Craig Hill with The Norris Group #364

Norris Bruce

Bruce Norris is an active investor, hard money lender, and real estate educator with over 30 years experience. Bruce has been involved in over 2,000 real estate transactions as a buyer, seller, builder and money partner.

Norris Bruce
January 10, 2014
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Bruce Norris is joined this week by Craig Hill. Craig is a hard money loan expert who has been with the Norris Group since the company began in 1996.

When people listen to the radio and hear about rates, they call the Norris Group for hard money rates. However, when they do this they are in for a little bit of a sticker shock. Bruce asked what the basic difference is between conventional lenders and what the Norris Group does. Craig said most of the people who call and have sticker shock are the ones who are generally homeowners or looking to be homeowners. They are looking to call them because they may have bad credit and cannot get a consumer loan at their bank or with a traditional mortgage company. They may have 30% to put down on a house and are calling trying to get a house in which they can live. Since this is not what the Norris Group does, there is a sense of sticker shock there because the rates are much higher than what they are hearing advertised on the radio.

One of the major differences is the Norris Group does not deal with homeowners who are going to be buying a house in which to live. The Norris Group deals with primarily investors who will buy and fix up houses to resell. In a lot of cases, with the way the market has been the last four years clients will buy houses to fix up and either rent out or hold until property values increase. Another difference is they tend to do loans, not “situations.” Most of the clients are repetitive full-time real estate investors. They still get a lot of homeowner occupant calls, but they also get a fair amount of calls from people who are calling because they have a one-time situation they are trying to fix. When Craig hears the terms, “I have this situations…” then he usually knows he cannot help them. They may be behind on a mortgage, on taxes, or have a situation they are trying to fix.

For the Norris Group, this has never been part of their business model. They prefer to deal with professionals who are doing this full-time. One of the problems with this situation is whenever liquidity happens, this situation gets taken care of, but then all the cushion in their life just disappeared with the additional payment of a hard money loan. Craig says there is not a solution, but rather it is more of a band-aid. You are helping in the immediate future, but you probably have not done much to help their overall situation. You are handling their crisis, but you are probably not helping them to really move forward. Since their beginnings they have really never done any situations.

Since their offices are so close, Bruce overhears a lot of Craig’s conversations. There are lot of times Craig is in the protection business and literally protecting somebody from themselves. A lot of times they are looking for an answer, and you are able to rationalize with them and ask them what their other scenarios are. To do some kind of loan and help somebody, you can look and see that they will be in the same shape or worse off in the future. A lot of times you try to get them to realize this fact and to go down a different path.

With the advent of the buy and flip shows on tv, there has been a genre of people that call the Norris Group for loans who found a deal in San Bernardino but live in Ohio. The deal they are told about was originally from an agent who may have been on commission. Bruce said when they look at the numbers they really don’t see any potential. There have even been others putting people in these deals and saying they figured it was just practice. Craig said the one scenario he tries to talk people out of is when they are the investor on a deal, they have to realize everybody in the deal is making money as soon they do the transaction except for them. This is everybody else’s motivation. Your motivation is that you will only be paid if the deal works out. Craig said there is more deals they turn down because of bad numbers, and it is probably quite a large percentage especially when you are dealing with new people. You are really trying to protect them from themselves.

Craig said even though they are involved in the transaction, they try to look at it from a point of view of the person buying the property. If it does not make sense for them to do it then they will not go through with it, even if it makes sense to do the loan. People will say they will put more money down or do something else, and at the Norris Group they always try to talk them out of it because you just cannot make those situations work. The numbers are the numbers, and the business they are in is pretty simple math. If the numbers don’t work, no amount of wanting it to work is going to make it happen if the numbers are not good.

Bruce thinks there is also a misconception about the ease of finding conventional investor funds where somebody who is not in the trenches on a daily basis comes into the fray, hears about their terms and interest rates of 12%, and they just heard a radio ad saying something about 4%. They go on to embark on this adventure of finding non-owner occupied funds only to come back and see there aren’t any. What is nice for the Norris Group is that so much of it is repetitive and customers have already been through a lot of what they do. Generally the people who are mistaken are the ones who have not really looked or had a deal in years past. You hear this all the time, and there may be some element of truth in it, but a lot of people are taught that if you find the deal money will come.

