Christopher Thornberg Founder and Principle of Beacon Economics (Full Bio)

September 17^th, 2010, The Norris Group returns with its award winning event I Survived Real Estate 2010. The Norris Group has assembled an incredible line up of industry experts to discuss the state of REO from the inside. Topics will include regulatory intervention and aftermath, bulk buying, myths and facts, and opportunities emerging for real estate professionals. 100 percent of the proceeds support the Orange County affiliate of Susan G. Komen for the Cure. This event would not be possible without generous help from the following platinum partners: Foreclosure Radar and Sean O’Toole, the San Diego Creative Real Estate Investors Association and Bill Tan, Investors Workshops and Shawn Watkins and Angel Bronsgeest, Invest Club for Women and Iris Veneracion and Bobby Alexander, Claudia Buys Houses, The Business Press, Frye Wiles, MVT Productions, and White House Catering.

This week Bruce is joined by Christopher Thornberg. Christopher is the founding principle of Beacon Economics, and is widely considered to be one of California’s leading economic forecasters. He is an expert in economic forecasting, regional development, real estate dynamics and labor markets. He was one of the earliest and most adamant predictors of the housing crash and the recession that followed. In 2008, he was appointed chief economist for the California State Controller as well as the Controller’s Council of Economic Advisors. He serves on the advisor board of Paulson & Company Inc., one of Wall Street’s most successful hedge funds. Dr. Thornberg holds a PhD in business economics from the Anderson school of UCLA, and a BS in business administration from the state university of New York at Buffalo.

Public sentiment tends to wander between optimistic and pessimistic. No one wants to believe that this recovery might be too slow. Instead, people either hope for a rapid recovery, or they panic over a double dip. Earlier in the year, people were far too optimistic about a rapid recovery, and now they are in a state of unwarranted pessimism. Thornberg does not believe that either of those beliefs are true. He believes that slow growth is most likely going to occur.

Expectations can have an economic impact. Forecasters tend to think that the stock market is a leading indicator of the economy. Paul Samuelson once said “The stock market has predicted 9 out of the last 5 recessions.” We must remember that when we see market swings, it has a material impact on the economy. When the market dumps 15 percent, you are literally talking about a couple trillion dollars in wealth disappearing from the U.S. economy. That does have an influence on spending, particularly at the top end of the income scale. From that perspective, unwarranted worries can create a self fulfilling prophecy and slow the economy.

Over the last 20 years, we have seen unprecedented volatility in the equity markets. We would help ourselves by putting in some rules to dampen that volatility. Thornberg describes the problem as “the tail controlling the economic dog”.

GDP growth in the 90s was caused by stocks. In 2000, it was from real estate equity withdrawal and profits. Currently, our limited growth seems to come from stimulus money. Thornberg does not believe there will be any sort of big driver, and that is part of the reason we will have a slow recovery.

In the mid 70s, there was a consumer let down with the oil shock. Consumers responded to the loss of jobs, high energy prices, and the overall pessimism by cutting back on spending, and that caused a down turn. At the back end of that down turn, consumers who were under-spending started to ramp up their income. They then bought the car they would have bought during the down turn plus another one. That caused a huge surge in consumer spending growth.

Similarly, in the 2001 down turn, we saw a cycle in business spending. Business spending was very high, and then it collapsed. When business spending came back in 2002, we pulled out of the down turn and we got back to normal growth in 2003.

This time, there is no single great source that will cause us to bounce back. The economy was vastly overheated in 2008, and the pain of the down turn was severe, because the pull back occurred in multiple markets at one time. The government got massively involved in both monetary and fiscal policy. In their attempt to stabilize things, they prevented our imbalances from returning to a steady state.

Consumer spending should represent about 80 percent of income, and the other 20 percent should go to savings, taxes and a couple other things. In the midst of the asset bubble, we went from 80 to 84 percent. That extra 4 percent represents approximately half a trillion dollars in excess spending. Savings rates have popped back up in the midst of the crisis, which is good, but the pain of that decline in consumer spending was profound on the economy. As a result, part of the stimulus package was a huge cut in taxes. Right now, Americans are the lowest tax rate in 65 years. This has steadied consumer spending at 82 percent of income. The government is running a deficit of $1.4 trillion per year. At some point, the government will have to raise taxes. When they raise taxes, consumers are going to have to cut back on spending, and that will slow the economy.

We have a lot of deleveraging going on. 23 percent of Riverside is not making a house payment. Because so many people aren’t making their house payments, Bruce believes that people will have plenty of money to spend. Thornberg disagrees, because he does not feel that the money saved from not paying mortgages will amount to that much. Mortgage payments in the U.S. amount to 15 percent of income. Thornberg believes the non-payment of mortgages only adds up to .5 percent of personal income. That is a much smaller number than what happens to personal income as a result of the rise and fall of the unemployment rate.

Bruce explains that in California, a house payment typically represents 40% of someone’s gross. When they don’t make mortgage payments, that saves money, and that fuels GDP. Thornberg understands this, but 1/3 of homeowners in California homeowners own their house free and clear. Of the 2/3rds that are left, the majority are still making their payments. You only have 10 percent of the people in the state that aren’t making their payments. Thornberg does believe that this will make a small difference in the economy, but it is not as significant as people make it out to be.

Bruce asks, “What does seeing a 2.6 10-year T-build tell you?” Thornberg laughs and exclaims that the t-builds are in a bubble. You got to call it as you see it. Sometimes that works and sometimes it doesn’t. A few years ago, Thornberg claimed the housing market was going to crash, and he was right. One of the worst forecasts Thornberg ever made happened 3 months ago when he claimed that interest rates would never go lower. Thornberg has seen some crazy things happen lately. He never could have forecasted this. He believes these things have been driven by worries about sovereign debt in Europe, and a potential for a double dip. This is why Bruce asked his question about Thornberg’s expectations for the t-build, because people’s fears have skewed a lot of categories.

The raw ratio of prices to income will show you that we have not seen a level of retraction that brings us back to the levels we were at in 2000. Prices are still high in comparison to income, but once you adjust for interest rates, affordability levels have never been this great. We have never seen such an affordable housing market when considering current interest rates. Thornberg does not believe that the current interest rates will be maintained. They are going to rise, but he wonders when they will rise and how fast they will rise. If we are on the path to recovery, we could have problems if the credit bubble pops rapidly. If interest rates increase 4.5% to 6.5% in 6 months, then it will severely damage the housing market.

Fannie Mae is planning to hire 1,000 REO agents in Southern California. This tells Bruce that Fannie intends to release inventory; perhaps as soon as the 4^th quarter. FHA has 73,000 REOs and 555,000 people that are 90 days late. There are a lot of properties that the bank has not released, but we also have to be concerned about the properties that the banks are not foreclosing on yet. There are probably 4 to 5 million homeowners that are behind on their payments.

Because affordability is so good right now, there will probably be some demand for the shadow inventory. One thing that distinguishes California from states live Nevada, Florida and Arizona is the fact that we did not over build. Nevada and Florida have years of home supply.

Rental vacancies typically stay high after a recession, but vacancies are actually starting to drop quite quickly, especially in California. Thornberg does not believe there will be enough inventory in California, so when the shadow inventory gets released, it will probably be easily picked up. Thornberg believes we will have a stronger housing market over the next couple years because of the inventory levels in relation to the population. It surprised Bruce to hear Thornberg speak so positively about the housing market.

