Bruce Norris is joined again this week by Craig Hill. Craig is the underwriter for the Norris Group’s hard money loan programs. He has been with the Norris Group since they opened, and he has been in the hard money loan business for over twenty years.
Craig probably gets a call once in a while where he quotes the fees, and the person is surprised at how expensive it is. Bruce asked Craig what it tells him about who is on the other side of the phone call. Craig said normally it is going to be somebody who has not been doing the business. Hard money is going to be more expensive than bank financing, but on the other hand it is creating a business opportunity for people who either don’t have the cash to do it on their own. It also allows people who do have the cash to do it on their own and to leverage much more and are really able to expand their business. They really drive around the other people who look to borrow money on their homes, and that is the range they think is available. This is why it is a shock to them.
Bruce asked when they make a phone call, do they come back around and say ok. Craig said they sometimes do, but that is usually a call from somebody who is very new and has not even found a property yet. Luckily, the majority of the people who would call in are pretty familiar with the hard money and most of the time with the Norris Group in general. It is not a matter of the cost being too much. To keep a lot of the A type clients, the Norris Group has adjusted their fees as of the first of the year. Both Bruce and Craig know that the business has exploded over the last six months.
Bruce asked about the changes that were made. Craig said they used to be 3 ½ points on the fees, and now they have gone down to 2 ½ points. They are at 2 points for people who can do a fair amount of volume. Craig likes to think they are always number 1 on people’s lists to use in terms of service. Now with the clients who are experienced, being down at 2 points puts them very competitive on the cost. The combination of these two things has literally led to an explosion in the private money loan business.
Bruce asked if the loan to value has adjusted much over the past year for their hard money programs . Craig said the loan-to-value over the last couple of years may have been around 60%. It has consistently worked its way up to 65%, and for some of the better clients they are close to the 70% mark. All of this is based on clients having a certain amount of cash in, probably a minimum of 10% of their own cash in the deal. One reason this is helping them is because in some instances, it is a little competitive in some circles and is allowing them to pay a little more for the properties. They are going for the loan-to-value, so it allows them to get a few more deals in a market that is so good like this on the selling side. It helps them to make a lot more profit on more deals.
Up until a few years ago, the buy/sell was the hard money loan business as far as it was connected to investors. Bruce asked what the length of time is normally for them to be able to comfortably fund the loans. Craig said they are normally able to fund the deals in about ten working days, which is typical. Sometimes there is a range of 10-15. A lot of it depends on how quickly the clients get all the information they need, especially if it is a new client. It is very important to get all the documents as quickly as possible, but the typical documents are going to be escrow and title, which they will need from all clients. If it is a new borrower and they buy a trust or some other thing, it is important to have all the ducks in a row. Once they order and receive the appraisal back, they can pretty much get the typing documents and move forward from there.
Bruce asked what some of the entities are in which investors buy the properties. Craig said investors are going to buy in land trusts, corporations, LLCs, and some people buy as individuals. Craig said they are okay with all of these, although they look at the individual first. They just have to make sure that it is a legal entity, and that is pretty much done through the title insurance process. As long as it is a legal entity and they have looked at the actual person who is going to be doing the deal, then they are good with the variety of investing.
Bruce said a lot of times they have the scenario where somebody who is finding a property is really not the money behind the deal, and he asked how they handle this. Craig said they really want the person to have the liquidity or the strength, so they want to make sure that the person who has the ability to solve the problem is on the loan. When they pre-approve somebody, they are going to make sure that person has the liquidity to do it themselves. If not, they are probably going to request that another person be on the loan also. It is not that uncommon for there to be two people involved. For a lot of people, one reason there are LLCs is because if somebody wants to put $200,000 into an LLC, thus allowing somebody they know who is active in real estate to buy and sell properties, then that would certainly work. Obviously that is a commitment from that person right there to put the money in the LLC. There are a lot of ways, but Craig said they are going to make sure if a situation comes up that they have the number of the person who can be responsible for the trust deed.
To get a yes answer from Craig on credit worthiness, Bruce wondered what he looks for with clients. Craig said for credit worthiness, they take a little bit more relaxed approach on the credit and they are really looking to make sure that the person does not have anything actively affecting how business can be done. For example, if somebody is currently in bankruptcy, foreclosure, tax liens, or judgments that might be attached to the property, then those are the types of things that would be more disqualifying. If they had some modifications in the past, there were a lot of people that fit that criteria. There were a lot of people five years ago who made the choice to let a few properties go and keep $3-$400,000 in the bank.
