This week Bruce Norris is joined once again by Shawn Watkins and Angel Bronsgeest. Both own the Investors Workshops in Orange County, and they have supported I Survived Real Estate every year that it has been around as well as have around 200 doors in Ogden, Utah.
Shawn first decided to create his own club when he was going to Nick Manfredi’s club at the Inland Empire Investors Forum. He really enjoyed his club, but he lived in Orange County away from his club and had to keep commuting out to him. Anybody who knows the 91 freeway knows if you do not get on the freeway by 2:00, you are not getting where you need to go very quickly. After doing this for several months, he went up to Nick and told him he wanted to start a club in Orange County. He ended up modeling the Investors workshops off the style of the club that Nick had. He did not pay his speakers, but he did pick them. He started the Investors Workshops in 2003 in Orange County chiefly because he was tired of not coming home until midnight, and he wanted to do things more efficiently. It was a large commitment for a small meeting, and Bruce has felt the same way. You realize it was a one day commitment, a one and a half hour talk, but it took all day. Some of it you just do because you love it, and ultimately these are the people who have great clubs.
In 2003 and 2006-07, there was a lot of interest because there was nothing you could do that would mess up. You had to be quick with any real estate you could touch. You did not have to be too smart; get in, get out, hope that it fell out of escrow at least once, then have a price increase and net more at the end. There was a lot of backslapping and congratulations. It seemed everybody had money, and nobody was afraid to flash it. In that mindset, you are casual about the decision process because you are blinded by the risk. Bruce and a lot of people he knew made some decisions they later regretted. Bruce said he should have read the book that he read once a year for money, and it was just one more lesson he had learned. Sometimes you have too many big chunks, and you realize there are some things you just cannot do.
When you owned a club in 2008 and 2009, there was a very different group sitting there. There was most likely a lot of damage and absence of people. Attendance was flagged, and Shawn began getting several voicemails of people asking if he knew anyone who did a short sale. The last time these words were uttered was in the late 90s. It is like the vocabulary does not exist for a generation, and we had quite a run. From 1998 until about 2007, there were people who did not even know what the REO department was. Short sales were even more remote. You had investors basically trying to figure out how to cut bait. There were multiple properties in multiple cities in multiple states.
Mike Cantu and Shawn Watkins told several stories about being loaded up with sub-divisions and properties, looking at them, and having to make a very hard decision. The stories were so overwhelming. When somebody comes up to you and says they have 30 houses in five different states, and none of them are worth even close to what is owed, then Shawn sees this makes people sick both physically and mentally. It is hard because you do not want to be the person who says it’s over and they need to let it go. Nobody else is wiling to tell them this, and the ones with the real estate clubs must be the only ones who know how to do it right. It is a very valuable experience to sit in this seat once in your life because it gives you perspective that you would not have sitting across from someone else who is there. It is not a permanent position; you will get a chance to own again, but it will not happen again within the next six months. You need to make a decision that takes you off of the pressurized seat you are on because it is not fun receiving certified mail; and you just need to give yourself a break. You were a renter before, and you can be a renter for a while. You just need to give people permission to go back and have that moment where they don’t have to have that stamp showing they owe something, which is kind of a badge of importance.
In order to have face-to-face conversation with someone one-on-one, then you sometimes have to be willing to have an uncomfortable conversation with them. They are going be more apt to tell you the things that are really going on since it is not going to be solely about the houses they own in twenty different states. There are other things going on, and they are more than willing to tell you this. Once you approach this and offer them solutions and conclusions to where you can help them stay afloat, then you create this trust. The people who go to their club who are members are people who know they can trust Shawn and Angel. This is very apparent by the way they have stayed and continued attending their club.
When you have this experience personally, you will sometimes sit across from someone who owns a house who is about to make a wrong decision since they do not want to sell it too low or on terms. The other choices here are leaving your family where they are and going somewhere else such as North Dakota. This way you have some legitimate ammunition and can tell someone if they need to reconsider a deal. You really can get stronger than you ever would because you realize you are really trying to help this person to not compound. We have a tendency to double-up. For instance, when penny stocks were doing badly, Bruce’s first reaction was instead of selling everything to buy more so his cost was less. This is called leveraging down. Leveraging down is lowering your cost on the worst decision you have made in the past. Bruce wondered if it would be smarter to make a new intelligent decision on the best investment in the future. However, you are still stuck with the evidence that you owe a specific stock at too high a price. You then say, “Let’s own twice as much at a lower price.” Sometimes this is what people do in real estate. They really feel they messed up in one area, so they need to fix it in another.
Bruce knows one person who sells bulk homes in Detroit, Michigan twenty at a time for $100 grand. He has mostly California investors buy them, and it has really worked out for him. However, his disclosure is rather hilarious. First, the home may no longer exist, so you are buying them in a pile. There is this spectrum of damage that is going to happen a certain percentage of the time. Second, if it does exist it may have tax liens on it exceeding its value. Nobody goes to see the houses because they are trying to make up for the damage in one area by a super deal that is obviously going to work out at $5 grand a pop. This is when they reconsider their decision. Shawn has seen this over the last few years. He watches people’s business model and looks at what they were buying a little over four years ago. He watched and listened, and for the ones who were gracious enough to ask him why his margin had shrunk so much, their honest answer was there was nothing much else they could do.
