This week Bruce is joined by Greg Norris and Craig Hill. Greg is the vice president of TNG Auctions. He buys properties and resells them. Craig has been working with Bruce for 15 years, and is responsible for speaking to all potential borrowers for The Norris Group.
Craig’s business was extremely busy during the first part of the year, but it became even busier toward the end as inventory decreased. Inventory is down 75% for REO buyers.
When Bruce and Craig first met, most of the business revolved around doing seconds for owner occupants in financial trouble. At this point, most of Craig’s business involves doing short term loans for investors who buy fixer properties and long term loans for investors who hold rental properties. This business works well for TNG, because banks do not want to loan money out to investors. Banks have stopped making common sense loans. The TNG hard money program allows investors to own property at 9.9% interest. These properties often cash flow well, and the monthly payment is often cheaper than rent.
Greg has discovered that most homes found at trustee sales involve smaller rehabs, newer homes and bidder areas. Trustee sales have made Greg’s job simpler, because the best deals for REOs usually involve heavier REOs. Discounts on trustee sales are smaller than on REO sales, and trustee sales are much more competitive.
The number of people who attend trustee sales depends on the amount of inventory and the kind of inventory. The largest number of people Greg has ever seen at a trustee sale is 50 to 70, but out of that group only about 8 to 10 were big investors.
10 years ago, trustee sales did not involve drop-bids, people had equity, and the investors involved in the business had been doing it for a long time. In some ways, Greg thinks the changes that have occurred in the trustee sales have made it more difficult for individual investors, but in other ways, it has become easier. Some of the individual investors are using their own money, so they don’t have another investor they need to repay, and they do smaller volumes. Sometimes you cannot compete with those people, because they are doing their own rehabs and they only buy a few properties every year. Some of them will buy properties for $20,000 over what Greg would be willing to pay. Because those buyers have limited research ability, Greg prefers to simply wait for those buyers to leave.
Greg’s typical day begins by doing research on properties with open bids, and other properties that may potentially drop into open bid. At 9AM, he attends the sales. After he attends the sales, he deals with real estate and repair contracts, and then prepares for the next day’s sales.
TNG’s loan clients have an unmatched level of experience in the industry, and Craig truly appreciates this. Craig’s phone is nearly constantly ringing. Many people discover TNG’s program through the internet, referrals, and from Bruce’s many speeches. TNG has gained a lot of respect for being a Southern California only real estate business and for being in the investment business for a long time. The most rewarding referrals come from people who have heard about TNG from multiple people, and decide to talk to us out of curiosity. Sometimes investors in the field are referred to TNG from agents who tell the investors, “If you can get a preapproval letter from The Norris Group, I will accept the offer.” That speaks more than any referral, because it means people know that TNG only approves of deals that are closable.
This year, Craig was surprised by how much volume picked up on long-term financing. There is a huge demand for this. Bruce believes TNG’s long term financing will perform at a very high level, because a lot of inventory will come out. This kind of financing will not work as often with an owner occupant as it will with an investor. A lot of rehabs and lower priced properties are turning into buy and holds, rather than flips. Craig believes it is challenging for investors to flip $100,000 to $150,000 homes in this market, because there are many investors willing to buy and hold. An investor who can buy and hold can probably pay more, because they will receive a cash flowing property that will give them a profit for 10 more years.
Bruce believes the 203K FHA loan program will probably return next summer. The problem with that program is that it probably takes 45 days to fund it. That makes the loan hard to sell, because a deal can be closed much quicker than that. In some cases, TNG will do a deal in 7 days or less. The speed of the deal makes a big difference in an investor’s willingness to buy.
The automation of TNG’s website has helped Craig tremendously, because it allows him to handle phone calls and it has automated TNG’s loan process. TNG’s loan business has doubled over the last 12 months, and the time to fund those loans has gone down.
Greg only gets to see the inside of his potential property purchases about 5-10% of the time. Only 10-15% of those properties are unoccupied.
Two of Greg’s employers, Joe and Kenneth, are responsible for going to every house, evaluating repairs, and talking to the owners to determine whether or not they are difficult to deal with. When Joe and Kenneth are not viewing houses, they are doing construction contracts.
Guessing the cost of a rehab when you cannot see inside requires a lot of experience. Greg often guesses based on the age of the home. For example, a house built in the 80s will probably require more cabinets than a house in the 1990s or the 2000s. You can learn a lot more about this if you come to a TNG bootcamp.
Realtors are very pleased with TNG homes, because they are in great condition and they are standard sales. Realtors get tired of wasting their time with REO and short sales. Also, TNG is easy to deal with so long as they do their job. Bruce Norris once attended a Realtor group meeting in which an agent stood up and said, “We wish The Norris Group would buy every REO in town, because of how they deal with properties, and how they turn out.”
Finding a reliable contractor can be tough. TNG has improved its business because of the relationships it has built with contractors over an extended period of time. If you keep your rehabs consistent, then your rehabs will get easier for your contractors, and they will have your same mentality. When a contractor has done enough repetitive jobs with you, they can advise you on how to best rehab your properties based on previous jobs.
It takes a while to build a good investment team, and your team doesn’t just involve your contractor; you need to have lenders and escrow partners. All those people will help you get to the finish line faster, and if you aren’t going to get to the finish line, then you will be notified sooner, so you don’t waste time on the market. Dishonest lenders do not want their deals to fall out, and will lie with the hope that some money might show up. Greg tries to make sure that he is working with a serious buyer by making them spend money to finish the deal.
When Greg first started doing trustee sales, a lot of people were using all cash and conventional loans. A lot of people got fooled into feeling that they had to buy because of the government incentive. If they had waited 6 months, they would have gotten more than $10,000 back, because the market adjusted down. Right now, Greg is seeing a lot of VA and FHA offers, and very few conventional offers. Only 1 out of every 10 of Greg’s deals fall out. Greg does a good job of weeding out bad buyers before escrow. Bruce feels that Greg has made a wise decision to force potential buyers to put effort into the property before it goes to escrow.
Every year or two, trends change in the loan business. In 2009, TNG dealt almost exclusively with REO. In 2010, we got more trustee sale buyer refinances. Those were people like Greg who would attend trustee sales, and then refinance to leverage the property. In the last six months, Craig has noticed an increase in people buying short sales. The short sale process is no longer a half year long process. Some short sales can be completed in less than 60 days. The bulk of TNG’s business is still REOs. This is probably due to the fact that TNG’s clients are experienced, and they have relationships with REO agents.
Short sale agents do repetitive business with buyers they are comfortable with, so developing a relationship with an agent can lead to repetitive purchases. The nice thing about a short sale is that you get to see the inside of the property, title insurance, and it is less likely to be in bad condition.