Craig knew of examples where they tried to make everything work and really lost everything. With credit, one of the things they look to see is if there is not anything adverse affecting it right now. They really want to see the liquidity, so if they want to pre-approve somebody for a $300,000 approval letter, they would probably want to see about $100,000 liquid in the bank. It does not mean that all that money is going to be involved in the transaction, but they want to make sure that there is more than enough liquidity to get through any situation that may be necessary.
Bruce asked how important it is to make payments on time for the borrower. Craig said it is critical because if they do not do it one time, then they have lost access to the service. They pride themselves on the track record they have, so it is emphasized all throughout when they are dealing with somebody new that they are not happy with simply doing a deal and then them not making payments. It should not be this and then three months later they say they paid them off. This is not how their motto is set up. Their investor clients on the money side are very used to getting monthly payments, so they really search for borrowers who are going to do that. If it becomes apparent that somebody is not going to do that, then that is not somebody with whom they will repeat a loan.
Bruce thinks there are a lot of people who are inexperienced and have the opinion that it is really easy to find cheaper money directly from people. They are going to turn into a money-finder themselves. Bruce asked how often this has not turned out so hot. Craig said this usually does not work real well for both sides. This can really have adverse effects on both sides, but there is that person who looks at the black and white cost of money or loans but do not add in all the time it takes to get the money. If they are really good and end up getting into a situation where they have this, the hand-holding and the entire process of gathering that money is almost like having another part-time job. Even though they might be saving a little bit in interest, in terms of value it does not really make sense. From the lender side, if they are not a broker then there is a limit to what they can charge. You have to make sure if you are lending to somebody who is a borrower, you don’t go over certain guidelines or it would be considered usury.
Bruce said they probably fund about 40 loans a month now. Bruce asked what percentage of these properties are actually seen by the trust deed investor at this point. Craig said since everything is so tentative, he guessed about 10% or less are seen by the investor and the other 90% are just repetitive where they rely on the system we have put together where we have a very experienced group of appraisers that does their job on the property. They know the qualifications, and it is a very simple process. What that says in terms of if somebody is borrowing money from them is that they will not have to worry. So many times Craig has gotten a call from an investor who he does not know, and he will say he has a deal but needs them to fund it by a certain day. They cannot do this, but inevitably it is one of two things.
For one, they may have had it as another company that did not perform. A lot of times they may have an uncle or a friend who was going to fund it, and for one reason or another they did not. You lose one good deal like that, and it can be a very expensive event that did not happen. This was why Bruce wanted to get the percentage from Craig since if 90% of the loans are funded by people who are so comfortable with the process, they do not have to see the property. This means they trust the process, and it is also very timely and depends on when the money can be funded. Anybody trying to work with a private party for the first time will go see the house, and there is a good chance they are not going to understand what they are seeing. They may get nervous about seeing the property vacant. If you are trying to do this, you probably don’t have a track record, and that is probably what makes it work. People who have had money with them for a long time would be very hard to discourage by telling them trust deeds are something that is scary.
Craig had a client who was told over a decade by their money manager that what they were doing scared them, so after a while Craig told the client to just keep doing what they were doing. He did not understand it any better, but he apparently knew that it was still working. Bruce and Craig were at a real estate club one time, and somebody was advertising for money. When Bruce talked with them about it, the person had never done a deal and had no experience. This is not somebody to whom money is going to be drawn. If it is, it is not going to have a happy ending the majority of the time because they really do not know what they are doing. There are a lot of different ways to buy, and some people are successful doing.
In the mind of the borrower, they understand the property and know they are reliable; so sometimes it is frustrating for the borrower because the person with the money just does not take their word for it. This can be frustrating when you are dealing with somebody because their intent is good and their experience is beyond question, but you cannot necessarily tell somebody you will do something because it is what you do. A lot of times they have an advantage because they are in the middle of it and are not telling them what the Norris Group does. It is more like being buffered and they can filter out loans in such a way to where when it does get to the investor, they are pretty comfortable with the process that has gone through.
