This week Bruce Norris is joined once again by Bill Shipp. Bill has been one of the largest wholesale buyers of real estate in Riverside for many years. He has a unique system that can even be done from a distance, which he proves every day by living and working in Utah.
In their last interview, Bruce and Bill talked about how he had one loan-remaining rental. He wondered why rentals were not as exciting to him and how that one survived. Bill said the one reason the rental survived was his mom lived in it. He bought it back in ’92 in Sun City, and he always kept it thinking his mom may need to move back into the house. However, she wanted to live down in Laguna Niguel, so he pays rent for her down there, which is about the exact same rent he gets from the house in Sun City. He always had in the back of his mind that just in case his mom does not want to live in Laguna Niguel and needs a house, then Bill would not need to buy one for her. He has always had this little house that generates enough income that pays for her rent wherever she seems to go. This is the only reason he has this rental. Sun City is actually an age-restricted city, so Bruce learned not to sell here during a downturn.
Bill also mentioned he does not worry about competition, even though he does have it. Bruce said every time something hits the MLS he would say that some systems would teach that all you need to do is pay attention to the MLS. It is not that he has an absence of competition; he just does not care if it is there, and he seems to be able to beat them at the same game they’re trying to do. Bruce wondered what Bill would do to prevent the competitors from buying the properties. Bruce said it is not anything he can do or can’t do because everyone is probably doing the same thing. Most of them are cash offers where you show your proof of funds. It also depends on that particular day how much you want to make or not make. Bill just bid on a house last week that had 29 offers on it, and it came out at about $75 or $80,000 under market. He actually bid $7,000 over list price, and he did not get it. People could have bid $20,000 over and still made $20,000 on it. At the time he did not step up to the plate and say he was willing to make $20 grand versus $35 or $40.
In the business of real estate, every morning when you wake up you have no clue if you’re going to make a dollar or not. If he wakes up, his agents call him, and he has not looked at a single house in several months, then he relies upon the agents to do the work. They will call him with a deal, sometimes one he does not have any time in. If they call him in the morning and he is going to make $20 or $30 grand, that is great. If he doesn’t, then that is okay. His last offer was on December 12 since he had been gone for two months, and he has not seen the offer that he made on that house. He has only seen one house since December.
He is dedicated to doing what he does; it is just that in this type of market you cannot get crazy over losing deals or overbidding it because tomorrow there will be another list. There is another list every day, and it was this way before Bruce and Bill were ever in the business. It is always there, and there is always competition. It is always going up or down, or it is staying the same. It is always something, and it doesn’t change. It’s just whether you want to play the game or not and how much you want to make or not. Bill used to flip houses in the ‘80s to make $5 grand. Bruce also did a lot himself that made $5 or $7,000, and this was okay. At the time they were only worth $60 grand. It is when you touch them for $250,000 and make $5 grand that it hurts. But then again, you still made something; it’s just sometimes not as much as you want.
Bruce wondered when Bill is making these offers if there are factors such as speed that determine how long he will take to close it. Bill said this used to mean something, but now there is so much competition. Some people put five days, others ten, others send in the entire cashier’s check for the whole amount. This is something Bruce does. Bill is not showing anything different than the next person. The only thing he might show is if the agent happens to know who he is, has done a deal with him in the past, and offers the same deals. Whether they are going to lean it toward him or the next guy, or if they call the asset manager and tell him they have done a deal with Bill before and don’t know the other person, then he might get the deal or he might not. But this is really the only thing he has to offer that Bruce or anyone else does if they are the same since the time closing does not really count anymore. Putting the time in really does not make a difference except if you are buying a house that might be going to trustee sale.
In the old days when you had three days to close escrow, time was very important versus the next person since you had to be able to perform. However, time now does not make a difference. Bill’s favorite entity to buy something in is an LLC. These require a filing fee when you do volume. Bill said he does not want to leave the 303% on the table if it is not an LLC. If you are flipping 20 houses at $200,000 each, then that is $4 million at 3 1/3%. Once it’s at $130,000, you’re letting the state have it for a while.
Bruce wondered if Bill has ever done anything that was subject to a loan. In this case he would have taken over a loan that he would later get a grant deed on but leave the loan in place. Bill said he did this in the 90s when he was buying the houses that were closer to trustee sale since there was no time to get a loan. This was why he would take it subject to. However, he had a letter that he would have the people sign telling them he was making a profit on their house. He would then sell the home within a certain amount of time and would not let anybody take the loan subject to. He would never sell a house subject to on his promise to someone that he bought their house subject to. He told the people the loan would be out of their name when he sells them the house. Bruce thinks in the next few years there will be a niche for people buying subject to and keeping them as rentals.