This is not necessarily true, especially since what happened in the ’07-’09 time period. There are several people who, if you do not have money of your own to put with an investor’s or company’s money, you will have a real hard time finding a deal that can be funded without any money. When somebody says money will come, it means tentative money will come. In one transaction, somebody said they were going to fund a private person directly, only to back out. This is not the kind of source you will need when trying to build a business model. What you need is a reliable source. Craig said they get a lot of calls from people who say that whatever they had working fell out, so now they have to close it in the next two days.

Usually the customer is not the one who offers this up, but rather it is the lender who asks. They usually come to find they were promised something for three weeks they realize is not going to happen. That is a very common situation they run into. Bruce asked Craig what some of the common misconceptions are for qualifying for hard money from the borrower side. Craig said the credit versus available cash scenario is a big thing. In the traditional world, if you have an 800 credit score and a limited amount of liquid funds, if you don’t have a lot of loans you could probably qualify for something. In the hard money world, they are the reverse of this. They are only going to look at credit in the sense that if somebody has an active bankruptcy or judgments, then this would prevent the Norris Group from doing a transaction. They are going to do a loan regardless of their credit if it is in the past. They are going to look at how much liquid cash they have.

For example, somebody with $200,000 in the bank and a 580 credit score would most likely qualify. On the other hand, somebody with an 800 credit score and $10 grand in the bank is somebody with whom the Norris Group will not work. When you are working with somebody in this business, there is always going to be a property or circumstance that comes up when you are fixing a house where you will have some unexpected expenses. You cannot be in the situation where your one $10,000 problem away from that 800 credit score turns into 580. Private money usually does not affect the credit score. You also have to consider the new person stepping into the fray for the first time who is thinking everything will work smoothly and they will sell it in a timely basis. All of a sudden payment 4, 5, and 6 comes up and they have a repair bill they did not anticipate.

Bruce said this is where you saved people a lot of grief. They may be frustrated in the beginning, but then they come to realize they were right and are glad they are not over their head. If they were over their head, they should have listened. This is one of the biggest criteria surprises because people are told over and over again from people. You go to a club, and somebody from the hard money world gets up and says there is no cash needed or credit requirements. All of a sudden they call the Norris Group and hear something different. The need for money is probably the biggest criteria. It not only involves money into the deal, but also money in reserves.

They have done this 18 years and funded a lot of loans. Whenever they have had somebody with problems, it is usually because they are out of reserves. Craig said that usually how he frames this cash scenario, which is usually a difficult thing to hear, he will tell them why he is talking to them the way he does. They are talking to him as a lender, so Craig then says to look at it in a different element. They are one of ten offers going in on a house, and you have five all-cash offers that have bank statements as well as three other hard money letters where someone has around $200 in reserves. They may have one that does not have anything to prove, then you have yourself.

The reason he won’t give them a letter is if they cannot show strong enough while they are making the offer, it is really going to limit their ability to make a deal. This creates a cycle of frustration. He always talks to them in the sense that if they are really serious about doing this and moving forward, you have to solve this cash-needed situation first and then go out and make offers. You are then giving yourself a much greater chance of success. Bruce said when you are new, you are really amped up to do your first deal. This is a make or break.

You also get people in the loan business who are like this. They don’t have a lot of really good clients to choose from, so almost any request for a loan looks like a good loan. However, when you have as many inquiries as the Norris Group does and really try to make loans that will be successful outcomes, they do not want it to not work for both sides. They do not want somebody locked in a loan where they have to chase the property. This has never been the Norris Group business model. He thinks some may look at hard money and see nothing wrong with the business model where they are making a loan strictly based on the fact they will do so much and take the property back if they have to do it.

Bruce has heard Craig talk about when he runs across a type of deal where instead of them finding a deal, the deal found them. Craig thinks this really fits because sometimes they will get a deal, and he can tell it’s a deal because it is a real difficult property. This goes back to where a lot of properties were REOs and are now being bought out as private properties and short sales. They say they have found something that has been on the MLS for 60 days where every other investor in the country has had a chance to look at it and passed on it at the value they bought it. This is a typical case where they are so anxious to buy something that they just want to make something work or take on a problem that they feel is manageable.

