This week Bruce is joined once again by Rick Solis and Andrea Esplin, both investors in Southern California.
Rick first noticed when things went from an up market to a flat market to a free dive in the summer of 2006. It was getting harder sell, there were less offers, and the excitement was beginning to fall off. He noticed the free dive in 2008 when things got really bad. Bruce said prices were dropping about 3-4% a month. You could buy things 30% below market value, and only 10 months later all your equity was gone. We were not in the buy and hold, but sometimes you almost got there because it was tough to sell, so it was a scary time. For business at the time, Rick and Andrea bought two rental houses in 2008. Although Andrea wanted to buy a lot, Rick was not buying as much because he saw what was coming, and in 2009 he sat out the whole year and didn’t want any part of the market. In 2009 Andrea was buying from all REO inventories, so it completely changed from where she was chasing the deal before with absentee mailers. Now she was building relationships with agents. She wants to build relationships to where she can have repeat business. She quit going to lunch with her investors and started going with realtors. This is the advantage of being around for a few cycles in that you realize the skill set you know how to do, in her case meeting with people, really does not play a part in the current cycle as much as it does building a relationship that is repetitive. It’s almost like having an account where you call on a store that you own where you have a product, and you would be able to only show up once in a while and take an order. This is what this cycle, this quadrant 2, is like. You are building relationships that have legs, which is very different from a one-call closing skill like in 2003 and 2004 that you would need. You want long-term relationships. For people who are in this business for the first time now, the assumption is that this is how it works.
The Norris Group just had a boot camp where two people were doing short sales. However, the word short sale was not even understood for a decade at a time in California. They have a business model that is working perfectly until it doesn’t work, and then it will be nonexistent for a long time. This is what is tricky about what The Norris Group does. You really have to have different skill sets for whatever phase you’re in at the time. Rick said it seems a lot of the investors are good at one thing and not the rest, so people like those in short sales are only in it for a few years. Either they have to change or find a new job because short sales are going away at some point. It’s like saying you’re really good at attending HUD auctions, but the last one they had was back in 1997. Even trustee sales are going to be very slim. In 5 or 6 years from now, there will not be as much trustee sale business. It will be interesting since the Norris Group does this now, the margins are very tight. The quantity of people interested in it is very big, but Bruce said they used to fund people, who were doing it before, and their margins were good but there were fewer people and fewer properties. Therefore, the ratio actually turned out to be fine. What has changed, especially in the REO business, is the accessed information is so much easier and quicker to come up with an intelligent decision that they have people walking in to a business that don’t know very much that become close to 80% capable inside of two months. This is hard to compete with. Even for the ones that leave, there is a whole new wave showing up that only needs two months of training and are then pros. It doesn’t mean they are coming to accurate conclusions, but they think they are. It wouldn’t be hard to do an appraisal if you think just pushing a button and getting an opinion off of a site like Zillow that’s accurate. Oddly enough, the flatter the market is, the more accurate Zillow is. Bruce just pulled ten recent sales because he wanted to see, and it was only 1 out of 10 properties that were wrong by 10%. Most of them were within 2%. In a flat market, even the assessed values are pretty tight. It gives somebody a false sense that they know what they’re doing, especially if this is all they have seen and they think Zillow is correct all the time, whereas a few years ago it was not even remotely correct.
The type of inventory that Rick and Andrea are buying and holding is different from the buy/sell inventory in that the buy/sell inventory can include much bigger houses, houses with pools, two story houses, or nicer areas. This is absolutely necessary because this is what the retail buyer really wants. Because of the interest rates, if he is going to buy he is going to be able to afford the inventory that he wants. If Rick and Andrea tried to sell inventory they have in Victorville they’re renting, even if the price per month would be nothing, they said it would be a challenge.
