RES 205 | Becoming Debt-Free

 

Sometimes your mission in life unfolds after a misfortune takes place. Jorge Newbery, the founder of Debt Cleanse Group Legal Services, shares his $26-million debt story. Jorge takes us back to the time he started to become a real estate entrepreneur focusing on buying a distressed property and turning them around. On Christmas eve of 2004, the most massive disaster in Ohio history hit Jorge’s property, tragically devastating it. Jorge reveals that in these situations, problems usually start to arise when insurance companies deny your claims and worse, sue you along with other creditors. Jorge is making it his mission now to help other people facing similar challenges get out of debt and recover from disasters.

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Becoming Debt-Free with Jorge Newbery

Our guest is Jorge Newbery. Thanks for being here, Jorge.

I appreciate you having me, Whitney.

I appreciate your time and expertise and being here. Jorge faced $26 million in debt he couldn’t repay after a natural disaster destroyed his real estate business. Discovered strategies and tactics to settle those for pennies on the dollar and some for nothing at all is now. His mission is to make sure everyone else facing the stress of unaffordable debt can take control of their payments and live their life debt-free. Jorge, give the readers a little more about who you are and we want to get into that story.

I’m a high school dropout, and not in a bad way. I wanted to become an entrepreneur. I tried different businesses and I ended up at roughly 28, I bought my first piece of real estate, which was a four-unit apartment complex in South Central Los Angeles. Over time, that did well. I said, “Let me buy another building,” which was nineteen units. I said, “Let me buy another one,” and that was 54 units. I kept building. This was Southern California. I had about 500 units. It’s not always good, but at the time it’s always to go bigger. I remember I said, “I want to go bigger.” I bought a 298-unit building in Downtown Los Angeles, which at the time was my largest holding. That building was a mixed blessing.

I’ll tell you the story because it may be entertaining to your readers. This building was called the Ford Hotel, 1002 East 7th Street in Downtown Los Angeles. It’s a hotel, but it’s an SRO hotel, Single Room Occupancy, and it catered to a transient population. What happened was a few years before this property has sold for $4 million. The property was in such disarray that the owner was jailed for slum conditions of the property. They have a slum housing taskforce in Los Angeles. This guy went to jail. He had to sell the property. He sold it for $2.5 million. A year or so goes by and he gets put in jail. He sold the property to another buyer who bought it for $2 million.

He went to jail so no one wanted to buy this property. 298 units, Downtown Los Angeles, there was a classified ad. This is 1998. In 1998, a lot of deals got done in the classified ads. I saw an ad in the Los Angeles Times classified section for 298 units, Downtown Los Angeles, $850,000. I’m saying, “Typo. Something’s wrong here. Too cheap.” I went down, checked out the building and heard about all the stories and I’m already super optimistic. I said, “I can do this.” I’d done some tougher buildings before and some of the inspectors were saying, “You’ve done well in these other deals, but this we don’t want to be adversarial. You’re going to end up in jail.” I went ahead and I said, “I’m going to buy this thing.” I bought it for $850,000. It was a fun deal. I put down $200,000, which I had saved up from my other buildings, and the owner carried $650,000. It’s an easy deal to put together. I met with the city right after I purchased it. I had inspectors from plumbing, electrical, fire, building and safety, health.

They all met and they said, “You’ve got six months to finish this thing. If not, we can’t selectively prosecute. We’re going to have to put you in jail.” I was like, “I can do it. I’ll get this done.” I set about working and I had a good-sized crew. We made great progress on the property and the inspectors would come by roughly every month and they’ll say, “Thumbs up. You’re doing good work.” I remember on Christmas Eve 1998. A friend of mine called me in the morning and said, “You’re in the paper.” I said, “What for?” He says, “37 criminal charges filed against Fernando meets man,” which turned out to be me. I had no idea it was coming, completely blindsided me. The first thing I thought about was my parents. The article was in the Los Angeles Times, the front page of the Metro section. I lived about five, ten minutes from my parents. I drove over to the house, looked for the paper and grabbed that section out of the paper. That was the first thing that came to my mind is my mom is going to be sitting down to her morning tea. She’s British. She’d be sitting, having her tea, leafing through The LA Times and she’s going to see that I’ve been facing all these criminal charges.