Bruce and Thornberg do not believe we have pent-up demand, but Thornberg does believe that we have a lack of overall supply. When you look at permits over the past 20 years, the numbers show that we have not built enough housing relative to the population growth since 1995. Even in the midst of the bubble, Thornberg believes we were only building an amount that was appropriate for our population growth.

The builders do not have many vacant unsold homes right now, but their competition, which is an REO, is going to be much to competitive. This competition will force them to build smaller houses. Going forward, Bruce believes that vacant homes are going to increase a tremendous amount. Thornberg does not believe prices will come back a lot.

The kind of building going on right now is on the basis of already finished lots. The inventory of finished but unused lots is disappearing rapidly. In the peak of the housing bubble, local economies ramped up fees. Given what people were willing to pay, there were enormous profits to be made in the sale of a new home. Now that the bubble is gone, cities need to reduce their fees, but they probably won’t. Right now, local governments have a lot of pressure placed on them because of the down turn in revenues. Thornberg believes we will have crowded housing, because many people will not be able to purchase new property due to the excessive fees.

In a down turn, people tend to start living together rather than moving out. This is actually starting to change, which is part of the reason why apartment vacancies are going down. We are not in a strong recovery, but it has been a year since the recession ended. Things have stabilized, and fears are beginning to lift.

Overall, jobs are down right now, but that is mainly due to losses in the public sector. Construction jobs actually bounced a decent amount from June to July. Thornberg does not believe the construction industry will come roaring back to what is was like 5 or 6 years ago, but we are seeing more stability in that sector.

Here are the pros and cons of our current situation: On the con side, we still have problems in the housing market. Many people are not making payments and many are underwater. California has some of the worst unemployment rates, which means we have more to recover from. On the pro side, prior to this down turn, this state was driven by internal demand. This means that our demand was coming from consumers with excessive amounts of false housing equity. At the same time, our external sources of growth were getting hammered. The dollar was over-valued and housing was too expensive, which made it hard to run a business here. Those internal sources of demand will not come back. On the other hand, with a weaker U.S. dollar and cheaper housing, other things will begin to improve. Despite our high unemployment rate, people are beginning to migrate back to California.

The percentage of homeownership is probably headed down. Thornberg does not believe that this is a real concern. He does not believe there are any particular benefits for owning vs renting.

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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Video Blog Sources:

Mortgage News Daily – “Mortgage Rates End Losing Streak After Reprices for Better” (8-19-10)

Wall Street Jounral –  “Redfin: Less Than Half of All Home-Sale Attempts Successful in ‘09” (8-16-10)

Housing Wire – “Bankrate: Loan Closing Costs Jump 36.6% Year-Over-Year” (8-17-10)

Housing Wire – “TransUnion: Housing Begins to Stabilize as Delinquent Loans Fall in Q210” (8-17-10)

DQ News – “Southern California Home Sales and Median Price Dip in July” (8-17-10)

Wall Street Journal – “Mortgage Delinquency Runs Slightly Higher in Dems’ Districts″ (8-19-10)

Today’s News Synopsis:

MDA Dataquick’s monthly study shows 6,773 new and resale homes closed escrows in Northern California last month. In the entire state, 35,202 new and resale houses and condos were sold. The California State Assembly approved SB 1178, which will extend anti-deficiency protection for consumers who have refinanced their original mortgage loans. The Census Bureau reports the number of people who own their homes free and clear has decreased, and the number of people in reverse mortgages increased 59 percent.

In The News:

Los Angeles Times – “Professional investors move into flipping foreclosed homes” (8-20-10)

“Hoping there are big profits to be made in the aftermath of California’s housing collapse, professional investors are flocking to the business of buying foreclosed homes at distressed prices. The investors, primarily private equity funds and groups of wealthy individuals, purchase the homes at public auctions, which are held daily on the steps of local courthouses. They refurbish the properties and try to sell them for quick profits.”

DQNews - “Bay Area July Home Sales Down Sharply; Median Price Slips From June” (8-19-10)

“Last month a total of 6,773 new and resale homes closed escrows in the nine-county Bay Area, down 19.1 percent from 8,373 in June and down 22.8 percent from 8,771 in July 2009, according to MDA DataQuick of San Diego.”

DQNews - “California July Home Sales” (8-19-10)

“An estimated 35,202 new and resale houses and condos were sold statewide last month. That was down 19.9 percent from 43,964 in June, and down 21.9 percent from 45,079 for July 2009. California sales for the month of July have varied from a low of 30,596 in 1995 to a peak of 71,186 in 2004, the average is 47,093. MDA DataQuick’s statistics go back to 1988.”

CBIA - “California Housing Affordability Declines in Second Quarter, CBIA Announces” (8-19-10)

“On a statewide basis, the HOI found that a family earning the median income could have afforded 58.4 percent of the new and existing homes that were sold during the second quarter, down from 60.8 percent in the first quarter.”

CAR - “California State Assembly passes SB 1178 protecting homeowners” (8-19-10)

“The California State Assembly today approved SB 1178 (D-Corbett) by a 49 to 14 vote, extending anti-deficiency protection for consumers who have refinanced their original mortgage loans and now are facing foreclosure. The CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) is the sponsor of the consumer-protection legislation.”

Housing Wire - “Commercial Real Estate Hit with 41% Price Drop, Soaring Delinquencies” (8-20-10)

“National property prices on commercial real estate dropped 9.1% in June from last year, according to Moody’s commercial property price index. The rate declined 0.9% over the first half of 2010, and while prices remain 4.2% above the current recession low of October, they are down 41.4% from the peak in October 2007.”

Housing Wire – “Census Bureau Reports 59% Rise in Reverse Mortgages as Overall Ownership Falls” (8-20-10)

“The nation’s homeowners paid a median of $1,000 in monthly housing costs in 2009, while renters paid a median of $808 per month, according to the 2009 American Housing Survey released Thursday by the US Census Bureau and the US Department of Housing and Urban Development (HUD). Compared to 2007, the number of homeowners that owned their home free and clear decreased 1.3% to 24.2m in 2009 from 24.9m. The amount of regular and home-equity mortgages increased 1.4% to 50.3m from 48.7 in 2007. Reverse mortgages increased 59% to 252,000 from 159,000 while line of credit options decreased to 1.7m from 1.8m.”

Housing Wire – “REO Listing Agents – The Helping Hand That Isn’t Always There” (8-20-10)

“In some cases, interested buyers have been ignored (as documented in ’secret shopper’ campaigns). This is not to suggest that all or even most of the REO listing agents are doing a poor job, it is to suggest that as volume levels to some agents has increased there may be a direct correlation to declining service levels that should be understood.”

Inman - “Don’t buy Fannie-Freddie ‘Big Lie’” (8-20-10)

“While the Fed and the Obama administration insist that recovery is moving forward, the pattern of inbound data produces the same, queasy sensation as their denial in the fall of 2007 and the summer of 2008. New unemployment insurance claims hit a one-year high, to 500,000 last week. There was no dramatic spike, just steady deterioration. The Philadelphia Fed index yesterday stunned the remaining optimists: Expected to rise from a weak 5.1 in June, it fell to negative 7.7, weakest in new-order and employment components.”

Inman - “Mortgage rates go lower” (8-20-10)

“Rates on fixed-rate mortgages tracked by Freddie Mac hit new lows this week, with 30-year fixed-rate loans averaging 4.42 percent with an average of 0.7 point. That’s down from 4.44 percent last week and 5.12 percent at the same time a year ago, and is a new low in records dating to 1971.”