Bruce said one of the things he feels is a really good level of protection for borrowers is not only the process where you protect them against themselves, but also seeing what is not something you want to be. Rick Solis is a good person to point out things like this. Craig said the combination of experience not only in-house with the Norris Group; but also when he is able to forward a deal to Rick, who has done several appraisals, and he can tell you not to make a certain decision and why. Craig thinks it is invaluable to a customer, and he does not know how many times he himself on the initial review or Rick once he gets into the numbers can talk somebody out of something that is not going to have a happy ending. They can get to this before somebody else gets involved in the process. Usually what happens is there is that initial thought they were going to be more helpful, then after a while they may come back and say they were glad they did not touch it.
Craig said it is funny how it works, but the most helpful you can be is talking somebody out of a bad deal. Usually after a while they come to realize this, and it is rewarding that you know you are able to do this. Bruce said because of what they have been able to figure out about when to do something and the timing of the market, he wondered if Craig had seen a transformation over the last couple years of where the deals are coming from originally. Craig said there has been a large transformation. They are still getting REOs, a few more than he thought, although looking deeper into it was probably with their top group of clients who have had relationships for the last four years. Craig does not think they are getting too many new clients who are out there making offers on REOs and are making deals that make sense. He just does not see a lot of this going on.
They are still getting a large amount of short sales, and the private party purchases are shooting through the roof. These are becoming more prominent because it is the time to be approaching private parties about selling their homes. That side of it was non-existent two years ago, and it certainly accounts for at least one third of the business if not more. Bruce also asked what percentage of the business is people who are buying and holding versus buying and flipping. Craig said it is pretty close to half and half. It might be a little bit more flavoring the flips just because it has turned into such a good market on the sales side. He feels like a lot of the experienced clients really are able to use this market to their advantage. If they are negotiating with an individual or private party; then even in fairness if you are looking at comps that are three months old and are going to sell your house you are buying from them three months in the future, there is definitely a little cushion.
A lot of people are taking advantage of the direction in the market and are doing flips. With a lot of the education, there are certainly a lot of people who are buying and holding. One of things they are starting to see on the buy and hold for the first time, a program they have had for 4+ years, is people are starting to buy nicer homes. It used to be everybody who was buying those were more interested that the properties were cash flowing. People may be buying in San Bernardino instead of in Corona. People are okay having a little negative because they are rolling the dice a little bit now, but two years from now whatever negative they may have put in on the house will be recaptured when they sell the asset. This is kind of a replay for most of them, and that is the nice part. When you refer to rolling the dice, it is probably a very calculated investment that they looked at and said this has happened in years past. With the properties, one may have sold for twice as much, and the rolling dice is very well calculated.
Bruce asked if the size of the deals people are buying has grown over the last year. Craig says is has, especially for the hold programs. They were doing a lot of deals in the $50-$70,000 range, but now this has bumped up to where most of the rentals average at least $100 if not a little bit more. In terms of the flips, those have probably gone to a point where most of the deals are between $200 and $400,000. There are even a few in the $500-$600,000 range. The value of the deals and size of the loans has definitely increased.
We are talking about being pretty active, not just in Riverside and San Bernardino counties, but now also LA and other places. Bruce asked how San Diego County was doing. Craig said they do still get a fair amount from San Diego, and Palm Springs seems to be a good buy and sell area for a lot of clients. They do some deals here and have a client that is building some very nice homes in Rancho Mirage.
Bruce said at the Norris Group they are working their way up to being a construction lender, and because of being so busy it is probably going to have some fits and starts. However, there is no doubt construction loans are going to be a part of their future. Craig said that essentially what they are looking for on the construction loans is that the people are going to own the land free and clear, and plans and permits will be put in place. They are going to do a loan of about 60% of the future value of the home or the constructed home. Next, they are going to turn the money over to a third-party fund control, who in turn will do the drive-bys and all the lien releases. So far, they got started and have done about 5 or 6, although due to the volume they had to back off. However, they are certainly looking at getting involved in a lot more projects and are looking forward to it. They success of their client base in finding buys has exploded, so it has been an amazing 6+ months of the year. Thanks to Craig’s relationship with the investor side, they have been able to fund everything. It has been a great start to a year.