Bruce Norris is joined this week by Craig Hill of The Norris Group. Craig is the private money underwriter for the Norris Group’s hard money lending division which focuses on loans to real estate investors doing fix and flips, buy and hold rentals, and new construction projects. (Note: In 2018, The Norris Group expanded their hard money lending division to Florida and can help with 1031 exchange transactions).
Bruce first met Craig in the early 90s at the time when he was buying and selling properties. At the time, the hard money loan business was basically doing loans to owner-occupants almost exclusively. Everything was about somebody having a situation or a problem they were trying to solve, and that is what hard money was. Now most of the hard money is investor-driven, so it has done a complete reversal. Bruce remembered for the first two deals he attempted to fund, the person who owned the company who Craig was with at the time was a little hesitant because it was not an owner-occupant. Now that they had a history of so many years of doing it, the payment history of a non-owner occupant or investor is amazingly great.
At the Norris Group they do not even do owner occupants. The concept back in the day was you were buying a house that could have been next-door to a house where there was an owner-occupant. If, for example, the house was worth $100,000, then the borrower would have been lent $60-$65,000. Bruce came to Craig with a couple deals that he bought at around $40,000, and it was hard at the time that the house was worth as much as the house right next door that was identical. Whatever you paid for it was what it was worth.
The private money loan business for a long time was really just setting up a sale on the property on the other side. Whoever was buying a property for a resale was buying it below market and putting work into it only with the intention of reselling it since this was the financing available. This was really all that made sense, even in the first 10-15 years at The Norris Group, because there was not a way for somebody to hold the property and have it make sense using hard money.
Our interest rates have been 12 ½% almost the entire time, varying only about ½%. Bruce wondered what happened to all the interest rates that are underlying the hard money loan business since this has been a pretty consistent number, whether the mortgage rates were 8% or 3%. Craig said it seems like it certainly does not adjust conventional mortgages. When people first call Craig and talk about the rates on the borrower side, if they are thinking of investing in trust deeds, then the question would be who would pay 12 ½% interest. They are thinking it must be somebody who has a problem.
There are actually two people who lend money and have different views. There is the one Bruce mentioned who thinks somebody is paying 12 ½% and must be a huge risk. Then there are people who think they can always get a higher yield somewhere. It really depends on who you are talking to in that regards. Bruce said the borrower is usually somebody who has lots of experience and just needs to have money to do yet another deal that he already knows is going to contain that expense very easily inside of the resale numbers. Craig said he cannot put a percentage on it, but he said out of all their deals at least 80+ percent are repetitive within the company. If you were to go outside the first-time people, even though they may not be repetitive with The Norris Group, they may have done the business in prior years. Therefore, it is very unlikely that they would get a client where this is their first deal.
Everybody has a first deal; and especially in a market like this, three years ago you did find a lot of people that were first-time buyers. At that time it was very easy to buy property, although it was a little harder to sell. With appraisals coming in from everywhere, it was a little harder on the sales side. Right now with the way the market is picking up, you really do not have a whole lot of first-time people buying a lot of houses. Even the experienced clients have to change their methods and take on strategies that they were not using three years ago.
The Norris Group is very busy right now, despite there not being much for sale. Their hard money loan business will be setting a record this month. They are very fortunate being busy. The people who buys houses to sell them have been the traditional hard money. Now, they have a program that allows people to buy houses that carries the loan out 8 years and gives them a lower interest rate. This is something that at today’s prices cash flows. There are a lot of people buying rentals. It is such a good combination because if the people have heard Bruce for years, they know his specialty is really tracking the market. It scares Craig in the loan business when they do not know exactly or it does not look too positive. However, when Bruce and the Norris Group say it looks like they are going to have some good appreciation, it is really a positive thing since it feeds into the loan business. They really have a lot of clients who listen to what they say, and there are a lot of people buying and holding properties just because it appears to make so much sense right now.
Bruce asked when the 8-year loan program was started. Craig said it was about 3 years ago. The conventional world had basically shut the pipeline off to investors, and it was something that just came out of necessity. There really was not a product for people who wanted to keep loans; and at the Norris Group there were a lot of people who wanted to keep loans. They were able to develop a program that not only worked for the people who were buying and holding the properties, but it was also attractive enough to investors. They were able to attract money, and you don’t have a loan business without both. It has been a good match between the two as well as being extremely successful. Now it accounts for about 60-70% of the business that is coming in.
