Bruce Norris is joined again this week by Craig Hill of the Norris Group. Craig is the person you will be talking to if you call for a hard money loan at the Norris Group or have an interest in not investments (mortgages and trust deeds). The topic on today’s show is investing in trust deeds and mortgages.
Bruce and Craig have known each other now for over 20 years, but the idea of investing in trust deeds is still foreign to a lot of people. When they go in front of audiences and ask them about trust deeds, not many people know about or invest in them. It is still not the most common vehicle on which their money to land. Craig said it is surprising in some ways since, comparing trust deeds to stocks, anybody who has bought a house and taken a mortgage is essentially the same as investing in a trust deed. The difference is you are on the other side. Instead of borrowing and paying the money, you are actually lending and receiving the money. A trust deed is a very simple concept to understand.
Bruce thinks most people are so used to the stock and bond world that they have not yet seen trust deeds as a viable alternative. Bruce asked who ultimately ends up being a trust deed investor and what their MO looks like. Craig said most trust deed investors are people who, regardless of their age or have already made their money they have, they are now in a passive position where they can get a decent yield on their money. However, they are probably more concerned about principle protection than taking any more major risks. They feel they have gotten to a point where they are more managing the money.
Bruce said when he got involved in trust deeds, it seemed like it was a natural extension to something he already knew. He understood real estate appraisals and values. If he was going to make a trust deed investment, it was comforting that he could take what he already knew, stand in front of the house, and say he was a lender at $140,000 on a $210,000 house. What is the likelihood he would be paid back, and if he did not get paid back what is the likelihood he would retain the principle? It was that concept where he had all the tools to where he could already understand it. When somebody asks if they want to invest in a bond attached to something, they will say they do not know that world. It is interesting how most money flows to that world, but he doubts many people could understand as easily as they could what a trust deed is.
You are dealing with concepts people already understand. Everybody has either owned a house, their parents owned a house, or somebody they knew owned a house. Everybody knows this house has a value, which people talk about all the time and is therefore a familiar concept to them. When you are talking about lending 70% of that value, which is what your trust deed would be, it is not really an investment until you understand what you are doing and what your security is. It really comes down to simple math and is not much more than a real simple math equation. This way you put yourself in a position where you are very well-secured.
A trust deed investor wants security, and a really good benefit for a trust deed is that you get a monthly check. It is very passive income, and being a trust deed investor you do not have to worry if the air conditioner goes out or the tenant moves out. Bruce asked Craig if he finds most trust deed investors cross over to real estate ownership with some of their money, whether they own money or trust deeds, or have they separated the two. Craig said quite a few will do both. It is a mixed bag. There are people like Craig who may only be the trust deed person because of his personality and then people like Bruce who would do both.
There are a lot of people who have had rentals and have held them. When there are times of appreciation, they sold them and are now more interested in the trust deed world. It is definitely a mix and there are people on both sides. You usually match investments with your personality, and for Bruce it drives him crazy to look at something if he owns a stock and can see what it is worth every second of the day. He is not geared toward this; and if he has a homeownership there is not an appraisal going on like a ticker tape on the front lawn. Bruce had discussed how when people had a trust deed in their retirement there would be some evaluation process where you had to figure what the trust deed was worth. It is pretty easy because, for example, if it is an $80 grand trust deed then it is worth $80 grand. 99% of the time it will send you a check every month, and you will forget that you have an investment. Bruce has been on both sides of the fences, not just the trust deed but the rental side too.
A couple months ago they had a big wind storm in Riverside, and he had the rental that knocked the fence down. Had he had the trust deed, he would never have known of that occurrence. He would have gone on and gotten his check. Because he owned it, he had to get the fence guy out there for a couple grand to fix it. They can see how comfortable people get with trust deeds because it does not take too long. Nobody ever starts with the maximum amount in trust deeds, but they may start with 1, 2, or 100,000. It does not take them long to see the investment and how comfortable they are with it. It is almost funny how many people make a call after that. It is almost as if they want to place an order on another trust deed. They are on the shelf, and people just cannot wait to get the next one. Unfortunately, it does not work that way all the time, but it really is pleasant with the familiarity of trust deeds and how much people want to up their investment in that type of vehicle.
Bruce was recently on a cruise and had dinner with people who had stock investments. The stocks were going up 500 points, then down 800, then up 500 again. It was driving them crazy. Bruce was glad he was not involved in this part of the world anymore. Bruce enjoys that his trust deeds are really on the boring side, which matches his personality. When somebody has their first introduction to hard money, either as a borrower or a lender, they do not hear a lot about the rates. If Bruce had money, and Craig told him he could get a certain percentage then he would be wondering who is being loaned to that make the rates so high. Craig said the rates are higher because you are using private individuals to fund the deal, so there has to be an incentive to do that. From the borrower’s point of view, people would be really shocked if they could see the credit histories of most of the borrowers and the amount of cash that most of the borrowers have.
