Craig Hill on hard money lending with The Norris Group Show #521

Bruce Norris is joined this week by The Norris Group’s very own Craig Hill. Bruce has known Craig for over 20 years. He has been running the loan business, getting people invested in trust deeds, and dealing with the borrowers.

Episode Highlights

  • What were hard money loans like 20 years ago?
  • What allowed Bruce to expand his business when he first started in real estate?
  • What differentiates a hard money lender from other lenders?
  • How easy or hard is it to deal with those who go to the lender directly to borrow money?
  • What programs are available right now for people who borrow money?
  • What is the popular of the Norris Group loan programs?
  • Which product types will they not lend on?

Episode Notes

At one of his seminars Bruce told the audience how there was a time that hard money lending was not done to investors. Craig was in the business at that time, so Bruce asked him who his customers were who received the loans. Craig said before he met Bruce, hard money was lending small seconds to people living in their house who had a first. They may have been living in foreclosure or had some kind of need. Primarily you were lending somebody $20-$30,000 to put a band-aid on a problem that was probably going to resurface in a year or two. It was really a much more risky loan at that point since you were a second and in a situation where you were solving something and creating the next problem. It was completely more risky and one of those things where you wanted to be careful not to make the last hard money loan. Somebody would make a hard money loan, then somebody would make another, and you were always cautious mot to make the last one because you would end up with the property. Ultimately you will end up with the property, a problem, or both.

Bruce had somebody working for him who went out one day to visit lenders. Bruce and Craig met because this person knocked on Craig’s door. He then talked to the owner of the company and devised a loan-to-value that would work. This was when Bruce and Craig started working together and was the first time that company did lending to investors. The one rule of thumb with hard money used to be that a house was worth what somebody paid for it. This was like a written rule. If the house next door sold for $100 and somebody buys a house identical to it next door for $50,000, now the other house is worth $50,000. This really was the mentality until he met Bruce.

When Bruce first met Craig he had bought two houses in Moreno Valley. They were worth around $100, and Bruce had bought them in the high $30s-low $40s. It was really difficult to convince everyone this made sense. Bruce had not talked about how much he paid in his original discussion with Craig. After working with the two houses he decided to give it a roll. The appraisal came in, and Craig gave Bruce the loan amount of 65%. He asked Craig if it would bother him that he was loaning more than what he paid. This was when Craig had to go to the owner and explain why it still made sense.

Everyone was holding their collective breath at this point. It was something that you felt like had to work. For the borrower, it did work tremendously so much so that Craig immediately almost stopped doing every other type of hard money loan. He only focused on people looking for people who were investors because it was a better business model. You have multiple loans from people who actually had a business, not a problem. You are dealing with somebody solving a problem, not somebody in a problem.

Craig said the funniest thing for him was how long the “old guard” held onto the notion that this will not work long-term. With 3 years there and 20 years here, it is still working fantastically. Now it is pretty much against the rules to loan to the person who has a problem and owns a house. It has gone full circle because you can have so many calls now at the office where somebody calls, and the first question you ask is whether they live in the house. If they do, it is a no for the Norris Group. Some companies will still do owner-occupied, while 70-80% minimum will not even look at hard money. This is something that could be a problem someday, and you do not want your business to have a lot of this.

There are a certain amount of things you do not want to do because if you do 10 of them, you will have three problems. The 7 successful ones will never make up for three problems, so it is better to not have this list if you can avoid it. He remembered when they first funded the loans people were tenuous. He wrote 6 months of payments on each of the loans, and it was then it dawned on the owner that it was a different borrower. Very few clients had written 6 checks in a row. There was one who wrote these checks, but he was shortly indicted on fraud charges. This was a different client and unique situation.

Bruce said for him this allowed him to expand his business. He knew this would allow him to get access to some money. He would go to the HUD auctions with a piece of paper that said he had $1 million available. When he bought something for $60 grand they would literally cross it out and make it $940. It is comical sometimes how they look at things, but this helped expand Bruce’s business. It was one of the things he had to learn. You could be a really good buyer, but there is a payment attached to these things. When you have a business that ends up with 20 of these simultaneously at all times, you really have a monthly cost that is ongoing. The inventory just changes out, and that is what Craig tries to discuss with people. Sometimes doing just a few less deals might be a better business model. If these three, two, or even 1 never go away, pretty soon if it gets to the end of the line you will end up with the one or two out of your 20 being now 15-16. You do not want to end up in this situation.