At the moment, that was my most important mission was to get that paper out of there. Luckily, they never knew about the charges until about a year-and-a-half later once I had it all resolved. At the time, I talked to my attorney, I said, “Call the city attorney. See what’s going on.” He called the city attorney and they said, “We’re getting good reports, but we can’t selectively prosecute. We put three guys in jail. Your guy may be doing more work, but we can’t not prosecute him.” We finally agreed that as long as I continue to make great progress, I’d pay a $10,000 fine and I was on probation for a few years. If I got through and I was able to complete the build, they said my record could be exonerated, which in the end the good news is this story has a happy ending. Not all mine do, but this one did. It took me several more months. One day, all the departments and inspectors had to come through and not find a single violation in this 298-unit complex. It took three tries, but it was a few days before Thanksgiving of 1999, and they came through and not a single violation was found. They signed off on the building and I sold it for a tidy profit, over $1 million. It was a mixed blessing.

It was great because I made some money and I proved I could do something where I could succeed where everyone else had failed. It also emboldened me to think that I can take on any property in any condition, any status across the country and I can be the one to make it work. I went on a buying spree. I started buying the most troubled properties across the country. It was always big. 200 units here. My next building was 233 units Downtown Kansas City, eight murders there. I bought that one and turned it around. I bought Oklahoma City and kept going on buying these multiple hundred-unit properties at a time at big discounts because they were all in severe trouble. I’d turn them around. In 2002, I found myself at a bankruptcy court auction in Columbus, Ohio. It was for a 1,100-unit property, a mammoth, one of the biggest properties in the country. A low-income property but backing into one of the highest income areas in Columbus, an area called Bexley. I paid $13.5 million for it. It was massive. It was 54 acres, 122 buildings and 1,100 units. It was huge. It was one of the biggest parcels of land in the city of Columbus.

It was called Woodland Meadows, but it was nicknamed Uzi Alley because it was infested with drugs, crime, gangs, prostitutes. It was an extraordinary situation, but because I was emboldened for my track record, the prior group called PM Group out of Michigan had bought it for $20 million several years before, a complete failure. They hadn’t turned it around, but I was saying they were this big company failed, I can do this. One of the first things I did and this was a regular occurrence for me. I moved into the property. I picked out a unit and it made the news in Columbus that, “This guy moved from California. He’s moving into Woodland Meadows, into Uzi Alley.” Most people thought it was noble. The reality is I cheat. I didn’t want to spend money on a hotel when I had all these vacant units at Woodland Meadows. We were probably 30% occupied. I bought the property and I started doing the rehab. The biggest problem was at night there’d be throngs of people on corners and stuff like that.

Do something that you can succeed in where everyone else had failed. Click To Tweet

It made it difficult for the majority of the remaining tenants for people that were trying to do the right thing. There were people getting into trouble doing drugs and whatnot. Part of the problem was we had our own security force. We had a twelve-man security force and they go around in these cars. We own a bunch of cars that came with the purchase and they would go around and stir things up. It was striking that all the security officers were white and the majority of the tenants were minority. It seemed like they were aggravating the situation. I fired them all. I said, “We’re going to have a community patrol,” which was me and I enlisted about a dozen residents. I said, “We’re going to take back this property.” We’d go up to the groups of people on the corner and we’d say, “Trying to clean up the property and we can’t have you all hang in here doing whatever you’re doing.” They say, “Sure.” They’d move, they’d disperse. Ten minutes later they’d be at another corner a block or two away. They start saying stuff like, “Give me a job.” At first, I was like, “We already have contractors doing work and stuff like that. I don’t know.”

