This week Bruce Norris is joined once again by Shawn and Angel. In a reversal this week, Shawn and Angel will in turn be interviewing Bruce Norris on his own radio show. Bruce Norris has interviewed countless people on the topic of real estate investing, not only in Southern California but also worldwide and how they are affecting what we need to look for in the market. You now have to look much wider than you had prior. Bruce, for example, listens to Squawk Box at midnight to find out what is going on with the global policy in Greece and what the GDP chart looks like now. In other words, if a tree falls in the forest and no one is there to hear it, does it affect our real estate market? Can we find other events that do the same thing?
Prior to the show, Shawn and Bruce talked about one-time events. Shawn wondered how these have begun to play in the way that Bruce looks at charts. Bruce said this is one of the themes of the newest report coming out and about the contemplation that California did exceptionally well in real estate, twice as good as the nation. Right in the beginning of the 70s, the California median price was $3 grand higher than the nation. Six years later it was doubled. Bruce asked himself why this happened and if this was a one-time event. He also wondered if this will ever happen again or if we will run out of one-time events. Some of the one-time events are profound. Having come from the baby-boom generation, growing up in this time and going through earning more money, Bruce has seen a lot of changes. This includes the emergence of a two worker family that has started to dominate instead of being the unusual, women getting paid closer and closer to what men are making, and the emergence of legislation saying that you cannot discriminate against minorities. When you play this out for two or three decades, you wonder if this is a new event anymore. The answer is no. It may have peeked out, and there are 35 of these. You have to think about this and ask yourself if this was the driver or if real estate is just a neat thing that people will always want, absent those drivers.
The first chapter in the new report is dealing with the numbers. The title itself is “Numbers are Compelling.” Bruce cannot find any chart that discourages him from buying something and later regretting it. However, he wonders if this can be trumped by legislation changes on how people qualify. This could include having a mandatory 20% down, taking away tax benefits, or changing Prop 13. Romney has taken a lot of heat about the fact that he makes $22 million, files a perfectly legitimate tax return and pays 15% because it is exactly the right income for the tax law. Now they are going to change the tax law; but if they do that it means capital gains are going to shift to a normal rate. However, real estate has its really cool toy called 1031 exchanges, so you might start thinking you might benefit by this. More people will do buy and holds and just hold it, or people will do 1031 exchanges and avoid it. If you think about how we’re going to balance this budget, you could really use a stock boom as this creates a lot of now revenue even more than a real estate boom would. A real estate boom creates equity withdrawal.
When we talk about time versus money, we talk about how it is more important to get out than to know when to get in to the market. You could survive a mistake by getting in a little bit late, but you could get financially and psychologically destroyed by getting out too late. This holds very true for the way real estate investors see the length of their real estate investments. There are quite a few investors out there who do not truly treat real estate as an investment, but more as a speculation. They somehow equate investments with a buy/sell business. Bruce said nothing he has seen would discourage him right now than what he has seen from buying any real estate and going long that made sense monthly.
Shawn wondered why it is taking investors so long to see the benefit of the term of their investment rather than focusing so much on how much they can squeeze out of it in 90 days. Bruce said it is slower, and we are really a society of tweets and everything being fast and instant. We just came off of real estate that taught us this was possible; and now we are wanting that back really bad. The scariest thing for Bruce is having to make up lost ground. This means the investors having a talk with Bruce and then coming up to him and telling him they lost $1 million in the downturn and need to make it back right away. This is a formula to make sure you lose the rest of whatever you have. We’re not used to thinking that way, and we’re not used to having a California that rewards the practice because it does not usually cash flow. It usually goes up, so now we have to adjust our thinking.
Unfortunately, it’s a hard adjustment to thinking if we would want to own something if it was not going to appreciate. It is really trying to prove mathematically and provide a set of proofs that shows what real estate returns if it does not go up in California. Ultimately, you have a balance of 0 at the end of the day. The question is whether you would want to own this. This is a worst case scenario in that you end up owing nothing and wonder if this is still okay. If this is okay, you would have to sign up for a few things because it would probably be different as you do have the demographic side. We probably will have about $50 million people here, but the problem is we do not have $15 million vacant homes. Now you have a cost.
