Bruce Norris is joined this week by Craig Hill of the Norris Group. Craig is the gentleman you would be talking to if you were going to invest in trust deeds or borrowing hard money loans from the Norris Group for projects like fix and flips, new construction or rentals in California.
Bruce asked Craig how long he has been in hard money, which he said it has been about 28 years. He asked Craig when he first started who was the typical borrower. Craig said back then the typical borrower was somebody who was an owner-occupant, meaning they lived in their home and had a first trust deed. They were either behind on their first or had another issue to solve, and they were looking to borrow $10-$20,000 to help solve a problem. Most of the trust deeds at that time were an average of $20-$40,000 seconds. At that time prices were progressing pretty well, so Bruce wondered if it was common to do another hard money loan for that same person. Craig said unfortunately there were cases where somebody would borrow money, although he said personally he would do it twice. If they can’t solve it in two segments, then there is something inherently wrong. However, there was definitely always equity to be pulled.
Bruce said the entire business really dealt with somebody who had equity and lived in the house. When Bruce and Craig met, it was an interesting day for Bruce because he was busy buying lots of houses and ran out of money. He sat right in front of Craig, and for the first time he had an investor with whom he had to deal. It was not an easy pill to swallow for the one who owned the hard money loan business and was thinking of loaning to an investor instead of an occupant. Craig said it was a challenge that shocked him.
As an example, Bruce was buying $100,000 houses in Moreno Valley just to make the number simple for $40,000. Typically, a hard money company would lend $60-$70,000 on the house, but it was hard for Craig to get the owner to lend Bruce what he paid for the house at $40,000. It was a long process to get it started and the realization that the house had as much value as the other house. The only difference was the house with the owner-occupant had somebody who was not credit-worthy, and this one had somebody who was absolutely credit-worthy and somebody to whom you should be lending money. It is funny how this has flip-flopped over the years. The investor world did not have access to that money. Bruce remembered thinking how this was a great tool at the time because of auctions.
Craig did the appraisal for the first two hard money loans Bruce had, and he got more money than he paid for the property. When Craig told him how much he could borrow, Bruce asked him if it was a problem that he was loaning him more than he paid. However, because he sensed this he remembered writing a check for six months payments on each house. He had never talked to the business owner, but it would have dawned on him this was a different kind of person. This eventually changed what hard money was because until Craig and Bruce met, a house was worth what you paid for it. If somebody paid $40,000 for a house, then that is what it was worth. Even though the one next door is worth $100, that one was only worth $40. Over time they really changed the model.
Bruce said what was also interesting was Craig was now able to go to a HUD auction, and he gave Bruce a $1 million credit letter. This was great because he had bought a house for $40 grand, and they actually took a pen, crossed off the million, and said he now has $960. He could not believe it. What it also did for the business was instead of having to loan one loan to one troubled person, then two years later getting a refi, this was not the model anymore. When Bruce went to an auction, Craig could not wait until the next morning when the facts would come over on how many deals he bought. He would get half a dozen deals, and he did not have to worry about chasing money. Bruce said he never understood trying to work all the angles to where he has all the money directly. He got paid really well by finding the next deal, and he really did not want to think about where the $40 grand would originate. He accepted it as a cost of doing business. However, it was not so much a cost as much as it was an opportunity fee where if he did not have access to it he would not have been able to attend the HUD auctions. He really appreciated the access to the money.
Having that part of it solved is really amazing because it really helps you leverage your whole business. The question is whether there is a net cost if on their own they can do two loans/properties/deals. With leveraging money, they can do four deals. At the end of that year if they make more money, there is a cost to using the money. However, overall there is a benefit. Bruce ended up with the same issue they had talked about in another session where he had access to unlimited money as well as monthly payments. Just because you can buy it does not mean you should want it right now.
This is one thing Craig has always used with clients. A lot of times they will ask him how much they can borrow or how many he will do. He always then asks them how many monthly payments they can afford. This is really where they should stop. The thing with dealing with investors is sometimes you can be a really good buyer, but you do not have the other processes down as well as you should. Bruce was neither a contractor nor a salesperson as far as exiting the house. He could buy well, but he was also delegating a lot of the processes after that. One of the things he had to learn himself was that he had 20 hard money loans, is counting on seven closings, and only two happened. You have to have reserves, and ultimately they have to tell people it will not be as easy as you may think.
