Aaron Norris is joined again this week by his own father, Bruce Norris, and Andrea Jennings. They are covering Buying Strategy: First Day MLS Buying. They are re-doing the Buying Systems course that was done in the past and is made up of about 24 different buying systems. By the time we are done over the summer, it will end up being closer to 3 days of information as opposed to two. They are covering first day buying out of the MLS, how it has changed, and technology. Last week they ended on Quadrant 2, which is in a down cycle and started in 2007, 2008 in earnest
- What was the market like in Quadrant 2, and why was it important to know in advance what it would be like?
- What was Andrea’s experience with realtors in this market, and how many stuck around?
- Is there a good way to wear multiple hats in the industry with all the new technology in place?
- Is it helpful to be the first one on the scene of a house listed in the MLS?
- What are the different mindsets of the sellers in the different quadrants?
- What kind of markets are Quadrants 3 and 4?
- Is it valuable to have a sales agents license in these quadrants?
It is important to realize in advance when a down cycle is coming because you start getting all your anchor people on your team when they are not busy. Suddenly, they get slammed and have 800 listings instead of 8. The changes to the MLS also has to do with the players involved. In Quadrant 1, investors start keeping an eye out or go back to the people doing the REOs in the last cycle and will be picking up the torch and doing it again. Now it is during the downturn, so a lot of what is being discussed involves the short sales in the MLS and, God forbid, equity sellers who are just dreaming and over-listing. Andrea said we are talking about a 2008 market when they were still in a 2006 mentality.
Aaron said he would hate to have to deal with equity sellers in that market since it would have been really painful. Bruce said dealing with lenders was not any easier because they could not accept the fact that they were going to lose more than 50% of their loan. You could see the journey of a listing, and it was ridiculous. Some of the properties he bought involved a $360 loan that started at $299. He thought it was a good deal until there was one for $199. However, nothing happened, not even when it went down to $159. You could methodically see they had a pattern. Every month they would revisit it, have to do it again, try to lower it another $50 grand, and still get nothing. It was really interesting to watch that journey.
Aaron said one thing he did not think about was the landscape of the people involved in the business really changed as well. It was a running joke that everybody was quitting their jobs to become a realtor in 2006 because they did not have to do anything and would make thousands of dollars on everything they touched. Suddenly, the downturn happened and they realized they did not have any skills or relationships, so a lot of them disappeared. What you had left were people who did not know any better because they were brand new and did not have any pre-conceived notions of what it should or shouldn’t be.
Aaron asked Andrea about her experience with the realtors and if the only ones who remained were those who had been around or the new ones who appeared and realized it was a bad time to be a realtor. Andrea said in 2008 the banks realistically thought they were going to get rid of their inventory in a 24-month period, and they absolutely flooded the market. Andrea said when she was working the REOs they would open a platform called Equator, where they would have tasks that showed up in green and yellow. You never wanted to see red as this was bad. They would wake up in the morning and have 50 new green tasks. These tasks consisted of checking the property and doing BPOs and monthly marketing reports. Banks were not realistic at that time on what they were really going to sell those properties for, although they did get realistic after this. There would be one house listed at $200, then the bank would do a BPO and list the next-door neighbor at $150. This was really what they were seeing in 2008.
Bruce said the other thing that happened to the agents was there was a lot of oversight that was not physical contact with a human being. It was a methodology and computerization, and they stopped listening to people who knew they were crazy and should not be listing the property. Bruce was called by REO agents telling him to make a ridiculous offer so he could beat up the lender. They needed to get jarred because they were asking something that would never happen. The agents were being graded; so you would have someone like Mike Novak-Smith getting listings taken from him because he did not sell them and would get a bad grade. He would then hand them to someone like Steve Silva who was about to get a bad grade because the price was still bad. There was nothing you could do because everything was in a free fall. They were trying to buy and sell properties at the time, and they were having to calculate and reduce the listing price by 3-4% a month.
Craig Hill of the Norris Group did an amazing job since that was such a hard market to flip in and he still made it work. As far as the first day MLS, it is important to note the investors who people may be up against who went from 0 to 60 in a year and had a carrying cost. People were concerned about the banks going under, and Aaron was hearing about $1,000 worth of utility bills and trash. It was not like they were front loading and giving $20,000 to handle all the fees. Agents had to bill to be reimbursed for everything. This was in the 2008 market, and they were a little bit smarter in 2010 when they started having a lot of outside companies.