At the Norris Group, they lend to really good borrowers. It is not the client they are lending to who is not good, but usually the situation is not considered bank-worthy. There can be ridiculous reasons for this. One is if they have over a certain number of properties, they are not bank-worthy. Somebody brand new is more bank-worthy today than somebody with a ten-year track record. This does not make sense. The condition of the property can also make them not bank-worthy, so what people have to understand when they have a higher yield is that it is not a reflection on the client. Rather, it is a reflection on the property or circumstances surrounding the situation. It is not necessarily the fact that the borrow is an unworthy borrower.
During the time when credit was really tight, they had people with billions of dollars in the bank and great FICO scores who borrowed money from the Norris Group because there was no access to other money. It is almost shocking that they could not get bank money. There were two or three clients in that category. It is what you would call AAA times two who could not get bank financing. It could be something as simple as not wanting to lend to investors anymore. This was in place for quite a while. Most of the time it is the product. You may have a house in a decent neighborhood, but that particular house is minus a kitchen or has all the work that needs to be done. However, the standard lender is saying they cannot loan on it right now. This is the opening for Bruce and Craig’s world to show up, the hard money lender.
They have landed on a certain product type. If somebody is putting up money for a trust deed, Bruce wondered what asset they would have it against most of the time. Craig said almost 100% of the time they will have an asset that is a single-family residence. They do some smaller units and generally do not do commercial or land. They will not do any 24-unit apartment buildings, and most of the loans the Norris Group does are in the $100-$500k range. They tend to stay in the niche that is very common and not anything out of the ordinary. This includes basic homes and basic dollar amounts. Bruce wondered why this was the safe pocket and if it was because they would know what to do if the worst-case scenario happened. Craig said you are actually dealing with a lot more know results regardless of what happens. You are dealing with a lot less volatility.
As an example, one product they do not do that is very popular right now is if somebody calls them with a million dollar buy that needs $1 million renovation that will then be sold for $3 million. They will not do this because they feel the risk is too high and so many things have to be right for this to happen. If the market were to change, it would not have been a good result. They try to stay away from things that are a little too volatile and things that may have a little less fluctuation and a little more of a known commodity. There are times where if they go out of a box they are comfortable with or normally don’t do, it is because of the expertise of the person who only deals with a particular situation who is helping them. Craig said a lot of their people have numerous experience in this type of product. They would not do a fire-damaged house for somebody if it was their first deal. When the market is escalating, then some more of the higher-end areas could be looked at to add more square footage. They would certainly do this, but not with a client who did not have experience. There are exceptions to the rule, but they involve very experienced people behind them.
Bruce asked what position their trust deeds are in usually. Craig said they always do first trust deeds, and as a company this is all they have ever done. If you are going to invest in trust deeds, this is where you should be. The reason it is attractive is because it could have a good yield. Seconds can be attractive for two reasons. One is the yield is higher, and also it involves a smaller dollar amount. That smaller dollar amount can come back to bite you since you will usually invest this smaller amount due to not having a larger dollar amount. The person in second may be responsible for bringing a first-current paying property taxes. They may have a lot of expenses, and if they are not prepared for it their investment may be jeopardized. Their investment could turn into double what they invested, but they will not have this if they are not prepared and this is what will jeopardize it.
When they do trust deeds, they generally have an individual trust deed that is available that one person will take and be the sole owner. Bruce wondered how this differs from other people’s process. Craig said they are the last company that does a large amount of trust deeds and still does the one investor/one trust deed. A majority of people have gone more to the pool route where you are investing in a fund. Pools work until they don’t, and until you are aware of a pool that is not working you usually have a large problem. If you are in an individual trust deed, you would know after 30 days if you did not receive your payment. All of a sudden, you are aware something may or may not be wrong. It may be as simple as it is in escrow and will close in 15 days. When you are in a pool, you do not have much control over your investment.
Bruce asked what the advantage is for the pool of a broker. Craig said there are a couple advantages. One is you can have a more favorable cost structure and cost centered to them, so it is a little more profitable. Another is if things are slow and you have a pool of money, it only makes sense for the money to be working. You may tend to step outside of your box if things are slow. One thing about the Norris Group since 1997 and 2000 going forward is a deal that was good in 1999 is still good today and vice versa. A trust deed that was good is always a good trust deed.
When you have a pool of money, you really do not have to ask if somebody wants to fund the trust deed. It is already in your control to fund it. This is very different from a one-person trust deed because you always have the right to go see the structure or investment and say if you feel uncomfortable with it. At the very least, the clientele who invest in trust deeds will have a copy of the appraisal emailed to them. They will have a full appraisal, be able to look at it, and understand what they are lending on and how much they are lending. If they want to, they can even drive by and look at it. With a pool, you will probably get a monthly report saying they have several million dollars in new trust deeds, but they are already after the fact. You are not involved in the decision-making process here.
