This week Bruce is joined by Rick Solis and Andrea Esplin. Both are real estate investors in Southern California and have been doing it for a long time. Rick is also the appraiser that appraises most of The Norris Group’s hard money loan situations.
Andrea got started in real estate investing right around 2001/2002. Her timing could not have been better because everything she touched probably started to go up a little bit, but as she was going through ‘03/04 it started going up a lot. Andrea said at the time she was too ignorant to know that, so she lucked out in that sense. Bruce said one of the things that happens is you immediately assume that whatever you’re experiencing is normal. If that is the only blueprint you have, then you think it is really how it works. This has changed. Andrea has gone from the most ridiculous upswing to the most incredible crash. In Bruce’s opinion, her having gone through that is an interesting experience. Andrea started out buying notes, and the first house she bought was actually a result of her taking one of The Norris Group boot camps. After the bootcamp, she came back and followed everything to the T. The first house she bought was in December 2003 on Orangetree in Fontana. At the time she attracted it through a non-owner occupied mailer. Prior to 2001, Andrea had a bookstore in La Verne that sold books on tape, so she gained a lot of skills here that helped her in the property-buying business. It’s all about helping someone out and the different ways that can be accomplished in closing your transactions.
Rick bought his first house in 1998, a HUD repo in Montclair on Princeton Street. It’s easy for him to remember this because he closed escrow one week after his 20th birthday. He decided to start really early after watching the late night infomercials as well as when he was that age he was looking to get rich quick. At that time he thought he was going to be a millionaire by 25 and be all done. Both Andrea and Rick had opposite experiences. Rick came in at the end of the cycle when he would have been blindsided for what he thought would have been true for two years but ended up not being true for seven. Rick was actually blindsided twice because he thought the 90’s was just a fluke and wasn’t really going to go down. When things were booming again in 2001, he really thought things were going to stay the way they were. He overestimated the success and, although he sold a lot, didn’t sell everything he should have sold. He knew bad times were coming, but he never suspected things would be as bad as they were. No one suspected anything, even though Bruce wrote a report called “The Crash” where he talked about the worst case scenarios. Rick did not suspect the worst case scenario was going to happen; he thought things would only drop 20-30%.
When Rick bought his first property, he held it the whole time just by the skin of his teeth. He lived there for the first year, renting out the bedrooms to individual tenants. After that, he rented it out, but things were plunging at this time. He was having trouble keeping the property afloat, so he gave the new tenant an equity-split deal. The tenant took care of the maintenance and the payment. He finally sold the property in either 2005 or 2006, and it worked out pretty well. When Rick was younger, he was loading up on the “nothing down” concepts from Robert Allen. He had tons of books by him which he picked up from the bookstore every week. He was reading a lot on creative financing, and interestingly enough Rick has no interest in any creative financing now. If there is no equity in a deal, then he is not interested. When Rick got started in real estate at age twenty, he didn’t really tell anyone what he was doing and didn’t care what they thought. He came from a lower-income area, so he didn’t tell any friends and kept it pretty quiet from everyone. When Bruce was younger and was selling electrical supplies in hardware stores, he knew at that time in his life if you told anyone what you were planning to do with real estate, you wouldn’t get much support for it. A lot of the time it is solo for a while until you start cashing a few checks, then all of a sudden people come around, which is really nice.
Andrea met Rick through her bookstore, and she actually started buying seconds as a result of Rick. He was the one who referred her to the bootcamp. They had not planned to be in business together. She started buying seconds in 2001, which was a real safe time to make these purchases and therefore worked out well since they were not kept past 2006. Timing has a lot to do with how things work out. You can have the perfect blueprint for the wrong era and have a real problem. This is what is unique about the real estate business in that timing aspect might seem good but won’t work for another three years. Rick just started buying notes again. There is a lot more available to buy, but he has noticed it is much harder to get the borrowers to make any kind of payment now. Even if it’s in their best interest, you can’t even get them to pay $100 a month because they’re so used to not paying that it is a bit of a challenge. Andrea thinks this is because they have been dealing with the banks that were not doing anything about them not paying. They’re used to this, so when they’re sent a letter saying that their house will be foreclosed on, they think this means a year from now.