Shawn said if he wants a specific deal, he is going to keep buying since the margins are lower. Eventually they will get better again; but the question is what makes people think this is even the case that they will get better. If you buy more now and pay more for it so you can be in the game later, then you should ask yourself if you would consider doing something in real estate a little different. This way, you do not have so much exposure. Bruce does not completely discount the fact that you stay in the game since his company is evidence of one that had to pay higher prices than they thought they would have to originally. However, he also understands that when the shifts happen you sometimes have to control the numbers. He also understands the decisions mentioned prior do not have to be made in a negative fashion.
Shawn will use The Norris Group as an example when he talks to the people at the clubs and will ask them if they think they can outlast The Norris Group. Unless they are better funded and better trained than them, they are not going to outlast them. It is a legitimate statement to say they are a bit player in the game and they cannot withstand a shift down. There are not a lot of groups on par with The Norris Group or who are not as willing to share. Bruce is willing to say when we are willing to take a hit on margin and give their properties away. We will become property managers for a while and go 8 or 10 years in the future. They are comparing their ability to last, and they don’t have it. One little blip, and they’re done.
In the buy/sell business, you can have both alternatives be perfectly acceptable. The scary part was someone would call Craig and say they had a really good deal with a $750 grand house, which is not possible. There is no way you are going to get out of this and no way to cash flow if you don’t. The scariest thing would be if they went to The Norris Group or any other group who had the same standards, Bruce would be intellectually honest enough to tell them his money is not going to follow their deal. What happens is they use their own money, whether it is family money or money from people close to them. They’re standing on a pressure mine; and in their mind if they step off they blow up or take longer to blow up if they stay on it. They can’t move off it, can’t buy anything else, and cannot exit it. In their mind, that’s it.
The alternative is the rental business is not as appealing with $150 houses. Difference is these were not bought with any plan B. Plan A is Plan A. If they step off that Plan A, they lose a limb. Sometimes the answer is to lose one limb rather than lose everything. From 2004-2006, there was almost none of this possible in California. It was just an escalation game, and it was valid to play because everything you touched was going to make $50-$100 grand. It’s when you did not catch the turn that there could be issues.
Bruce once met with a guy who was one of the big speakers and was telling everybody to buy all over the world. He had an 8×11 sheet of his 62 properties, and it was his business card. You would look at it and be in awe, except for the fact that you would look at the cash flow that was -$15 grand a month. He had $4 million of worth, $12 million of debt, and $4 million of net worth. These included all the properties in Florida and California. He came to Bruce telling him things were going to change and go down, and it scared him. He was not exposed to this conversation. He looked at his list during lunch and told him he really scared him that night since in Bruce’s opinion the man had 6 months to turn everything he had into what was going to cost him $2 million to sell. He had $2 million in net worth on which he was going to have to pay taxes, and he was going to walk away being a millionaire. If he waited six months, things would go down to 0. If he waited a year, it would be -$4 million. It is very hard to make these decisions, but preventing this damage going forward now is possible because you can choose an area and a type where both the decision to sell or to buy and hold can come in the same property at the same moment. If one thing does not work, you can just keep the other.
Nowadays, The Norris Group does not usually buy a property with the thought of keeping it. If they make a mistake buying and selling, they are just going to eat the mistake. Usually this has to do with the size of the volume. You will have a stinker, which could be one out of every twenty properties, and it would not matter too much. However, if you’re only buying four, then you care a lot more. This happens because things are not always in your control. Sometimes you have some very strange things happen with the appraisal.
In the area where Shawn and Angel are buying, it cash flows mostly because the ownership group that would occupy it is not that excited about owning, so they don’t care about paying more to rent. They like that flexibility. Aaron Norris mentioned the Y generation and how this is how the buyers are built. They do not necessarily need roots of owning a home; they want the flexibility of going to the next job market. Bruce said he really has to look into this as a big shift. The way we used to do real estate was we would camp out on an ownership of a property and stay there. This is where you would usually start. When you get married and go to college, the whole idea is you are going to set aside money and buy a house. However, what if this is new and not going to be replicated? This is where it becomes interesting.
Bruce, Angel, and Shawn went on to discuss the education side of their business. What was really neat was they were taking on subject matter that no one else had. This has been a very big help as they have very experienced people who have had an impact on others learning the field. Angel said this is something that is hard to do even within the education space because working out deals is usually one of the last things investors learn. They begin using their own cash or their family’s cash, all their credit, and eventually they cannot build a career on the extent of what they can do. They have to learn how to buy in a creative way and buy in a way where the seller is participating in a transaction one way or another. This could include a Subject 2 or strictly a seller financed free and clear home. They have to learn how to have those kinds of conversations because they will not grow an empire. They won’t be able to quit their day job on only the extent of what they have. Most people don’t even have a lot to begin with, especially during a time when nobody wants to finance for investors.
