On Friday, October 19, the Norris Group proudly presents its fifth annual award-winning event I Survived Real Estate. An incredible line-up of industry experts joins Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. Proceeds for the event benefit Make a Wish and St. Jude’s Children’s Research Hospital. This event would not be possible without the generous help of the following platinum partners: ForeclosureRadar and Sean O’Toole, HousingWire, the San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops, Invest Club for Women and Iris Veneracion and Bobi Alexander, San Jose Real Estate Investors Association and Geraldine Berry, Frye Wiles, MVT Productions, and White House Catering. Learn more about the panel and how to attend at isurvivedrealestate.com.
Celebrating our 300th radio podcast, Bruce Norris is joined by three special guests. Rick Solis is a very successful investor who flies a little bit below the radar. He is an appraiser, buys trust deeds, and buys properties. Tony Alvarez, who invented the radar, is the REO Mentor and is a very successful buyer and teacher. He works with buying to hold, buying and selling, does wholesaling, and buys currently out of the MLS. Mike Cantu is a very successful property buyer. He has been a developer, landlord, and trainer. He is specialized in talking to clients on the phone and never meeting a soul who he buys houses from.
Rick Solis is currently appraising a lot of properties for loans and rentals. He also gets a bird’s eye view of the areas he is appraising, which is very helpful. He can see trends. Rick said in most of the lower end markets, most of the places he has seen since March when the buying season started have gone up about 1-2% a month. Most of the areas he looks at have less than one month of inventory. If the neighborhood is selling 20 houses a month, for example 240 a year on average, there are less than 20 active listings. He sees every neighborhood from Hesperia, Perris, San Bernardino, Ontario, Glendora, Pasadena. Every area is a month or less, which is about 1/3 of what is normal in a normal average flat market. There is very little for sale. Under a month is almost unprecedented, even in 2005 when everyone was grabbing everything. This is half of normal. In Moreno Valley, the REO agents reported three weeks of inventory. This is 300 normal sales, 200 total listings. One of the problems, for example with dominance in San Bernardino, is 40% of its REO up until now. Riverside is very similar in percentage, only they are not replenishing that inventory. What is representing 40% of your sales is not even going to be a player six months from now.
Bruce also wondered about what he saw in Palmdale and Lancaster. These would have been a dominant REO market just like Riverside was. Tony Alvarez said the inventory has tightened up just as much as everyone else’s. He draws, organizes, and reviews his statistics on a weekly basis, and what he has seen is the differences between what someone was willing to pay at the trustee sales in comparison and what they would pay in the market. If you look at the graph, you see the two lines, and all of a sudden the one from the trustee sale shoots all the way up. It really has been justified. He does not chase deals, but he still spends most of his time creating and nurturing relationships. He lets the guys who get paid to chase deals chase the deals and then call him. This is where they are still getting everything.
Tony said Bruce did something that changed his direction a little. He brought him a statistic that Tony locked in, loaded on, and took it home. From there he changed his direction based on that statistic, which had to do with the percentage of fallouts. Bruce had done it at his crash presentation over a year ago. The fallouts were at 40%, and he went to show the reasons why. Tony said that made his life because all of his attention went from looking at new things, new MLS listings, to scratching this and looking at pending deals. Their margin has taken hits, but still 40-50% of everything that goes into escrow falls out from 1-3 times. They are doing just fine; he does not pay attention to how many listings are coming out but rather keeps focusing on the pending deals. The other benefit is they have those conversations with agents, form relationships, and gain listings they are just about to list that come from all different angles. This could be a short sale or some other problem, and they benefit by being first in line.
They have also been selling. He has had other investors approach him who were willing to buy a vacant house he had for sale for $100 grand. He said he had one that already had a tenant that he kept on keeping for ten years that was already rehabbed. They would be saving themselves a lot of trouble and may pay about $105 for the house. He has been selling some properties that came with a tenant already. He has a hard time doing this sometimes because he really does not want to sell his things, but he has had a couple good offers from the big guns who came into town and wanted to buy everything.