Craig said it is not the best case scenario. This does exist, but not every time. When they first started the hard money lending business, it was right at the end of the REO cycle. Bruce remembered thinking about who they were going to loan to after all the REOs go and there are no more auctions. Bruce thinks maybe it was part of his education as an investor since he had to go someplace else to find deals, but so did everyone else. Bruce found he was getting business without having to change the model. They did not have to go to commercial or land, they just had to deal with the same people who now had to find different properties in a different way. Craig thinks this is why our model has always been successful in trying to create a program that is attractive enough to the most successful people in the business. This way they will always want to borrow your money.
If it is not REOs they are buying, they will be sending out letters to homeowners. They will be doing something since that is their business. Just because the REOs are gone, it does not mean they will get a job somewhere else. They are property buyers. You had the same market you would have in 1998-2002, and Bruce had lived through this in the late 80s when you were definitely buying properties directly from people out of the MLS. All of a sudden, all the phone calls he got were from people who were over encumbered. There was a transition to go from buying directly from people to buying from auctions.
Bruce said what happens with experience is you recognize the next phase in advance. When the REO auctions were done by 1996, it was already in Bruce’s mind what things were like. This is the 80s again, and Bruce already had experience with that. He was surprised to see the hard money loan business so busy with the same kinds of things, only bought from an owner. He did not know if there were enough people who knew how to do this. Craig has always been amazed how many people buy houses at a discount.
Bruce said one of the things they ended up doing because they had access to money they bought 93 lots in Rosamond and did 93 hard money construction loans. The company learned how to do construction loans, and they learned how to do construction projects in order to teach others to do the same. Perhaps one of the next phases for the Norris Group in the coming years is they will see construction projects created from scratch. You do not necessarily have to find the deal because you can create the deal, and this is the difference. They have already done a fair amount of construction loans in the last six months.
When we got to 2008/2009, we had REOs at an amazing price and very different from the discounts. It was not like you were getting 50% off what it was worth since it was worth 50% less than it was. Whatever your discount was, it put it in a range where it cash-flowed but investors could not get money. This was the big deal; so the question is how you get money. He went back to Washington D.C. and got an interview in front of Fannie Mae asking if they would loan a pile of money rather than four loans. The answer was no, so they were able to start a program at 9.9% at the time. This was a big deal.
When this program was started in 2009, it really did not exist. There was not a hard money company that was trying to attract people who were buying rentals. When they came out with an 8-year term at 9.9%, it allowed so many people to keep so many rentals priced so well. As a result of this now six years later, a lot of people really made a lot in equity over the years. What is also interesting about this was there were a lot of pieces to it. At the Norris Group, they picked an 8-year timeframe because of the cycles and seeing how they had a long way to go before it petered out. Getting 9.9% investor money would have never happened without a track record that is trusted.
There were a lot of elements that came together. They had a borrower come in who would have never been able to without a lot of pieces of the puzzle happening years prior. If you create an environment of successful investments, it makes it much easier to change course because they feel more comfortable with what you are recommending and why. Sometimes the market will change. What used to be the 12% turnaround became the 9%. The environment now has changed yet again, and it makes perfect sense. For the 9.9% program, they must have funded tens of millions of dollars. The last time Aaron showed it to him, they had funded $50 million worth of the loans. It was 3-4 notice of defaults they had out of the entire $50 million, and not one REO. For people who don’t know what an REO is, this meant not one property went back to an investor at the sale. This speaks on the quality of both the buyers and the borrowers. It is really their hats off to them since this speaks of people doing a really good job on that side.
Bruce asked what some of the misconceptions are that borrowers have regarding hard money. Craig said the biggest misconception they may get is they almost have this idea that since it is hard money, they do not need any money of their own. That is the most common call. The worst thing you can probably do is lend to somebody who does not have any money of their own. This is just a recipe for disaster. 90% of the time this would be the number one mistake people make with hard money. A lot of other people may have misconceptions that hard money is a different animal. Craig tells people hard money is like Bank of America money since the paperwork and process is identical. Hard money is a term and not a way of doing the loan.
Bruce has struggled with the term “hard money” since it did so much for him having access to it. The only thing hard about it for him was how hard it was to get the pile of money together for the person who put it up for him. He respects that somebody worked hard enough to give Bruce a chance to do what he needed. Paying them back and paying them on time was a big priority for him as it is for Craig. Bruce said this is one of the things he sees our industry abuse. They have access to it now, then all of a sudden they start doing things that are not acceptable. You always have to stay true to the process so you end up with a secured note or deed of trust. Sometimes if you get a little too casual with a relationship, this can happen.
