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Multifamily Risk and Reward with Jorge Newbery - CREPN #225

Commercial Real Estate Pro Network

Release Date: 12/05/2019

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Today my guest is Yakov Smart. Yakov is considered to be the leading expert when it comes to attracting A  list investors and raising capital using LinkedIn.  He is the author of Disrupting LinkedIn and a sought after authority by top business owners and sales leaders worldwide. Yakov has shared the stage with Samantha DeBianchi of Bravo's hit TV show Million Dollar Listing.

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It's a great question. It's not something that I you know, honestly think about on a daily basis. I guess I'm you're a little more. You know, you see, you see A lot more different scenarios as being an insurance than I probably do when it comes to risk. But I'm gonna I'm gonna give a bit of what might be a bit of a surprising answer here. I think the BIGGEST RISK is a combination of plagiarism and misinformation because in the space, let's call it mentorship or online programs or coaching, consulting.

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I think the BIGGEST RISK for a self directed account is that you take responsibility for all the investments, and it's a risk of personal accountability, right? If you keep your IRA in the stock market, one really nice benefit is that when it goes up and goes down, you know, you can kind of finger point your way around around it. Risking in a self directed account means you're taking on all the risk.

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Today, my guest is Jon Bell. Jon is an IT professional turned real estate investor. He's a he specializes in vacation rentals, and today we're going to speak with him about Airbnb. He's also got a podcast he hosts the podcast Vacation Rental Machine Podcast. And he's also the co founder of the Vacation Rental Machine Formula an online training.

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I'll answer it and maybe the most common risk that people assume when they think of short term rentals or specifically Airbnb s and that is major parties. People messing up your your place. With my experience, it's not the major risk, it is something you can hedge off. And this is how you do it. 

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You know, the BIGGEST RISK that we have right now is that for the percentage of the tenant base that is unemployed, or that has lost their job because it is worked for housing, we buy c properties and B neighborhoods you know, that that if they've lost their job and unemployment you know, kept gets cut down, that they might not be able to To make their rent payments, so though, that's a big risk right there.

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Yeah, it's a fantastic question.  The truth is we've we've transferred a lot based on your description, we've actually transferred or deferred a lot of the risk based on how we actually buy and sell real estate because the sellers still typically on title, and we have the ability to renegotiate based on our contracts. You know, we're collecting a non refundable deposit from our buyer. So that's limiting the risk.

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Multifamily Risk and Reward balance most of the time, unless you are Jorge Newbery.

Jorge Newbery, is a high school dropout with more drive and focus than most successful real estate investors.  His drive for success has led him to create multiple successful companies and amazing success.  

Entrepreneurial

Before the age of 25 and prior to investing in real estate, Jorge had several entrepreneurial endeavors.  

  • He purchased a refrigerated tricycle and pedaled through his neighborhood selling ice cream to the neighbors.  
  • He became a record producer for hardcore punk bands in the Los Angeles, CA.
  • Olympic Cyclist: He competed in an Olympic trials for a chance to go to the Olympics.  
  • Real Estate Mortgage Broker - worked to become the top representative in one company, then started a successful mortgage brokerage.

Multifamily Risk and Reward 

In 1992, Jorge recognized the opportunity in undervalued real estate based on all the loans he had been making to his clients.  So, he purchased his first investment property, a 4 plex. Like his prior entrepreneurial endeavors he did not stop with a 4 plex.  Subsequently, he purchased a 19, 50 and a 298 unit property all in Southern California.

The properties Jorge was purchasing were the most challenged properties available.  This was because he recognized he could most positively add value in these unwanted, undervalued properties.  

There were some hiccups along the way, like the time when he was sited for 32 housing code violations and the threat of jail.  Fortunately, his prior work and reputation was recognized by the authorities, and jail time was avoided.  

When he sold his Los Angeles multifamily properties, he had a proven value add system, over $1,000,000 in profit and a sense that he was unstoppable.  

More Risk More Reward

After his success in Los Angeles, Jorge turned his sites towards the Midwest in search of more risk and reward.  His search led him to Pickwick Plaza Apartments in Kansas City, MO. The 233 unit property was distressed, and for Jorge, this was another opportunity.  The purchase price was $1.6 M and he put another $1.5M into the value add rehab. Upon the renovation completion, the property appraised for $8M, which allowed Jorge to refinance, take some cash and find another property.  

