Aaron Norris is joined this week by his own father, Bruce Norris, and Andrea Jennings. Bruce, of course, is CEO of the Norris Group, and Andrea is an award-winning realtor currently with McKey Real Estate. Over the years she has worked with buyers, sellers, and even investors. She started her career in the early 90s and began working with Bruce in 1993. From 1996 to 2002 she owned and operated her own successful real estate business. During this last downturn, she joined the “dark side” as an investor and worked both as a realtor and investor.
- What are the different Quadrants in the market, and how do the buying strategies change by quadrant?
- What is the main thing that has had the biggest impact on changes in the quadrants?
- What kind of markets are labeled under the different quadrants, and what years did we see them change?
- When and why did Bruce and Andrea first begin doing business together?
- How often does Andrea see agents write an offer on a property without first looking at it?
- What are probates, and this something with which Andrea works?
- What was the best thing that happened to investors during the different quadrants?
Today is a little bit different since the purpose of this show is to renovate Bruce’s talk on Buying Systems. Aaron first came on to the Norris Group back in 2005 with 2 goals. The first was to rebrand the Norris Group to a California-only company with Bruce’s timing report The California Crash. This report was 400 pages, 1,000 charts, and two days of nothing but charts. This was followed up by the California-only investor series, which ended up being over 1,200 pages, 44 CDs worth of 40 hours of how-to information from Bruce’s entire career put on paper.
A decade later, things have changed. One of the things they did not get to do in the Buying Systems was go through each buying strategy, 24 in total, and talk about how they each change by quadrant. Technology is one thing that has definitely changed these things. If you have never been to one of the Norris Group’s education events, it is important to understand the quadrants. You can always go to thenorrisgroup.com/freemium, and if you register there you have access to a few free chapters: Chapter 6 of Investor Essentials and Chapter 1 of Buying Systems.
Quadrant 1 is moving from a hot market to a flat market. A good example from the last downturn would be 2006-2007. Quadrant 2 has moved from a flat market to a bust market, which occurred from 2007-2011. Quadrant 3 is a bust to a flat market. Bruce said it is the little piece in between, both the upside and downside. The downturn has ended, so you have quadrant three as a flat. Quadrant 4 begins the boom. The two quadrants that have lengthy years are 2 and 4, while the transitions are 1 and 3. The timing is very important because if you are holding the wrong inventory at the end of Quadrant 4, and Quadrant 1 hits you may just be seeing 1-bedroom condos landing. The buying strategies change really quickly as well, so this is something you need to bring to the market.
Aaron asked how Bruce and Andrea first met. He said she was actually very instrumental in him creating the buying systems. In the 80s, Bruce was running ads in the newspaper and buying 100% of whatever he was buying directly from people. Around 1990, his ad calls doubled off the same ad and his purchases went down by 90%. He felt like he was a counselor instead of an investor since everyone was upside down. It was awful, and Bruce remembered thinking how it looked like some other time he experienced. When he saw the HUD auctions start happening he realized he needed access to the MLS.
Andrea ran a really good ad, which led to Bruce giving her a call. He did not have access to the MLS at the time, but they had books. Andrea said when she and Bruce met they were just transitioning from the MLS books to a system that was the original system known as Lightning. This was how Andrea and Bruce first started with the buying systems. They looked through the information, and data was printed with perforated pages. Bruce said to print everything in a specific price range and give it to Andrea, and it ended up being a stack several inches tall. He went through every one of them, faxed over a list of about 15 properties, and said he wanted to write an offer on all of them. This was how they started.
Bruce knew the deals had moved somewhere, but Who Moved My Cheese book was perfect. His cheese moved, but he had no idea how to access them. Bruce remembered how this was reminding him of a past time, but he had not coordinated this in a sequence. He was starting to be in Quadrant 2, but he did not recognize what he was supposed to do yet. When he had access to the MLS, he was seeing these listings and seeing things like a $70 grand house for which they were asking for $30 grand. When it hit the paper, he called up and it was already pending. At this point Bruce asked himself what they had to do. Three times a day Andrea would send Bruce the hot sheets by fax, and the next sound you would hear would be his car starting. They had already pre-written the offers, and all they had to fill in was the address and they were done. It was really a first game: if you were first, you were probably going to get it.