Looking Back:

One year ago, the delinquency rate for residential mortgages increased to 9.24%. A home buyer survey showed that 70% of women made up their mind to buy the day they first saw a home for sale, vs. 62% of men. 55% of women place more importance on living closer to extended family than to their job; only 37% of men felt the same way.

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 event 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.

Bill Shipp, California Real estate Investor (Full Bio)

This week Bruce is joined by Bill Shipp. Bill has been investing in Riverside real estate for many years. Bruce thinks Bill is Riverside’s best kept secret.

Bill believes it is important to be true to your word when doing business. Bill has been working with his contractors for 10 years, and he has never had a bid on a home repair. These contractors know that if Bill hires them, they will get paid at the time he specifies. This is even more important than having people skills.

Bruce has taught many real estate investors. Some of them have great people skills, and that is what gets them business. There are also people that are trustworthy, and that is also attractive to business partners.

In the last segment, Bill said that he is willing to do his job every day, and that attitude has allowed him to accumulate a wealth of knowledge. Bill’s knowledge of his market place allows him to live in Utah while still making good investment decisions in Riverside.

Bill has never closed an escrow with a person in it, and he has never bought a house at the steps. Bill does not want to deal with those hassles. This is why he uses the MLS and agents who know what they are doing. Bill gets over 50 percent of the houses that he makes offers on, because his realtors know not to call him unless a home shows promise. Bill works regularly with two realtors, but he receives calls occasionally from other REO agents as well.

Bill has a specific skew number for the paint which he uses on all his houses. Because he uses the same paint for his houses, it is easier for him to calculate how much repairs will cost when buying a new home. This also makes it much simpler for his repair men, because they know exactly what to do for every new job.

Bill discourages investors from traveling to see their investments. Do it for the first two properties, so you can figure out how to do the job. After the second, you should know what kind of property is worth your time, and trust your contractor to do his job. Traveling to your investment homes will cost you money and time. Also, Bill suggests that investors not bring their wives. His wife always has minor problems with his investments, such as the amount of flowers in the yard.

The typical repair cost for Bill’s investment houses is $15,000 or less. However, he has had home repairs that cost $100,000. In the early 2000s, he bought older homes. The oldest home he ever bought was developed in 1828. The house was so old that the home began to dissolve when the repair man tried to pressure wash it. Bruce once bought a home in 1898. Bruce had a termite investor inspect the home, and the inspector told him that there were no termites because the wood was petrified.

Bill does not have a construction background, but he has learned some things about that trade over time. When you buy a lot of older homes, you have to be creative to find a style that people will want to buy. In the late 1980s, Bill only bought homes that were 5 to 10 years old and did not need work, but Bill now only works with fixers built before the 2000s. Bill does not like to compete with home owners. When you are flipping new homes, you are not creating value. Bill thinks that working in the trustee market requires too much work. This is what Bruce’s company does, and Bruce agrees that the trustee market is too much hassle for Bill’s business model.

When reselling a property, Bill uses the listing agent that found the home for him, and he only uses two agents to keep the process simple. Using a large number of agents makes it difficult to determine whether or not those agents are doing their jobs correctly.

When Bill is selling his properties, he tries to control the escrow, but he never controls which lender is used. Bill’s buyers are always cross checked with the lender. Bill’s agent will not tell him that he has an offer until the buyer has been cross checked, and until he can know if he will get a good offer.

Bill is constantly educating himself in real estate. He reads many books, he has attended Bruce’s seminars, and he has been trained as a certified financial planner. Bill believes that many people know how to make a lot of money, but they do not know how to spend it. People do not often plan for downturns in the market, and their lack of planning ruins their financial health.

In the early 1990s, Bill had 40 rentals. It took 8 years to get those homes sold, and it was very frustrating because the market kept going down.

Bill began investing in Texas during 1989. He bought homes for $10,000 each and he owned them free and clear, but he was receiving negative cashflow every month because of property taxes. Repairing one roof could wipe out your positive cashflow for a year. In the end, he only made money on one of those homes. Do not buy real estate in other cities and states if you do not know what you are doing.

In 1986 Bruce was asked to speak on a panel of real estate experts. There were two well known attorneys on the panel, and all of their claims regarding out-of-state property ownership contradicted Bruce’s practical experience. When Bruce asked those attorneys how they came to their conclusions, he discovered that they had no out-of-state investment experience and were relying on theoretical knowledge. When people come from other states and tell you to buy homes in their areas, be careful. Why would someone travel across the United States to encourage you to buy their property if they cannot even get the people from their own state to buy?

If there are more listings in a region than sells, you should be nervous. On the other hand, if there are more sells than listings, then you should be happy. This is all Bill looks at when predicting whether or not he should be investing. Bill does not pay much attention to economic forecasts. He only pays attention to Riverside’s market, so he does not have to worry about general market forecasts.

The best deal Bill ever had was a wholesale in Corona. The property sold in 2 weeks and he earned over $100,000. If you want to find deals, you need to be watching the market every day. You never know why a seller might want to get rid of their property quickly. An agent once called Bill and told him that the seller was offering five houses and two lots on one street. The seller was the chairman of a bank who had stock options which were about to expire. The banker needed the money for those properties quickly, so that he could buy his stock. This deal shows that you never know why and when a great deal is going to show up. Bruce once bought a house from an agent once who was getting into the plastic extrusion business. The agent needed to buy an extrusion machine for $10,000, so Bruce bought two of his homes for that amount.

Bill has been approached with bulk buying opportunities over the last few months. The people offering these bulk buy deals told Bill that they have had bulk buys in the past that sold quickly. When Bill asked for an example of one of these bulk deals, he never received a response and he still hasn’t. Bill received a bulk buy opportunity from a company in Los Angeles as well. Because the company seemed professional, Bill had his agent check out the properties. The agent discovered that all 20 of the properties for bulk sale were short sales.

Bruce will be a moderator for Fannie and Freddie in June. These companies are putting together bulk sale divisions, so perhaps bulk sale opportunities will be available in the future.

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.

Elite Auctions Randy Grigg (Full Bio)

This week Bruce is joined by Randy Grigg. Randy is the president of Elite Auctions. He spent 30 years as a pest management consultant, and gained a large portfolio of rental properties during that time.

Bruce begins by asking how Randy’s auction properties get purchased, and what the sellers’ perspective is towards their property values. Randy is soon going to have his largest auction. He has two trustee sale buyers that his company is working with. These two people have 50 unsold properties in their inventory. Most of their properties are lower quality houses. Right now, nice properties in nice areas have more demand. Bruce has noticed that trustee sale properties are typically cleaner than REOs, but the trustee properties that Randy will soon sell are in moderate condition. Some of them are beat up, but their landscaping is still in decent condition.

Many trustee sales are still occupied when the sale takes place. Bruce has noticed there is a common perception that these occupants are beating up the property, but he does not believe this is generally the truth.

Randy has typically been a low volume auctioneer. There are 4 nice properties that he will be selling at his next auction. His two clients will be selling 22 properties with him. This auction will be taking place at the end of January.

The trustee sale business is a highly competitive market, and most of the competitors are educated investors. There is also a much smaller range of profit to be gained in a trustee sale, and this profit can easily be lost in overhead costs. Trustee investors will often buy at 80 to 85 percent of market value with all cash. This is the model that The Norris Group uses, but in order to do that, you must be very good at minimizing expenses. Sometimes a trustee buyer has access to a property on the day he buys it. This allows trustee buyers to quickly plan for selling through methods like auctions.

