Bruce Norris is joined this week by Rick Solis. Rick is a fellow investor, property manager, property finder, and a good teacher.
Bruce Norris is joined again this week by Rick Solis. Rick is a fellow investor, property manager, property finder, and a good teacher.
One of the things Bruce remembers asking Rick was in regards to how he started reading books that were way early for most people, even before most people were thinking about financial things. Bruce asked what he read and how he got started thinking this way. Rick said his uncle was an entrepreneur, so he was always reading the books an investing. This was what attracted Rick to it since he was the only person in his life who went that direction. He gave a book on how to think and grow rich, a book on which he actually did a report. He had to speak in front of the class, and it was hard to explain it. It was hard for him to get through the book at the time, and there was not a kid in the classroom who had any interest in what he was saying, not even the teacher.
Rick’s uncle is now down in San Diego as a property buyer. He usually gets things a little below market, not a lot, but he is the buy it and hold it forever type of investor. He has a lot of apartments as well. Usually, he will buy a house and 1031 exchange this, then 5-10 years later get a four-plex, then turn this into a ten unit. He also is a big proponent of cash out refis. When interest rates were low and he could improve the cash flow by refi nancing, he would do this. He has done really well in San Diego, which is probably one of the most expensive markets in the United States. He got his start in 1970 when prices were on par with the country, so it was good timing.
Bruce asked Rick when he stepped up and said he would buy a property. Rick said he was taking classes at Mount Sac when he was 17 after he had dropped out of high school. He saw how well his uncle had done, living in a penthouse condo right on the beach with an ocean view. He decided he wanted to do this too and thought he could get it way easier and faster. He bought his first house after shopping for a year when he was 19, and he closed escrow one week after his 20th birthday. He did not know what he was going to do with the property originally, but he ended up living in it. It was a four-bedroom home in Montclair, so he ended up renting out all the bedrooms. At the time he was going to school and delivering papers for the LA Times, so he was making $1,000 a month. At the same time, his payment was $1,000 a month, so he had to figure out how to get it afloat. He ended up renting out each bedroom for $250 a month.
Bruce asked Rick how he can drop out of high school and go to college. He said he took a test his junior year of high school where, if you passed, you got a high school equivalency. He took this, and his senior year he went to Mount Sac. Back then anybody could go and there were no qualifications. To further his education in real estate, Rick watched Dave Deldado on television. On one of his shows he had a guest from one of Rick’s favorite television shows called That’s Incredible. Rick bought this seminar in 1986 or 1987 before buying his first house in 1988. He accomplished this, got some equity built up the next year, and then the 90s hit. He used all the tactics he had learned from his seminar and started buying a lot of properties in San Bernardino, all no money down in the worst neighborhoods. They were all welfare tenants who were paid twice a month, so he would collect half the rent the first of the month and half on the 15th. There was no qualifying required; if you had the money he let you move into the property. It was a debacle.
He was a twenty-year-old landlord, and these were professional tenants who knew how to get one over on him. At the peak he had about a dozen properties in San Bernardino that he bought all for no money down. He used his house in Montclair as the down payment for the first house in San Bernardino, then wrote a second as the down payment on the next San Bernardino property. He then put a second on the next San Bernardino property to buy the following, and it was a huge domino. They fell apart unbelievably on him by 1992 when he got into the teeth of a downturn. He ended up selling a few and giving some away. He deeded his worst one back to the tenant because he was afraid that the foreclosure would go on his credit. The tenant was a crackhead at the time but was so happy to get her property since she had not paid her rent in 3-4 months.
He ended up losing another property in foreclosure. For the original house in Montclair, he did a rent-to-own with a tenant and nursed it all the way through the process. He barely broke even on it, and he went all the way through the 90s watching it drop from $150 down to $110. He ended up selling a property and made a nice chunk of money. For the tenant, it was life-changing since he walked out with $50-$60 grand. They had to refi to do some repairs right before they sold it, but they each walked out with about $60. On another property, he did a 1031 and ended up losing the whole thing. However, he was fine with it since this was more money than he had ever had.