When you are a good buyer, you think about how you have to get everything you can. Then you realize this isn’t the best option and you should be more selective. You could end up having some liquidity because you never know. One of the things that drove Bruce nuts was when he had just had the property business, he had 7 closings one month that were going to happen. One of them happened, and he had enough money from closing to pay the hard money loan payments. You definitely have to manage that. It is a little easier way to leverage, but you have to remember there is a cost associated with it. You have to be always aware of the overall situation.

Bruce said at the time the discounts were pretty sizable, so this was a big help. When he was first borrowing it was 5 and 12 ½. He was just grateful to have access to it, and that was the big deal. He was thinking he could go to a HUD auction, and for everything that made sense to him he could say yes to it. He had a bank account; and when it was done he was done. Same with a credit line. After a while you realize there is nothing you can do to expand it. This was a big deal.

It was also a big deal to know that this part of his business was solved. This was a big deal because he did not have to worry about finding someone else with money. Craig said you have two trains of thought on the money. One is where the money side is now solved with a cost, which is the route Bruce chose. Others will try to solve the money issue themselves with what they figure is little or no cost. However, time is always a cost. If you are spending 1/3 of your time working on the money, then that is 1/3 of your time you are taking away from the property-buying side of it. One may not be better than the other, but that is two distinct train of thoughts.

When you have a relationship with the hard money lender, you really don’t have to think about that side of it. Bruce said for him this was a big relief as he had no intention of saying he could save all this if he went direct. This was not even a thought. He was just thinking how relieved he was to be able to buy five houses at this auction and not think about where the money is originating.

Bruce asked what differentiates a hard money lender from other lenders. Bruce used the illustration of being an investor and getting a no answer from the bank, but when he goes to a hard money lender he gets a yes answer. Bruce asked what the difference is in what hard money lenders look for when giving loans. Craig said the difference is credit or qualifying-driven. Everybody out there has probably been through a bank process at some point. The bank will look at every detail of your income and expenses as well as what kind of funds you have available. They will then make a decision based on this.

Craig said the most comical thing about this is if you want to buy a house and the purchase price is $500,000 and you want to put $250,000 down. They will say they cannot do that because your debt ratio is 41 instead of 38. These were the numbers 25 years ago, but in all they are looking at it in a totally different prism of light. With hard money, it is not institutional money. Private money is often interchangeable with hard money. You are getting the funds from private parties, whether in a pool or directly. The Norris Group receives theirs directly and look at it in a more common sense perspective. They will primarily look at the property and equity position; and secondly they will look at the cash available to the borrower. Over the 20+ years the Norris Group has been doing this, the cash available is the most prominent factor in a successful outcome.

While a bank may look at somebody with an 800 credit score and just enough money to get by as a good client, the Norris Group prefers somebody who had a 590 credit score and was able to put $250,000 down on a $500,000 property. They will not take all credit, but they will look at the major issues like foreclosures and bankruptcies. They will look at anything that is current or could affect title. A lot of people who are full-time investors have made decisions not to do a deal for one reason or another. A lot of times people can have a low credit score just because they will have a lot of rental loans if they own a lot of rentals. That makes them unlendable.

What was interesting about this when they spoke in front of Fannie Mae was Bruce realized you would probably not make many loans to the Norris Group’s clientele because they always have vacant houses. If Bruce had five vacant houses, which is not a lot for somebody in this full-time business, and five hard money loan payments with no rental offset, it will make him not qualify under a standard term for anything. This is the business model; and from the investor’s side they will have clients who the bank will look at having 0 dollars if they are in short term loans, even if they invest in short-term loans, are paying 9% on their $1 million worth of trust deeds. They do not have the money in their account nor income. This sums up the bank in a nutshell since Craig said he does not understand how you can say there is “nothing” there.

Bruce said the other thing that would differentiate a hard money lender from a standard lender is they would look at the home that is in disrepair very differently. In most cases the Norris Group does rentals and buy-and-flip loans. They look at the property more as it will be, not as it currently sits. Most problems are solvable, and the bank will want everything in place. With the Norris Group, they are aware there will be a lot of issues and work needing to be done.

