, you create another. So, now, people would read the book, and they'd say, "Hey, I'm following the steps in the book ..." They'd reach out on social media, and by email, and they'd say, "I'm following the steps in the book, but I need an attorney. Do you know any attorneys who can help me?" I knew from my experience when I was in a lot of debt that a lot of attorneys ... Some attorneys can be very helpful, but a lot of attorneys aren't that helpful; don't have that much experience in being ... Outside of law school, there's a lot of things you can do if you can't afford your debts that can be used to your advantage. Most attorneys aren't familiar with the tactics. So, what do I do? What do I tell these people to do? I can't tell them just to google 'attorneys in my area.'.
Jorge Newbery: Over time, we realized that what could work here is a legal plan, where consumers struggling with their debts paid a $99 enrollment fee and $29 a month, and we'd give them access to attorneys in their area. Those attorneys, as part of the plan, agree that, "For that $29 dollars a month, I'm going to give this member half an hour of my time at no extra cost." They're going to get half an hour with their attorney every month.
Jorge Newbery: Not only that, when they first enroll, these attorneys will send letters to their creditors saying that, "This member is represented by our law firm. Please cease communication with a member and direct all future correspondence to us." That has been very effective for members at stopping the phone calls, stopping the letters, which oftentimes create a lot of anxiety, so it's a big relief when that happens.
Jorge Newbery: That's what we've done, and these attorneys ... The goal is they look for violations. It happens all the time, millions and millions of times a year, where there'd be live violations of the Fair Debt Collections Practices Act, the Fair Credit Reporting Act, TCPA, RESPA. When they can find these violations, they use those as leverage to get the debts settled at big discounts, not get paid at all and sometimes, in some cases, they'll sometimes even get the creditor to pay the member a statutory penalty, plus pay the attorney's legal fees. Most of the attorneys work on contingency, so they're not looking to get paid by the member; they're looking to get paid by the creditors.
Eve Picker: I want to go back to AHP Servicing and what you've done there. I haven't talked to you in a few years, but I know you were buying large blocks of foreclosed homes and trying to keep people in them. That was really your first goal. I'm wondering how many people you've impacted by now. How big has this become? Where does everything stand?
Jorge Newbery: I think we've bought, over the years, about 10,000 mortgages, so it's ... We bought a lot of mortgages. We've helped thousands of families stay in their homes with long-term sustainable modifications. Others, they don't want their homes. We've been able to give them cash; in exchange for the deed to the property, we forgive the debt and then, we sell the property. So, we get these vacant homes, which are oftentimes pock-marking low-, and moderate-income neighborhoods, and we get those back into service and occupied. Someone's taking care of them, paying taxes on them, and whatnot. So, between the two, one is keep the family in the home if they want to stay. Number one, that's the goal; but if not, the second thing is to help those communities by getting these vacant homes back into service.
Eve Picker: Let's talk also about how you fund this, because that's how you and I [crosstalk] together, right? That's probably the most interesting part of the story, or very interesting.
Jorge Newbery: Yeah, that's how our paths intersected. So, in 2013, September, we were one of the first crowdfunding offerings under 506(c). Before that, we raised money initially from friends and family; then from private investors who we knew; then accredited investors only, into a hedge fund. But then we heard about crowdfunding. So, September 2013, we offered, under 506(c) ... It was still accredited investors only, but we made it more accessible. It was a $10,000 minimum, which, at the time, was pretty low. I think our first offering raised about $4.5 million or so, and we bought a considerable number of loans. I forget how many, but it was quite a few; probably close to 1,000.
Jorge Newbery: It worked. It made it more accessible. It was still accredited investors only, but it made it more accessible to a wider audience. I remember being really shocked, early on, when people would go online, go through the process, make an investment, and we had never talked to them. I was really astounded by that, because previously, as a hedge fund, we had to talk to people, and explain things, and send out these private placement memorandums that were numbered. So, it really was- seemed to be a lot ... It was just a lot more streamlined.