Finally, I heard it many times, I said, “This problem is not going anywhere. It’s here. We’ve got to do something.” These were mostly residents and the children are residents and children like teenagers. Somehow, we’ve got to address this situation. Finally, we said, “We’re going to give them jobs.” We made a deal. We said, “We’ll spread the word as we did our patrols that if you came down to this building,” the teach building, it was a community center, “and you show up every day for two weeks on time, you don’t miss a single day and we’ll guarantee we’ll give you a job.” It could be doing a demo, doing maintenance and clean up. We had contractors who agreed because we were spending millions of dollars in renovations at the property. We said, “Part of getting the contract you have to hire some of the residents.” Everybody was hesitant at the beginning and only a few people showed up the first few days.

After those people graduated and got jobs and we’re working, then it was filled to capacity. We had 40, 50 people in every two-week class. That’s when it turned, it started. When somebody had painted a wall and now someone else tags it or something like that. These guys were like, “I’ve got to do that again.” It worked. It was people-powered where the community was rebuilding itself. Some of the money that we’re spending on renovations was getting pumped into the households of the residents that were living at the property. They were better able to pay their rent. Everything worked. It became a big success story in Columbus. A lot of the residents over time were hired outside the property. Someone started their own businesses, construction crews and whatnot. It worked well, a big success story. A couple of years later, we had finished the rehab. We were over 80% occupied and an ice storm hit the property.

This was Christmas Eve 2004. The largest disaster in Ohio history hit our property. Our property is one of the biggest, most severely impacted properties. The property was devastated. Christmas Eve, ice storm comes through, knocks out the power to more than 40% of Columbus including all of our property. It stayed that way for four days. We had no power. When the power went down, the boiler heaters went down too. It was negative eight degrees outside. We had no electric, no heat. All the water both in the boiler pipes and the domestic water, everything froze. We had no electric, no heat and water, and 800, 900 units occupied, thousands of people living in lots of big units. It was a complete disaster. Red Cross opened a shelter across the street at a church a few days later and we called the insurance company and the insurance company came out and surveyed the property.

A couple of days later they said, “Claims denied.” I said, “What are you talking about? I had almost $50 million in insurance.” They said, “The damage was caused by faulty boilers. You didn’t have boiler endorsements on your insurance. As a result, you didn’t have those endorsements and boilers caused the problem, you’re not covered.” Something I didn’t know was that when you have a big claim against an insurance company, they’re not going to pay you out. They’re going to make you sue. I had to sue them and I made a huge mistake here. My attorney said, “Eventually, they’re going to pay you. It’s going to take time.” I borrowed money on all my other properties that were doing well across the country and I used that money to fund the renovations of Woodland Meadows. In the end, the insurance took a lot longer than expected.

RES 205 | Becoming Debt-Free

Burn Zones: Playing Life’s Bad Hands

The city became impatient. Everybody became impatient. I ran out of money. I couldn’t borrow any more money. It was over $10 million that I borrowed. The city seized on an opportunity to take the property from me, which is what they ended up doing. They still own it to the day. In the end, I lost everything including all my other properties. I ended up with $26 million in debt I couldn’t pay. I never filed bankruptcy. The good news is I learned strategies on how to deal with overwhelming debt when you can’t afford it. I was able to help other people. Now my mission is to help other people who run into similar challenges and get them out of debt. Lots of times it’s smaller numbers, but the feelings are still the same. The scene was a failure, embarrassment, shame. Where did I go wrong? What could I have done differently? That’s probably a story of what many of your readers probably don’t want to go through.

I didn’t even want to stop you because you were going into lots of detail. That was good showing your determination time and time again to go through those properties that were difficult to turn around. There are many questions I could ask you, but as far as when you were getting started with the first property in LA and they were threatening you that you’re going to go to jail. Time and time again, it happened numerous times before, then moving from that property to others that were difficult. Why go through so much trouble? What gave you the confidence to make that happen? How did you have the mindset to get in there and do something like that?