One report Bruce recently read by the New York Federal reserve Board showed a chart that meandered its way up from 6-15%, which is the percentage of properties that when the people filled out the loan application they said they were not going to live in it after all. There was another chart that meandered its way up to 50%, which is the percentage of foreclosures caused by people where 50% of them were multiple grant deed owners. What happened was the other 35% did not say they were going to be non-owner occupants on their loan application. Now, they figured out that in California half of all the foreclosures were caused by multiple property owners. The chances of getting financing after this report would be slim. You would not be able to go to Congress and tell them which people were not really responsible for a lot of the damage. This was a speculator doing this, not an investor.
However, it is going to lend a lot of credence to the things Shawn and Angel talked about because it’s going to be about how to own a lot of properties. Unless you are just richer than Midas, you are not going to get financing, no matter who you are. Even with the ten loans that are available to people, you have to have so much backing. The people Angel knows who are getting these are people with high incomes who continue to stake in their jobs to get these ten loans, then have all this financial backing sitting behind every single house.
When Bruce went back to Washington D.C., they met with Fannie Mae and asked them what was not making sense because there was a $15 million portfolio of loans that was perfectly current. It was a 9.9%, and they were worried about a group they were going to loan to at 5%. They came up and said nobody wanted the current model because the loan application almost had to be figured like a commercial loan, which is not part of the factory process. The factory only wants to produce single-family loans that are owner-occupied, while everyone else doesn’t care. If you can’t place the loan, then why originate it? This is what really becomes the problem and the overlay of other lenders where you say Fannie Mae will do one thing, then the lender starts piling on other things. Fortunately, we are in a time where 75% of the mortgages in America are 5% or less interest for the first time in history.
In California, you have a lot of negative equities that are going to keep making their payments and emerge at the break-even point for a long time in the future. This niche of “Can I take this off your hands” is smart for both people. It’s like the hard money loan business right now where you have an investor who buys a house that cash flows, and you have an investor that wants 9% on the trust deed. Smart decisions are on both sides of this table. If you owe $120 grand at 5% and were just transferred to Texas on a job, your choices are to write a $12 grand check to accomplish a closing and make payments while it’s listed. The other option is somebody could come along and say they will take it and enjoy a cash flow, and the lender is a beneficiary of a non-threatening transaction as they are much less likely to have a foreclosure. However, this is somehow not supposed to be allowed.
Educating people on these things is mostly difficult because everything we are talking about is based in 100 years of law. It has happened before people had large banks when they dealt with one another. You might give somebody $10 in valuable consideration in at that time chickens or a horse. We used to do meets and bounds when we used to do legal descriptions. You go back and see that one person may be a geek for title like another may be for stats. That person’s boundary may be the old oak tree and the big rock, which do not exist anymore. You have had to evolve.
When we are talking about educating people on what a trust deed actually is and what a note actually is as well as legal descriptions and how these things work, they think you’re doing some type of voodoo when you’re not. What you are saying is, “Did you actually give money to the seller?” No, you traded documents; which if proper and in order, there is no reason why you cannot do that right now. It is not what the factory puts out. You are fighting this headwind, and we just keep doing it and trying to teach from a base of practical knowledge. We are doing about 7 or 8 a week; and these things are just constantly coming and coming when you are doing this kind of volume. It is not hard to stack a list of examples and say, “Clearly you can do this. We get title insurance, go through all the hoops, and we’re not trying to hide anything.” It might go against the lender policy, but the policy is going to ensure they have more damage than necessary.
Bruce said he had just spoken with a realtor who told him during the 90s, a niche that nobody else wanted was wraps and contract sales. He was so busy because he was the only realtor who fought this one out. He had a legal background and said it was worth the risk.
Bruce wondered how Shawn and Angel were finding their deals or how the deals were finding them. Shawn said what they have did was put the word out to local realtors on the MLS because they looked at stagnant inventory. They would also do mailers to owners of free and clear houses. They bought the list off of Data Trace; and this all took place in California and in Utah. The call rate was phenomenal, and it really all came back to personal referrals. Shawn said the number one source right now is he is getting calls from people, particularly a builder recently who had great prices and offered to lease the house that an owner currently owned if they bought a new one. As soon as he saw this he inserted himself and wondered why someone would do this when it could be sold to them on contract. The builder’s lender, who they own, sat down with them, looked at the documents, gave them the blessing, and now there is a constant stream of people who are trying to build a new one. The sales agent is pointing out different ones for them to buy; so when Shawn shows up to close a deal, it goes fast and he is the buyer’s new best friend. Shawn has been able to turn his deals into multi-transaction deals. Part of the key to being successful is not having to do deals one at a time.
For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.