This week Bruce Norris is joined by Shawn Watkins and Angel Bronsgeest. In a reversal this week, Shawn and Angel will in turn be interviewing Bruce Norris on his own radio show. An interesting fact is that neither Shawn nor Bruce like to have their questions written down ahead of time as Bruce believes it is important that if you are the interviewer you listen to the answers. A lot of times the second question will have nothing to do with what the person just answered on the first question even if you thought it might naturally go there, it might have actually changed directions and improved the interview. You have to be open to this. This is why Bruce prefers the interviewee to listen to the answers so they can go to whatever naturally flows. For Bruce, he does not really care what the question is as he should already know his material. For Shaawn, the biggest challenge for him is getting beneath the answer. It is easy to have answers ready because we live in a society of sound bytes. What everyone wants is what the biggest thing is they took away from the interview, but if you fall into that trap then you will be asking the same questions that everybody else asked. As soon as you get your answer, you have moved on without going deeper.
It is clear that everyone who knows Bruce knows he is a man who follows statistics. One of the ports of discoveries for Bruce was figuring out how to have access to the past so you can look at trends, and this would paint a likely picture of what was going to happen in the future. Back in the day this did not come easy, but now we have the internet; so it’s like cheating. Prior to this, you had to earn you way to a 25-year chart. Bruce built a successful real estate lending business, but this did not happen in only a couple years. This has happened over the last thirty + years. However, Bruce said they did have success quickly to a certain extent. Sometimes you look at the timeframe you did something in and tell yourself you were fortunate, especially if things were escalating in price or other scenarios. Bruce happened to get into the business in ’81 when interest rates were awful. After ’81, things were tough, so there were builders who could not sell. Bruce and his company started buying the builders out, and they made enough money to where they quickly changed their lifestyle and built a custom home. They had some success, but what they did not know was that there were changes of cycles coming. Bruce was in the middle of all this.
When you’re in the middle of your business, whether it’s doing really well or doing poorly, this is the draw. When it is doing well, we have the tendency to think things are not going to change. We say, “Well, if that worked yesterday, it is going to continue to work today.” Where you find deals when these changes happen and you don’t know the changes are coming, this is when you find your business is over. What Bruce has been able to do better than anyone else in the real estate business is when he started the business; he had watched people in the real estate business and realized he had the ability to find out what the real issues were with others. It was an innate skill he had that had nothing to do with knowing the front end of an escrow from the back end of a HUD. The thing that drove Bruce to find out where the trends were coming from at a time when the information was not easily available was he drove around to different colleges in the UC system and looked at archives and at information that no one else had that dated back years.
How he originally started was he had a painful experience back in 1989 when at the time he thought nothing about trends but rather what things were like at the time. He was stuck here and decided everything was successful, so he decided to build seven custom homes exactly at the peak of the market. Unfortunately, when you are building it takes a while to complete them, so when he finished them everything had changed. Three years later he finally exited the mess by writing checks. When you write a $52 grand check to complete a short sale and it is a personal check, this is a good lesson as you remember it. What is important as an investor is you go through pain sometimes and tell yourself to remember it, or else you might blow it off at a later time.
In 1995 when he bought Aaron a car at a higher price than a house in Riverside, he asked himself what happened from 1989 to 1995. Why did real estate go from you not being able to do anything wrong to no one wanting a house for $13 grand that rents for $550. This led him to think that someone must have figured something out, so he began searching for the guy who had figured this scenario out. He went into the archives and looked up every article written that had “price” in it looking for somebody who said, “Here we are in 1984; by the time we get to 1990 it’s going to go boom!” Unfortunately, he did not find anything as no one had figured it out. Mr. Schumacher, who wrote a book called Buy and Hold Real Estate, said in one of his chapters that it is actually easier to appraise a property a decade out than it is next year. Bruce wondered if this was true for an entire state and if he could literally appraise the state of California out in time. This was really the start of his journey where he said all he really needed was 25 years of charts so he could see what happened, could play and see what was an initial event, and see what kicked things off originally. He said if he could just find that domino that makes everything else happened afterwards, and then he would really have a cheat sheet. He said you really get tired of writing checks that are never coming back.