I was optimistic and can’t pass up a great deal. Usually, the best deals are those that have problems. That became what I bought. If you buy a nice turnkey property, you’re going to pay top dollar, but if you buy something that is broken down, in terrible shape, and even to the point where people are going to say, “I don’t even know this could be repaired, restored or brought back to life.” That’s the one you’re going to get absolutely the best deal on. I liked the challenge and the hunt to find those deals and then succeed at turning them around. It brought me a lot of satisfaction. At the time, I never lived luxuriously. I always lived spartanly and that was because I liked to have the money to fund new deals. I kept going bigger and bigger. It wasn’t like, “I’m going to make a lot of money.” It was more like, “I put myself in a situation where I want to prove myself that I can do it where other people couldn’t.”

Give us a couple of things. If we’re going to pursue a property that’s in that disrepair, you’ve got to know this before you go in there. Maybe even as experience, but maybe with properties not in this bad shape, what are some things that we need to keep in mind? Insurance, and what’s going to happen there. What are some things, maybe even including the insurance that we need to know?

To do a challenging situation and to conquer it, you need to be hands-on. You can’t rely on management companies or anybody to say, “We’ve got this. We’re going to do it for you.” Many times, these were in the hands of people with much deeper pockets and companies with deeper pockets and resources. They get it done. If you go in there and you’re spending a ton of time at the property, supervising the rehab, changing the culture of the building and the tenants, think about when you go into a company. You always hear about companies with bad culture. It’s like, “It’s a big company, but no one wants to work there because it’s a bad culture.” You need to change that. It’s the same thing with buildings. You need to change the culture. You can see it as a great 100-unit building, but it’s poorly managed and no one likes to live there. There’s another building, which is maybe not as desirable, but it has the right culture. You’re changing the culture of the building.

It’s very easy to change and at the same time not. Click To Tweet

Give us a couple of examples or techniques as far as changing the culture.

The big one at Woodland Meadows was engaging the tenants and that’s anywhere. Whether it was hiring them, which we ended up doing at Woodland Meadows, but I didn’t do that at prior projects, but we took their complaints seriously. We’re responsive, basic. Whether it’s you or your team, but you’re listening to them and addressing them, addressing their concerns. You’re not giving them lip service. They make a suggestion that makes sense, do it. They’ll be thrilled. They’ll pay your rent, they’ll stay there for a long time, they’ll tell their friends versus the opposite where, “I can’t wait until I get out of this place. I’m not going to pay the rent. I’m going to escrow it or I’m going to wait until I get evicted.” You can be on both sides of that. It’s easy for that balance to turn one way or the other. You want to keep everybody on your side.

Did the tenants know that you were the owner?

They did. I lived on the property occasionally. I didn’t encourage it, but people once in a while knocked on my door and said, “My toilet stopped up,” and it was after hours. Not much I can do, but we had 1,100 units. One good thing too, going from four units to nineteen units to getting these multi-hundred-unit buildings. As you get to bigger buildings, you can have onsite maintenance, onsite management. The bigger buildings, there was always maintenance available 24/7. Those types of things make it a lot easier to manage those bigger buildings. The small ones, you had four units, and then you had some overflowing toilets, someone had to drive out there at midnight or whatever. It’s a lot tougher to handle. I like the bigger ones.

As far as what you learned about insurance aligned, what do we need to know so that doesn’t happen in the future, to have the correct insurance in place?

Here’s the challenge. It’s hard to prevent. It’s easier to say, “If I had only had a big-name insurance company.” Big name insurance companies may be a little bit better generally than the second or third tier insurance type that I had there. The major insurance companies generally won’t insure Uzi Alley. All of these murders, chaos, they’re going to see that right away and say, “Pass.” You always get the bottom rung insurers, which are most expensive, also resort to these tactics. Going in, if you have a significant insurance loss, which rarely would it be that significant, expect to face a challenge. I’d say my biggest mistake and probably the biggest lesson is to let each building stand on its own. I’m sure most of your readers when they buy multiple buildings, typically they’ll have one LLC for each building. It makes total sense, and that’s what I had here. When things went bad, the insurance company wasn’t going to pay me. I should’ve said, “I can’t rehab it. We’ve got to close the building.”

