Aaron Norris Interviews Bruce Norris of The Norris Group on the Real Estate Radio Show #556

Aaron Norris

On Friday, September 22, the Norris Group proudly presents its 10th annual award-winning black tie event I Survived Real Estate. An incredible lineup of industry experts will join Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. All proceeds from the event benefit Make a Wish and St. Jude Children’s Research Hospital. This event would not be possible without the generous help of the following platinum partners: HousingWire, Coach Fullerton, Coldwell Banker Town and Country, PropertyRadar, the Apartment Owners Association, the San Diego Creative Real Estate Investors Association, InvestClub, Las Brisas Escrow, MVT Productions, Inland Empire Real Estate Investment Club, Realty411, and White House Catering. Visit www.isurvivedrealestate.com for event information and tickets.

Episode Highlights

  • What were the repercussions of Hurricane’s Irma and Harvey?
  • What was Bruce’s job after Hurricane Andrew to help re-establish things?
  • What were the main differences between Hurricane Irma and Harvey
  • What is the main problem in Florida when it comes to flood insurance?
  • Could California see a decline in contractors from them leaving the state?
  • When Bruce calls asking about opportunities, who is the first person he asks?
  • What Quadrant is Florida currently in?

Episode Notes

In a role reversal, Aaron Norris is joined this week by his own dad and the Norris Group’s very own Bruce Norris. They received a lot of calls and emails asking them about Florida, and they assured everyone that Doug Duncan, Peter Fortunato, and John Schaub had some property damage but are doing ok. Bruce said he built his Florida project to the spec of knowing this could happen. Leesburg has probably not seen a hurricane in 100 years that was really a direct hit. The eye went directly over them, and one roof was hit by a jagged object. Outside of this, they have very little damage. Part of this came from his experience with Hurricane Andrew where he looked at the survivability of different types of construction. This included different types of construction including manufactured homes versus stick built or concrete.

Today they are doing something a little different. They are going through the Buying Systems course they have online, and one of the chapters covers investing after a natural disaster. The system specifically talks about the process of how to get in the way. As of today, Hurricane Harvey was personal to Aaron and Bruce as they had family in Houston. 20,000 still remain in shelters and hotels, and it has killed 75 people. Aaron looked the information on Katrina, and over 1,800 were killed there. 65 were killed during Hurricane Andrew. In some parts, there was 50 inches of rain. This is crazy for such a short amount of time. 120,000 people were rescued in Houston.

There is not as much information on Irma, but it seemed many heeded the warning and got out of there. A lot of people’s complaint with Houston was that it escalated so quickly and they did not think it would be as serious. They almost told people not to leave since it would have been more dangerous and you could have sunk in your car. ½ million cars were lost this way in the hurricane. It caused $75 billion worth of damage.

With Irma, at this point there are 4 million without power. There are 22 confirmed dead in the U.S. and 37 in the Caribbean. There was a story out recently about retirement communities that lost power, and the Florida Keys were hit the hardest.

Aaron asked Bruce if a lot of this rang true for him as he was part of the Hurricane Andrew process. He said Andrew was an accident, and a lot of buying systems are. As a buyer, you go through and find a niche, and from this you could see how to treat the next hurricane. With Andrew, he would have never thought of it being a buying opportunity. Bruce had taught his friend Alex Navarro how to run a business, so he was running an ad in Florida about how he had bought houses. The hurricane hit, and he still had the ad. He was not trying to take advantage of the situation, his ad just never got removed. 30 days after the hurricane, he received these phone calls saying he received his insurance check for 80% of the value of his property. He wanted to get the rest to 20% from a buyer.

When Alex went to see the property, the amount of damage was mind-boggling. When Bruce flew into Florida and looked at it, it was hard to conceive of an area coming back. 90% of the homes had roof damage and flood damage inside because of the torrential rain. Insulation was so heavy that it all got blown in, and by this time 30 days had passed since Bruce arrived. People were writing their policy numbers in black paint on their house. You would pass by a neighborhood that was five years old that looked like Beirut. The visual was so impactful that Bruce had to sit back and ask himself if he really wanted to do this. He really thought this might never change.