Aaron said this has changed a lot because of technology. System 1 in the Buying Systems is Buying Systems Through the MLS: first day only. We have gone from paper and faxes to now setting up automatic and immediate notifications when something is listed and getting very granular where you are searching. You can say what you want, and you and 1,000 other people will simultaneously get it. A lot of people think it is for chasing properties, but it is not. It is for chasing relationships. If you capture an agent who has a clientele and can tell you how you can get a check in a week and it is not bad, it’s great. He would ask you if you want to leave with a check even if you did not pay anything for your house. This world exists constantly; but when it comes to capturing the agent you find that the agent who can list properties below market quickly through the first day MLS. The problem is that it is usually pending, and this means somebody is in place.
Aaron asked if you would be looking for an agent who prices it right out of the gate. Bruce said absolutely and that this is what System #1 does. This tells Bruce that they have motivated sellers, and maybe this is a niche. You then start finding out what Quadrant you are in currently. If you are Quadrant 2, invariably they are dealing with short sales and REOs. They will be dealing with this for years, and the agent relationship is much more important than this property. Bruce said he would rather capture the agent than lose the property any day.
Aaron asked Andrea why she first decided to work with Bruce. She first said she felt very fortunate to meet him because she had only been licensed for a year. She was working in an office that had a lot of old-time agents who had a really negative attitude toward investors. She remembered Bruce walking in and telling her what he did, and she was very receptive and open to the idea. The fantastic thing about working with him was he had a reputation of closing deals and not going out to write an offer, then changing his mind or renegotiating. These are really key factors in today’s market as well.
When they started working together, it was fantastic. Bruce was out looking at the properties, faxing, calling, and saying which ones he wanted offers written. They created the First Day Buying System that worked really well for a long time. Bruce remembered being at an auction where a lot of people already knew who he was. A lot of them kept coming by and saying hello, and Andrea turned to him and asked him who he was. As an investor, this taught Andrea so much about how to be a good investor who agents will call. They know that when they get into escrow with her, they have already seen the property and done her due diligence. She will not re-negotiate, and she will close the deal. These are all things she learned from Bruce. Having those relationships is very key in this business.
Aaron asked if she sees it happen a lot where the other agents lock something up and write an offer when they have never even been inside the property. Andrea said she actually has a property in escrow right now she is flipping, and this was how she got the property. She had the second highest offer on it, and she said she did not see how the numbers would make sense for a flipper. They went out and saw the property after they had locked it up, went back in, wanted to re-negotiate, and the agent kicked them out of the property. She called Andrea, who had seen the property, and worked with her. Andrea bought it, and they closed it ten days later. It really is about doing your due diligence and writing a strong offer. You also want to convey to the agent on the other end that you are going to close and will not give them any issues. The most important thing that happened is not the property purchase, but the connection.
This was a Buying System, so whatever produced that deal is really this buying system. This is why he always asks how they came by the property. Invariably, it was a buying system. Somebody was in a probate or foreclosure. There was a repetitive theme, and maybe this agent pursued the theme as their niche. Bruce did not have to do this. He does not understand a lot of what is happening right now since there are some people who want to wear all the hats. They do not want any team members. They want to find the property themselves, so they spend $10 grand a month in mailers. They want to fund their own deals and work with all the private parties directly. It is competitive, so with their margins this is what they have to do. However, there are some people Bruce knows who do not do any of this and have bigger margins. They are doing what they do best by finding properties instead of wearing all these hats to eliminate cost. The people who are doing less are making more.
Aaron takes two calls more often than he should. One is the person telling him they just locked up a property and need to go see. They will mention numbers, and Aaron will ask them how they can be giving him numbers when they have never seen the inside of the property. He will tell them they are about to shoot themselves in the foot if it is from the MLS because they have not even thought about the process. The other one is when people who have heard from the national gurus and think they will work with all these REOs and foreclosures. Aaron will walk them through the process, and they will see how much it has changed and they may be biting off more than they can chew. They have been told the wrong information, and Aaron shows them what they are really up against. Unfortunately, these two conversations are still happening way too frequently.