That would have caused some short-term pain, but it would’ve been early on and to the point where it would’ve been in the news that, “This insurance company is not paying on this huge claim,” versus getting several months later and I’m saying, “The insurance company’s not paying.” At that point, all the fingers are pointing at me. They should have been pointing at the insurance company. Think about this. I paid $13.5 million, I had probably put in $7 million or $8 million. I was into that property $20 million. In the end, we got an insurance settlement with $32 million. That was a lot of money. If I’ve closed down the property and several months later gotten $32 million, I’d come out fine. Instead, I poured money into this thing. I was into it $45 million and I got the $32 million. $45 million on the insurance, it’s crazy how these things can skyrocket. I got the $32 million. By the time all these contractors and everybody was paid out, I was still short $13 million. At that point, everything else was collapsing.

Going forward, we want to make sure we have a big-name insurance company, if possible, doing a property that’s in that top of the area. It’s going to be difficult to find somebody to ensure it, I’m sure. As far as trying to confirm that they’re going to pay you on something like that, you’re not going to know until a disaster strikes, are you?

If you think back at Hurricane Katrina, stuff like that, you heard stories about the big name insurers, Farmers, Allstate saying, “Claim denied.” I forgot what exactly they were saying, but they said the damage wasn’t the hurricane. It was the water that came in that flooded and there wasn’t flood insurance. You’re claim denied even though my house is gone. You heard about this stuff back then. You never think it’s going to hit you. When it’s massive losses, it’s worthwhile for them to make everyone litigate. It’s unfortunate, but that’s how it works.

Jorge, knowing all of what you know now, what would be your buying criteria? I know that’s not much your focus, but would you still buy that type of property or would you look for something else?

Optimism may get you out of trouble, but hard work is the key ingredient to overcome all these endeavors. Click To Tweet

I was in my 20s and 30s when I was doing all that. If I want my fastest route to make millions of dollars, that’s what I would buy. It is absolutely the fastest way to make a ton of money if you do it right. You’ve got to commit yourself that you’re, “This is not going to be easy. I’m going to spend a ton of time on this. If you do it right, you can make tens of millions of dollars if you scale it.” Now I’m 53, I’m married. There’s no way I could do that now. The circumstances change as you get older. I was flying all over the country, which I loved and I was doing all of these deals. It was a blast, but it would not happen in my circumstances now. I’d probably be the guy buying the turnkey. If it was real estate and if I buy turnkey, which is much lower returns, it’s not as fun, but it’d be tough. It’s a full-time job and it’s not just full-time eight hours. You’re going to be hustling to do those things. I’m sure it’s still there. There are always those big problems that no one is saying, “We’re not going to do it.” They’re always there.

What’s a way that you would suggest that we can improve our syndication business for anybody that’s in the business?

The investors out there, if you can generate the good returns, it’s easy to track money. Even when you’re, “I need money for Uzi Alley,” that was a challenge. I’ll tell you, don’t expect to have everything lined up in a row. This bankruptcy court auction, I walked into that place. I had $250,000 cashier’s check. That was my deposit and non-refundable. Within five days after the auction, I had to get it up to 10%. I had to be 1.35% non-refundable and had to close in 45 days. I had about $2 million, but I had absolutely no idea where I was coming up with the other $12 million. I was scrambling in those 45 days to come up with investors to fund $11 million on Uzi Alley.

I did it, but it was a challenge. The big investor, this mortgage company, later on told me the reason they funded it is that they visited my property in Kansas City and said, “We want to see one of the properties.” I go, “Come to Kansas City.” They flew out there and they said, “Where should we stay? What’s a nearby hotel?” I said, “Don’t stay at a hotel. Stay at the property.” They were like, “Really?” I said, “No, do it.” They came to this property and they spent the night there. That’s what turned them. They were the biggest investor by far it turned. The president of this company stayed at this low-income housing complex in downtown Kansas City because it’s where I stayed, but also it had turned around. It was stable, it was tranquil. Not all those chaos buildings have to stay that way. You can turn it around.