This was a lot of education Rick got early on in his life. He is a lot more conservative now and does not take unusual risks. He got started in the appraisal business on about his second or third house when he realized he did not know how to value them and did not know what he was buying. He was only concerned with term and did not care as long as his payment matched his rent. At the time he learned however that whatever much he owed is what he would be worth. It did not matter if you paid $1 million for ten houses, you would be worth $1 million eventually. About the third to fourth deal in he realized he did not know what he was doing. His mom was a loan processor at the time and told him to become an appraiser. He started taking some classes at community college to prepare. In order to be an appraiser back then, all you needed was a clipboard and a business card. You did not need a license or any kind of experience.
He got a job for an appraiser in 1990. He bought his first house in 1988 and obtained them over two years before starting as an appraiser. The appraisal world changed a lot in the downturn we had back in 1988 with the emergence of the management companies. Bruce asked Rick if he knew of other management companies and how this affected their livelihood. Rick had a different path for who he was appraising, but if they are just doing normal appraisals it must have really messed up their income. Most of the appraisers Rick knew got started about the same time as him in the late 80s and early 90s.
Most of the appraisers he knew have all moved on except for two. The appraisal fees got cut in half. You used to be able to do an appraisal in four hours, then with the additional requirements for the lenders it turned into six hours. You are spending 50% more time to be paid 50% of what you used to get paid. Most of them left. Of the two he knows who are still doing it, one is a VA appraiser, which is pretty easy money. It is hard to get on with them, but if you can it is pretty solid. There is no appraisal management company involved in this, but he still gets the full fee. The other one works for a credit union and other companies who do not require appraisal management. Most of them are gone, and it is kind of a shrinking industry. Bruce asked if this is because of automation or because it is not profitable, which Rick said is the latter.
In his twenties worked as an appraiser and made $75 an hour, which was a lot in 1990. You could work as many hours as you want. There is always as much work as you want, so he would work 80 hour weeks for a decade. Now you make about half of that and there are a lot more problems that go along with it. Even $40 is still a good wage, but that is $40 self-employed. This means you are paying your own retirement account and taxes, and there are no days off or sick pay. A few years back he broke his leg and still had to work. He was measuring houses while on crutches because there were no benefits to go with it.
Bruce asked about concerning changes that have been implemented. Rick said a lot of the loan officers and appraisers are concerned, especially since this is their only livelihood. For Rick, appraising is a side thing he does. However, for those counting on this for their living they are concerned. Fannie Mae and Freddie Mac have been automating their appraisals. A year and a half ago, they would send two copies of the appraisals, one to the lender and one in a digital form that gets uploaded to Fannie Mae and Freddie Mac. In that digital form they are compiling a huge database of all the properties in the country. You have your subject property you are appraising, and then you have information about all the comps in that report. They are taking out all the data on the comparables; so with each report you have information going up on seven different properties.
As more and more appraisers start putting things into the database, they got to the point where they have so much data that they can automatically look at your appraisal and see one appraisal that says the comp is a 1500 square foot, 3 bedrooms, 2 bathroom home in good condition. However, they have 50-100 other appraisers who have uploaded the information and shown the comp to really be way larger and with other amenities that were not put into the appraisal. There are a lot of appraisers who fudge things a lot, and these people will be squashed. For this reason the GSEs are going to review every single appraisal.
The biggest thing where appraisers fudge things is if you have a house in average condition and this is your subject property. You have comps that have been completely remodeled and in good condition. However, to hit the number some appraisers will use the good condition comps and write it down as being similar to the subject property, which is average even though it is not the same thing. This is where Fannie Mae and Freddie Mac are trying to catch them. They are trying to find out if there are any instances where the data they are using is being fudged in order to hit the number that makes the deal work. They are concerned about this, although this is not an issue for him since he checks these things thoroughly.
What concerns him is that they are now going to go and do their own automated appraisals and pull up a long list of comps, possibly up to 50. If you use six of these in your appraisal, they will send you a request to explain why you chose those six comps versus the other 50. The lender will have to sign off on these agreeing with you that these were the best. Rick will spend an hour on each report narrowing down the best comps. A lot of people grab the first six and only spend a minute or two on each. Fannie Mae does not want this anymore and instead wants you to choose the best ones. They will have this list, and you will have to explain why you did not use the others. With bank appraisals now taking six hours, this could add up to eight hours. This is what concerns him the most.