Jorge Newbery: What was exciting is we did two more 506(c) offerings. All went well, but then, when we heard about Regulation A+, because now it was crowdfunding, but we could accept investments from both accredited investors and non-accredited investors. For me, that was exciting because it really ... We had homeowners, at times, who we helped them out of their predicament, and they'd say, "Hey, I have some extra money I'd like to invest, or my friend, or family member would." I can't tell you how many times we had to tell people, "We'd love to have you participate, but you can't. You're not worth enough, or you don't earn enough, so we can't accept your investment." It seemed [crosstalk]
Eve Picker: -you're part of the 97 percent of the population that's not permitted to invest, right?
Jorge Newbery: Exactly! It didn't feel right. So, when I heard about Regulation A+ [inaudible] accredited investors- I mean, non-accredited investors can invest, that was exciting. We were one of the first Regulation A+ offerings in 2016, and to make it as accessible as possible to anyone, we made our minimum investment $100, which I think is still amongst the lowest, if not the lowest of the major ones.
Eve Picker: Be sure to go to EvePicker.com and sign up for my free educational newsletter about impact real estate investing. You'll be among the first to hear about new projects you can invest in. That's EvePicker.com. Thanks so much.
Eve Picker: I think it's probably the lowest, although there's some pretty low ones in Reg CF, but it's pretty low.
Jorge Newbery: Yeah, it's pretty low. People will say, "Why are you doing that? You don't need to be that low!" The reality is, we don't need to be that low, but it did make it ... People would- it caught people ... It was almost a marketing strategy, but we've kept it because many people have started out with $100, just saying, "Well, what is this? It looks curious. Oh, it's only $100. I'll try it."
Eve Picker: Yes.
Jorge Newbery: Now, though, now they're an investor with us; they get our emails; they see that they get the returns; and they keep up with our news. Then, over time, they increase- the vast majority increase their investments and then, they tell their friends and family. So, definitely, the $100, I think, is a winner. I think we'll do it forever. It's a great way to start a relationship, and that's grown.
Jorge Newbery: Now, our first Reg A fund, we raised $40 million and now, we're working on our second. Our goal probably would be to get to around $65 million. Then, our third fund, which'll come out sometime in 2020, we expect- our goal is to do the full $100 million. Regulation A+, we actually now realize that vision of having homeowners who we helped out of their predicament and now, they've turned around and been investors, and I think that's just- it just feels right-
Eve Picker: That's pretty fabulous.
Jorge Newbery: It is. Socially, it seems right, and it feels good. That's along with a lot of other ... We have a lot of accredited investors that participate, but alongside the non-accredited. We've had people invest very substantial sums, several hundred thousand dollars at a time, and they've asked, "Hey, can I get a better deal, or can I get a little bit extra, or something like that?" We always say no. Again, it plays to kind of the-
Eve Picker: Because everyone's money is the same, right?
Jorge Newbery: It is. Exactly-
Eve Picker: It's a great democratization of investment.
Jorge Newbery: It truly is. The person who puts in $100 and the person who puts in $600, they're getting the exact same terms, and I'm talking $600,000 ... It's fair, it's transparent, and that's the way things should be. I know, in Wall Street, it often isn't the case, so it feels good.
Eve Picker: Yeah. While you've been helping people save their homes and taking people's money to make that happen, how much have you been returning to investors?
Jorge Newbery: I'll tell you what we did in our first fund, because it's kind of a ... You'll see the progression. In our very first 506(c) offering, we said, "Hey, if you invest your money for five years, you earn 12 percent. If you invest your money for two years, you earn roughly 10 percent. If you invest your money for one year, you earn nine percent." That was our first offering, and that's what we did. Then, in our first Regulation A+ offering, we said, "Let's make this simpler. Let's just pay everybody 12 percent, but if they need the money early on, they can ask us for it, and we'll undertake our best efforts to return the money. If they need it back ..." I think we did ... Currently, if they needed it back early, then they'd get a slightly reduced return.
Jorge Newbery: That's evolved into today's fund, where we pay- the first 10 percent of what we earn, that's what we pay to investors. Anything over that is what we keep, and-.
Eve Picker: So, that's pretty motivating for you.
Jorge Newbery: Yeah, it's very motivating to hit big targets. Again, there's a tension between you want to make money, but you also want to deliver a very favorable resolution to the homeowners. We make everything formulaic, so I think our returns don't come from ... They come from creating efficiencies in resolving these, and speed/urgency in resolving these, and trying to minimize legal fees, and other expenses in getting these resolved. When we do that, that's when we generate the big returns.