Mike Cantu’s area is more of a stable area than Victorville or Palmdale, although there has been a big change. In the first quarter of this year he did his usual, worked the REOs, short sales, and multiple listings. He has always been a fan of fishing for multiple pawns and has always wanted multiple deal sources in case one of the pawns dried up. Longevity has always been a goal in this business, and this is his 31st year as full-time investor. He wants to have multiple sources of deals and put a big effort in the first quarter of this year with a lot of first A listings and staying in contact with REO agents. The end result was he bought one house, and it was a standard sale probate. He looked at a lot of things, and as he was following up to see what it was actually closing at, he was absolutely amazed. There were a few big hedge funds that came into his market place that really started buying the things that were being publically offered. His deal count this year was right where it normally was, and he had been dealing in the private party arena. This was by far his preferred choice of business because it required a totally different skill set than the things that were publically offered. The publically offered things are a reactive business, not pro-active. A listing comes out, you jump in your truck, you go look at it, do the math on it, and you have to know what it is worth and what the real fix-up on it is.
With all the competition out there, that is a tight market with no room for error. Some of the private party deals he put together this year have been absolutely fantastic. If they had been offered publicly in the multiple listing, there would be an absolute feeding frenzy. With some of the other things he bought, he could not even imagine what it would have ultimately gone for, so there has been a big change. However, as far as months of inventory, every time he is up in an airplane and looks down, he says there are not months of inventory but rather multiple lifetimes of inventory out there. As long as people own houses, there are deals to be made since time and circumstances change all sellers. The private party arena will always be there. Mike has probably done mailers where the mailer will get a call a year later, and you have almost forgotten you did the mailer to that area. You ask yourself when they got it, and sure enough it has been on somebody’s refrigerator for fourteen months. On one property that was in escrow, the letter the person received was four years old. Mike was asked if he was still a buyer, and he told them he would always be a buyer. Mike had mailed another mailer to her at a point between the four years. They had saved one, but Mike kept on proving that he was still active, which is important. There was a deal earlier this year where a man had called Mike’s daughter and secretary and told her Mike had been mailing to him for seventeen years. He had a big stack of letters from him and probably had enough to wallpaper his garage. He said if Mike was still a buyer, then he was finally a seller and to have Mike give him a call. Mike has eliminated the competition because as a trust factor he has been in the same business for a long time, which makes a statement. It is important that there is some longevity to this.
This situation is very similar with some REO agents. The same set of REO agents was in this run as was in the 90s. It is much easier because Mike was already there with them. The agents were calling Bruce just like they were calling Mike asking him if he was still in. They wanted to know that they did not have to reinvent the wheel but rather do it again.
Rick is doing some mailers too, but he does not want to buy 30-40 houses a month. If he buys 1-2 good deals a quarter, he is happy. He jokingly said he was sure the rest of them wanted 30 deals a month, but he does not want that headache. He is only doing it because he sees prices going up. If prices were not going up, he would probably just sit on the sidelines. He is pretty excited that prices are going up.
Bruce wondered what the attitude is of the person receiving the mailer since he has not done a mailer since the downturn. When you mailed in 2000-2005, it was always a happier story. Prices went up, and Bruce said he sometimes does not even know what they had. When you tell the other party you can pay them more than you thought, than you’re happy and they’re happy. Bruce said he would not have wanted to do the mailer in 2008 or 2009 because somebody would have had such a recent pleasant memory of a value, and it is much better now because at least they have gotten four years of negative news about real estate because they probably think they have the worst stick in the world rather than the best. Bruce wondered what the reaction is when the number is what it is and if this is comfortable now. Mike said it all depends. For a lot of people 2008 was a terrible year to mail. Everybody was in denial, but enough years have gone by to where most people are fairly realistic. He had a conversation last Friday with a seller who responded to a mail piece, and Mike asked what the seller’s ballpark opinion was of what the property might be worth. He said he had it in escrow five years prior at $500,000, and it almost closed. Mike made a comment about how he probably wished it had closed and if he had a ballpark opinion of what he thought the place might be worth. His answer was at least half of the $500 grand, to which Mike said that is the most optimistic comment he had heard all year. Bruce said he and Mike both would have handled this with humor; Bruce would have asked if it was worth about $100 now. The fact that he at least acknowledged that it was worth half of that was a good running start for somebody who is at least going to be realistic.