Bruce asked about the people who decide to go directly and borrow money. It is not easy to get trusted. Bruce met with someone once who had a check to make a trust deed purchase, and when asked him for one more check on another deal he went home with that check. This taught Bruce how tenuous this is. Craig said it is a challenge but the most fun he has in the entire business. He likes seeing someone starting with one trust deed and seeing five years down the road where it may end up. The one thing here is you always want to try to know you are not setting somebody up for a no answer.

In Bruce’s example, he was yes on one but not on the other. He knew one was yes; so when he said two this could have been yes or it could have been no. Once you get a no, it can change everything. When the Norris Group first started, a lot of the investors where Craig worked chose to follow him and the Norris Group. One of his investors who had funded twenty loans at the previous company was presented Bruce’s loan, and looked at it like it was totally foreign. You really have to know how they are going to react because you do not want to get into a situation where you feel like they have asked you for which you do not have a good answer. However, if they do ask you a question for which you do not have the answer, do not give them an answer and tell them you will find it.

Bruce said over the years the programs have changed and morphed to whatever the industry is up to and what the people are finding. Craig said they have the standard program which everyone has had for years. This is where you go off the ARV, usually 65-70% of what you are holding for repairs. That has been around forever and everyone has it. Of the two relatively new programs they have, one is for rentals. This has been hugely successful on both sides for borrowers and investors. This is a 3-year loan, interest only, at 6.9%. Realistically, if you cannot get a bank loan you will not get a cheaper rate than 6.9%. No other hard money company has come close to doing that interest rate.

One reason the Norris Group can do it is they use individual investors on individual trust deeds. They can offer a greater percentage of that 6.9% than something pooled. In a climate where it is necessary, this has been a fantastic program. They do a lot of refis and purchases with this program, so it has been very successful for them. They also do a flip program where they go off the purchase price and the customer puts 25% down. The Norris Group does not hold any money for repairs, and they do it at 8.9%. This is becoming more popular as it has been introduced over the past year. It is probably the most popular program of all three with both programs being a couple points.

The flip programs are 1-year, interest only, and no pre-pay. This means you can pay them off at any time. There are exceptions if you go over the 1-year, then it will extend it as long as the taxes and insurance payments are current. For the 3-year loan, it does have a 1-year pre-pay in it because people who took the lower rate want the consistent yield.

Bruce asked what would be an example of a product type on which they will not lend. Craig said conforming is the word he uses the most. A 1960 house on an acre and a half in Hesperia might be conforming. However, a 1960s house in Corona on an acre and a half in the large area of new homes or next to the freeway is in a situation where they will probably not do it. This also goes for properties over five acres. They do not do commercial, dirt, or land. If something has a structural issue they will not do it either.

Sometimes at an event someone will come up to Bruce excited about their first deal. They will him where it is, and Bruce will ask him how many he has done. If he tells Bruce it is his first one, he will tell him to get his money back because this is not how you start your career. This is something you will get a lot run by, including foundation issues or fire burnouts. The first question asked will be if it is a niche he owns. For example, if he is a contractor with a good niche, then it might be a good niche for him to continue to pursue.

Craig said the one thing he tells most people in a situation like this is that they really did not find the deal. Instead, the deal found them. Craig and Bruce know how competitive the business is; and he will ask questions like how long it was on the market. If it was 120 days, then every buyer may have passed on it and now you have it. If your first deal is not a good deal, your career really is over and you do not think well of the business.

Another phenomenon is the flipping to flipping to flipping. You may get a call from someone who was third in line, and you will fund it and bring in profits. This is an example of the property finding you. Another thing that is quite common is they will look at a deal, and their estimation of value is higher than what the Norris Group thinks it is. One of the first questions Craig asks is what their basis for the estimation was. A lot of the time it is based on an agent, sometimes even the listing agent. You need to know this yourself, and Craig tells the client that everyone is making the commission but them. It is all their money. They need to make sure they are doing what is best for them, and they need to protect themselves.

Tune in next week as Bruce continues his discussion with Craig Hill. If you want to talk to him about hard money, you can call him at (951) 780-5856.

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