During his research, as he was looking for the one person who had assembled the vital information, he did not find this person and was building his own archive as he was reading through the articles. He never really charted anything until he realized that no one had ever done it. It was only then he realized he needed to do it himself, so he started at the library and tried to see what they had. Bruce spent a lot of time writing year to year statistics since he could not take some of the books as you had to buy them. What is so amazing is you look back and see that there is no one of this generation who does not have a personal computer. People ten and younger will never know an age without wireless communication. Shawn said when he uses words like encyclopedia and library, they are going the way of the dinosaur because just like any kid, they can have an internet or audio book. Everything is at their fingertips, and it is so fast to access. Bruce was doing his research at a time when it was pen, paper, and you could not take certain materials out of the library. Most of the investors who Shawn has met have a shelf life that goes back about five years depending on when they got in.
It is not exactly the right timeframe when people say real estate goes in 7 year cycles, and it doesn’t. The five years mentioned above is probably enough of a cycle to where it shifts from working to not working. If you don’t know the shift, you are finished. When something is working, as soon as it begins to shift, there is this lag that lasts 6-8 months where the checks stop coming as frequently or you start to write bigger checks. People do not know when to change direction. Shawn has attended every class that Bruce has taught, and he has seen how detailed Bruce is with his charts and his graphs. More than anything else, sometimes people are overwhelmed by the data and are really looking for him to tell them what to do now. Bruce has chosen to go wide-range with his information instead of giving a five-step process for being an excellent California real estate investor today. The reason for this is there is a teacher in him who wants people to leave with a capability of drawing better conclusions themselves. Bruce will show them the blueprint he has found to process the information and come to the best decision he can as an investor, so it scares him when he sees people picking up a cell phone after the first fifteen minutes to find the information quickly. What if by chance he is wrong and the people are looking up the answer based on bad information? This is why he likes to teach the process because he not only thinks it is fun to discover but it is also good to translate to tomorrow. You have to ask yourself what you are going to do tomorrow morning as an investor that is the most efficient activity that is likely to find something that cash flows or is profitable.
Without a blueprint, you listen to late night television; and what seems to be a natural conclusion is usually wrong. Foreclosures are way up, so we need to talk to people directly in California that are in foreclosure. Unfortunately, the great majority of them owe twice as much as what a house is worth. You are going to find yourself very frustrated, and it is expensive. The business model always changes. Right now the Norris Group buys everything at trustee sales that has a certain segment of cost involved, but it is very inexpensive per house. If you are buying REOs or short sales, it is very inexpensive per house because you are talking about relationships. When you start mailing to people in foreclosure, you are going to be out thousands of dollars. If you do that in the wrong cycle and it nets no results, you will not be out in five years but rather in five months and be out $20 grand. Timing to know when the appropriate activity is going to take place makes investing possible and survivable.
Brue and Shawn have also had discussions on conclusions and how during his research, he has not come to the same conclusions that others have come to. Bruce makes up his own mind, so ten people could look at his charts and come to ten different conclusions. The danger is, they assume his conclusions are always right; and they know what he has been doing is exactly what he said. Shawn said when he talks to investors who come out of Bruce Norris’s training, he sees people who know to come to their own conclusions instead of solely copying what Bruce did.
Shawn wondered how much external influence from other investors has an effect on where he is looking next. However, Bruce said this is minimal as it is something where people do look to him. However, Bruce does look outside the world of real estate, a transition that has become necessary. Bruce never thought he would have to pay attention to Squawk Box at midnight to see if Greece pays money or not. The input that the Norris Group receives as far as what is working is the loan business in their own experience as buyers. As far as what they thought would be working, they look at the charts and hit the ground doing a specific activity. In this regard, he is almost always correct because things are pretty easy once you understand the cheat sheet where the deals are going to be. For example, every month they may have $6-$7 million of pending loans; and every one of these loans was predictable as well as the core of where you found them was replicated almost 100% of the time. It is not owner-occupant owners in California, but rather short sales and REOs.