Mike said he had done a little bit of preliminary homework because his client had left a message, and as he called him back he was armed with comps. There was not one single comp that started with a 2. There were some that were less than $100,000, so they went from the high 80s and 90s up to about 200, but they did not quite make it there. He truly was a bubbling optimist at that point. It’s amazing how we have lived through the Great Depression of California real estate and survived. Bruce is not sure when the large buyers started showing up, but he does know that it has been the majority of this year. This was when they started making in roads and plans, and there seems to be new funds. These are staggering numbers. Tony Alvarez said he was asked going back almost two years now if he wanted to participate in putting together a fund. Tony was involved in a hedge fund with the guy who had the largest return, 1200%, in a year named Andrew Lotti. They had discussions, and Tony spoke to an attorney they had. They told him they would like him to get involved and be at the forefront and be their mouthpiece. They wanted Tony to be involved in the acquisitions part of it. He decided to back away from this because he felt for them to succeed, everything had to go perfectly for the returns to really be recognized. A lot of it went back to what they were willing to promise as far as a return. They were extremely optimistic.
Bruce said what is interesting is the returns they were promising then probably no longer have to be promised. Even the returns they are promising are probably optimistic on the same level. In one article two different men were interviewed who were running different hedge funds. One of them said regarding the hedge funds that they are just not overly optimistic, they’re just idiotic. It is not a realistic return. When you are promising to get a 20% return to someone, those funds have high overheads. There is no other way around it; and in addition they try to save money on everything. Tony said he knows some of the inspectors they have hired, and they are just barely knowledgeable about what they are doing. What is interesting is that having been involved in the city of Riverside and in some of the meetings about the foreclosure task force, Bruce said seeing some company coming in and managing it from one location and dealing with all these cities that have their own opinion about how well they are taking care of the property is going to cause some issues.
Tony has sat down and interviewed with some of the people, and they all tend to have proprietary software. They say this is what is going to give them the edge, which is nonsense. What is built into these software packs is the ability to get someone in the field to send the information. However, the ability to transfer information from one point to another when it is inaccurate is worthless. You have proprietary software that can communicate rapidly among people, but you are coming to the wrong conclusions. Something else interesting is how people are having a hard time finding anything to buy. He said he noticed the big hedge funds coming into town way over paying for the inventory out there. He thought to himself they should turn this into lemonade. He has always had the attitude that if you cannot beat them, join them. He had conversations with several agents who represented the hedge funds, and he wanted to find out what their buying criteria was. He went in thinking he was going to sell them items and take a fee out of it. He always wanted to be a small-time operator and only have the income so he can do this life on his terms. He never wanted to be a big hedge fund, so he found out what they did not want. He needed to find out the inventory they were not touching and figure out how he could make it into a niche and exploit it. This was real easy because that was one of the techniques that he used throughout the 90s.
Bruce said he thinks it was really smart at trustee sales when they started becoming the dominant buyers there. This was what his son Greg did. He literally looked at everything they bought for months and came to conclusions. You have to understand the animal before you know how to deal with it. Tony said he really took a great interest in them and did not see them as a problem as much as he tried to figure out how they were going to be an asset to him in his market. They had bought everything that he would never touch. It was not so much that he would have to refocus his attention since it was already where it should have been. If you had described Mike’s ideal rental, these guys were buying the antithesis of this. They were buying the replacement house; they think that in the future somebody is going to build a 3500 square foot house in Palmdale and Lancaster, and we’re going to buy it for less than cost. One of the pieces of criteria that they use in their paperwork is they use the value at the peak of the market and say this is what it is. They are thinking it’s a deal because it is less than cost replacement, but they are not exactly buying the 1400 square foot single-story house. Whether it is 3500 or 2500 square feet, it is just nuts.
When regarding Mike creating his own activity, when he is relying on the MLS it is a problem. You have to fish for multiple pawns, and as long as it is being dominated by the big companies, it is a waste of time. Bruce said their loan business started to reflect things like this. They are still getting short sales because they fall out, but the REO is not getting replaced. Bruce talked to the biggest REO agents, who literally were saying they were not even sure they were going to have the doors open three months from now. They had been told that they were just not going to get it. The new REOs they are mostly seeing are the ones that have taken long evictions. These were not new assignments. Somebody who had 500 listings has five now. This is apparently not in the future. There may be another way to look at the companies. For the things that Mike bought, he does not want to hold it. He wants to exit as soon as possible. Those companies are stimulating demand and increasing property values, and he could care less if they don’t know what they’re doing. He is excited that they are coming in and sucking everything up since he wants to sell his things to them. Once it gets to the magic number, he’s out.