Eve Picker: Wow! That's quite a story. So, by the time you've raised all three funds, how many mortgages will you have purchased?
Jorge Newbery: That's a good question. Right now, I think we're right around 10,000. I think we will certainly ... If we do all three funds, it should hit 30,000-plus. Of the current funds- I mean, in future funds, and our current fund, our AHP Servicing Fund, we can buy mortgage-servicing rights. We haven't done that yet, partially because we're still waiting on getting our government approval for our service. We did get, recently, approval from the Veteran's Administration to service VA loans. We're working on getting our FHA, Fannie Mae, and Freddie Mac approvals.
Jorge Newbery: Once we have those, we can buy mortgage-servicing rights, which actually, we'd spend a lot less money per loan, for the ability to service that loan. But then, we can service it with our homeowner-friendly strategies, which will, I think, touch a lot more homeowners, so we will ... Actually, the amount of loans that we will own, or service will expand- it could be much, much more than that. I don't have a number yet, but I think, as we start seeing- buying those rights, and then, also, we're servicing now for third parties, so other people that own mortgages that-
Eve Picker: Oh, really?
Jorge Newbery: Yeah. We see that as another way we can impact a lot of homeowners and do what we've been doing, but for other people who own mortgages and are also kind of ... See, it's funny, and I think you may have experienced this in your undertakings, as well. Oftentimes, people interpret socially responsible, or social impact as meaning, "Okay, I get the benefit of doing something good for society, but I have to take a lower financial return." I think, at least in our business, we've demonstrated that you can actually achieve both a solid, oftentimes above-market financial return, and you're also doing the right thing. They're not mutually exclusive. I think other investors now see that, that own these loans, and we can help them in their interactions with the homeowners if they service with us.
Eve Picker: So, then, do you believe that most of your investors are investing because they're making an impact or because of your solid returns?
Jorge Newbery: That's a really good question. I think it's a mix. There's definitely people who are attracted by the financial returns, but there's others who are investing ... The draw is the social impact. Since we've been able to marry the two, I think it's been a ... They don't have to compromise their ... I think, so many times, social impact investors feel the need, upon occasion, to compromise their financial returns because it has a good result. That's certainly understandable, but when you can deliver both, I think that makes it very compelling.
Eve Picker: That's pretty fabulous. Going back to the beginning of this story, I'm just wondering if you could have built this business with bank loans instead of crowdfunding investment?
Jorge Newbery: I don't think so. We're still doing it. I think we qualified for some ... We financed. We've done some financing here and there. Usually it's only for a short term, like we committed to a deal that's bigger than we have- that we're raising capital, and we need to close it by year end, or month end, or something like that-
Eve Picker: A bridge loan, right?
Jorge Newbery: Yeah. We'll borrow, but it hasn't been for long periods yet. Over time ... We've talked to Wall Street investors, or I should say not ... Wall Street institutional potential partners and, for this space, for non-performing loans, they're most interested when the scale is bigger, and we're talking $100 million. We're just not there yet. Over time, I think we will have more institutional capital in here, and we blend that with the equity that we've-
Eve Picker: But Jorge, by then, maybe you'll have such a big crowd of investors, you still won't need them.
Jorge Newbery: Ha. Maybe. We'll see. I guess the attraction is we can get institutional money. Sometimes, you can get it at even lower returns than what we're paying our investors. So, maybe ... It'll make us more competitive on some of the larger transactions, but you're right.
Eve Picker: Yeah, yeah. That's what I hope for. Going back even further, you had this portfolio that was hit by an ice storm, but what's your background? What got you into all of this?
Jorge Newbery: I started as a loan officer almost ... In 1990, so, a long time ago, my first job was answering phones for a loan originator, and I had- that was my first exposure to real estate. Before that, I raced bicycles, and I had a GED, so my options were limited ... I was 25, and my main source of revenue was bike racing, so I needed to get a real job. One of my teammate's girlfriends helped me get the job at the loan company, and that was kind of the start.
Jorge Newbery: A couple years later, I started my own mortgage company, and then I started buying properties. It kind of evolved into buying and doing ... I'll share a strategy, though, that's been a consistent, as I've learned, and it's still what we do today. I always buy what other people don't want. When I first started in real estate, we would do loans that other people wouldn't make. Then, I started buying properties that others didn't want. These would be mostly because they were in less desirable areas, neighborhoods; maybe challenged properties that were maybe the target of- had been vandalized or were a blight on the community.