Andrea and Rick’s first property they worked on together was the house on Orangtree in Fontana in 2003. They held it a year before they sold it. The bought the house at $.60 on the dollar, and Rick remembers after walking out the door everyone was giving Andrea a hug. At first he couldn’t understand it because the customer had just given away $40 grand and was hugging Andrea like they were planning vacations and picnics with her. Andrea and Rick are partners in a business that is hard to be partners in. Most of the time it doesn’t work because in a lot of partnerships you have two people who would be incapable of doing the business alone, so they partner together and don’t do it well in pairs. This is not the case with Andrea and Rick. Both of them are very capable of doing it on their own. In the beginning, Andrea said she was ignorant about real estate. She and her employees put together a letter, which her employees mailed out. She knew how to close a deal; this was her only true gift. She thought she would be able to figure everything else out, but if she couldn’t close anything, then what’s the point of having the knowledge. Rick truly has real estate values, so they would both take phone calls. He did all the values in the beginning, while Andrea sent all the letters and did all the negotiating. It worked out that she didn’t know they were buying their first house so cheap because she thought she was doing a service to everybody and was going to solve their problems. They both had different strengths, which worked out well. The reason why they have stayed together is because they both have the same type of character but two different skill sets.
Rick does not really enjoy negotiating. He usually did the best and picked up the best deals where it was people who were just calling him, telling him what they had, and mailing him an offer. He did best where all he had to do was get them an offer in the mail, then perform quickly and close it. He is not really good at establishing relationships and getting back and forth, but he usually cuts to the chase. He asks them what they have, what they want, then tells them the offer and that he can close in ten days. Andrea is the best at closing the hard ones where they need to feel very comfortable with the person to whom they are selling the house. A lot of people don’t realize they have a lot of the tools that are important in the buy and sell business, but they think they can’t do it because they don’t know real estate. Bruce had a very similar experience when he went to work for a company in Orange County in 1981. He didn’t know a grant deed from a trust deed, but he was able to understand the concept of what they had as he had cash and the buyers had equity. He understood this clearly, but he would have made the same decision on most of the deals that he was sitting across from. It made sense for him to get a yes answer. Rick also looks at the customers problems and says it makes sense to him that it would be an acceptable solution to what he has. The belief of this is very important, as Andrea agrees. You have to believe that you truly are solving their problem. Both Rick and Andrea have done some wholesaling, so in a way they are making the same decision mentioned before, but at a different level. They understand they are leaving part of the pie for somebody else, and it’s perfectly okay. It’s a big step once you cross the barrier because you realize there are circumstances where a piece of something is so much better if it is quick than the whole pie six months down the road. When you do some wholesaling, you all of a sudden really get it. You understand the service and don’t even mind being on the other side of it. This really makes you more persuasive because it’s not like you’re trying to get somebody to do something and are then shocked when they say yes.
When Rick and Andrea started in the business back in the early 2000s, they were initially only going to sell most of the properties. However, the ones Rick saw were the most profitable were the ones that were held on for a little while. Initially, they did sell quite a few, but they actually regretted it years later. They walked out with $10-$20 grand profit, whereas the houses they held for even just a year profited over $100 grand in profit. This was an error they had never seen before and would be hard pressed to see again.