When he traveled to these locations, rather than rent a hotel room when he visited his properties, Jorge would take up residency in one of the property’s vacant units.  Because he was buying such rough properties, this made him intimately aware of the living conditions residents were experiencing. Sometimes, the local press picked up on this and would publish stories about how the out of town owner was moving in with the residents of the roughest property in town. 

Success breeds confidence.  Jorge had successfully turned multiple rough properties into handsome profits.  His track record attracted bigger challenges and capital to do the next big challenge. 

BIGGEST Challenge

Looking for the next big challenge, Jorge was led to Columbus, OH.  There he found an 1,100 unit property named, Woodland Meadows, aka Uzi Alley due to the gang activity. 

He purchased the property at auction for $13.5 M and promptly moved in. 

The property had its own onsite armed security patrol with a jail.  The security patrol was all white and the residents were primarily minority.  When Jorge saw the jail with a tenant locked up, his first act was to release the tenant.  Soon after, he closed the jail, terminated the security force, and assembled his own unarmed Community Patrol made up of Jorge, his managers and paid volunteer residents.  

The Transformation 

Originally, the property was built as workforce housing.  When Jorge acquired the property, over 40% of residents received Section 8 vouchers.  Many unemployed residents with lots of time on their hands

On patrol, it was common to find a large group of intimidating teenagers gathered on a street corner.  Pizza delivery drivers refused to deliver in the community due to safety concerns. The Community Patrol would ask the group to leave.  Ultimately the kids would leave one corner and move to another corner. The frequent inner actions with the teenage residents let the teens to ask Jorge for jobs. 

Jobs for Residents

The continuous request for jobs made Jorge ask his contractors, if there a way to train the kids and put them to work?  He was spending millions of dollars to rehab the property, and the contractors had more than enough work. The contractors agreed to put a training course together for the residents. 

For residents wanting jobs, the contractors training course taught basic skills needed to work in construction.  The opportunity for the residents was this: If they showed up everyday on time and did not miss any of the training for two weeks, at the end of two weeks, they would get jobs.

The first class had three participants.  After the two weeks, the three trainees had jobs.  Word of the jobs for trainees quickly traveled through the community.  The next class had 40+ trainees. The transformation was incredible to see.  At first the trainees would show up dressed with their pants falling off. Within a few days, trainees started showing up dressed like they were going to church.  They really wanted to learn and wanted the jobs.  

Change from Residents

The residents wanted change.  Once they were employed in the community, they took pride in their work and community.  They self policed, the community, and if someone wanted to harm their community, employed resident would actively discourage the would be trouble maker.  Community pride was contagious.  

Jorge was able to prove that by providing training and jobs to local residents, he created responsible citizens.  Instead of paying the outside contractors money that they took home to their neighborhood, the tenants received training and compensation for the work they did to improve their community.  The work gave the residents money so that they could pay their rent. Some of the trainee graduates went onto create their own businesses that are still in business today.

Pizza Delivery Drivers were no longer afraid to deliver pizza 

Now he had a value add formula on how to turn around the biggest challenge he could find.  Not only was he changing the property, but he was changing lives.  

By December 2004, the property renovation was complete and occupancy had increased to 80%.  

Disaster Strikes

Christmas Eve 2004 an ice storm struck Collumbus, Ohio.  Trees & power poles were knocked down, and power was out for all of Woodland Meadows.  With no power, the electric boilers were unable to generate heat. For four days, the temperature was below 0 degrees and the water in the pipes froze.  When the power came back on, it was clear that things were out of sorts. As the temperature rose, the frozen pipes thawed. Water started pouring through cracked pipes, into the apartments.

Insurance

Realizing the damage caused would need a lot of money to fix, Jorge called his insurance company to see what help his policy could provide.  The adjuster made a quick inspection of the property, and returned to his office. A couple of days later, the adjuster called to say, “you are not covered.  The damage was caused by your boilers. You do not have boiler coverage, and you are not covered.”

Jorge’s attorney explained that on large claims, insurance companies often will use a strategy of delaying payment in an effort to force the claimant to settle for a reduced amount of money rather than the amount provided by the insurance company. 

Jorge knew he had coverage and thought the insurance company would eventually pay the claim.  Rather than wait until they paid, he elected to borrow against the equity in his other properties for some cash to pay for the repairs needed at Woodland Meadows.  He figured that when he received the insurance settlement, he would pay off the loans. 

After a couple months of trying to work with the insurance company to resolve the claim and their refusal to pay, left Jorge with no option but to sue his insurance company.  By August 2005, Jorge was running out of money. He had over 200 people working everyday to repair the damage. To preserve cash, he reduced his labor body count from 200 to 20.  