In the boot camps the Norris Group used to have, one of the several hour time slots was spent on getting a negative response on what the lenders thought would be good. They thought you could call the lender directly and avoid dealing with the agents. Bruce had them spend two hours doing this, and at the end of the two hours they realized how terrible this was and how the lender did not want to talk to them. They have a team together already who they know will list and sell the property. You need to become the first person on that team who they want to call first.
Aaron said what has really changed is the technology piece, especially the media. Aaron asked Andrea how often she gets offers when she lists something on the MLS. Andrea said technology has really changed because Zillow offers a coming soon feature, which a lot of agents use. They want to double in their properties; so instead of it even being in the MLS, they put it in the coming soon on Zillow. They are already creating that buyer pool and looking at the property. A lot of agents are also putting their properties on Facebook with the coming soon and are selling their properties off market. Andrea thinks we are looking at two different things.
We are looking at a property that is an end user property versus a property Bruce and Andrea would buy that has no kitchen or the pool is empty. This is more of the relationship-driven idea they are talking about since agents who have those properties want to work with an investor who is going to close. If they are a bank REO, their performance is tracked. How close were they to their BPO price? How many days was it on market? They have been doing a lot of probates lately, and they have heirs who are wanting to get their cash out of the property and close it. They do not want to be in a 30-40 day escrow, neither do they want to close anything.
Bruce asked Andrea if she is pursuing probates, which she said she has started recently. She actually went and took a class on how to purchase probates. This is a good niche since the last couple flips she did have been listed but were probate properties. Every time Bruce heard from Gene Devine, it was always a probate. Andrea just bought a property that was inherited by the sister of one who had passed away. She wanted nothing to do with the house and no capacity to deal with it. This was not the only case of somebody who just wanted out and nothing to do with it.
Bruce said one of the things that is lost is everyone who wholesales houses makes that decision. When you are selling something, you are saying you do not want retail, you want a check. You want it to be fast and are leaving it on the table for the other person. There are times when this is a benefit. This is not true 100% of the time, but definitely a certain percentage of the time, especially when it is a gifted house. It does not really matter if you get 100% minus closing costs, repairs, and months of time devoted. You would just want to check where it is maybe 10 or 15% less than what you would have possibly gotten going through all that. These are two different skill sets: finding the property and taking it through to the very end. It is not always the same skill set, and this is why Aaron said he is a buy and hold type of person.
Andrea said after doing it now for a little bit, it is nerve-wracking. You wake up in the mornings and tell yourself you better have done the right number. Bruce said the other part of it is closing. Bruce remembered days where they were supposed to have 7 closings, and they would only have one. He would have enough money come out of that to make the payments on the hard money loans for the 20 that were waiting to close.
Quadrant 1 is a fast, in-between boom and a bust cycle. It is that calm period where everybody is trying to pretend that it is still okay. On the MLS, agents are listing these properties as prices flattening out and people are in denial. You just had a great run, everything you touched turned to gold, and it will continue but is just taking a pause. Unfortunately, charts do not usually do this. What happens in Quadrant 1 is you have a rise of foreclosures and inventory. You also have a stopping of sales and price increases. All of a sudden, these defaults convert to trustee sales that then convert to REOs. The mix changes radically, and the REOs start dictating what the number is and not the fixed house. As soon as this happens, you are in Quadrant 2. You are inevitably going from Quadrant 1 to Quadrant 2.
Some things happen very quickly here. For example, land becomes very unpopular. If you have land for sale, it is not going to sell. At the very best, it will get an option. Somebody will buy it, string it out, and see if it will work. Usually they fall out of escrow. There are some things that happen, such as mobile homes and things that are okay in Quadrant 4 since you rationalize it. These are things that are not okay in Quadrant 2, and it changes really fast. The agent at that point is also trying to realistically deal with the sellers who are not understanding what is transpiring.