There is a huge difference between buyers with the two properties Andrea has in Anaheim and Rialto. The Anaheim property is a single-family house that Rick flipped to her. The house originally was a mess and needed a lot of money to fix, and this is what has changed as far as what they sell and one of the reasons The Norris Group shifted to the trustee sale inventory. 75% of what they have is newer than 2000 and bigger than 2000 square feet, and this is really the sweet spot for the retail buyer. This would not make a good rental. For most of their rentals, they have less than $100,000 tied up in the rehab and the purchase price. If you’re over $100,000 and you’re getting hard money financing, it’s hard to make that pencil out. You have to end up with the farther out and older things. You’re not going to get a lot of Ontario, Upland, or Rancho Cucamonga rental houses right now unless you’re putting a lot of money down or you can be one of the very few people in the United States that can get an investor loan from a bank. Bruce thinks a lot of this is going to change; and he got a sense of this when he was back in Washington. They’re trying to figure out how to make it palatable to whoever they have to make happy. However, it has probably dawned on them that they’re not going to fix anything by selling things one at a time to owner occupants. Rick said he is positioning himself to take advantage of that when the financing becomes available. In Victorville, for example, one of the charts Bruce has shows that 76% of the people are over encumbered from either 10% to over 100%, which means that they’re either stationary, going to be in REO, or they’re going to be short sale. If you go up and look at how many percentages of the transactions are REO or short sale, it’s probably 80%. This means that 80% or more of the time, a buyer does not emerge from the sale of that property. Those people are going to buy. You have an extra family looking for a rental or to move in with themselves, but they don’t produce a buyer. This means that at a ratio of 4 to 1 you have to have another occupant buyer move in to their Victorville property. This is not going to happen.
In their Victorville property, the aforementioned situation is perfect for rentals, and they are getting the best renters they can. The tenants are people who just lost their house, and they think very much like a homeowner, which means they are used to taking care of things themselves. A lot of the tenants they have come in contact with are solid, hard-working, blue collar families that don’t make a huge amount of money but make a good living and can get by. They also happen to end up in a first-time buyer situation where they’re paying $400,000 for a house that’s worth about $125,000. Everybody would walk from that situation. You’re paying three times your mortgage than for what you can rent the house next door. You can understand the rationale between to know when you can’t continue to doing it forever.
Both Andrea and Rick manage the properties, although Andrea does about 80% of the property management. Rick said he doesn’t really enjoy the 20% that he does, so he is really looking forward to buying rentals. Also, when you have the thought of creative financing, you never get rid of anybody. You’re buying with a wrap, you’re selling with a wrap, and everybody is still with you. One guy who worked out in the desert used to have a $100 spread on 100 houses. This was his $10 grand a month. This would be perfect if everybody pays. He was showing Bruce this, and Bruce was thinking that if 10% of the people would pay him, he’s gone. Bruce likes the spread and buying at a discount, but he also likes being by himself and having a great life. This he said is cleaner.
Andrea and Rick were more aggressive with their purchases in 2010, but not so much in 2011. Rick misread the market and thought that with the way things were taking off that demand was coming back because of the government stimulus. He really thought the government was going to keep rolling this out, so he thought they had bottomed, making the houses cheaper and there being plenty of inventories. At the time he wanted to load up on as many as he could at that point. Once he noticed that property values were dropping, inventory levels were shrinking, and every investor and their brother was entering the market, he started losing motivation. When he notices we are bottoming again and can get good financing, then he said he is in with both of his feet. But it’s not clear how long this is going to be.
Rick and Andrea usually draw the same conclusions and are on the same page with a lot of things. All the rentals they have gotten have been from forming relationships, although now most of their inventory would be down as well as far as the REO agent themselves. They have one in particular they know will call them on a weekly basis. They’re calling now with things that don’t make sense, but they’re desperate. When Rick is appraising, he usually gets a sense of areas that are either going up or declining in different price bands or different counties. If you’re selling something over $500,000, in almost every market where you have something like this the market just seems like it’s gone. Even the really good areas like Glendora, Upland, or Claremont seem to have so little demand for the product that it’s tough. Rick doesn’t really see any areas that are going up in value, although he is mostly in the Inland Empire. He doesn’t really know about areas like Orange County or West LA County. Rick said it seems like things are gradually declining in most areas. The listings are usually higher than the sold that closed a couple months ago, and it seems like they’re dropping on average about ½% a month. Sellers are also kicking in a lot of closing costs, which translates into another 3% you’re paying out that you weren’t a year ago. Andrea has not had any appraisal issues when she was selling the property, but she doesn’t really try to squeeze it for everything. She wants it to be well-priced from the get go. She put $100,000 into her Anaheim property for repairs alone, something she knew about going in as it was a big rehab. Right now it’s listed at $485 for its resale price.
