Bruce Norris is joined this week by Craig Hill. Craig has been with the Norris Group for almost 20 years. He is active as the hard money lending underwriter, salesperson, and private money raiser for the company (trust deeds and mortgages). You might say he wears a lot of hats.
Craig’s start in the hard money loan business came prior to the Norris Group. He got started in the business itself close to 30 years ago. He started in the hard money business, which at the time was primarily doing a $10-$20,000 second behind some kind of first on a house where you had an owner living in the house. Generally those people were in some kind of trouble, possibly behind on their first. Therefore, 30 years ago that was hard money.
Bruce remembered meeting with Craig at a time when someone he knew was door knocking hard money lenders. It was a completely new concept to loan to an investor at the time, not to mention uncomfortable. Craig said they cannot single-handedly take credit for it, but when they did them the company he was with at the time had never done an investor loan. The rule of thumb was a house was worth what somebody paid for it. If the house next door sold for $100,000 and was identical to the house next door that was bought for $60,000, then that house was worth $100,000 and the house you bought was worth $60,000. Yet somehow they were able to equal it out in their minds. It was started where if one house was worth $100, with improvements the house you bought would be worth $100.
Bruce remembered coming to Craig after being given the parameters, which were around 60-65% LTV. He came back with a loan amount, and the appraiser was a HUD purchase and $85 grand appraisal. Bruce had bought it for $34, and Craig was going to loan him about $15-$20 grand more than he paid. It was interesting because it was not a concept that he had not been approached with prior. He had never been approached by a professional doing this, and these were the numbers. It was conceptual instead of factual before, and now here were actual facts. They had been massaging it around, but they found something on the first couple loans that worked for them. It jettisoned from there.
Bruce immediately recognized how important it was from his side. Here he was getting a chance to buy a little tract of houses. He could buy from a HUD auction, but he did not have the money or the credit line. All of a sudden this new world opens up, and the light went on and he recognized something important. The other side of the equation could have been nervous, in this case the owner. Bruce remembered making 6 payments in advance of both of those loans. What must have gone off in his mind was this was a completely different niche they had never seen.
From Craig’s side, he was with a group of four people trying to gather loans. A light went on in his head and he thought he could continue to search for those $10 and $20 grand seconds with homeowners. He immediately stopped what he was doing and made investors the focal point of what he was doing. It was great because the HUD auctions were buying bulk. Everybody else was grinding them out, and Craig would just wait by the fax machine until one would go to a HUD auction, and here come 7 properties. All of a sudden, he was the high man on the totem pole because with that effort, it was more than everybody was doing. You had other clients too, people like Mike Cantu. He was Craig’s second client, so between him and Bruce he was surpassing what anybody had done and was setting records. With the better borrower, it made so much more sense to everybody.
The initial thought would be that loaning to another investor is riskier. This is not true because the rates on hard money back then were not 6-8%, but rather 12% and the points were 5. When an owner-occupant borrowed that money, it was down to it being their only choice. When you separate it into facts, you actually have the same house and lending the same amount of money. One difference, usually with the owner-occupant, is you are lending a second and are a little more risky since you have a first in front of you. With the investor, you are lending a first trust deed. When you go into more facts, the investor has really good credit, the homeowner is not paying their bills, the investor has cash reserves, and the homeowner has no reserves. It seems riskier, but when you really break it down the facts suggest that it really is the only way to go.
Bruce had never really made an attempt to find his own money, or source of private funds. Every time he was in escrow the time frame was tight. Once he ran out of money or credit lines, he was in the position of having to stop looking. This gave him access to think of bigger chunks within moderation. He was able to concentrate only on finding deals. The cost did not matter because it was making those deals possible that made a lot of sense.
Most of the time in the hard money world, you were either working with borrowers or you were the person working with the money side. Craig crossed over to both of these worlds. Before the Norris Group was formed and he was at his previous company. Craig had always wanted to do both sides of it, and he thought it made a lot of sense. That was something that might still be unique to the Norris Group in a lot of ways because Craig does both sides. He is not really a salesperson in the sense of having to do something without worrying about the consequences. He has to be responsible for making sure that together he and Bruce bring in enough business, but then he has to talk to the people with the money. He has to make sure they are not having too many bad experiences.