Bruce just wrote a newsletter about price increases that have to be inevitable. You cannot have a month’s supply of inventory with all the other factors going on and without this kicking off. One of the things they have done as sellers since they are usually in escrow with 25 properties is they put them in the MLS. The appraisal is no longer going to determine sale price, but rather it will determine your loan. If you agree to a sale price, then be prepared to bring in the rest, especially when there are 30 buyers lined up to buy. This is a statement of market value, not some appraiser who is under the gun. It is not the appraiser; it is the bank lending the money and making the rules. Their definition of market value is three closed sales. This eliminates any possibility of upside. They have literally had people bring in $25,000 on top of it, and that is a comp. They did not overpay on it. The second it closes, that is the value of the whole neighborhood. Tony said he can rent the house out and make it happen, and this is why he uses two exit strategies. He has to be able to rent it out. He had this on an FHA loan. He said he did not care; either you pony up or move.
One of the things they are doing is when they have people do applications for buying, they take a look at people who have reserved cash since they know this is what is going to happen. Tony said he does not find anything wrong with the hedge funds. If someone can write a big enough check then they can have whatever he has. The one caution he tries to look at is when you look at what they are forecasting for rents, it is right out of the Section 8 website. They are forecasting the highest allowable rent for properties, which out in his area is not reality. If you have a senior citizen sticking his money in one of these hedge funds thinking he is going to get a 20% return on his money, he is going to losing the same thing that made him his money. If the mutual fund salesman guys were out there selling these hedge funds to knowledgeable people and get into something like this, then that is their fault.
Bruce said one problem he does have is if they end up getting special access to inventory that they do not get. He does not want somebody saying they are only going to sell $100 million of notes, which FHA is actually about to do. They are about to sell a big pile of notes every quarter to a very few participants. If it hits the MLS and they want to compete with everybody else, that’s great. However, if they start being able to buy 2500 homes here, $100 million of notes, and it never passes through, then how is this good for employment. These REO agents had staff they had to let go, and it’s just crazy. One of the speakers said he received an email about three weeks ago that said they had 162 vacant houses they were trying to rent out, and the rent prices were top dollar plus about 15%. Maybe we could buy the houses from them eventually. He was sweating five vacants, so it was a little comforting seeing 62 vacants. Hopefully they won’t stub their toes too soon and it instead takes them a year or two to figure things out.
Bruce wondered if you were a land developer and you all of a sudden had a problem with how many of the hedge funds that had $100 million to $1 billion. They all said it would only be about 2-3 years, and that was 6-8 months ago. This is way too early, and they are going to have to change that dynamic. This will change their yield, and we may have some pretty strong price increases. A lot of it will come down to what they are selling to their investors, and a lot of the people who are selling it will be long gone 2-3 years from now and living a different life. They will most likely find a new toy to play with. We might as well create a hedge fund and buy everything from them. They will probably find the single-family needs some more expertise and is not the high-flyer they have advertised it to be. It is kind of a challenging time for people because if they just got in the business in the last four or five years, they do not really have the skill set to talk to people directly. This is a very different skill set.
The Norris Group would like to thank its Gold Sponsors for supporting I Survived Real Estate: Adrenaline Athletics, Coldwell Banker Pioneer Real Estate, Elite Auctions, FIBI, Inland Empire Investors Forum, Inland Valley Association of Realtors, Investor Experts Incorporated, Keller Williams of Corona, Keystone CPA, Las Brisas Escrow, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Personal Real Estate Magazine, Realty 411 Magazine, Rick and LeAnne Rossiter, Southwest Riverside County Board of Realtors, Starz Photography, uDirect IRA, Wilson Investment Properties, Tony Alvarez, Westin South Coast Plaza. See isurvivedrealestate.com for more on the event and all of the I Survived Real Estate sponsors.