In 2008, the agents were really responsible for and fronted everything. This included the utilities, pool person, gardener, cash for keys. If they did not have them on the ground, they could have the “great benefit” of being fined every day. They dealt with a lot of properties where they were fined for dead yards. Riverside made a lot of money back then for something like this. Aaron said he has seen and even negotiated some of these fines.
Putting the realtor hat on, Andrea has all these investors hitting her up when she is slammed. Aaron asked if there is any good way to do this at this point with the technology in place, knowing that at certain periods of time they had very little control and it was just a numbers game. Andrea said in 2008 and 2009, there were some really great asset managers. These people would call, and back then they wanted feedback. They would say they did the BPO and would wonder why it was being brought in at a different price.
At this time they were looking at the appraised values at the time they had sold they property. They would ask how they could have a house in Moreno Valley, for example, at $300,000 that was only a 2-bedroom. The answer would be that they never should have had a $300,000 2-bedroom house in Moreno Valley in the first place. It took them about a year before the asset managers became receptive of understanding that the agents were there knowing what was happening. If they wanted their properties sold, they needed to read the BPOs and listen to their comments. Things changed in 2010 when the robo-signing started happening as well as everything with MERS.
If you were a first-day investors and had a notification from the MLS that there was a decently-priced listing, Aaron asked if there was anything the investors could have done differently or not done. Andrea said one thing a lot of people completely ignored was the auto emails. They did not want to take the time to respond to these. Another thing that happened was the house would be listed for $60,000 and they would get an offer for $20,000. This was not something they wanted to present to their bank since they had to be a little bit more realistic.
There is a process to this. Asset managers will listen to you as an agent if you have a good track record of moving their property. The other thing about investors is when the agents call an asset manager and tell them the status of a property, they were able to get them to listen back in 2008. They had power and influence to be able to take Bruce’s offer because it was all about getting him off the books. If you are on the investor side, you are thinking how you can make your offer stronger than anybody else’s. You are thinking how you are now looking at it through the eyes of a seller. If they are going to do the price they are at, then they just want it to close. You have to make it a no-brainer. When you make an offer, especially when you are trying to tie up a relationship, and you do everything that is necessary, then process is over.
Aaron asked if it is helpful to be first out of the gate. If it is listed on the MLS, and within 24 hours an investors has seen it, told the story to you of what needs to be done, and come in with all cash, Aaron wondered if this makes a difference. Andrea said when you are talking about the 2008-2009 market, you did have opportunities to be first. Banks were wanting to liquidate property wanting them off of the books. They were not wanting them sitting there, but it is a different story now.
Bruce said in Quadrant 2, you are dealing with a really motivated seller. Quadrant 3 is a semi-short period of time where we have hit the bottom and are flattening out. First day MLS listings come out, and there may be more options. Therefore, we are going from a buyer’s market to a little bit more of a balance with the seller’s market. Aaron asked how it all changes. Bruce said it is subtle. If you are in Quadrant 3, you do not even know what occurred until you look back. For example, in 1999 you look back and see how you did not go down. It is not stark, just blah. Usually when things change, it starts with construction. This brings in the migration of construction workers; and all of a sudden we get off to the races and off we go.
For an investor to understand what to do in Quadrant 3, you can really do well. If you have had dirt through Quadrant 2, you are the loneliest person in the world. No one has called you to ask if they can buy your lot or take the tax bill away from you so they can mow the weeds for five years. Quadrant 3 is one of those where if you have charts that say things are over, this is not the case if you are a landholder. You are still mowing the weeds and with no hope of having out that expense. This is a perfect time to option dirt since you know you will be able to use it. In a few years, you can buy it for nothing since it is worth nothing and does not pencil. This is why the quadrant system is cool because you are always doing the right thing in advance of when it is worth something. When you try this in Quadrant 4, you see how great this is.
In the scope of the first day MLS, it was hinted that something changed. Originally, in 2008 it would matter if you were first, and Aaron wondered when this changed. Andrea said at this time a lot of motivated banks were wanting to liquidate their inventory and work with investors who were going to close. The time it started changing was when the market started improving and people did not think they needed to take the first offer. You also had 97% of sellers who owned equity also. It does not mean there are not motivated private sellers, but it does mean there are less of them and not the dominant number of REOs. It is going to be the isolated case of somebody with equity who wants to sell.