Looking at charts, you look at states that are not so damaged, and they are asking themselves what all the trouble is because they are not doing anything wrong. You have Florida, Phoenix, Nevada, and California falling off the face of the earth, while you have other places wondering what the deal is. It is hard to make a national policy, and this is one of the reasons why it is difficult to make other states pay for what is going on in five states. The reason Bruce has so much humility about the conclusions is because he says he is wrong. He said he just looked at last night, and one of the predictions he made was he thought there would be inflation and higher interest rates. Of all the projections he is looking at 6 ½% interest, and now we are looking at 4%. This is a mistake, and it meant that there was something outside of the world of real estate that trumped what should have happened. Now, you are going as somebody trying to figure it out, and Bruce said he does not have to just read the California budget or the U.S. budget, but rather the IMF Global.
Shawn wondered what the monetary policy is globally. Bruce used the example that if Greece defaults and they have a recession, this will hurt our GDP. Now, Bruce would have to figure out a GDP chart along with price movement in California because he would have to see if something pauses a recession somewhere, do we just not go up because there are no more chips. The basis of what Bruce knows is a big help as he would not want to start from scratch because what he knows allows him to be very efficient with the next pile. He already knows this is not true, and it is so much easier. He has his lie detector on all the time, and he has a baseline where he can already know what a false leader is.
Shawn wondered how much emotion played in his decisions. His mother had been in the title business for a long time, and she remembered being invited to a lunch at the California Escrow Association. Here, she remembered listening to Bruce and a lot of the people not believing him about what he would say would happen with the housing market. Shawn’s mother believed him and knew that he was paying attention to what was going on, but emotionally the people in the room were not prepared to hear what he had to say. So he wondered how this played out, whether positively or negatively, on him when he knows what is going on in the backs of people’s minds. However, Bruce said this does not affect him. One thing about being a contrarian investor is you have to be capable of drawing completely dependent conclusions, and he does not need anyone else to tell him he is probably right.
When you are talking about a positive report in ’97 after a negative event, people were happy he showed up even if they disagreed with him. In 2006, when you come after 8 years of successive, ever-increasing good results, then they do not appreciate you showing up. Getting in at the bottom is not even important because the first two years of a boom do not even feel like you did anything. You are not missing very much except for the fact that the most motivated sellers will exist right then. However, if you do not get out in a timeframe that is sometimes as tight as a quarter, then you are not getting out without a loss. That is when you begin the emotional support of your past decision, and this is when you begin to slide down the hill a lot farther than you thought. Shawn said 90% of the investors that he meets think it is more important to know when to get in, but they do not think about when to get out. With this old adage, people will ride a loser and dump a winner. Too many people say they are going to wait, take their chips, and sit on the sidelines until they know the bottom has come. However, the question is when this will happen.
Bruce said they took some heat in the blogging world for buying things in 2008 because it was obviously not a bottom to other people. Bruce said they were buying one of their typical rentals that would sell for $350,000 at the peak that they bought for $56,000, put $30 grand into, and rents for $1400. Bruce said he will live with this one if he is wrong because it is for a different purpose than if he flipped it. He is going to own something that cost 1/3 of what it cost to build. Most of the time you find the people who are giving you opinions than if you actually asked them how many they it is have done and they say they have not done any or had been hurt doing one prior. The blogosphere is filled with very opinionated amateurs, and Bruce usually likes to stay away from this. Shawn said if his neighbor, who has never done anything sensational or successful in his or her life, is going to give advice on what he is doing, he is going to take advice from someone else.
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.
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