People were calling to say they got their insurance check and getting 100% whole. The greatest thing about the experience was that the people got to move on completely whole, 100% cash from the insurance and the buyer. The deal was he had to end up with something that was overestimated by the insurance people. This massive number of people who are insurance adjusters descend in this one area, and their experience ranges from great to not knowing what they are doing. They are looking at this damage, and it looks visually awful.

The city is also participating and red-tagging everything in sight. The insurance company sees the red tags and get 80%. Alex called Bruce up and asked him to fly out there to help him take all the junk out of some of the houses since he saw the structure was still fine. They started buying the homes that were totaled; but when they took all the junk out, they could have the city come back in and re-inspect it to tell them whether or not they could fix it. This was one of those times where you were actually helping people move on. When you think about how many homes were uninhabitable, those people had to go somewhere when there was nowhere to go.

When Bruce got into Miami, there were only two rental houses in the entire city. They were both going for $4,500 and $5 grand. You could not go anywhere. If you got a check from an investor, who cares whether it took a long time. You had spaces that you would never see again. The difference was the type of hurricane that Andrew was is wind damage, not ten feet of flood water. In the chapter Aaron was reviewing, Bruce really compared Katrina to Andrew, and it is water versus wind. Since writing that chapter, they had instant calls asking if he was going to New Orleans to check on the damage form Katrina. Bruce said no and that this was different because you have 8 feet of water sitting in a house. There may be other experts who say this is doable, but not something Bruce would want to take on.

The other problem is that a lot of people are not covered by flood insurance. Aaron read a bit about forced flood insurance, which was due to expire this month. There has been a 3-month extension through December, so Congress has to act on this now. The program started in 1968 and is administered by the Federal Emergency Management Agency. The goal is to reduce impacts of flooding. It is providing low-cost insurance for people because private insurance companies did not want to touch it since they knew it was a total loss. Part of the issue was it expired back in 2010, and they were looking at greatly increasing since the rates were not commiserate with the risk.

Aaron did not have a lot of time to research to see if the numbers were true, but they were saying how there is around $2 billion available right now in the fund, and they can borrow up to $5 billion. In Harvey alone is $75 billion worth of damage, so it’s laughable. What is interesting about those ratios is the $75 billion in damage, but you have to ask what percentage of it was insured. Did FEMA come to the rescue with loans? Aaron said yes, but you still had to buy the insurance policy. Those with insurance on average in 2016 got on $86,000 worth of a payout, while those without insurance got an average of $9,000. Aaron assumed the people with the insurance policy were dealt with first, and those who did not were left at the whim since they were not a priority and were getting far less.

Aaron asked Bruce if he remembered people with and without insurance during Andrew. Bruce said it was not a flood issue, and this was the difference. Everybody had wind, and this was backed by some government program. It was not outrageously expensive and is very different from earthquake insurance. It goes partly with the deal. When Bruce got insured on the properties, the price was so reasonable he contested it. He told them to explain as simply as possible what is the maximum he would pay out of pocket. The person he spoke to wrote it in an email so he could see exactly what they needed. This was the difference, but almost everybody has wind insurance in Florida if they own a structure. You may have a fire policy or a writer for the hurricane, and it is not much more expensive.

Aaron read a Pew Research report that said a lot of people do not realize they are not covered by their insurance because of an addendum. For the flood, you probably have a huge percentage of people not covered. Houston had not seen a flood in over a century. In Miami, with Hurricane Andrew, Bruce considered not doing anything as it was so bad. He could not imaging it coming back; but Bruce called where the recent hurricane, Hugo, had hit. He talked to the city building department and asked them to tell him what happened. In a year, it was like nothing happened expect everyone having a new roof. There was full employment and occupancy.

It turned around, and you cannot have this in Houston since too many people are uninsured. Too many houses will be vacant like they are now ten years from now. This is the case in with homes damaged in Katrina that were never redeveloped. You can’t have your house fixed up when nine of your neighbors are still boarded and green. What happened in Florida just now did not cause extensive damage. If you were hit by the eye right over your house at 85 mph, that is very different from what happened with Andrew at 165 mph. There were some visuals there he would never forget and for which you would not want to be waiting at home. There were 1,000 trees in one location that were all snapped off at about 20 feet. This created wood shards, which flew through telephone poles like arrows. Signs were also coming loose in the wind and becoming projectiles.