In California, some prices have escalated pretty excitingly. If you had kept everything you bought in 2000 and sold it in 2005, it would not have been a bad number. However, if you were buying them all in 2005, it would have been a bad number. If he had bought them all in 19890 or 1990, it would have been a bad number. There is always bad numbers, but what is important is knowing when to buy. When people talk about rentals, the blanket statement is that you should buy rentals. Whenever people advise others to buy, there are a lot of people who really shouldn’t buy rentals. If you have a group of 50 people and you say rentals are a really good thing, but one of the people is 70 years old, he probably should be buying a bunch of rentals. However, if you’re new in the business of flipping houses, then you shouldn’t buy rentals.
If you have $30-$40,000 to work with, you buy a rental, and hear that you can receive a 14% cash-on-cash return if you buy rentals right now, Bill can show you that by using that $30-$40,000 to flip a house, you are going to make 200-300% a year return. If you borrow money from Bruce Norris, buy a house with $25-$30,000 down and are making $25,000 a house in the 101 day turn Bill averages, you are making a 100% return on your investment. If you do that 2-3 times a year and that $25,000 is now $75,000, then you can maybe talk about buying a rental. However, you should not talk about buying a rental when you save your first $30,000. If the market does turn or you have a roof or certain cash flows, you are out of the flipping business because you have used your $30,000 on a rental. In short, there are certain times you should buy rentals and other times you shouldn’t.
One of the things that Bill has avoided but also has a bent towards is teaching people what he knows. Bruce wondered if this is ever going to come about, which Bill said people have asked him before. A few years ago Bill even wanted to work with Bruce because he loved teaching people. He loves teaching people how to flip houses or even just talking about it. But he also enjoys something even better than this. For him, he feels more rewarded when he teaches people how to be a good investor; not just in real estate but also in planning for the things you should or should not do with the money that you have. The reason Bill is able to do what he does now is not 100% real estate. Money can work as hard as you can, and if you are really good with your money it can work better than you do. It really depends on what you put it in.
Bruce said the goal of most people is paying off a fleet of rentals or having trust deeds. The money is producing other things. Most people who are in the buy/sell business have a full-time job. You have to ask yourself what position you are at in your life. If you do have a full-time job, are flipping a couple houses a year, and you have some extra money to create passive income, rentals are a great thing to do. Most people who are in the buy/sell business have a full-time job doing this kind of work. The business has been very easy for Bill, even though it is not easy for most people. This is why people with a lot of experience are shaking their heads saying it is an interesting twist to what they have found personally to be much more difficult. So Bruce thinks it would be interesting if Bill threw his hat into the education arena, but it is not easy to create the document.
Bill also works with things other than real estate, one of them being stock trades. He stock trades every day and tries to do trust deeds. However, he actually does not recommend stock-trading. There are a lot of people going to take classes on how to do options and trade stocks. The best people in the world get paid millions of dollars a year to even get a 12% return. For example, if you work for a Vanguard firm, are a money manager, and have a 12% return for 10 years, you are literally making millions of dollars in bonuses. So if you think you are going to be beating 12% and are going to beat people all over the world who are spending 100% of their life trading, you may not have as good a chance. Bill is a flipper, so he really should not be dabbling in trading stocks and think he can beat the guys who do this all day and night long. It is a tough game, but he has been doing it off and on for 25 years. It is not something he just started, but rather something he has trained. He has his Series 7 license and had sold stocks to people as well as mutual funds and life insurance policies. It was part of his planning and studying; he did not just wake up one day and start training.
Bruce also traded stocks, and he said it was a good way to learn about himself. It taught him he had no business being here in the first place because he was an amateur who got in a lucky stretch. This happened to people in real estate also. When Bruce was speaking in front of audiences, especially in 2003-2005, he asked the people how many of them had been around for fifteen years and told them that sometimes real estate does not work the way that it was at the time. Both Bruce and Bill had an experience in the early 90s that taught them to be aware of 2006 before it happened. This is probably going to have some lingering good effects for people who went through hard times now. They will respect the debt and the leverage. They will realize things will not always work out well.
There is something to be learned even when you are trading stocks as well as real estate. They say you never lose money by taking a profit, but this is incorrect in the world of stock trading. For example, if you are trading and you see that you have made $500-$1,000 on a trade and sell it, you think you have made money. The problem is that people do not sell their losers. Your $500-$1,000 winners could be totally offset by a $5,000 loss that you are afraid to sell since now you have to admit that you lost on it. You sit and wait for it to become a winner, and it becomes another $5,000 loss. It is the same thing with real estate. When you have a house that is a loser, you get rid of it. If somebody makes an offer that seems a little low that has been for sale for four months, you should take the offer and run since the first one is usually the best. When you have losers, you have to get rid of them because it could be a lot worse. One loss could be better than ten wins in the stock market. In real estate, if you have a loss, you just get out of it because it is not going to get better.