Advertising has changed since Randy began his auction business. In the past, Randy had to spend $8,000 per house, because the print advertising is very expensive. Recently, people have started searching for properties through the internet. This has made it much cheaper for Randy’s business. His business posts properties to about 100 websites, and then sends emails to 100,000 Realtors.

Bruce once tried selling his properties through auctions, but he discovered that it took a lot of effort. He tried advertising his properties using street signs, and it did not work well. Bruce thinks that he has never worked harder than the 45 day period he spent trying to set up his real estate auction.

When Randy heard that The Norris Group was going to try doing real estate auctions, he was worried at first. Fortunately for his business, it is not as easy as most people think to begin an auction business, and most people eventually fail. There is a costly learning curve that is required for setting up a good auctioning business model. Randy lost 20 percent on his properties when he first started, but that process of trying and failing helped him to learn. There are many ways in which an auction can fail to have a good result. The first phone call that a potential buyer makes can completely lose their interest if they do not receive the proper response. Many people call on auction ads, and they receive a recording.

Bruce attended an auction one year ago in which 93 stilted duplexes were being sold. The sellers had placed their ads in the wrong place of the L.A. Times. Bruce tried calling the company, but all he got was a recording. By the time he arrived at the auction, the seller was closing the gates. Bruce talked to the seller and he discovered that he was the only person who had ever showed up to this auction.

Randy’s auctions are held in front of the home being auctioned. He has to analyze each house individually in order to understand what kind of buyer he wants to attract. If he wants an owner occupant buyer, he always advertises the phrase “45 days to close”. He also tells buyers that if they can close within 30 days then the sellers will agree to pay their escrow fees. The escrow fees are $400, but the cost of holding the home for two weeks is much more. Randy offers a 45 day closing, a free home warranty, and a guaranteed clear title. A home warranty does not cover foundation problems, but it does help relieve some of the buyer’s concerns. People often worry that they will not have a clear title when they buy a property from an auction, so Randy always mentions that they will.

Randy does not invest much time in open houses for his auctions, because he has discovered that establishing urgency is the key. He has a two hour, two day open house which takes place on the weekend. The auctions always take place within the working week.

The key to getting a potential buyer to come to an auction is to make them feel comfortable with the process. Randy usually has a mortgage broker present at the sale. If the buyer has not been prequalified, he encourages them to do so. He tells them that an auction sale is just like a normal transaction except they get to choose their price. You have to make people believe that they can get a good deal at an auction. Randy also offers a cash prize for people who guess what the final auctioning price will be. Their guesses allow Randy to more adequately gauge a property’s true market value. Randy does not hold auctions on the weekend, because holding auctions during the week attracts more serious buyers.

Randy has discovered that his quality buyers in Bakersfield discover his auctions through paper advertisements, because there are a lot of people who read the news there. However, buyers from other areas typically discover Randy’s auctions through the internet. Knowing where your audience comes from will help you to know how to advertise.

Bruce asks Randy what he considers to be a safe number of bidders in each auction. Randy has found that his auctions do better when there are not a lot of bidders. When lots of bidders come, they become more competitive and over price the property. Unfortunately, the high bidder often realizes 3 weeks later that he does not want the property, because he will pay too much. Randy’s typical preference for an auction is 5 to 10 buyers. Having fewer bidders will cause the property to sell closer to market value, and it will more likely be a successful sale. High bids might make clients happy, but if their property does not finish the selling process, then the selling value does not matter.

When Bruce has sold his properties through auction, most of his failures came as a result of defects in the property’s location and condition. Sometimes Bruce’s own selling expectations have brought about his auction failures. Sellers must have reasonable expectations for their selling prices.

There have been occasions when Bruce though his house would sell at a low value, but ended up selling for a much higher value. It is hard to predict what will happen at an auction.

When Bruce tried to hold his own auction, the only house that sold was the one in the worst condition. Two of his houses were priced very highly, and one of his potential buyers could not get financing. Bruce asks Randy if the property’s condition is a major factor in whether or not a house will sell. Randy usually makes minor repairs on his auction properties. He tries to make his properties better than the average REOs in that area. Bruce thinks that is a very smart decision. Bruce made many repairs and upgrades to his properties, but this caused trouble with appraisals, because his homes were in much better condition than the comps in his market.

Randy’s son Mike enjoys working as the president of the California Auction Association. He is still on the board for the CAA. Mike won the bid-calling contest this year for the CAA. He prefers doing charity auctions, because there are a lot of items, and that makes his job more fun.

If you are interested in doing auctions with Randy, his website is www.sellwithauction.com, and his office number is 661-325-6500.

The number for Elite Auction is 661-325-6500, and their website is www.sellwithauction.com

Elite Auctions Randy Grigg (Full Bio)

This week Bruce is joined by Randy Grigg. Randy is the president of Elite Auctions. He spent 30 years as a pest management consultant, and gained a large portfolio of rental properties during that time.

Bruce begins by asking Randy what gave him the idea that real estate was a good investment. Randy read a book by Mark Hearld which persuaded him that he could make big money in real estate. Bruce also owns Mark’s book, and he believes Mark did a good job at marketing it. Randy also received some training from Jack Miller in 1983. He started buying a couple properties in 1976.

Randy had a very slow method for buying real estate. He had a career when he started, and he continued investing as he continued his education. His beginning goal was simply to break even on his net cash flow. He always used the seller to produce the financing, because he did not want to frequently use the bank. That is very different from how Bruce got financing. Bruce thinks that, in the future, sellers will have to be more willing to carry paper for financing.

When he first started, Randy attracted offers through Realtors. Randy would make approximately 20 offers per week. Doing this, he would get one to three properties every year. Later on, he started using ads as his primary source for getting deals. Eventually, he also used letters to neighborhoods he wanted to buy in.

Bruce also used ads for quite some time, and it gave him a great education in dealing with people. He eventually learned what kinds of people were or were not worth his time. He also learned some patience, as he had to sit through 100 calls before he would get the 1 call he wanted. At one time, Bruce would not make deals unless he could personally meet the seller. He only had so much time for doing this, so he became very efficient.

What is interesting about Randy’s and Bruce’s philosophy is that Randy kept his, and Bruce sold his. Bruce believes that Randy’s philosophy for buying worked better. Bruce sold properties for profit, but Randy kept his properties for income. Randy learned this philosophy because the area he invests in (Bakersfield) does not have much price inflation. Mike Cantu has a similar buying philosophy and he is also happy about his outcome. Bruce has learned from Mike and Randy, and now he also keeps properties as rentals. Bruce feels that having rental properties helps his decision making process. People who have cash flow above their expenses do not have to make risky decisions. If you own 15 rental properties, you will be provided with a nice and steady lifestyle.

Randy and Mike started their auction company 8 years ago. It was easy for Randy to buy homes, but he did not like the unpredictable aspect of selling. Randy attended a public auction in his neighborhood, in which he tried to buy a property, but the people attending out bid him. This taught Randy that auctioning was an effective tool for determining a property’s market value, so he decided to sell his homes in auctions. He had a lot of trouble using auctions when he first started. He sometimes lost 20 percent of his equity on a sold property. He slowly learned how to better set up his auctions, and he discovered new ways to attract the buyers he was looking for. In 2004 to 2006, Randy’s typical seller was someone who wanted to capitalize on the appreciation that occurred during that time.

Bruce feels that most people do not think of auctions as a good way to maximize your selling price, but it is. When you sell homes in an auction, you place all of your potential buyers in direct competition with each other.

In 2004 to 2006, Randy’s typical buyer was either a speculator who thought that prices would increase forever, or an owner occupant. At that time, Bruce noticed that people were desperate to buy property. People were not concerned as much with appraisal values.