One of the best charts Bruce has seen shows a history of the difference between prices of new homes and existing homes. It is another proof of a peak because the only times those charts have converged to where the existing inventory is above the new is in the “silly” years such as 2006 and 1989 when builders did not meet the demand. All the pricing pressure went to the existing inventory and blew it up. This is a good chart to know if you want to be aware that it is at the peak of exuberance that you say goodbye. Exuberance is now a distant memory, so you now have to look at real estate as a much longer term investment, and people are not as excited.
Shawn said this was his forte in that he took charts Bruce presented in a class where he talked about other markets. He talked about what other places do when California is doing what it is doing currently. Shawn took this information out of state in 2004 and found where the prices converged and where the new inventory was actually less than the existing due to the fact that there was not any inventory. The builders made this a reality by making their products so hot and their lot reservations so desirable that it made the existing inventory to where everybody had to have it and sell it. The builders said if they wanted their house, then they had to sell their current one in 30 days. There was an opportunity here, but it did not last very long because pretty soon you had a lot of new inventory. Then, the air came right out of this balloon. You really saw this happening in the Phoenix market.
Things like what happened here are usually driven by different dynamics in California. In Phoenix you had migration of money, where California is driven by a migration of people. You had equity refugees taking money out of California and trying to dump it anywhere else, and the main focus was there were bus loads of people getting off these in order to make a quick dollar. It became a badge of honor that you wore. People were great to cash the checks, and Shawn said he participated in this just as much as anyone else. However, there is the real estate hangover when you realize you have to spend a lot more money to get into the market. Somehow, we started taking more and more risk thinking that if we just risked a little bit more, we could somehow recreate what we had done in the past, and it just stopped. This is part of human nature and the part when you learn the statistical side and know you are not home yet.
Cal Poly Pomona has put together the statistics and drawn conclusions exactly 180 degrees of mind almost every time. Bruce is on their board now; and the last time the gentleman did the quarterly he said something about the chart, then turned to Bruce and told him he probably saw something totally different. Bruce said this was true because there was an emotional component that was not statistical. This is why the moodometer is a good mathematical model because it does not measure capability, but rather your desire to do something. Almost everyone is capable of owning something, but your desire quotation at 0, meaning you don’t want it. This is why you find no price support and no push of price at 4% interest rate. It is because the people don’t want it.
As a contrarian, you look at this and ask if this is always going to be true. History says no; you are going to want the things as bad as you ever did. It is just going to take time until we are at that low number of affordability. At this point, that ride will have been a lot of fun. You just have to get in at the time when other people are saying they will never touch real estate again. You need the capitulation moment for the bottom to exist. You could be two years from now, and you would probably only miss some small rise. However, you would miss the cash flow if you decided to buy something that worked. As an investor, Bruce has that side where it is not going anywhere; then we have a buy/sell business that is completely different. These two things exist independent of each other. One is personal; one is a business.
However, it is nice to have these two divisions because you can see what is happening in one and draw conclusions for the other business clearly. However, Bruce said a better reason for him is to make no urgent decision because the other world exists. He does not need one dime to exist anew for him to live everything he wants. That makes this group of decisions really sane because he does not have to catch up. You’re talking really about an arms length transaction now because you are not pulling that in by saying if you do not make your bills this month then you are in trouble. Bruce and Shawn had discussed this and talked about how any time you make a decision based on scrambling to pay your bills because it is almost the end of the month, then you are going to make a mistake because you want it more than the person sitting across the table from you. If you are there, then you have to be really good at faking that you’re not. If you really are in that position, to negotiate from that weakness is a poor stance. It is an uphill climb at that point.
The model has changed for Bruce and the Norris Group because they are buying at trustee sales and not dealing with people. However, if he was dealing with people directly, they would probably pick up that he really could care less if he bought the house today. He wants to talk with the people and see what they have, and this is a powerful position to be in. Shawn said there are other buyers who are motivated. One of the things that the Norris Group did one time was they taped an auction where they were auctioning off five new homes. Bruce said this was fun because he was controlling the auction and actually did not know it. His friend Kessler watched Bruce on the video and told him he was in control of the auction, not the auctioneer. He controlled every final bid, every decision, asked a lot of questions, and really messed with the guys unintentionally. On almost every house Bruce asked the auctioneer who had the highest bid and wanted to make sure his bid was still good.