Jorge, what’s the number one thing that’s contributed to your success?

RES 205 | Becoming Debt-Free

Becoming Debt-Free: Give up control if you really want to scale your business.

 

Relentless hard work and relentless optimism. You can see my optimism got me into trouble, but hard work is usually a key ingredient to all these endeavors.

You’re definitely not afraid of hard work. You proved them that many times. Is there a way that you’ve improved your business that we can apply to ours?

Let me tell you a simple one, which is delegating more. I’m not a great delegator. I’m a control person, which also doesn’t serve you well. Here’s a thought and many of your readers, entrepreneur-types are going to think, “I can always do it better myself. I can do it better than anyone.” As a result, you end up doing some mundane stuff and you spend a lot of time doing that. It’s not that fun and it’s a bad use of time. Throughout my career, I would oftentimes end up doing stuff where I say, “I’ll do it.” Once you give it to a subordinate or a teammate and they don’t do it well, then I was, “I’ll do it,” and you can’t do that. You’ve got to say, “Let me spend more time with you, show you how to do it.” If they don’t do it right, there are a couple of things wrong. Send it back instead of, “I’ll correct it and send it on.” That’s the only way to scale. Some of the businesses now have scaled and that’s a result of me ceding control and letting others be part of the mission and to utilize all their energies and their talents. Lots of times they have more time and skills in certain departments, and they can do those things better than you can, but it’s hard to give up control. Please give up control if you want to scale your business.

Make more time to do though the high-dollar tasks. Jorge, how do you like to give back?

Since this disaster, I wasn’t able to go right back into real estate and I never went back in because I was un-bankable for a while. No one would make the loans, no syndicator, no one would touch me for years. What I would do is I started helping people that had debt issues, people that were going through the same thing I did. That’s what my mission is to help. Millions and millions of families and small business owners across America right now are struggling with debt and that’s something I can help with.

The best deals are those that other people have problems with. Click To Tweet

What does that look like? Who’s your prime client right now?

Somebody who’s at the point where it’s not just, “I’ve got a budgeting issue,” but, “I’m being served with lawsuits,” or “A foreclosure started,” or “They’re repo-ing my car,” stuff like that. In a crisis, that’s where I can help. The goal would be to simply create leverage against the creditor in order to settle that debt at a significant discount.

I appreciate the stories and all that we can all learn from. It’s great stuff and unfortunately at your expense, but hopefully, we can all learn from that. I’m thankful you have come through that. You’re a hard worker and you’re making it happen again. Tell the readers how they can get in touch with you and learn more about your business.

My business is called DebtCleanse Group Legal Services. If you want to hear the stories, I’ll give you a bit of my background. I wrote a book because it was crazy that as I went forward, I needed to put my side of the story of what happened out. This book is called Burn Zones. It’s available on Amazon, Audible, Barnes & Noble and places like that. It gives a story of me buying all this real estate, making a ton of money, then losing it all. I encourage readers, if they’re interested, to take a look at that. If they’re in trouble with their debt or they know somebody who is, please have them contact us at DebtCleanse.

Jorge, thanks. I also appreciate the readers being with us and read about these experts giving their stories and their expertise. I hope you all will also go Life Bridge Capital and connect with me and join our Facebook group, The Real Estate Syndication Show. We will talk to each of you next time.

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About Jorge Newbery

RES 205 | Becoming Debt-FreeFounder and CEO, DebtCleanse Group Legal Services.

When a natural disaster destroyed Jorge Newbery’s real estate business in2004 he was saddled with $26 million in various debts that he couldn’t pay. Through years of fighting with creditors that were trying to collect non-stop, he discovered tactics to settle those debts for pennies on the dollar – including some for nothing at all.

He founded DebtCleanse because over the years he’s personally seen too many people swallowed up by the financial system and funneled into a cycle of debt. The strategies he learned can be used by anyone carrying the weight of endless payments.

Jorge understands the mental and physical stress that unaffordable debt can bring, and he’s determined to help people break out of the payment cycle and live a debt free life.

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