In 2009, Randy’s selling clients were people who had a better understanding of the cost of selling. During the downturn, some people felt that if they did not sell their home quickly, then they would lose the opportunity to.

Selling a property is not an easy or guaranteed to happen. Being in escrow does not mean that your sale will surely finish. In 2007 to 2008, if you had a 60 day escrow that didn’t finish, then somebody made you lose 5 percent. In 2009, selling was not as problematic, but it was still difficult for people to qualify for a purchase.

When people put money down in an auction, there is a better chance that the sale will close. If buyers cannot finish a sale, then Randy splits that down payment with his selling client.

In 2009, 25 percent of auction buyers paid with cash, and 75 percent paid with conventional loans with large down payments. Randy only had one FHA buyer in 2009. Sixty percent of his buyers are long term investors, and about forty percent are parents who are buying homes for their children or owner occupants. Bruce thinks that is amazing. Randy’s auctions sell for an average of 107 percent of comp value.

In 2010, conventional loan providers may change their policies to match FHA. Wells Fargo changed their seasoning policies, not long ago.

2009 ended much differently than Bruce envisioned, because many rules changed. The HVCC and the 91 day FHA selling rule made it difficult for Bruce to sell. Because of this, his business shifted from FHA inventory to conventional inventory. At the beginning of the year, Bruce was buying properties for 60 grand in the beginning of the year, but after June, he started buying properties for 250 grand, and selling them for 350 grand. Those more expensive properties were much cleaner properties, and they were easier to sell. This change made Bruce feel like he had died and gone to heaven. This experience has taught Bruce to have flexibility. When rule changes force you to change your business plan, there is always another way to make money.

In 2010, Bruce estimates there will be “big dollar” foreclosures. Randy is beginning to see Bruce’s estimation come to life more and more. For example, in Riverside, an 8,000 sq. ft. home, in a nice area, was being sold with $1.7 million worth of financing. The owner lost this property at a trustee sale. The opening bid at the trustee sale was 608 grand but there were no bidders. This property is now listed for 525 grand. It is $1,100,000 less than any other property on that street, and it is not pending. The problem is that people cannot get financing for these homes. This may be the next market for Randy, and he would be happy to deal with these expensive properties, because he earns a lot more per sale with expensive homes. His income has decreased dramatically because home prices have greatly decreased. Realtors have also experienced a great decrease in their income because of these price decreases.

Randy bought properties in 2009. 85 percent of these homes were bought through other auction companies who do not have selling models which maximize sale prices. The rest of them have been bought from private sellers and banks. These low-price auction companies deal with large sums of properties, so they do not spend as much time properly valuing them. Randy’s company sells fewer properties, so he has more time to properly maximize his sale values.

The number for Elite Auction is 661-325-6500, and their website is www.sellwithauction.com

Mike Cantu Investor (Full Bio)   Tony Alvarez Investor (Full Bio)

This week Bruce is joined by Mike Cantu and Tony Alvarez. Both of them are very successful California real estate investors.

At the end of 2006, Mike made a list of people that he thought would be out of business in a short period of time. Later he discovered that his predictions were true. Bruce asks what was wrong with their business plan that caused them to fail. Mike said that these people did not know how to adapt to market change. They had unsustainable lifestyles. They were spending between $10,000 to $20,000 dollars per month, and that lifestyle ultimately brought them down during the rough times. Many had negative cash flow on their investments, they were too optimistic, and they were speculating too much. Some people have a hard time understanding the difference between speculators and investors. Mike labels himself an investor in the rental market, and he labels himself a real estate entrepreneur in the buy/sell business. In the late 1980s, people were speculating how high prices would go, and they thought prices were going to keep going up, and many of them were hurt badly. Mike has a much more conservative business plan than those people.

When Bruce and Tony met in 2003, he was considering leaving the real estate market. Bruce made a list of similarities and differences between Tony and Mike. Tony chose to unload his properties, but Mike did not, and both of them are very happy with their outcomes. Tony had a variety of properties, and he felt that his assets would be more difficult to manage. He was also facing high taxes, so he chose to 1031 exchange into commercial property. He had a good friend who was involved in the building of shopping centers, so he had the right relationships to make good commercial deals.

When Mike saw properties go up in 2006, he chose to hold onto his properties, and he is still proud of his decision. Mike wanted to have enough rental income to live life on his terms. After he made his big mistake, he just wanted to have one more chance to achieve his goal of freedom, and he didn’t want to take the risk of losing it. He realized that he had everything he had hoped to obtain, so he felt no need to trade his properties for more money. He also realized that if he decided to sell his properties then he would eventually choose to reinvest that money back into real estate. He already had all the real estate he needed, so he just decided to keep it. However, he has made upgrades on the properties that he owns. He traded his lower quality houses for good houses in good neighborhoods. These houses take care of him, and now he feels that the rest of his life is an open book because those homes take care of all his expenses.

Bruce has watched people made desperate decisions over the last few years. He met one man who had $16 million worth in real estate, $12 million of debt, and $30 thousand dollars of negative cash flow. Bruce knew that this man had $4 million in equity, but he was very glad that he was not in the same position. That man lost a lot of what he had. Decisions made in desperation don’t work out very well. The philosophy of buying, holding and paying off assets saves you from making desperate decisions.

Bruce asks Tony what he would do if he had lost everything and he had to restart from scratch. Tony did a little experiment in which he asked himself, “What would I do if I was starting from nothing in San Diego.” It took him 2 days to analyze everything in the MLS, and use the same concepts he teaches in his books. He called agents and did not tell him that he was an investor. The agents quickly decided to work with him.

Tony received a negative response from an investor who had attended his classes. This investor told Tony that he had been working in San Diego, because there was no opportunity there. He told Tony that he could not get a deal. Not long after that, Tony got an email from two men in their twenties. They had done 8 deals within the last 12 months and gained about $200,000. Tony discovered that they only $1,000 dollars to start out with.

Tony tells Bruce that if he had to start over, he would take whatever resources he had and go back to the Antelope Valley. He would use his knowledge about real estate to do exactly what he had done before. He would look for inventory that would provide him with positive cash flow.

Bruce noted that both Mike and Tony have a sense of humor. Bruce thinks that Mike’s humor has been a big part of his success. Mike has zero expectations from his close friends, but he wants to have a good laugh every day. He does not want to take life too seriously. Bruce’s business involves taking peoples’ expectations down from the sky, and bringing it to earth.  Bruce and Tony both enjoy a show call “The Pawn Shop.” Bruce noticed that there are three negotiating types displayed in the three characters. There is one character with a good sense of humor, and he easily gets people to reduce their prices by making sellers laugh.

If Mike was starting from scratch, he would hunt for a partner with money and credit. He would present a detailed plan to this partner, and continue learning about the investment that he wants to get involved in. He would do his best to become an asset to his partner rather than a liability.

Tony made a partner out of a hard money lender. He was just coming out of bankruptcy, but he was able to show the lender what he had going for him. He showed the lender his knowledge and ability to find deals. He had a mindset that he was going to walk out of the lender’s office with money.

Bruce asks Mike who his important mentors have been, because he has spent a lot of time getting an education. Mike feels fortunate that his first mentor was Mick Blackwell. He was not an easy man to do business with, or getting along with, but he pushed Mike very hard to do his best. Mick’s usual response to anything Mike did for him was, “Is that the best you can do?” This made Mike want to do his best to impress Mick. Mick also lived very conservatively. His wife has a lot of nice things, but Mick could be satisfied with a trailer in his backyard.