Jorge Newbery: I found that you could achieve a good social impact, when you remedied whatever the problems were, and you could also make money doing it, and that was rewarding to me. I always like a challenge ... The bigger the challenge, some people say, "Oh, this can't be done," and it's kind of like, "Okay, well, I've got to prove them wrong." Even today, Wall Street does not like to buy the loans that we like to buy, which is those secure- in low-, to moderate-income neighborhoods. Our average home value that we buy is $40-some-000, and that's just Wall Street ... They'll say, "Hey, congratulations, Jorge, you just made $6,000 on that deal." It doesn't mean anything to them, but for us, we make $6,000 on 100 loans or 1,000 loans, and it's like, wait, now we have a business. We buy what others don't want, and that's, I think, where there's some success.
Jorge Newbery: Today, we're working on a deal right now to buy the debt on three churches. These are three churches in kind of low- serving low-, to moderate-income neighborhoods. It's another opportunity for us to buy the debt. No one wants to foreclose on a church, including us, so our goal will be to make those loans affordable for the churches so they can continue operating. 90-percent-plus of what we buy is loans secured by homes, but when we see these opportunities ... No one wants to buy that stuff, so we'll buy it. We'll buy it at a substantial discount, and we can add value by working directly with the church to get the loans back on track.
Eve Picker: I think, as I'm listening to you, I'm realizing this is like ... I've been talking to a lot of different people about different ploys around how to fix the affordable housing crisis. This is such an effective one because it's keeping affordable housing; actually making it more affordable for people who really need it without actually building anything. Pretty dramatic impact, I would say.
Jorge Newbery: Yeah, the housing is there; it's just making it affordable and keeping people in it. So many people in the last housing boom, you know, in the early 2000s, took out big loans. Then, when the values crashed ... Unfortunately, these neighborhoods have not recovered. To a large extent, whereas the rest of the country has recovered, the only segment of the market where values have continued to deteriorate is those secured- those mortgages, or those homes whose values are $50,000 and less.
Jorge Newbery: There's a number of reasons for it. A primary one is Dodd-Frank. Dodd-Frank was a well-intentioned bill, but it really strangled new-mortgage capital from going into these neighborhoods, which basically, they made they made some very tight constraints on what could be charged to originate a loan in these neighborhoods, or everywhere. But, when you get a loan of $50,000 and you can only charge five percent, and that includes a lot of the fixed costs, it's just no loan agent, no mortgage company [crosstalk] No one wants to do it. You're working for very little, so why not spend your time on a higher-value mortgage?
Jorge Newbery: That's made it so that most of the properties that are sold in these lower-value neighborhoods get sold for cash. Most owner-occupants don't have cash, so then, you end up being sold to investors who rent them out and then, it's majority rentals. Then, the banks ... A lot of mortgage holders say, "Hey, it's not even worth it to foreclose," and then you have all these homes that are sitting there with $100,000 mortgages that are vacant, getting vandalized, and deteriorated, and are now only worth $10,000 or $20,000, which eventually, they get foreclosed on; they get sold to investors. It's really left behind a whole segment of our population, at least real estate-wise, and, I think, a driver in the widening wealth and income gaps in our country.
Eve Picker: So, in the work that you do, you're working in neighborhoods where people must be pretty angry. I'm wondering what sort of community engagement tools work for you?
Jorge Newbery: You know, we have a very simple one, which we started in ... Eight years ago. Especially at this point, so many of these ... To your point, so many families who are struggling in these neighborhoods have already had overtures from Bank of America, Chase; whoever has owned their mortgage before us. They've said, "Oh, we could do a modification. We can do this. We can do that." Then, when they go through the process, they're oftentimes left disappointed. Bank of America will want the last year's tax returns, bank statements, paycheck stubs [crosstalk] all this stuff. Sometimes, people are working, you know, doing babysitting, or helping ... Their income is untraditional, in some cases. That goes for all segments of society, but for some of these families, where, "Hey, I run daycare," but, "Oh, we need your daycare license." "Well, I take care of friends' and family's kids ..." There's things- they just don't qualify, and there's no real ...