When someone comes to talk about money, Bruce asked what would prevent them from saying yes. Craig said the number one thing would be if the client does not have enough liquid cash of their own. They look at a 30% rule, so if somebody wants to borrow or be approved for $200,000, they would want to see about $60,000 available to work that project. They will not have to have all that money in the project, but at the Norris Group they need to know it is there in case the client needs it for another reason. Without a doubt this is the number one reason. Other reasons are if somebody is in bankruptcy or other factors may affect the title of the property. Second, they say no more than anything because the customer has not found a good deal. They may think they have one and are anxious to do it, but once they start adding up the numbers and costs, they will probably go through the whole process only to not make any money. This is why not having a good deal is the second reason they say no.
Bruce asked if that because of the outreach in the education that sometimes they will receive a call from an out-of-state investor wanting to know if he is doing a good job. Craig said yes, and as an example they used to receive a lot more calls than this because of seminars. The people used to tell him how much they would buy it for and how much it needed in repairs. They would then tell Craig how much they were selling it for, and he would ask them how they came to that price. One person said it was because this was what the listing agent told him. He thought this was bizarre that somebody was making a decision based on information that really should not meant anything.
People need to know certain things like how much the house will sell for and how much it will take to fix it. If you miss either of these, you are going down a bad path. Bruce said this is hard to do from a distance. If you are calling California from Texas asking how much it will cost to fix it, you have to have a team on the ground you can trust that is not there yet. You are relying on people who are making commission or profit because of a yes answer from you and not a no answer. The classic comment was “We know we will not make any money on this one, but we are practicing.” This is not worth the practice. The broker will get paid, but the one putting up the money will not get anything. In a tight situation when a broker was involved, Craig would suggest putting his commission at the back side so that there was a little more in there and the rest they could deal with themselves. This never went over too well with the brokers.
Every once in a while Craig will tell Bruce about an investor who did not find a deal, but it found him. Craig said it is not uncommon for this. Sometimes he will receive a call, and can tell it is their first deal and they are relatively new at it. He will ask them to tell him how they found the deal. Often they will tell him that it was listed and had been for six months. Craig would say with all the investors out there looking at listings daily, a good deal will not last on the market that long. A lot of times what happens is people do not find their first deal but it finds them. Usually this means there is something hidden in there or it is a foundation issue. You really need to be careful about jumping in too quickly on the first deal.
Bruce heard a story of someone who bought a single-family, 20-acre property that had no permits or electric meters. Escrow was closed, and it turned out it used to be a former chicken coup. The broker was certainly happy to get commission on the sale, but that is literally after the fact. After they found out the meter was not there, they found out there was nothing structurally correct on the property. This is the wrong time to find out.
Bruce asked Craig what he thinks of the flips of the flips of the flips. This means he is dealing with the buyer, and suddenly he finds out it did not originate with the buyer but rather was flipped to him by someone else who in turn had it flipped to him. Bruce asked at what point this makes him feel like the designated back-holder. Craig said you always want to help the client with the initial numbers. They can analyze the deal and make sure they are not paying too much. Getting a deal from someone who flips properties may be a totally good deal, but most of the people who do the flips do not make a whole lot on every deal. Sometimes you will see a deal, or Rick Solis will note on the appraisal, that it was just recently bought for a certain amount and $80 grand has been added on to it. When you start to see numbers like that, you really want to caution people that maybe there is not any profit left in it for you.
At the Norris Group, they are now at a point where they have a brand new 6.9% program. This was actually what they had before the 9.9% program. This is a three-year loan that is now being used for new purchases or refinances of properties. New loans to the Norris Group are all available for this loan. There is also a prepay for the first year. What they tried to accomplish with this was they did a lot of research on what was available. Bruce was working with someone who wanted to be involved with them, so they could compete in a way at a lower interest rate since this is where a lot of the markets were going with banks and hedge funds.
At the Norris Group, they came to the fact that they wanted a product that was theirs. There would be no 20-page application or anything tricky about it. It would be exactly what they do. They have tried to find a niche for people who want to hold onto a property for a few years and then sell it. This helped them find a little niche in the market that nobody else was in at the time. It is an exciting new program they feel they will fund tens of millions of dollars through and have support from both sides. They are trusted with the money and have a borrower who deeds the interest rate. By doing this program, they can lend to really good borrowers they have had throughout the history of the company.
You can go to www.tngtrustdeeds.com for more information. Tune in next week as Bruce continues his talk with Craig Hill on the trust deeds side of the business.
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