It has gone to a point where a lot of what has happened will be doubled-ended. You still have the first-day motivated seller, but now it is being contained by somebody who says they already have the investor. Therefore, they will flip it and earn both sides of it. This is still there, it just may not be the same methodology. One of the things you should do is pull comps and see whichever ones are pending over a day or two and priced right. Bruce said he would call to try to work his way into the number 2 position since he would know he cannot be number 1 yet until he gets a chance to make an offer. When you do this, you write an all-cash offer and it is sitting there. All of a sudden, the agent says he likes this person better and it is easier. You can slide into number because that is what they want: an easy transaction.
The other part is that the reputation part has legs. The Norris Group did a transaction in Norco where they had a septic tank under a room addition. A call was never made to the REO agent to complain. Bruce tore the floor up himself to get to the tank not realizing the young couple was bringing their parents in to show their parents what they were buying. Andrea said a similar thing happened to her last year where she had an REO they had purchased during the summer and rehabbed it. It had a skylight in the bathroom, and she bought this house when it had 20 offers on it. She bought the house and met with the agent to talk. Her offer was actually not the highest, but she had gone out, done her due diligence, and established a relationship with the agent. The agent she met with was not only new to the business, but he was also an attorney who worked with seniors. These were the people who owned the house, and this was how she ended up buying the property. He felt like she was going to do what she said and let her have it.
What ended up happening was the skylight started leaking after they closed escrow. The agent posted on Facebook about the skylight leaking, so Andrea called and asked them why they did not tell her about it. Andrea said she could have taken care of it for her, but the problem was she did not know it was going to leak. The assumption was that she was not going to take care of it, and the agent was shocked. Andrea sent her people out there to replace the skylight for them and fixed the drywall, and it only cost them around $2,000. This made for the best relationship for that agent and those people because they took care of them.
This is what is really important with being an investor. It is not just when you close the house, but what happens after you close. Agents remember this. Andrea sold one property on Piedmont, and she went over to the house after a heavy rain to make sure it did not flood. They fixed this, but they wanted to check it since it had been a while since they had a really heavy rain. After it closed, Bruce also went over there, and the owner’s wife was surprised that he was there in person. This is important and what will create longevity for an investor.
It is not only how you treat the agents on the front end, but also how you treat the agents and people who buy the house. You survive and have long-term relationships by being honorable. You might as well say this is how you will be in business since you will need to be in order to have a successful referral base since they will already know what to expect. This is what everybody wants to know. If it hits the fan, it will be okay.
Going back the first day MLS, there are still opportunities on the first-day MLS. It really is how you present yourself to that agent when you want to write your offer. A lot of people may write this off because of technology. They think they are not going to be first because it is not faxes and printed papers with terrible ledgers. Aaron said he has glad it has taken this turn since in the original chapter it did not read into the relationship as deeply as it should have, especially today.
Moving on to the next quadrant, Quadrant 4 is definitely a seller’s market. If you have a good property listed at a decent price, it will get beat up. You have investors who are writing offers without seeing it more oftentimes than not. Andrea said in Quadrant 4, investors, especially new ones, will write dozens of offers based on what they see on the internet. They do not actually go see the property, and this is one of the biggest problems. They will write offers where they have not done the numbers and are writing over what the property is really going to be worth once they fix it up to flip it. They then go to see the property and see things in it they did not know it had. They will then want to renegotiate, and this is what makes agents mad. They have accepted their offer and the terms, then they go view the property and want to renegotiate the offer.
In Quadrant 4, there is really not a suggestion that the first day MLS be one of your lead buying systems. In the course, the Norris Group specifically wants to show the history of how it changes over time and how technology has changed. You also want to realize as a buyer that you are in Quadrant 2 and have all these foreclosures. This is a skill set and is relationship-driven. You figure out how you can get the person to see you as a valuable team member and will want to work with you for several years. When you get to Quadrant 4, you are usually dealing with an owner directly off of a mailer or sign. They have a completely different skill set, and the MLS has taken a back seat. As an investor, the whole idea of the buying system is to look at a set of charts so that you can best use your day.