Jorge Newbery: With these families, now they come to us, and they explain what the situation is. It makes sense to us, and we do it. It's not like- we're not bound by some criteria that a lot of the big banks are, and I think that's given us a big advantage. But to reach them ... Now, we own their mortgage, so, of course, they're thinking we're the bad guy. But we send a letter - one-page letter - that says, "We just bought your mortgage. Great news. Here are three options. If you want to stay in your home, we will accept $2,000 to satisfy your delinquency," which oftentimes is $20,000 or $30,000. "You pay us $2,000, you're completely up to date. Your existing mortgage payment is, for instance, $800. We will drop it to $500." That's option number one. That's a modification.
Jorge Newbery: Number two, "If you don't want to stay in your home, or you've already moved out, we will pay you $1,000, and you sign a deed in lieu to us, and we'll forgive the rest of the mortgage." The third option is, "If you want to settle your loan for a lump sum, then we will accept this amount," and we give them the actual amount. So, let's say they owe $100,000; the property's worth $50,000, and we bought the loan for $20,000 or $25,000. We'll probably say we'll settle it for $45,000.
Jorge Newbery: Those are the three options. It's very simple. If you call, and you say, "I want to do any of these options," we're bound to it. We're going to take it. We have people ... It's so simple. We're not asking for tax returns, bank statements, any of that kind of stuff. People literally call in and say, "Yeah, I got your letter. I want to do option number two." They've already decided that this is [crosstalk]
Eve Picker: I would've thought you'd need someone answering the phone to questions, like, "Is this for real?"
Jorge Newbery: Yeah, well, that ... After, we get over that ... Sometimes, then, we do get those questions, definitely. "Is this for real? Is this a scam?" We get all those questions. [inaudible] we have to give them the assignment that we got from their lender, but oftentimes, we would direct them online. They can Google us and see that we're really who we say we are. Yeah, it works ... I mean, it's so simple, and it's funny, we've been doing this for years, and no one else is still ... I thought, "Oh, this is our secret sauce. Someone else is going to steal it," but no one's stolen it ... They're all so rigid, the other lenders, and they're set in their ways. It's amazing that this is such a ... You can simplify things. I imagine it'll work for all stratas. We primarily do loans in low-, to moderate-income neighborhoods. That's what we buy in those neighborhoods, but in higher-income neighborhoods, I imagine they would also appreciate the simplicity, but still, everybody else still does it ... "We want tax returns, bank statements, all that stuff." That's just- it's a hassle. It's like a big block [crosstalk]
Eve Picker: It's a lot of work-
Jorge Newbery: It is.
Eve Picker: I mean, if someone's got two or three jobs to make ends meet, they're just not going to get it together-.
Jorge Newbery: Exactly.
Eve Picker: Yeah. I can barely get it together.
Jorge Newbery: I know! Whenever somebody asks for my tax ... It's not that tough to get it, but it's like, "Aww, okay, let me dig them out." Then you send them, and then, "Oh, I want a paycheck stub," and then you want this and that ... It's crazy. The banks will actually ask these families who've been struggling, they'll say, "Oh, we need a hardship letter to say why you fell behind on your mortgage." Then, it's like you're getting graded on this thing. Just, just ... They're behind. I mean, they lost their job; there was a divorce; a death in the family; an unexpected medical expense; any of these reasons. But does it really matter? They're behind ... People don't fall behind. No one wants that. Everyone wants to pay their bills, and be on time, and not have- to go on and focus on other parts of their lives. They don't want to fall behind, so you don't have to shame them. I feel like some of the banks almost ... The process they go through, it's almost like they shame them for falling behind. It wasn't something people wanted to do.
Eve Picker: Yeah. Wow! So, you found this little corner here; actually, a really big corner. What's next? I'm sure you're ... I've gotta believe you're thinking about other things.
Jorge Newbery: Two years ago, we started our AHP Servicing, and it actually went operational just over a year ago. Now, we service our own loans. That's new. We always used to have to rely on a servicer. We're doing a couple of things now that ... That's, I think, our big step forward. What we want to do is to get government approval to service government-backed loans. That's a market that we haven't had too much exposure to, but we think we could do a lot of good. A lot of people, the VA and FHA loans, for instance, are oftentimes in our target neighborhoods, and they're struggling, so we think we can help a lot of these families once we have those designations.