Tony considers his first two mentors to be his mom and dad. His dad encouraged Tony to integrate into American society. His dad taught him to be persistent and to do hard work. His mother taught him how to negotiate and build relationships. They did not have money to go to Catholic school, but Tony’s mother negotiated the school leader to let them in for free. Tony’s first business mentor was Victor Ayela. Victor told Tony that appraisers were making a fortune, and that he would be crazy not to learn about that business. Tony learned negotiating skills from a liquor buyer named Al Rudolph. Tony learned a lot about business integrity from a man named Joe Germaine. Many of his mentors were not in real estate. Most of the people that Tony enjoys doing business with are people who are true to their word, and they look for solutions to problems rather than let themselves be absorbed by problems.

Bruce believes that Tony, Mike and himself are going to be some of the main trainers for the next generation, and he takes that very seriously, because he was given the opportunity to learn from people like Jack Miller. Bruce remembers that he is the example for the next generation. Mike has always felt that he has an obligation to give back because of the help he received from other people. Mike wants to leave the better place than the way he entered it. He feels that it is very rewarding to help other people, and he enjoys the notes he gets in the mail about the way he has affected other peoples’ lives.

It was not easy for Mike to transition into his role as a teacher. The first time he was going to give a public speech, he threw up from his jitters and he considered bolting, but he felt very good after he gave his speech.

Thank you Mike and Tony for taking the time to do the interview. Happy holidays for those reading. Look forward to more interviews in 2010!

Mike Cantu Investor (Full Bio)   Tony Alvarez Investor (Full Bio)

This week Bruce is joined by real estate investors Mike Cantu and Tony Alvarez.

Tony started working in the real estate industry in 1981. He became an appraiser, and then started buying houses in Burbank. He eventually went on to invest in apartments and other types of real estate. Tony believes that what really gave him an edge in the business was his training as an appraiser. If you look at the front part of an appraisal form, it gives you all the information you need to focus your attention on.

Mike Cantu became attracted to the real estate business after watching a late night infomercial. The infomercial was about a surfer who claimed that he went from being a 20-year-old loser to a millionaire in a year. Mike Cantu believed the infomercial and decided to pursue real estate as a career. That night he took some notes and he created a list of goals. He and his friend Chuck went to a free promotional seminar. After going to the seminar, he revised those goals substantially upwards. His first goal was very modest; it was to pay the 40 dollar balance on his retread tires at J&J Tires.

People being trained by Bruce are viewing his finished project and it is very intimidating, because they cannot even imagine owning one of his properties. Bruce asks Mike how important it is to escape reality and set goals for future desires. Mike believes that goal-setting is the most important part of investment. Without a plan and goals you will wander aimlessly. Mike is a very goal oriented person. He has a stack of goal labeled cards which he reviews daily. Mike described a Harvard study in which a graduating class was interviewed. They tracked down that graduating class 20 years later, and they found that 3 percent of the graduates had set long term goals, and that 3 percent had a combined net worth that was greater than the other 97 percent.

Bruce asks Tony when he began to set goals for becoming wealthy, and actually believed he could do it. Tony began to set goals after his first bad experience in the 80s. His initial goal, after coming out of bankruptcy in 1993, was to get to 1 million dollars and 10,000 dollars a month in income. That was a big deal for him because he did not even have a car at that time, and he was working at Shakeys. His income eventually reached 55,000 dollars a month. He made all that money by working with REO agents.

Freedom is what defines wealth for Mike. Wealth gives him the freedom to do what he wants and live life on his terms. Mike obtained his first level of freedom in 2000. He realized then that he had all the things he needed to pay of some of his debts. Mike once thought he was invincible and that he could avoid the mistakes that many other people made, and he was wrong. He often found himself taking three steps forward and two steps back, but he does not regret the mistakes he made, because he learned from them.

Tony was born in Cuba and his family immigrated to the New England area. He grew up very differently than the other people in his area, and the struggles he faced helped him to develop certain personality traits which he believes greatly helped him in his business. Tony never felt that he was poor even though he was not able to buy some of the things that other people had. Tony describes the wealth he has as his piece of mind. He does not have to get up and go to a job. He is not being forced to work for someone else every day without being able to control his destiny.

Bruce explains that feeling of control of his destiny and his family’s destiny. It does not feel good knowing that you do not have control of your family’s destiny, and to know that you cannot let them experience all the things you wanted them to. Tony warns that investors must be careful when they start feeling like they are free and clear. Mike tells everyone that there is always a way to screw up your plans. He has tried to dumb-proof his plans, which has lead him to investing in well located single-family houses with good schools and no debt on it.

Mike agrees with Tony’s definition of wealth. Mike believes there are three life currencies, which he calls money, time, and serenity. You can have the first two, but if you don’t have the third then the money and time is not very valuable. Once Mike gained his serenity, he realized that it was something he never wanted to let go of, and he works every day to maintain it.

In 1985 to 1989, people gained a great amount of equity. Bruce asks Mike how well they were doing during that time.  In the 80s, Mike was still learning to invest. He started his business in 1982. When the real estate market picked up, he started building houses and developing them. In 1987, he developed plans to become a big-time real estate developer. At that time, he did not understand that real estate has different cycles, and eventually he lost a lot of what he had gained.

Tony did very well during this same time period. He started as an appraiser because he wanted to invest. He learned a lot from banks, because he was able to look through all their files. He studied how banks qualified people, and he studied their top clients. He took that knowledge into his investing business. He also gained a lot of money by appraising for other investors. By the end of this cycle, he felt like quitting both sides of the business, because his work was all about the money and he was worn out. When he gained a large sum of money, he allowed someone else to handle his money for him, and he lost it all. When he went bankrupt, he had to walk home from the L.A. courthouse to Burbank. This gave him a lot of time to think about what he would not do the next time around.

After Mike’s bad run in building, he owned a lot of land, unfinished houses, a big subdivision, and a couple of unfinished condo projects. He learned from that experience that no matter how well you do, you can lose everything. Unfortunately, at that time he did not realize that you could also go negative, and dig a hole that takes time to get out of.

Not everyone chooses to dig themselves out of those sorts of problem. Some choose to walk away from their debts. Bruce has had people brag to him about how they own a rental that they haven’t made a payment on for 15 months. Mike considered the possibility of a corporate bankruptcy, but his partner encouraged him to pay off his debts. Bankruptcy decisions can hurt a lot of people other than the one declaring bankruptcy. It took Mike two years to take care of his debts, but everyone he was working with gained from his work, and he feels good about the decision he made.

It is very important to choose who you do business with. Mike suggests that you approach your search for a partner with the same seriousness that you would approach your search for a spouse. Mike has been approached for many partnership deals, but he accepts very few of them. He always asks his potential partners about how they are doing financially, because you do not want to let someone else’s bad decisions affect you.

The main less Tony learned from the down market in the early 90s was that he did not have to go into bankruptcy. Unfortunately, he did not realize this until later. Tony was given bankruptcy advice from an attorney, and he encouraged Tony to do it because he gained a fee from that decision. Tony warns that if you are chasing after deals out of fear for something, then you will eventually lose whatever you are making. When Toney came out of bankruptcy he learned to set goals. He was not so concerned with just making money, but with gaining his piece of mind. After he experienced bankruptcy, he came out with a better sense of who he was and what the ultimate purpose of his real estate business was.

Mike’s primary lesson from his downturn was that the bad times will not last forever. Everything will pass in time. He also learned the power of goals. He gained the determination to clean up the mess he had made. He also realized how important it is to figure out what you are really pursuing in life. Mike views real estate as a means to an end.