Even in their initial conversation, Bruce said Craig sounded more like an underwriter than a salesperson. When he is talking to the borrower, he really has to talk to them like he is lending them the money. You almost have to be a detective in searching out good loans. Bruce asked what Craig looks at for evidence in seeing if this is the kind of project or person to whom they can say yes. Craig said the number one criteria that he has seen from people’s applications is liquidity. This is the key factor and they definitely want somebody to have enough liquid cash where they can afford to do the investment and they are not putting them in jeopardy. Sometimes you have to make sure you don’t let somebody put themselves in jeopardy. They don’t like that necessarily, but sometimes that is what you need to do.
The question that comes up is credit vs. liquidity. Like he explains to people on the phone, there were a lot of investors who were very strong and went through some difficult times in 2006-2009. At some point along the way they made a choice to save the $200,000 and let some of the modifications go. Unfortunately, this was a choice or something they did where there was no way for them to pull through it. They will look at somebody who has liquidity of $100,000 and a credit score of 600 in a positive light. The other case that may come up is the credit-heavy case. This may be somebody with an 820 score and $20,000 with no experience. This can be somebody who is $10,000 away from a 600 credit score and does not have enough cash to survive a negative situation. They have no experience to tell them that one is going to show up; and unfortunately when somebody calls in the deal will always work out, and they know most of the deals do. There are deals that do not work out, even with the most experienced investors and you really need to be prepared for any outcome. That is how they qualify people in terms of individually.
You also have to look at the property. Craig said they tend to lend on houses that are conforming. You might have a house out in Apple Valley that is a 1400 square foot house on an acre. If that is in the neighborhood of those houses, that is conforming. Conversely, most of the houses are in neighborhoods typical to everything else. You might tend to avoid a 4,000 square foot house in a 1200 square foot neighborhood since this will be hard to appraise. You do not really have any other comps to do that. At the Norris Group they are looking for a conformity in that and anything that might prevent it from selling at what they think it will sell. They have pretty much landed on the product that is 1-4 units, and 90+% of the time it is one unit. Craig said this seems to be the sweet spot, and over time the programs have worked best on this.
This is a combination of two things. You have programs and are willing to do certain things, but it seems like there is a certain product that seems to gravitate toward what you have. It seems like 90% or more will be single-family residences. Sometimes there is disconnect between what people might be taught at a training event, and their expectations of hard money is that it is easily accessible with no money down or credit. One of the biggest misconceptions is that you do not really need money to do a deal. While there may be scenarios where that works out, Craig tends to tell people they should get themselves into a scenario where they are ready to perform under multiple situations, not just this one scenario that may or may not ever come up again.
Some of the ways people can work without funds is a lot of times they have somebody who is unique to them and wants to work with them, they will generally both be required to sign on the documents. If somebody has someone like that willing to do the leg work, often times they can find somebody who has the money and would be willing to give them that percentage they need to do the deal. From the Norris Group’s perspective there will be money into the deal, whether it is the original person who came up with the deal or partner. There usually be money into the deal. Even the program where the Norris Group leverages them the most, they can expect to have about 10% into the deal. This does not necessarily mean a down payment, but if you add up the purchase price and the repairs, they will have about a minimum of 10% into that deal.
At the Norris Group, there is a lot of experience including the appraisal. This is another level of protection when they have people go out into the field to appraise and are under no direction from The Norris Group at all. Rick Solis is the primary appraiser in the Inland Empire local area. When you have somebody with the experience of buying hundreds of houses and can look at a house for somebody, that is an invaluable tool for somebody buying their first property and can get his input on a deal. So many times Rick is able to send Craig an email or talk to the client and give a very good reason why they should back out of the deal. It may be as simple as if the house was across the main drag, it would be worth $220. However, because it is on the other side of the main drag it is worth $190. The realtor who is trying to get them to proceed has given them all comps from the $220 side of the drag, and Rick knows that is not accurate.