Eve Picker: Is that hard to get that approval?
Jorge Newbery: It's a little bit of work. It feels like applying for a modification at a bank. No offense to FHA and VA, but it does. They're asking for all these documents; these explanations ... We're getting through it. We got VA done, and now, we're working on FHA. But, yeah, it is a lot of work. I guess it's, they want to know who you are. They want to make sure you have all your licenses, and all your credentials, and all your bonds, and everything like that - everything lined up. So, totally understandable, but it does ... It's not the funnest process.
Eve Picker: Okay, well, I'm going to go back to big picture a little bit and just to ask you, where do you think the future of real estate impact investing lies?
Jorge Newbery: Well, I know where the need is, so I guess the future will lie in solving the need. But, as you and I have talked before, housing is as unaffordable for a huge chunk of America, and that has to ... We have to remedy that. I don't know if ... There's all kinds of remedies for that, but that needs to be fixed, and we can't ... In these low-, to moderate-income neighborhoods, and I can think of locally- I'm in Chicago, so South Side Chicago, West Side Chicago, there's definitely some of those communities in those areas need help; and East Cleveland needs help.
Jorge Newbery: There's homes out there selling for $20,000, which seems ... Well, that could be affordable. If someone had a mortgage on a $20,000 home, that payment's going to be a couple hundred dollars or something like that; very, very affordable. But no one's providing financing for those loans. Then, investors come in. They buy them, they do a little fix up, and they rent them out. That's not rebuilding the community. It's helpful that somebody is at least occupying the home, but it would be nice if you'd get more homeowners into, through financing, to stay, and move into, and own homes in these lower-income neighborhoods. That has to happen. It can't stay as is. It's just going to get worse.
Jorge Newbery: This is what happens right now is somebody who decides, "I want to buy a home," and they go to a loan officer; "Hey, I want to buy this $40,000 home." The loan officers say, "I just can't finance it. Why don't you buy a home that's maybe $80,000 in this slightly more expensive neighborhood, and we can finance that?" Then, the people that can buy homes, now they're buying homes in the slightly more expensive neighborhoods, and these really affordable neighborhoods are just getting more and more abandoned. That has to stop.
Jorge Newbery: We're doing what we can because we're buying a lot ... A lot of our loans are secured by homes in those areas. But there needs to be a solution to that - the inability, or unwillingness, or really the legislation that created the inability for, or the undesirability for lenders to loan in low-, to moderate-income neighborhoods. It's almost redlining, except, it isn't redlining. It's just, "Hey, we don't make any money doing it, so we're not going to do it." I guess it's hard to argue with that, but that has to change.
Eve Picker: Interesting. Yeah, it does have to change. That's really interesting. I wonder if you could do a huge Reg A raise and simply provide mortgages-
Jorge Newbery: Believe me, it's crossed my mind. I mean, the thing is, we have to ... We'd have to do a Reg A that would be ... Then, you want to provide the rate; you want to provide really affordable rates, or at least market rates - five percent or something like that. So, you'd have to pay the investors-
Eve Picker: Less. I've thought about this-
Jorge Newbery: Yes, and that becomes less desirable.
Eve Picker: I've thought about this a lot too, because we see on Small Change, a lot of people coming to us with new, larger affordable housing projects. Of course, to keep them affordable means that they're subsidized and that they really can't provide much in the way of return. I've thought a lot about who's out there who would invest in that? There would have to be people who invest in that. The interesting thing to me was the little project L.A. Bungalow Gardens that was on our site, which is only eight- actually eight units for formerly homeless people, raised money faster than anything else on our site did. I'm pretty sure it wasn't because of the return. So, someone has to have the guts to test it.
Jorge Newbery: Yeah. Out of curiosity, what was the return?
Eve Picker: They actually offered nine percent, which was very nice [crosstalk]
Jorge Newbery: Yeah, that is-
Eve Picker: -because they're keeping it ... The asset value is not going to increase. It is going to be set as affordable housing for the next 15 years. So, it's really- its preferred return is almost like an interest on debt. You and I should talk about this offline.