Bruce asked if the source of the deals has changed over the last year. Craig said it has. A year ago when you received applications or deals, you would see REO on almost every application. This means it would be a bank-owned property. Occasionally you might see short sales, and usually people who were buying these were very frustrated because it seemed to be very difficult to close a short sale in a timely manner, if at all. Very rarely you would see something being purchased off a private party. Today, you can almost reverse that to where there is an awful lot of private party deals being purchased as well as a good number of short sales. It appears that the process with the short sales is a little easier to navigate since they are closing a lot of short sales. You still have a decent percentage that is REOs.
Within the REOs, the majority are probably still relationship-driven. They are not just your REO that you are driving down you street and there is a bank-owned house that is being bid on by 100 people. It is probably more of a scenario with the REOs where that house has fallen out of escrow five times. One of the clients may receive a call that the house needs to close and are asked what price they can do it at and quickly.
Craig sees deals happening up and down the coast of Southern California. Rick Solis is doing the appraising of these properties, so Bruce wondered if there is any sense that there is a fair amount of price progression over the last year. Craig said absolutely. Talking to Rick, it is hard to put a percentage on it. However, even with him, at 2% a month it is one of those times where it is almost hard to appraise it for what it is going to sell. You are dealing with data that happened in the past, and the future is definitely going to be higher than that. This is happening almost across the board.
In the buy/sell business, one of the things they end up with is they get paid off and things sell. Bruce wondered if there is an increase in payoffs or a speed change in the length people are holding. Craig said the average length of time is still 3-6 months, but there are a few that are paying off more quickly. Craig usually does not monitor all the payoffs since he usually does not see them. The ones he does see still seem to go the 3-6 months since by the time you do the fix-up, the investor would get it into escrow almost immediately. The time is in closing the loan. You have a process between the fix-up and the closing of the loan where you get at least three months in except for rare cases.
Bruce said one of the things he teaches people to do is the longer it takes to do a project, the more profitable it becomes. One of his clients who just went through a boot camp is completely rehabbing a fire damaged home. This takes a lot of experience, but it also takes time to do. Each month he owns this property, it clicks another $1,000 in his favor. This is one of the good times to be a buy and flip person because a lot of times the monthly payment is prohibitive, and this is extra incentive to get everything done as quickly as possible. However, with the way the market is now, any monthly payment you make is absorbed in the appreciation. Craig said he has also heard if something falls out of escrow from a buyer and flipper, when they put it back in escrow they put it in for more.
Right now we are in what is called Quadrant 4 pricing. This is a very comforting thing for people who are in the business because the price can change as well as the rehab requirements. The buyer who is looking to buy something and occupy it is not in the mindset they were in back in 2009 where everything needed to be perfect or they would not touch it. In 2013, the mindset will be surprise that there is actually a house for sale. Two to three years ago you probably had all the houses on the market needing to look like model homes and the buyers needed to feel like they controlled everything. Now, it certainly does not have to look like a model home as long as it is fixed up nice. If people doing the repair estimates make some errors, they usually can get bailed out in time without too much of a problem.
Craig said when they analyze deals; it is pretty hard to make a mistake. If somebody is making that big of a mistake now, it is even easier to catch. Craig spoke with Greg Norris, who works on the buying for the company, about a deal. It was a deal in Riverside they looked at where they thought the numbers were a little tight. However, with the way all the numbers were going the borrower almost insisted on moving forward. Craig was on the fence about it, but this was exactly what Bruce was describing earlier. If the buyer does a really good fix-up on the house, even if it takes six months to get out of it, he will probably benefit because of the direction of the market.
Bruce talked about loans for the process of constructing new homes. In the construction program for reselling and holding, Craig said to cover the difference of the two, the ones that will be for flipping will be like the rehab loans and therefore shorter term. These will pay off when they resell the property. For the people who carry the rentals, they will start out like a construction loan or typical rehab loan. When it is finished, they will do the typical 8-year loan on it so they can keep it as a rental. Bruce also asked what the change in the interest rate will be and when it will turn into a long-term loan. Craig said it will start at 12.9%, and then it will turn into the 9.9% for eight years. The construction loan is 12.9% as opposed to 12 ½% for the buy/sell on the REOs or short sales.