When Bruce spoke at a club recently, a gentleman came up to him and asked him if they do upper-end hard money loans. Bruce asked him to tell him about the transaction, and the guy said the house was worth around $2 million. It had been in the MLS for $1.2 for a few months, and it needed about $200 grand worth of work. The real problem was that it had a real serious black mold problem. Bruce told him this was his first flip. This was the kind of thing where someone might be inclined to borrow 100%. If you could loan them $1.4 million, there would be somebody thinking they could give it a shot. It is not their money, and this is the kind of situation where the property found him.

The Norris Group has had a great track record for a long time, and a lot of this came from Craig’s service level when he walked in the door. Bruce remembered years ago when he was listening to Craig talk. He thought he could probably answer every question with the same answer Craig gives, he just knows why it is the answer. He remembered being surprised a couple of times where they may have had an 8-unit condo project and the person received what seemed like a legitimate price deal. However, it was a product type they really did not want to do. There are few of these, and Bruce wondered why this was one of them. Craig said a lot of it has to do with possible assessments on the Homeowners Association. Any type of expense, when you are dealing with 100, would be spread out over 100 condos. When you are dealing with something as small as 8, then it is only spread over 8 times.

Sometimes the takeout financing world or funding for an occupant is not there. A lot of times in a small condo complex like that, most of the people want to rent them out. There is going to be a large percentage of non-owner occupants in there. Bruce asked if in the investor profile whether most of them were part-time or full-time investors. Craig said they are all almost exclusively full-time investors with the exception of a small handful who have other jobs who also have 5-15 rentals. These they may have already purchased or are trying to accumulate them.

Bruce asked what percentage buy in their personal name versus some kind of an entity. Craig said it is probably upwards of 90% that buy in an entity. A lot of times when they buy in the name it might be because they wrote the offer and happened to make a mistake and have to close it that way. After it closes they might transfer it into an LLC or land trust. Bruce also asked what percentage of the business usually has a finder and a money partner that is like a pair. Craig said it would be about 25% on both sides. There are a lot of business models set up this way where they do get deals flipped to them, especially when you are dealing with the long-term program. They are not as concerned about an immediate profit; so somebody could buy this, flip it to them, and they still get a good deal.

There are a lot of buyers out there with the business models where they do have a group of investors or people willing to put in down payments or repair money for them. Craig said this is probably around 25-33%. Craig said the majority of their clients and what really works best for them is the all-inclusive one man shop where they are doing the majority of it and finding the deals. They are funding it with their own money, anywhere from 10-20 a year. This is probably the most typical type of clients. It really helps because when the market changes, which especially happened about six months ago or more and all you heard was how difficult it was to buy property. When it is a one-man shop, most of those people are probably equipped to adapt if they need.

What happened was a lot of the people who were getting flip deals did not have the contacts with the REOs. Most of the apps that come in always say how they found the deals. They started going from REO to private party and were being bought off of them. The percentage drops when it turns into this. The skill level it is taking to buy right now is much higher than it was three years ago. Bruce said they typically have a repetitive borrower who every once in a while goes to them with a property in the area that they are not thrilled about. They are very cautious about where the property is, even if they have an experienced borrower with them. There are times they call back and tell them they have to pass.

A lot of times there are circumstances, whether it be location, where what happens is if the market should turn at all then nobody is going to want to buy this property. One of the things people who are getting into the business are thinking is they are going to end up with the worst house in the worst area because that would be all that would be discounted. Bruce said this has not been their experience in 18 years of hard money loan business. Craig said the thing that has shocked him the most is that is really absolutely not the case. The longer they have done the business, the realization has become even more that the skill is in buying the property. You are not buying the property when you are buying off a private party. Rather, you are buying the situation inside the house, and this does not mean the house has to be bad. It could mean somebody went through a divorce and has to sell it.

Check us out on our website at www.thenorrisgroup.com and be sure to tune in next week as Bruce continues his interview with Craig Hill.