Oddly enough, Bruce became good at attending auctions because he observed them first. He went to the back of an auction many times before he was a bidder, especially early in the 90s when they became prevalent. He observed different companies do it right and wrong, so he really understood when he saw a flawed auction about to happen. All of a sudden he became a little excited when he saw one completely blown, and he realized there was an opportunity there. He looked at all the HUD houses, went to the HUD auction, and was rewarded on the third property. Bruce said he did not need loans until this time, so it is interesting how life changes. He originally was not buying enough to exceed his cash or credit lines, and then all of a sudden he was buying ten HUD houses.
This was actually how he met his loan officer Craig Hill. He had an employee who he told to door knock every employee until they found somebody who wanted his business. This was Craig Hill. When they met, Craig told him his parameters. One house they looked at was in perfect condition; it only needed a hedge mode. It was worth $85,000, and Bruce bought it for $34,000. He asked Craig about the loan program, asked if it was 65% of values, and then asked if he could get his property appraised. It came back at $85, and Bruce asked Craig if it bothered him that he was going to loan Bruce more than he paid for it. Craig told him a simple yes, but that was both the start of their relationship and expansion of their business. Bruce said it was odd at the time because he never thought about being in the hard money loan business. It backed its way into it as you teach people and they become successful. This is when they start asking you if you have any money. This leads to a commonly held belief that the money follows the deal, and people usually do the opposite.
As an investor, Bruce has gotten so many phone calls regarding if Bruce can count on another for support if he should find something. Bruce said it is much better to call him up with a deal where you are nervous because it is so good you don’t want to lose it than them having to find the money. Most people will not make the effort to find the wholesale deal. The fact that the person actually has a deal is good. Bruce one time did something where he had a deal and put it in the L.A. Times in the Sunday paper regarding a property. He had $13 million in phone calls from just one Sunday ad. You realize from this that the people calling you have to have more than $200,000. The amount of money Bruce reached was so ridiculous, and it was because he had a deal. If he had run the ad saying he thought he could find deals, then no one would have called. You have a deal, and all of a sudden you have a club.
Shawn said he is constantly amazed he does not have more people rushing the front; and what this tells him is they are all done before they get there. Deals don’t wait around; you start calling the people you know. For the people who are new to the business or trying to re-enter the business, he gets close to the same amount that Bruce does because of the club of people saying they were tarred and feathered the last couple years but are ready to get back in to the market. The question for them is what they mean by they are ready and what they were doing prior. If they find the deal, the money will follow. For so many of them, the barrier of entry for a lot of them in their minds is they do not have the cash, so they are not going to make the offer. There is some validity to the process of having proof of funds, so they need to fine proof the funds.
When Bruce first started, he did not have the money to be a buyer; he worked for a buyer who had money. He was on commission with the ability to find deals. This worked well enough to make a year’s salary a month, so this is one avenue that people can take. Bruce was at a club meeting one time where someone stood up with a really good deal. Bruce got up to leave, and the man asked him why he was leaving. He then asked to go see his deal, and it was an 11-unit building for $100 grand. He flipped the property by pulling up whoever owned all the other ones and flipped it for $60 grand. This was a really good 1 minute meeting for Bruce.
We have a lot of technology now; and the number one thing Bruce has seen changed the most by technology over the last twenty years is the increase of competition that can become knowledgeable very quickly. A good example is Sean O’Toole’s site ForeclosureRadar.com. He has made trustee sale buying much easier through his website. For information that was difficult to obtain before, you can now go to his website instead of calling all the trustees. For $50 a month, you can be in the trustee sale business. Bruce met Shawn through a club in Northern California. He brought Shawn with him when he was invited to speak in Washington D.C. Both of their careers have been affected by a progression of who they know, the exposure, and branding. This is how it works. It’s knowing who is at the clubs, making friends, and being trusted.
Talking with another whole different source of agents who deal with properties, he saw there was a kind of secret auction going on that he was invited to with another REO agent. Being able to put up equal amounts of dough and qualifying for it at an invitation only event is really cool. But you really have to know somebody. Shawn said with all the advances we have made in technology, the thing he keeps coming back to is you have to have a balance between being willing and able to get out and meet people so they can see the content of your character. They could have the best website, the best app; but the reason you’re going to use, even know about it, or use it to its fullest potential is because you knew the person behind it. Every person Shawn knows who has been successful in REOs comes down to (relationships). You could write 300 offers a day and automate it; but unless that person knows you, you are really not going to get a shot at it. Personal relationships do not stop at talking to a seller directly; it is the REO agent that is repetitive in the short sale.
Tune in next week as Bruce in turn interviews Shawn and Angel.
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.