Bruce mentioned a big changed this year in points. One of the reasons they are so busy at The Norris Group is they produce the points, which has always been at 3 ½. However, they felt the need to be a little more competitive and went down to 2 ½%, which has been received extremely well. They also have the business to back this up. Some of this business is coming from people who would have already done more than 10 loans. There are also additional incentives. If somebody buys a larger quantity of deals over a year, then they may drop the point level down to 2 points. Typically their loan-to-value ranges from 60-65%, most being at 65% because of the direction of the market. People that would fall into the category where they are high-volume buyers will probably go 65-70%. The property always dictates something on this, so we are definitely talking about very standard conforming properties for the neighborhood. If something is non-conforming, for example condos, the property will have some bearing on the loan-to-value. However, if it is your standard rental house it will be close to 70% for those clients.
To clarify, Bruce asked if a standard rental house has a perfect lawn and is brand new. Craig said this is one of the things for people on the investment side have been used to seeing. They are used to seeing houses that will be bought and resold. Most of the clients do make them look close to model houses. What generally happens when they are dealing with the rental is there are two things involved. One is they are probably going to appraise it as if it is only in average plus condition. You won’t get the extra $10 grand on the appraisal because it will not be in good condition, but rather average plus. It is in livable condition, and most of the properties are coming from an owner-occupant being there, whether they bought from someone doing a short sale or is a renter staying in the property.
The condition is still very good, but it is not done over the top. A lot of times the yard may not be as manicured as it would be if you were going to sell it. Overall, the condition is very nice, just not all the way up to the top as if somebody was competing to sell the house. Partially, one reason you don’t do this is because if you do it right now and you keep it for 7-8 years before you sell it, you are probably going to have to do a lot more work.
70% is the most aggressive we have been, but there is a reason for this. The market is changing rapidly. When we are at 70% after a six-month holding period, it is very likely that value would have changed by 10%. This is one of the benefits of the research being done. At the Norris Group they are always trying to be on the front of what is happening with the market. Right now when you have a deal at 68-69% and show it to investors, it is almost not in the conversation anymore. Conversely, when they were first coming out of the crash and prices at a third of what they were at even the top end, they were only doing about 58-59%. There were a lot more questions and concerns at that level just because of the direction of the markets. When the news is positive, people are a lot more comfortable about making the loans.
Around $45 million of loans are being serviced, none of which are in the process of foreclosure. There are a couple that are teetering, but usually the customer comes through with making payments before it gets to that level. It could also be that the loan-to-value is so reasonable that it would get sold at a trustee sale.
Regarding construction and the process of fund control, Bruce asked what role this plays and why it is necessary. Craig said there have been new regulations where when you do a construction loan, it has to be a third-party. This is something that will be necessary on every construction loan and company. There are two parts of it, the first being you doing a loan and it being very repetitive of what we already do. The second part is going to be the fund control. Some of the differences are, for one, before The Norris Group does a loan on a property that they are going to do construction on, they are first going to own the land free and clear. They are going to have plans, and then they are going to have permits. This is where they are at in the process.
The Norris Group will do a loan for 60% of the after-built value, where the process will start. You then have a fund-control company that comes in to play. The Norris Group would take out things like fees and then forward an amount to the fund-control company, which is the remaining dollars. The loan has to be fully funded now according to the rules; so whatever comes after the points and fees gets sent to a fund-control. The fund-control is basically around 1% of the amount; so if they get $240,000 then $2400 is going to be the fee. Realistically for this amount they do a lot. They will work with the person and try to customize it a little bit. They may either release funds twice a month or once a month depending on the contractor’s preference. They will have a complete list of everything that needs to be done, and they will actually go out to the property to take pictures. They will then send a packet and advise The Norris Group how much they should release. They will then release it.
They are really an investor’s best friend because this really allows a third-party to say they cannot pay the contractor yet since he is not done. They are not going to sign off for it, and that money is not coming out until it is done and the supplier is paid. You really have to have a check and balance system in place. They are going to make sure suppliers are paid, permits are given, sign-offs are taken care of, and everything is done. When Aaron and Craig met with the people, the amount of work they do on each loan is pretty amazing. They were glad they did not have to do it and could just be involved in the process, but really have somebody who works specifically with this. The construction loan fees start at 2 ½ points, and there will be another point for the company that does the fund control.
The Norris Group also has special pricing on loans that are $400,000 and above. Anything over $400,000 is going to be a flat $10,000, which is 2 ½ points. Even at up to $500,000 it stays at $10,000, a flat fee. Anything over this is reduced to 2 points.
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