Craig does not know if he would pick this up, but somebody with Rick’s experience would absolutely know that fact. Someone would then be saved a lot of trouble and time by this being mentioned. Even for properties in which Bruce has been involved that he needs to sell, such as Piedmont, he had to set aside what he wanted as opposed to what was in reality. Rick had told him it would bring about nothing on the resale side, and Bruce really believed his assessment was correct. He was able to sell the property more quickly because he accepted it as a fact. A lot of times you may not want to hear what he has to say, including to get out of the escrow. However, at the Norris Group their experience has been to listen to the team put together because they have seen a few thousand of them already occur.
There is no doubt the experience they bring to the table when you include yourself and everybody at the house, it is a valuable combination of people they have put together. On the other side of the table of the person finding the deals is the person finding the money. Bruce wondered what they have in common and what their goal at this point is. Craig said the majority of the investors at this point would fall into the category of people who have not necessarily made a lot of money but made their funds and are in a much more passive mental state. They do not want to have the activity of doing the business themselves. A lot of them have rentals, but they do not care to have any more rentals. They like lending on something they understand, and they are in a passive mindset and keep the wealth versus build the wealth. They do not need to try to take a chance and make more money, they just want to get a good yield and keep what they have.
Bruce asked out of the 100 loans, how many of the lenders would do a hard money loan hoping to own the asset? Craig said with his group, probably n0. When you get into higher risk and yield type of situations, there are lenders who are probably looking at it like they might have an opportunity to take over a house but that just isn’t who their borrower or money lender is. The business has really changed since the downturn. They had a chance to buy California rentals, and none of the standard lending responded with any volume possible. They were able to start a 9.9% program in 2008 or 2009. One good thing with the research that says to do it yourself has allowed the Norris Group to be on the cutting edge of what is needed. For the first time in several years, California real estate would cash flow even at 9.9%.
When they started the program, they were doing a lot of that and it was very well received on both sides. When they started it they were doing 9.9% for 8 years initially. As the program moved into the midpoint of where they are now, they started going the 9.9% route but at only 5 years. The program they have now is a 6.9% loan that pays 6% to investors. They have made it only a 3-year loan since that is the timeframe that seems to fit. A lot of thought went into what they did. The whole twenty years there has been a Norris Group, they have always lent to the same client. They talked with a lot of their money people, and the yield is as low as it will probably be. However, it is very competitive now because they consciously make a choice to lend to the exact same clients versus trying to find a client to keep the yield up. They will not go that direction. The program is about six months in, they are over $12 million, and it has been a very successful program.
There is a lot of inventory that is available that probably could get refiid free and clear if they wanted to go get other properties. A lot of them also could have had bank financing that had a call date. At the Norris Group they are learning things each month as they go through the program. Initially they thought it might have some benefit as a purchase, and they are realizing the real benefit is the lot of people who have free and clear properties and the clients who made pretty good buys numerous years ago who had bank financing and had call dates on them. Some of these are also being refinanced. It has really turned into more of a refinance program than a purchase at this time.
In virtually the last week the Norris Group created a new program for purchase. They now have two programs, one being the highest leverage program. What that one does is they go off the after-repaired values, which will be the value of the house when you sell it after it is fixed. They are pretty aggressive with this program and go up to 70% of that number at 11 ½% interest rate. Since there are more people with the ability to put in more money and want a lower rate, they just came out with another program where if they go 25% down off the purchase price, they will do this loan for 8.9%. Out in the marketplace this is a very competitive rate, and that percent into the deal at that rate is very competitive.
What is good about both the products, the 6.9% and 8.9%, is not replicated in hard money so much as it is almost like a mirror of a bank program but a lot easier to get funding. One of the important things with the 8.9% program and the down payment requirement is these people usually have an escrow that has to close fairly quickly. There is no way a bank will meet this criteria. They will not perform in a timely manner to close on a deal where you will buy it, fix it up, and flip. With these you are usually dealing with 5 or 10 working day escrows, so this is an option here. With the 6.9% rental hard money program on a refinance you do not necessarily have to close quickly, but they have existing clients that are trying to refinance with banks and other institutions.
Bruce has a loan out with one gentleman who has been in his refinance process since March. This means he could have a prepayment penalty of upwards to 5 years. The Norris Group’s prepayment penalty is 1 year. If you have a property you know for sure you will keep, that might be the way to go. However, many clients are choosing this 6.9% program because it is a very good option and you are not dealing with a 6-12 month loan process.
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