Bruce asked where we are at right now with loan-to-value for our private money lending programs. Craig said we are about 70% LTV for the maximum. They do not do anything higher than this. Most of the trust deeds fall between 65% and 70%, maybe even 60-70% depending on different situations. They will always ensure the client has a certain amount of money. If that criteria is not met at 70%, then it will be a lower loan-to-value. Bruce asked what the criteria would be for a 70% LTV. Craig said at 70% you will have a pretty conforming property, and this will be a borrower with whom they are familiar and has a done a lot of business. It will be a property that is easy to hit the mark in terms of value.
There are a lot of areas where Rick Solis, their appraiser, will go out there, line up the houses, and say how much each of them is worth. It is almost a model match to the comps. There will be other scenarios where Rick may go out and initially see the comps as being all over the board. If the comps are all over the board, they will not maximize that trust deed because they do not want to maximize to the wrong number. If you go to a real estate investment club and hear various hard money lenders give their speech, you get the impression that no one ever says no. The Norris Group is kind of the anti-hard money lender because they say no a lot since their business model has been to create a program where they can lend to the best borrowers. They only want to say yes if it is good for both sides.
There are times when you have somebody who will put in more money. They bought something at 90% that needs $30k worth of work and has to close it or up 30% down. They don’t get a loan because they just cannot do this. This is something in which the Norris Group will not participate in. They can always make a safe loan, but they would not do a hard money loan where they feel the borrower is making a mistake. They would prefer they get out of the deal and look for something else.
What is rewarding is sometimes people, after they feel their progress has been prevented, will circle back around and thank the Norris Group for telling them not to do a particular loan. The truth then comes out or they realize it was not as represented. One of the rewarding things is knowing you have really helped a lot of people, especially those who are first-time. They have a tendency to want to do a deal so bad they might make a mistake. This could happen on somebody who wants to make an investment also. They may want to lend their money so bad that they will make a mistake, and the Norris Group serves as that level head to keep both parties from doing that. When people invest in the trust deeds, they really do not know what is going on before they are contacted first.
There is a filter system in place that has gone through the six deals that did not make the cut that they did not have to get bothered with, and the one they will get is already ready. They have already gone through the due diligence and know it will work. Bruce has watched this over 20 years, and it goes through a process before there is a yes answer. This makes it as safe as it can get. Craig said they do not appreciate it on the first one, but later on they come to appreciate it. In one example, years before the Norris Group started Craig had a friend who would have accountant after accountant tell her how risk trust deeds were. After about ten years, they told her they had no idea what she was doing, but keep doing it. People do not seem to have an appreciation of the initial deal, but when they see the track record and results over time, they realize that is not typical for trust deeds and realize the Norris Group is doing something that goes beyond what other companies do.
They just started the 6.9% program for the California investor/borrower. They are asking for the support of the trust deed investor, and that is a yield that is different from most trust deed investors. Yet they have already had millions of dollars accept that would be a safer decision to stay with them at that yield than doing something else. It came to the point where they were getting so many payoffs in their rental program that so many people had money and were getting a zero yield. With Aaron’s help on what was available in the marketplace and Craig talking to existing clients. They realized there was flexibility there since people with the Norris Group want to make sure they get from one point to another safely. They were fortunate enough that about 75% of the existing clientele said they would take the 6% since they liked the fact it would be the same product.
They made a decision to lower the yield and keep working with the same clientele that allowed them to have the track record they have. This is as opposed to increasing the risk to keep everybody’s yield up. As a company they do not want to chase yield when the yield has in fact changed as well as the industry and has new participants. This gives them the flexibility to retain the best people who want to do business with them if they can get close to the program. What it comes down to for the Norris Group is they have a $40 million pool of money that has been involved in the rental program. They came up with something where they could keep a large portion of that money still busy. It does not do them any good to only keep $5 million of the money busy.
Bruce said as an investor in trust deeds it does not do him any good to wait for the 10% trust deed if he has been waiting four months. He would rather say that it is whatever it is. Years later they will make a new decision. People really have to realize that 6% over three years on all your money will equal a lot more than 9 or 10 in half of that period. Yield is one thing, but the amount of money you make is something else. They still feel this will be a good way to keep return for the investors. This also includes the safety with those with whom they are giving the loans. Wit the product that naturally lends itself to that type of financing as cash flow from day one, as you go forward the value will increase. This trust deed should mimic the 9.9% program as far as success in payment history or successful business creation for both them and people with money waiting for a trust deed to fund. It is only 30 days in and already proving this to be true.
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