Around 2004/2005, the mood of the investors was they seemed like they had just come out of a pep rally seminar for Amway and were really pumped. This made having any type of discernment not necessary because it had a front door and was going to make dough. At this time it was hard to make mistakes. This is one of the hardest things coming from the era where Andrea obtained her experience. At that time you could misprice something and be forgiven for it and sometimes blessed. Also, you didn’t have to repair properties as well as you do right now because the retail buyer was of the same mindset that they had to get something. So if they had a front door, then they were not picky about what was on the other side of it. At that time they did not fix their properties; there was no granite or floors. They usually were not handed repair lists from the home inspector. This is hard to overcome mentally when you come from an era like that to what amounts to the Great Depression of California real estate. To overcome this, Rick said he just stopped looking in 2007. Andrea said some of the pains they have had were blessings because they were able to learn quickly from them. She learned more going through bad times than good. In good times there is not as much to learn because you think you’re doing everything right. When things change, you realize if you really were doing everything right then how come you are in a bad situation. There were a lot of houses Rick kept that he now realizes he should have dumped. Life would be better now if he had not kept them, but you later just write it off as experience. He and Andrea now have a new plan that should get them in the same place, which involves buying and holding. Andrea said she still has to do retailing to make a living, but they have been acquiring more rentals. Last year in particular they acquired several rentals by going by Tony Alvarez’s plan. This was the first chance Andrea had to buy a property and still have a cash flow. When she started out she knew the long-term wealth was in holding and cash flow. Especially in this cycle this is true because the margins are really tight for buy/sell because there are so many people trying to buy/hold that they will pay a different level than we can buying and selling. That margin is tight, and for the first time you can buy something you don’t even need a super deal on to cash flow. If you get a deal, then it makes even more sense. Ever since 1988 Rick has never been able to buy something where the rent is way higher than the house payment, even with a hard money loan. Yet you still don’t have people breaking down the doors wanting to buy, and if they do they are not qualified. There is not very much demand. Bruce cannot imagine the perspective of coming into the market for the first time here because you would get a picture where things are normal when it is anything but normal. There are a lot of people that could buy houses or even just a home to live in are not motivated at all and don’t realize what a gift this is. A lot if it is mental, both in lender policies and buyer decisions. About 25 people Bruce knows are in escrow right now, and for the first time in their life 25 people are looking at every article negative to real estate, biting their nails and asking if they should borrow money at 4 ½% at a price that is 60% off. They’re really tossing and turning over it because they don’t have support. People made decisions back in 2005 because it was overwhelming that that was the right decision even though they were paying a ridiculous price. Now, it’s just the opposite. You know that your rent is going to be higher than your payment would turn out to be, and yet signing the documents is so permanent that people hesitate to do it. Rick said they don’t realize that they’re always going to need a place to live.
When Bruce was speaking in front of people a lot, one of the questions he started asking was if anyone renting houses was willing to give a 30-year fixed rent. Imagine if your life was blessed with a 30-year fixed payment at this level because at some point you are going to make a lot more money. When Bruce first bought a home with Marsha, the payments seemed pretty high since they were at $209. They stepped up to the next house where it was $310, and it was stressful. All of a sudden, five years later, you realize you basically have two car payments on your hands and it’s basically a joke. This is the chance people have now, but that mental problem is they’re surrounded by everybody that has gotten damaged by the product. The memory of the 05/06 era is gone. The optimism has now turned into the mindset of, “How long has it been since you made your payment, or when are you getting booted out.” The optimism came back really fast last year when the tax credit was put out. Buyers flew back into the market so fast, and Rick does not understand what has changed their minds so much now. It’s kind of unusual now that they either cannot qualify or are simply not interested. $8,000 was basically a down payment when you have a nothing down loan program. People need to look at how these loans have performed that people got back $8 grand. They would have performed wonderfully. They got $8,000 back and paid $20,000 more for the house. What’s interesting is mindset currently going on is it is all geared toward down payments being bigger in the future, 20% down being mandatory in most cases. This concerns all of them, especially since they’re making that decision based on faulty information. There is an assumption that that loan pile is safer than any other one, the best performing pile of loans for forty years is a VA nothing down loan. It beats the 20% down Fannie Mae loan. Bruce wants the people at the Nixon library to see a chart of this and take it wherever they go because it really fights the nonsense and is undeniable. Nothing down beats 20% down because they have underwriting standards, so it makes sense. Usually their underwriting standards have nothing down, and you will have people coming out of the woodwork and a lot of people buying houses.
Join us next time to learn the work Andrea and Rick do on a daily basis and their thoughts going forward for being a real estate investor and how it might change in the next decade as opposed to what they just experienced.
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.
Tags: "The Crash", 30-year fixed rent, Andrea Esplin, bruce norris, California, Fontana, real estate, Rick Solis, Robert Allen, the norris group, The Norris Group Real Estate Radio Show, Tony Alvarez, VA nothing down