Bruce said if Fannie Mae looks at your six comps and you did not use the ones they would prefer, he wondered if there is a box they would check saying you will not get any more work. Rick said they are supposed to have a blacklist. If they see you continually making that mistake, you are gone. Rick wonders how they would know this, especially if your house is a remodeled home. There may be 3 or 4 sales on the next street over that are the same model that were not fixed, so how would they know. The appraisers would not have seen it either since you do not go inside the comps. You can pull up MLS and read all the information, which have lots of pictures now.
One of the things that happens in Bruce’s industry is a house gets sold. The appraisal will come in and $15 grand is missing. The appraisal comes in at $285 on a $300 grand home. Bruce asked what the law is that helps combat this. Rick said the way he approaches it is that it really comes down to common sense. If you listed it at $300 grand, especially in an active market with active inventory and prices going up, you have several offers that came in a short time frame. If you list it for $300 grand and a week later you have ten offers at $300 grand, these would literally be ten comps if they could be. Lenders do not really consider this, and neither do underwriters. These are people who do not buy, fix, or sell houses and are not aware of closed sales that were done three months ago were on the market six months prior. These are not as reliable in indicating value as the ten offers.
Rick said he would look at the offers, add an addendum that they have all these offers and spend a lot of time searching the pending sales. He would then call the agents to see when they would close. Usually, he was successful about half the time and could get it bumped back up to $300 grand. Bruce asked about Use Pap and if there is a problem when someone gets in trouble with this to where it will affect their bonds. Rick said Use Pap is the appraisal guidelines. It is like the task code in that it is very difficult to read and most people do not know about it, but it is the guidelines appraisers are supposed to follow. If you violate these guidelines and someone puts in a complaint, they are supposed to reference the areas of Use Pap that you violated. If the state investigates you and it is found that you violated them, you have to take continued education and you could lose your license or be suspended. Usually you have to pay a fine, and once you do all that, it is very difficult to get insurance since there will be a question on the form asking if you have been investigated or had any issues with the state licensing board. If you cannot get the insurance, then you really cannot do appraisals for banks or any federal institutions.
Bruce asked Rick his sense of 2014, where values went, and if it varied depending on the county. Rick said it did vary. Most of his work is in the Inland Empire, so his view on this is skewed. In the Inland Empire, he noticed it was taking longer to sell, and inventory levels were gradually increasing while prices were dropping, some areas a half percent a month. He sold a lot of his own houses, some in March and April that went really well. He sold them fast and got top dollar for them. A few months later they were a little harder to sell and a little less on the price. He sold one in September, and he got 5-6% less than he did for the first batch they were selling in March and April. All their inventory was about the same with 200 square feet of each other and 3-4 mile radius. For Rick, staring in March they were getting $165, then he was getting $155 in September for the same house. The most important thing to him is listings; so when he is selling things he is keeping an eye on the market. If that area is selling 4-5 houses a month and there are ten houses on the market while he has two months of inventory, then he is not as concerned as if he sees there are twenty houses on the market and he has four months of inventory. He has noticed in his area that the listings have been gradually declining, which is better than the first half of last year when they were increasing.
Bruce asked if the mix of inventory is important as far as the softness of the price. Rick said he noticed when he was selling his properties, he did not have to compete with any REOs. There were still some short sales, but a lot were occupants who bought in 2008-2010 and were reselling. There were not many investors who were buying, fixing, and reselling. When you are an appraiser where the area has 50% of the comps being REOs, this is harder. Prices are dropping, and you will have trouble getting your house sold as well as have less money than you thought. You could have multiple offers on your house, but there is only a certain percentage of changes. If your house is more than 15% higher than the rest of the comps, this will not work. They will want at least a couple sale comparables that are similar to yours that were sold at your price level.
This was a problem that occurred in 2010. If you are selling yours for $150 and everybody else is at $110 with torn up houses, you will not get that to appraise. Bruce also asked about hedge fund influence in the area in Victorville. Rick said they did not have this issue up there and they seemed to like more of the Riverside and Corona areas. Bruce asked if this drove prices there, which Rick said did not happen. Prices did increase more, however, where the hedge fund people went.