Bruce’s real estate experience has lead him to his passion, which is teaching. He enjoys the experience of calculating statistics that can be used to help other people. This discussion will continue next week. Mike and Tony will be back next week.

Craig Hill Hard Money Broker (Full Bio)

This week Bruce is joined once again by Craig Hill. Craig has been handling The Norris Group’s hard money loan business for over ten years, and he is a trustee investor.

Many new investors think that it is easy to get into the real estate buying business. To reduce risk, The Norris Group uses Rick Solis to appraise properties through the eyes of an investor. Sometimes new investors will find a property, and they think they have a good deal, but then Rick will look at the property and find problems with their deal. For an example, an investor might try to buy a property in an area with comparable sales located on 8,000 square foot lots, but the property they are trying to buy is on a 4,000 square foot lot. That 4,000 square foot difference could make a $20,000 dollar difference. Rick can easily spot these devaluing problems and save these new investors money. Craig has received multiple responses from investors who are thankful for Rick’s services.

A new investor wants to get their first house under their belt. One of the things a new investor may do is try to prove that a house is a good deal, rather than let the evidence speak for itself. These people might feel that if they can just buy a house and sell it for a profit then everything will be a little bit better. Those are the kinds of people that will typically make a mistake. When people are trying to make up for lost time, they often try to do too much too quick. You cannot become a millionaire in one deal, but you can ruin your finances in one deal. Craig has met many people who tried to be too aggressive, and then lost a lot of money. During the boom, people felt like they couldn’t lose, and they didn’t want to believe that the up cycle would end. Now people are starting to have success again, and Craig fears that they will go back into that same mentality. Craig warns that you should be able to handle a rental property. If a rental property is going to ruin your life then you shouldn’t be investing.

If someone came to The Norris Group with a great deal on a $1.2 million dollar house, The Norris Group would probably not help that investor, because there is a lot of risk involved in that deal. If an investor discovers that his $1.2 million house is not really worth $1.2 million, or if the investor starts making $7 grand payments, they can severely damage themselves.

If Craig had to choose between a borrower with a high credit score and low cash reserves, or a borrower with a lower credit score and more cash reserves, he would choose to loan to the borrower with high cash reserves. When you are dealing with investments, you need to have cash. If an investor doesn’t have enough cash reserves, he may want to think that he can make the investment work with only six months worth of reserved payment. His property may take more than six months to pay off, and his credit will not help him, because The Norris Group’s program is not credit based. They cannot get a loan to improve their situation. If a person has a lot of cash reserved, it makes it better for both the investor and the lender.

Many unexpected problems can occur when you invest in a house. Craig bought one house to fix up and flip, but the sewer immediately needed to be fixed. If an investor cannot handle those kinds of surprises, then she is jeopardizing herself.

If Craig had to choose between a borrower with cash into the deal, or a borrower that got a superior discount in the purchase who is looking for a zero down loan, he would still choose the borrower with cash in the deal. There might be a reason why the other client got a superior deal that won’t reveal itself until later. Also, the zero down investor may not be capable of handling the monthly debt on the investment. If you have $50,000 in cash reserves, you will be much more comfortable making an investment. When you do not have that kind of cash in reserve, you may feel a need to make a deal, and that causes problems. People often get caught up in the idea of making a property investment, but their ideas may not work out in reality.

If Craig had to choose between a borrower who is an experienced investor with a 650 FICA score and has a proven track record with The Norris Group, or a new borrower with a 750 FICA score and the same amount of money, Craig would choose the experienced investor with a good record. Many people have had troubles within the past few years, so a 650 FICA score may mean that they have also had trouble, but they are working through it. A track record with The Norris Group is important, because that experienced investor respects their business relationships. Dealing with a lender who knows their track record allows them to do their business, and if their investments are their livelihood, then they will probably not sacrifice their relationship with their lender.

When loaning to an owner occupant, there is never an intention to develop a relationship for future business. An owner occupant might be taking a severe risk with the $20,000 they take in a loan.

If Craig had to choose between a borrower with a job, good credit score, and a money partner, or a borrower who is a self employed, full time investor using their own money, Craig would choose the self employed investor. People who use money partners are historically known to cause problems. They may not take into account that surprises will come up, such as unexpected repairs or a delay in the selling process. The Norris Group will do business with money partners, but Craig is much more involved with those people. Craig often requires the partner to sign the deal along with the borrower, because they need to know that a property is a responsibility.

If Craig had to choose between a borrower who is a cocky and experienced investor with lots of money, or a new investor with less money and a humble attitude open to learning, Craig would probably choose the humble investor. He strays away from the know-it-all attitudes. Craig has had thousands of conversations with investors, and he has a good sense for the kind of person who will work hard to protect his investment. The cocky, know-it-all investor is often a one-time deal. The cocky investors will often call Craig, give him a big conversation about how this deal is an opportunity for him, but their “deal” is really only borderline. Sometimes these cocky, experienced investors will be trying to use Craig after their other lenders reject them.

Over the years, Craig has developed a good sense for when people are not telling him all their problems. When you have had thousands of conversations with borrowers, you develop a sense for conversation patterns, which lead to certain outcomes. It would be difficult for Craig to have an original conversation at this point. He has probably heard what any new investor will tell him many, many times. The Norris Group does not want to do deals with just anyone who can qualify. The Norris Group wants to do deals with people that make good matches with the company. Craig deals with both borrowers and investors, and he wants to make sure that his deals are winning deals for both ends.

The Norris Group does not work with pooled trust deeds and never will. If you used pooled money, you have much less control. When an investor buys a trust deed, he knows the property it’s going to be on, the amount, and he knows what the appraisal on the property is worth. The investor can easily find out what his investment is. With pooled funds (fractionalized trust deeds), the manager of the pool has a lot of discretion. You might have some possible investments that you would not take if you personally inspected them.

The reality of what is happening to your investment can be masked in a pooled trust deed. In a pooled trust deed, you make regular payments. You can make these regular payments for a long time, but by the time your investment is not worthwhile, your investment may be upside-down. With an individual investment, you are receiving monthly payments from one person on one trust deed, so you would know after 30 days if the borrower was 30 days late.

There are some lenders who do not require monthly payments, but Bruce always does. He wants them to know that they have a debt, and it prevents them from getting overextended.

A pooled investment might attract a smaller investor. The Norris Group does not usually give out loans that are only worth $30,000 to $40,000. A person who has $50,000 they want to invest, but they require the $500 dollar payment every month to live on, then they are not a good candidate for a trust deed.

Bruce asks Craig to explain how he makes people feel comfortable investing. Craig likes to show people examples of what The Norris Group does. Craig sends new investors a copy of a The Norris Group appraisal, so they can see what The Norris Group does to calculate value. Once Craig makes people feel comfortable with what they are lending on, they are anxious to invest in a trust. The majority of the people that work with The Norris Group trust deeds want to ramp their investment up as high as it can go. When they do ramp it up, the majority of them have chosen that as one of their main investment vehicles. Many people who deal with trust deeds have a diversity of investments. They do not want to put all their eggs in one basket.

The Norris Group sees trust deed investments as a great way to offer diversification of a retirement account.  You can also diversify your trust deed investments by selecting multiple areas.

The Norris Group has a new 8-year loan program for investors who plan to buy and hold a property as a rental. This new program has opened up a new investment at 9% for 8 years. This program is great for people who have IRA money, or money in 401Ks, because they can earn 9% tax free. The nice thing about this 8-year program is that the loan is intended to go on for an extended period.