Bruce read a book from the 1800s about emotional cycles of investing. The first emotion of a downturn is denial. The admission is that they made a mistake, which people have a very hard time doing no matter what the investment is. You then go through the whole cycle until you capitulate and lose a fortune. The book was called The ABCs of Investing, and the person who contributed to it was named Charles Dow, the same man who came up with the Dow Theory. He said you can tell wherever you are in a cycle by taking the temperature of the emotion of the people that are participating. When they are euphoric, you sell to them. When they are fearful, you buy from them. It is that simple. This is why a lot of people are trying to become stock traders because the euphoria is up 30-40%. It has possibly even doubled in the last four years, and that is euphoria and something they should have been thinking about in 2009. Then you would have to really be a contrarian, facing what people thought was a catastrophe and thinking they will be okay.
This is real estate in 2012. Real estate this year has just come off of pretty scary, stretchy years. You have 4% interest rates and not a lot of volume of normal buyers. Bruce wondered what Bill’s favorite price range to buy in is and if there is a limit. For Bill, he does not like his selling price to be over $225. This way your carrying costs and commissions are lower. This is what has been great about the 50% knockoff on the price. When he sold houses in 2006 and 2007, you paid $24,000 in commission and now pay $12,000. Your profits are even better just because of the commissions. With your carrying costs, back then whatever the interest rate was you could get a few points lower now, your holding cost will also be lower. Things have been profitable, and last year was Bill’s best year ever. A lot of it had to do with he did not have to pay twice as much in commissions or in holding costs. This really helped the profit bottom-line.
The buyer changes overtime too. In 2012 you have different buyers than you had in 2005. With the ’05 buyer, you come to their door and they are interested. In 2012, this is not the case. Now they are pickier. Nowadays, a real buyer means they have to prove income, prove they have good credit. You do have a lot better buyers now, even if you look at the credit going through FHA, which is a lot stronger than it was in prior years. Bill said he has not had fallout since buyers have done their research and found the house they wanted. With the amount of houses for sale, buyers are pickier. If they have chosen your house, it is usually because they really want it.
What is interesting about this market is when you are selling; if you look in the MLS there really is an absence of inventory that is available today. You have a lot of short sales. If you go through a journey with your wife and go through a typical short sale, it is a maybe for some months. If after all this time you get a no answer, it is really doubtful you will sign up for another one. The conclusion would be that they cannot keep doing this. There is inventory that comes from people like Bruce and Bill, and there is still not a big pile of normal sellers putting their inventory out at this price. There are some, but it is still not the dominate thing. The REOs are pretty restricted too as there are not a lot of these. You pretty much have to be in the short sale business now.
When we are presenting inventory for sale, we think about this before we even buy it if we look at what is going to be our competition and find out there is not a lot. This is one of those things you may not worry about, but Bruce does because he looks at what might occur and how much inventory should be here that is not. There is an artificial level of inventory that is in the MLS that could be a lot higher. Bill does not worry as much because of the short term and he is not dealing with the volume that Bruce is. If you have 30-50 houses going at a time, which Bill does not, and you see your holding time get longer and longer, you should definitely worry about it. Bill has found his holding time is still very doable less than four months. They are in the same range, but if something happens with a lot of houses, that is worse than just the few. If you just have 3-5 in the system, you make your adjustments and prices and let it go. But for some people who may have the 40 or 50, their spreads may be a little lower than a person who only has three or four. This is the only way you could do volume. Bill has bigger spreads and more room to move in case something traumatic happens.
The age of the properties is usually in the 70s. The model is different, and in this particular stretch when we are buying at trustee sales, we are really concentrating on inventory that is newer than 2000. We just happen to live in a county that was blessed with a lot of builders building things. It is very common to find half of the daily trustee sales were built after 2000. It is in demand areas, but the margins are tight. Bill does not do the trustee sales and does not think he has ever had a house that was built after 2000. What is also interesting is the rehabbing business. The reason why it has been profitable is because the rehab business is less than it was before since in the uptick of ’05, ’06, and ’07 a lot of people were taking credit lines out, putting their new roofs on, or doing kitchens and bathrooms. Bill thinks in the last four years he has only had to do one roof. Back in the late 90s when he was buying the ‘60s and ‘70s houses, people did not have a lot of equity buildup where they were pulling out seconds and doing the new roofs. It seemed like he had to do a new roof for every house he did back then, and now he doesn’t.
Bruce remembered a stretch he bought where it seemed like every house he bought had the faucets coming straight out from the wall. He bought four in a row where it was all the same thing. He had to redo the plumbing and everything. The oldest house Bill ever fixed was from 1878 where he had to put in the pressure water. This was a house he started that ended up disintegrating. He had to get rid of this property and ended up flipping it instead. He bought two adobes and did not fix either one of them. This was a property one of his coworkers found when they were knocking on doors, and Bill wondered why they were showing him the property. However, it was a great deal and he did not want her to be discouraged, so he bought it. Bill also bought another property in the Rubidoux area where it did not have any permits on it. He bought his 3 bedroom, 2 bathroom house, and when he was done it was a 2 and 1. He lost a lot of square footage and money.
Bruce said he had a similar experience. They did not lose money, but they had a box the city said was 1500 square feet because they took a picture from the air. 400 feet of it was not permitted when they got into it.
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