This happened in the 2006-2007 market. It went from where it was in 2006 to 2007 when the banks were not realistic at all about what their properties were worth. Buyers were simply not going to buy either. Lots of people had borrowed a lot of money, so the buyers were upside down. Everybody had a big loan and had refied money out, then they started losing their credit. At the worst case in 2009, around 75% of transactions in Riverside were REO and short sale. This meant that 75% of the time a close of escrow did not replicate a buyer going forward. This was completely ridiculous. You had this big hole, a large amount of REOs showing up, and there were only cash-buyers to take it off the table. 2007 and 2008 were pre-hendge funds and mostly involved private people. There were 50 listings in San Bernardino for every $1,000 price increment.
In Quadrant 1, investors in the first day MLS should spent their time building relationships with the agents who are going to be focused on short sales and REOs. One of the things that started to happen was in 2005 when they wrote the report, you would have someone like Mike Novak-Smith in the audience. Aaron asked how you spot the agents who look like they are going down that route. Bruce said this is repeat history and you have been there prior. Before this, Mike Novak-Smith was an REO agent. When that cycle started, Bruce received calls from people who were doing it in the 90s. They asked Bruce if he could send them things like he did ten years prior. This is how long those relationships work, as well as your reputation.
Quadrant 2 was the bust when REOs and short sales really start landing on the MLS. This has really changed too. Technology and a lot of the banks have forced agents to have a board with all the properties, and they are really looking at the net net. Aaron asked if after so many not closing they are finally giving investors a chance. Andrea said one of the things you have to look at is Fannie and HUD had their first look time periods. They are wanting to keep those properties for the buyer pool that is going to be an owner-occupant. Those type of properties go through the first look period, then they are open to investors being able to bid on them. As far as regular inventory is concerned, we are talking about a property that does not have a kitchen or the pool is empty. These are not going to get the financing. It is about them being realistically priced.
One of the best things that happened to investors was the city got their capacity to find homes. It was different in every city. In Riverside, it could be up to $100 per day per fine. Aaron had a listing in San Bernardino where the fines were greater than the listing price by a lot. The lender was selling it, writing a check, getting paid off a little bit, and having to pay off the city lien of $80 grand. The cities also had the neighborhood stabilization fund, so they were suddenly competing with investors being able to buy the worst of the worst. Even if they were over paying for it, it was not money with which they had to worry. They ended up not being able to spend a lot of their money fast enough.
What is interesting is Bruce does not know if we will see this glut of foreclosures dealt with the old-fashioned way and cause great price damage. It seems like there is a learning curve. The technology curve is also matched with what we did that was successful. Nevada decided not to foreclose; so you had people living in their house 4-5 years without making a payment. They were upside-down by so much that the lenders did not even want to touch it since they would lose 80%. A housing shortage was created to where the builders came in and built things for retail.
Everybody’s prices rose, and all of a sudden you are wondering if this is the new method. If you are a lender, do you want to take a 70 or 80% hit, like what happened in Moreno Valley. Bruce was buying properties at $60 grand that were going for $360. This was how much the loan was, so they were almost getting an 80% or more haircut. You can ask yourself if you would rather straighten up 4 or 5 more years and get $280 for it. If you think about it, this is an interesting thing. However, you need the cooperation of the powers that be. In 1995, there was a dip in foreclosures but an increase in NODs. The lenders said they were not foreclosing on them, and they enacted a law saying that within 100 days of being late you have to foreclose. This forced their hands, and the peak happened. This lead to the worst year in 1997. This time, the NODs went through the roof and the trustee sales went down because they did not want to deal with it anymore.
In 2008, they tried to incentivize buyers with a $1,000 tax credit. It worked, but you brought forward buyers into that year. When the $8 grand disappeared, you had the buyer pool that was so damaged credit-wise and mood-wise, and this is one thing which you do not have a chart. The question is what the psyche damage is when you have a great depression in an industry take out housing values to such an extent that you thought you were safe at 50% equity. Now, you are upside-down. This is bizarre.
Tune in next week as Aaron continues his discussion on the strategies with Bruce Norris and Andrea Jennings. For more information, you can call Andrea at (951) 640-8131. You can also visit the McKee Real Estate Group’s website at www.mckeeregroup.com.
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