Then the city representatives visited the property asking, “why progress is slowing down?”  

The City

The City, unbeknownst to Jorge, had decided that they wanted to acquire Woodland Meadows.  When the city visited in August, they sensed Jorge was at his breaking point, and they acted.  In an effort to acquire the property, they notify Jorge that he has 3 days to evacuate the property.  

The city claimed that a prior owner had made a construction shortcut and given that the buildings had filled with water, the buildings were imminent danger of collapse.  Jorge hired an engineer to inspect the buildings, and he found no such evidence of danger of collapse.  

The court awarded Jorge a temporary restraining order against the city of Columbus and 6 months to complete the repairs.  Jorge then authorized his attorney to make the best deal with the insurance company to collect money and get the repairs made.  

The damage was estimated at $45 million.  The insurance company settled for $32 million and work was back on schedule.  

HUD

When the city was unable to acquire the property under the false claim of imminent danger, they notified HUD of the conditions at the property.  Under HUD guidelines, property owners receiving Section 8 income are required to maintain properties to a certain standard. Due to the damage caused by the ice storm, Woodland Meadows was below the standard.

HUD notified Jorge that he had 30 days to complete the repairs, or lose the funding for his Section 8 tenants.  Jorge appealed to the local municipal court who requested HUD show up in court, but HUD refused stating that they are a Federal Agency and not bound by municipal courts.

Thirty days later, HUD returned to the property and terminated contracts worth $200,000 per month in rent.  The loss of rent forced Jorge to accept the gravity of the situation and surrender.

Six months later the property was evacuated by the City of Columbus.  Since then, all of the buildings have been demolished and a new high school has been built on the site.

Hindsight

Hindsight is always 20/20.  Had Jorge understood the city’s desire to acquire the property, he believes he would have acted differently.  In the city’s efforts to acquire the property, they had offered to help him acquire a different property. If he had accepted, he could have then taken a reduced settlement from the insurance company and moved on.  Could a, should a, would a, didn’t.  

Unfortunately, Jorge saw a problem that needed a solution.  He acted in the way he believed was best to fix the problem.

Out from Under the Loan

In order to get the money he needed to fix Woodlawn Meadows, Jorge got loans against his other properties and signed as a personal guarantor.  This had never been a concern in the past, because nothing had ever gone wrong. However, this time was different.  

Creditors pursued Jorge personally for the outstanding loans.  When he could not pay, the lenders pursued foreclosure on the properties.   At the foreclosure auction, the bank bought the Kansas City property for what was owed on the first position lean.   

Jorge’s experience as a mortgage broker made him realize that when the bank foreclosed on the property, the second position loans were extinguished.  This meant that the second loan against the Kansas City property which was used to purchase the Oklahoma City property meant that the OK property free and clear.    

Debt Cleanse

This foreclosure experience caused Jorge to review all of his loans, where he found multiple mistakes, from minimal to egregious.  These mistakes provided leverage for him to negotiate more favorable settlements with his lenders. In one case, the bank ended up paying him to settle the debt.

Shortly after this chapter in Jorge’s life, the Great Recession struck.  Jorge recognized that millions of Americans needed help negotiating settlements with their banks.  Jorge then started Debt Cleanse, to help others in need, find the errors in their loans in order to negotiate better settlements with their lender.   

BIGGEST RISK 

Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”  

BIGGEST RISK:  To not learn from the past. And so that would be for me to look at my own past and the past of others and see what has happened, how they navigated it and, whether it makes sense to, or how that should influence my actions today. And I'll give you a real life example, is that you know the market. I've been through a couple of downturns in the real estate market and towards the end of every up cycle is like today. Today there are the lenders are, freely giving out money. It's very easy to qualify. They have these, you know, kind of almost subprime loans called non QM loans, and things have gotten very easy and that happens every time. At the top of the market that the money is free flowing, the pricing gets expensive, everything gets really competitive. I'm trying to buy loans and other people coming up with money pay more than me, And they could be the winner of the bid. But really, time will tell whether they're the winner, the loser. So today, I think the biggest risk today is ignoring the past and the fact that we are probably in a very overheated real estate market and just overheated economy, which is likely to turn down very turn down in the near future. It's hard to say exactly when it happens, but now would be the time to take some chips off the table and avoid or at least minimize that risk.

For more go to:

Website: DebtCleanse: https://debtcleanse.com/

Book: Burn Zones

https://ahpservicing.com/