Craig can be reached at 951-780-5856. He will be glad to talk to you about borrowing money.

See Craig’s full biography HERE.

Craig Hill Hard Money Broker (Full Bio)

This week Bruce is joined by Craig Hill. Craig has been handling The Norris Group’s hard money loan business for over ten years, and he is a trust deed investor himself.

Bruce begins by asking Craig what the difference is between Craig’s California private lending business and other lending businesses such as Bank of America or FHA. Craig says that there is not as much of a difference as people think. The main difference is that you are lending to a different client and for many reasons. Craig has the ability to lend within a shorter time frame, and he will lend on properties that banks would lend on due to conditions. Craig’s business deals to people who have more need for a quick loan.

The funding source in Craig’s business is very different from a bank. Banks have a pool of money, but with Craig’s hard money, there is an individual who has money to lend and they get a good return on the loan they end up making.

Hard money lending is a generalized term for private money and private loans. The Norris Group is a private broker for investors. Hard money has a negative connotation to it because it can be expensive and, in the past, it was given to people with bad credit.

When Bruce and Craig first met, Craig was working for another company in Orange County. Bruce asks Craig what his typical client looked like in that environment. Most of Craig’s clients were delinquent on their trust deeds. They had poor credit because of some sort of problem they had been affected by. Hard money was a way for those people to get rid of some of their problems, and move on.

When Bruce and Craig met, Bruce was an investor. He had found a couple properties, but he had maxed out his credit line. Bruce had never met with a hard money lender, and Craig had never met with an investor. If you have a house that is worth $100,000, hard money lenders are typically willing to lend 60 to 70 percent of what that house is worth. Bruce had two houses that he wanted a loan on, but he was only asking to borrow 50 percent of what those houses were worth. This made Craig realize that working with Bruce was a great opportunity. Craig had a hard time finishing those loans though, because at that time, people had the mentality that a house was only worth as much as what you were willing to pay for it. Even if two houses were appraised at equal value, the lender would have still wanted to lend to the person in foreclosure.

In the 1990s, there was usually a first deed on a property when a hard money was asked for. Most of the hard money loans that Craig did at that time were between $10,000 and $25,000. 80 percent of the home was typically covered in the borrower’s first loan, and Craig gave them a small loan behind that first loan. The interest rate was typically 15 percent. Most of the companies that did hard money dealt with brokers. Craig’s company worked with brokers who would refer loans to them. If there were 10 or 15 points, those brokers would receive half of that value. There were a few more people involved in the transaction.

Bruce’s company does not rely on referrals. The Norris Group has a great network, so they do not need to use referrals. Craig had to frequently persuade brokers that it was better for borrowers to get a $15,000 second loan. The brokers wanted Craig to give them a new $80,000 first loan, because that generated more income. With The Norris Group, Craig does not have to worry about this problem, and he can choose the best option for each client.

Most hard money loans are still very referral based. If you are not talking directly to the borrower, a broker may not give you all the information you need, to make the best decision for the client. The broker may try to make you believe a false story.

Bruce and Craig quickly became comfortable with talking to each other, because they were dealing with the same people. Bruce was talking to people in foreclosure who wanted to sell their homes, and Craig was talking to those same people about making a loan.

Investors had come to Craig before Bruce, but it was with a concept rather than a property. People would ask Craig what he might do in made-up scenarios, but Bruce was the first person to come to him with his two properties. Craig thought Bruce’s idea gave a lot of security to the investor. After Craig’s experience with Bruce, he chose to only give loans to investors. The second investor Craig dealt with was Mike Cantu, and this loan plan worked well for Mike as well.

Mike Cantu is still borrowing from The Norris Group. That consistency would not occur for a loan business, or for people who were invested in trust deeds. People who loan to those kinds of borrowers will have to work very hard just to get them to borrow money once. Lenders who deal with investors will only have to find a few people who can borrow 40 or 50 times a year for them. It did not take Craig very long to realize that this was a very sensible business plan.

Most people think of the investors as the risky borrower, and the occupant as the safe one, but this is not true. Bruce asks if there are different rules for loaning to occupants. There is more protection for occupants, and there are different regulations on loan amounts. When Craig is doing a loan for an investor, he understands that the investor needs money to fix a home and sell it. When you give a loan to an owner occupant, you probably never know why that person needs the money, and Craig has been shocked in the past by the ways owner occupants will use their loan money.

Hard money loans are not a cheap resource. An owner occupant would not want a hard money loan unless they have no other choice. An investor taking a hard money loan probably has the option to use another loan option.

When checking to see if an investor is qualified for The Norris Group’s hard money loans, Craig checks their credit, the amount of debt leverage they have, and cash reserves. Someone with good cash reserves is a good candidate for hard money loans. Most investors take these loans for single-family residences and small units. The Norris Group is currently not offering loans on land, and tends to stay away from commercial real estate. In the future, The Norris Group may give loans for construction. Craig asks people how they found the property and how long it has been on the market. If an investor finds a property that has been on the market for 60 days with no price change, Craig will be cautious, because there is probably a reason why that property has not been sold.

Some passive investors are really looking to get involved in the market by getting properties flipped to them by a wholetail investor who passes it on to them for a small fee. The fees being tacked onto these deals sometimes wipe out a lot of the profit. Most wholesalers get a nominal fee for the work they have done. Craig recently talked to a man who was buying a $400,000 house for $349,000. He though he had a good deal, until he discovered that the original buyer had just paid $249,000 for it.

It is very important to predict real estate cycles. We are currently in a good cycle, but you still have to be careful when buying. If the cycle is going up, lenders can do deals according to a loan to value scale. In the current cycle, Craig stays away from deals that can take 6 months to complete, because a lot of things can change within 6 months. In the last six months, investors have had a “can’t lose” mentality. This can be problematic, because if investors feel like they cannot get a bad deal, then they may pay too much. The Norris Group encourages people to not get involved with long-term project houses, unless they have experience. Craig often asks his client if they have a background in construction. Craig thinks that a new investor should not try buying a house that has been red tagged by the city.

There are many people who come to The Norris Group expecting to receive a loan, because they have attended clubs and seminars in the state. Other people have told them that they can get a loan without a credit score, and without a down payment. This is not true. Craig has disappointing conversations with these people, but most of them are thankful, because Craig informs them on how they can get qualified for a future loan. Some of these people will put everything they have into a deal because they’ve been told that it is easy. This is a difficult and volatile time for real estate, yet people are willing to go “all in” on a property investment. People are coming from a 2006 mentality, where any property you got your hand on would get you a big check, but now things are much more difficult than that.

Craig can be reached at 951-780-5856. He will be glad to talk to you about borrowing money.

Bruce speaks with Craig Hill about the hard money loan business, how they met, how they work together, and what Craig brings to the table as a money partner. The Norris Group only loans in California so The Norris Group offers local insights and prides itself on a very good track record. Video on the program can also be seen at http://www.thenorrisgroup.com/hard_money_loans/ and more on trust deed investment in california can be found at http://www.thenorrisgroup.com/trust_deed_investments/

In 1984, Craig took his first job in the lending industry working for Vanguard Mortgage as a loan officer and loan manager. While employed there, he met and began funding REO purchases with Bruce Norris. When Bruce officially started the Norris Group in 1994, Craig came aboard as both loan officer and investment manager and never looked back. Since that time, they have arranged over $150 million dollars worth of investor loans.

See Craig’s full biography HERE.