Rick believes rents right now are pretty stable. You can usually get a good tenant within a month. There are a lot of landlords that are renting to lower quality tenants and getting higher rent, but overall they have a lot more evictions, vacancies and problems that it balances out to the landlords that are pricing them at market rents. Rents are only down about 5-10% over the last 3 years. Andrea and Rick usually put their rents a little lower than market, and they try to fix their rentals as best they can, even a lot better than some landlords do. Rick sees a lot of landlords that do terrible work from missing screens to broken appliances and heaters that don’t work. These are usually the landlords who end up with the problem tenants. Rick and Andrea try to fix everything so everything is working. They want to attract the best people they can attract. The Norris Group did the same with a lot of the rentals they had in Moreno Valley. This was an area that got hit like Victorville, so you would have a fair amount of people looking at it, but you would have only one house that had repairs The Norris Group did, so it was kind of easy to pick the best one. They have not had challenges of kicking people out or with people who have missed paying their rent. One of Bruce’s thoughts was when he resold the house, he would not have to do a major rehab again because things like the granite were still going to be there.
Similar to Mike Cantu, who was on the show a couple weeks ago, Andrea finds her reading time very important to her and something non-negotiable. In addition, she also works out on a regular basis. It not only keeps her in shape and a time for her to be alone, but it is also the time she comes up with good ideas. She can decompress and think clearly. Bruce does something similar. He will have his headset on during his workout because he uses this time to think. It’s a good diffuser for him. Andrea will keep a notebook with her during her workout because she will think of things that she knows will immediately go away. It’s amazing that the ideas don’t stick around, and these are usually the best ideas.
Rick doesn’t really have anything non-negotiable. He has to have 7 hours of sleep a night, which is really the only thing non-negotiable for him. Although, he said he has offered to sell this to people. If they need a rush appraisal and are willing to pay a couple thousand dollars, he will give up a night’s sleep. When he was younger and more motivated he did read a lot, so this was non-negotiable for him back in the day.
When asked about Rick’s best quality, Andrea said he is a really great guy and has good integrity. They have been through good times, and it is easy to go through good times because of his integrity. They started out with nothing, and they had a lot to overcome. It is during moments like this you really find out the kind of person with whom you’re working. He always had her back, and they would figure things out together. It is very important to know who you’re working with especially during the tough times. Bruce has often talked to people who assumed something was in place, and he would then ask them if they had been through tough times together. He and Mike were at lunch, and Mike told Bruce he had seen a lot of people’s character change in the last couple years. Bruce replied he didn’t see the change, he saw the change revealed. This is what shows up when bad times hit.
Andrea’s quality is she will never give up. She will fight to the end to get to the finish line. A lot of the time Rick will look for the quickest and easiest solution, but Andrea will look for the best solution. No matter how bad things are, she will get to the finish line, and it usually works out a lot better than the way Rick would have gone.
Rick read a book by Dan Kennedy called My Unfinished Business, which told the story of his life, all the business he had done and how he carried out the business. He told about his failures and how he would get back up again. Reading is something you get into the habit of doing, and it becomes hard not to do it. Andrea’s bed is full of books, while Bruce has about five he’s reading all right now. What is interesting is all of his books are wrapped together. There is not one real estate book amongst them, but they are all connected tissue. One of them is about how people get to be great, and you find out you don’t have to be the most gifted person in the room. You can be the person who finds out they can try harder, work harder, and end up with the best reputation. He enjoys reading these books because he can relate to them as most people can. Most people have average skills and often ask themselves how they can become excellent. Bruce has talked with someone who has been a karate master for 40 years, and he told him the people who were the best students were not the ones who came in already gifted in karate and could do 70% of what he was going to end up doing naturally. These people very rarely have the character to take it to the level of somebody who has to struggle with every piece of it and finally emerge. This is usually how it is with investing. Starting out not having much is probably the best favor in the world because then you’re not putting too much emphasis on the things.
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: Andrea Esplin, bruce norris, California short sales, Claremont, Dan Kennedy, Glendora, HUD, Mike Cantu, My Unfinished Business, Orange County, property management, rentals, reo, Rick Solis, the norris group, The Norris Group Real Estate Radio Show, trustee sales, Upland, Victorville, West LA County, zillow