In Quadrant 3, you are thinking about how you are going to cash this in when it is all about whether or not you have inventory instead of whether or not you are trying to get a deal out of the MLS. You would want to be presenting inventory to the MLS at that point because you have thought about the process that is going to happen in Quadrant 4. Aaron said when people call in and tell him they are working the MLS in general, he wonders what their angle is. In Quadrant 4, this is the only opportunity you will have to get a big discount because it does not have anything that can get financing and maybe an expandable structure. If you are in a county that goes for $800 a foot in a 900 square foot structure, and most of the houses are 2500 square feet, this is perfect.
Aaron said this is something that changes by city. You really have to make sure the cities have locked it down, which is something they want you to do anyway. Cities like Pasadena, LA, and several other markets do not even want things like McMansions anymore. Quadrant 4 MLS is limited inventory; so this is very relationship-driven, and the people you make those relationships with are very different. A lot of things hitting the MLS are things they are buying. Aaron said he still sees short sales and REOs come through the lending division, just not as often.
Aaron still gets a lot of questions on whether or not it is valuable to get the sales agents license in this quadrant in general. Aaron likes the education piece of it, especially for somebody who is new and has no background in real estate. Aaron likes having the three courses since he thinks it is very helpful. However, everybody is so worried about the risk involved. Bruce has had his license since 1995 when he started the Norris Group. He interprets every conversation he has had to deal with regarding the license as to whether he is trying to get a listing. This was a question he would answer and say he had a license as a realtor and appraiser. However, he did not want to appraise your house or list it. Instead, he wanted to see what your situation is and help you get to the finish line. If he is part of it, then that’s great. This was how he would get started. Usually, he never had somebody hang up if he had a license because he explained how he was not interested in the listing.
He saw a fantastic sign just recently. Normally the sign would say “We buy fixer-uppers.” However, this time it was a broker sign that said they helped people who owned fixer-uppers. This is a great angle since you will get the person who is fixing them up, or you may even get the person who already has one. Aaron heard of a realtor in San Diego who does contracting work, and somehow she figures out a cost share with the seller. They just have to be willing to fund the money for the repairs.
Aaron asked Andrea if she has had a problem wearing both hats, both a flipper and an agent. She said as a realtor she likes people to know that she is still a realtor. However, you are talking about an end user who is either going to list their house or buy it. As far as an investor, she has not had an issue because she makes it very clear when she is contacting the agent that she is not contacting them because she wants to write the offer. She makes it very clear that she does not want to represent herself and wants them to represent her. She then discloses to them that she happens to have a real estate license. You do not want to wear the commission hat and the equity hat at the same time.
Andrea said to her if you want to be an investor, it is not about the commission. Bruce taught her this too when it came to selling their flips. She had someone contact her a couple months prior asking if they would list their flips for 1%. She told them they needed to find another agent. However, she gave him some advice on if he is trying to put together a team as a flipper and property investor, treat your people right. Trying to ask somebody to sell for 1% is not treating your people right. You will be replaced by somebody who will do it for ¾ of a percent. This is the shortsightedness of what Bruce sees happening.
A lot of things happened in the early ‘90s. Bruce met Andrea, then suddenly they were going to auctions and buying 6 houses in a day. He needed Craig to help him with this, and he did not want to have to invent the money wheel. It was one of those things where he realized Craig was there, and his money was going to fund. It is a long-term play. Andrea said as an investor you really need to have a good team, and this is what is most important. This includes your contractors, agents, everyone. Bruce met with Gary’s Carpeting and L&H Painting, and he has done business with him for three decades. For this reason Bruce already knows what to expect.
Aaron asked if the first-day MLS is a good strategy to hit up if you are a brand new investor. Bruce said it depends on the quadrant. It will be the main one in Quadrant 2 and a sub-partner in any other quadrant. Quadrant 2 is the main relationship-driven quadrant where you will make relationships that will last for years. This includes REOs and short sales. The first-day listing is filled with these things every day. If he was just starting in Quadrant 2, he would drive relationships to get repetitive inventory. This is not so much the case in Quadrant 4.
Thank you for joining us for Aaron’s interview with Bruce Norris and Andrea Jennings. If you would like more information or need to reach Andrea, her cell phone number is (951) 640-8131. Their website is www.mckeeregroup.com.
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