Jorge Newbery: Yeah, agreed. It's a problem that needs to be solved ... I guess that would test the willingness for ... You're going to pull out the ... The investors who are investing in some of these crowdfunding opportunities that both of us are involved in, purely for the financial returns, would probably fall to the wayside. So, it's going to really test the ones that are really socially driven and are willing to take a reduced financial return. Can that be done on that scale? I don't know.
Eve Picker: Yeah, and that's going ... Someone has to test that, and ... Let's talk.
Jorge Newbery: Yeah ... Think about that. Just [inaudible] gives us an interesting challenge. If you did a Regulation A+, it's going to $75,000 in legal fees, and accounting to get there. Then, you go to market, and oops ... I go into market at three percent and it just wasn't- the market wasn't there. That would be challenging. So, I don't know. It would be nice to do it on- test on a small scale and see [crosstalk]
Eve Picker: Isn't there an attorney out there who's listening who would do this pro bono for us? [crosstalk]
Jorge Newbery: Maybe. Let's hope so.
Eve Picker: -there's enough who would help us do this offering pro bono, and then we could all take a deferred payment later, when we're successful.
Jorge Newbery: That may be the case, or maybe that's necessary.
Eve Picker: I've got a platform.
Jorge Newbery: Yeah, exactly.
Eve Picker: Let's talk about it.
Jorge Newbery: Yeah, absolutely. It's an interesting ... Certainly, any of your listenership if you have ideas, contact Eve!
Eve Picker: Yeah. So, now, I'm completely derailed ... I do have a couple of wrap-up questions for you and then, and then we'll all wrap up. What do you think is the key factor that makes a real estate project impactful just to you?
Jorge Newbery: Has to solve a real problem and a real need. I think that's the key factor. In any business, in any undertaking, it needs to be a real problem that you're solving, and there's plenty of problems in this country to solve.
Eve Picker: Okay, and the second question, because I ask everyone these three questions, is how can involving investors through crowdfunding benefit a real estate developer beyond just raising money for them?
Jorge Newbery: You get a lot of people rooting for you that now have a financial interest. So, now, they want to see you perform. They want to see you succeed. It's not just you, or you, and your bank, or you, and your one big investor. Now, there's a whole crowd saying, "I want Small Change to win. I want this project to win. I want this project that I invested $500 hours in that's helping the homeless in L.A. that you mentioned, I want that project to win." You have a lot of community members and just people that are out there cheering for you ... They've done it with their money, but they're out there on the sidelines rooting for you. I think that's helpful. Certainly, if you were to ask investors ... Our investors will sometimes volunteer, "Hey, what about this? What about that? Have you thought about this?" They're doing that ... Some of them would probably do it just because they want to be helpful, but because they have a vested interest in your success, I think you get more of that.
Eve Picker: Yes. Finally, if there was one thing that you would improve about real estate in the U.S., what would that be?
Jorge Newbery: We touched on it - the affordability for the every man, and especially those that are of modest means. That has to change. I drive through ... I was in Austin a few weeks ago; a massive number of homeless. I think it has the third largest homeless population in the country.
Eve Picker: Oh, really?
Jorge Newbery: Austin, L.A., San Francisco. Chicago, for that matter. It's really cold right now, so, if I were homeless, I'd have probably migrated out of Chicago because it's just so cold sometimes, but .... Some of those, Texas, California ... I'm sure it's everywhere, but that ... To be as powerful and wealthy of a nation as we are and have so many people on the fringes who are not surviving, that's not ... I don't look at it as their fault. I think that's our fault. That's society's fault. We need to build a better society so that doesn't happen.
Eve Picker: Yes, I agree. So, on that note, we're going to say goodbye and thank you very much for joining me.
Jorge Newbery: Thanks, Eve.
Eve Picker: That was Jorge Newbery. If anyone else is trying to recover from a $26 million loss, they'll likely get a few pointers from Jorge. He did not file for bankruptcy when financial disaster struck. Instead, he painstakingly worked his way through resolving his debt. Then, he rebuilt his life on what he learned. To date, 10,000 homeowners have benefited from Jorge's life lessons and his good heart.
You can find out more about impact real estate investing and access the show notes for today's episode at my website, EvePicker.com. While you're there, sign up for my newsletter to find out more about how to make money in real estate while building better cities. Thank you so much for spending your time with me today, and thank you, Jorge, for sharing your thoughts with us. We'll talk again soon, but for now, this is Eve Picker signing off to go make some change.