There are definitely a few things to think about with Irma versus Harvey. It is really flood versus wind, wind being far less of an issue. When comparing Irma to Katrina, in New Orleans you have a levy issue. In Houston, if this is a 1,000 year flood, that is not even the same thing. The problem with water is in Andrew, the assumption of damage was way greater than reality. In Houston, the assumption will be way less than reality. All the water is gone, and you would need to take off the drywall. Bruce fixes these houses. There was a flood in northern California in Napa Valley, and he bought six mobile homes that had been submerged for several days in 4-5 feet of water. These sat here for two years with lawsuits going around, and he bought them three years after the event. He bought them for only 10% of what he sold them. He was willing to take the risk.

When you get into the wall, you are dealing with mold in everything. You have to really realize this is a different animal. They had to fix the houses one at a time. You are not just talking about water, but also chemicals and sewer. There is a lot that has been soaking into that wood, especially if it has been marinating for a while. Aaron asked how you even deal with this or know what you have. Bruce said you don’t, and this is why you can bet somebody has likely underestimated the repair cost. The insurance company is often not involved since they are not there. The only deals that would be had would be from the lenders at a huge discount. As a buyer, you could care less if they say no because you have to have such a big margin in order to taking something on like this. However, this could happen. These lenders will take these back with no one to look to, and they will have to decide if they want to keep it. This is also a liability. One of the problems is that you will have a loan in the middle of a neighborhood that is totally decimated. If you want to buy this house, the lender does not have loans on every house. You are going to buy one house and hope the next door lender reacts in a similar way and sell it. Otherwise, you have a problem.

Aaron said we have never had two category four storms hit at the same time. You have two letters back to back, Harvey and Irma. Two of the biggest states got hit, almost the whole state of Florida. There is opportunity in some places that were damaged by wind in Florida and would definitely be a hat Bruce would put on if he were interested. They have to go after the areas that got wind damaged to where someone was really totaled or it looks like it’s totaled. See if you can take all the junk out, see if it is structurally sound, and fix it from there. That is the scenario you need.

Aaron would tell investors to pay attention to the flood insurance program since it could increase substantially due to how underfunded it is. The rates are not commiserate with the risk and how much the government will pay out. There are Florida investors who intentionally do not have flood insurance because it is so cost prohibitive. A lot of these people who own waterfront properties have old houses where the value has become the dirt. A 1300 square foot house may be worth $1,000,002, and if it fell down they could replace it with $200-$300 grand and build a bigger house with more value. People are seeing it as not a big deal since they do not have a loan on them. If they replace it, they can save $10 grand a year by not paying the insurance. Essentially, it pays for itself.

Aaron gets calls from investors who are definitely seeing dollar signs. Aaron asked Bruce if there were things he would caution them on at the local level. Bruce said if they are going into it, they need to know what they are looking at. They need to know structural versus physical and bad visual damage. If it is red-tagged, you need the city to come take it back. With Andrew, every roofer in Florida had a smile on their face and a backlog of a year’s worth of work. You had to really think about who was going to fix this and how long it would be before it is fixed. Bruce had brought out crews from California since their houses were isolated. If you add to the pile during the year, they would be going off to happier grounds.

Florida is known for contractors who are not really good or consistent. You have two of the biggest states in California where Aaron wandered if the contractors would move. Aaron wondered if California would have an issue with contractors leaving, which Bruce said they already have. One of the problems for people who are builders is skilled labor. One of Bruce’s relatives lived in a town in Texas for a summer program at her church. At that time, they were big in oil, unemployment was 0, and the McDonald’s worker got paid $25 an hour. Bruce thought they had a housing boom; when in reality there was a housing shortage but no boom since you could not get anybody to stay on the job. The second they are framing a house, somebody from the oil world comes over and asks why they are working here when they could make $100 grand elsewhere. It was very interesting.

Water is a niche that is not a simple fix and involves several houses. Aaron asked about the water in states like Florida and if it is handled the same way as California. Aaron has a rental in Florida and had just gotten word that nothing happened. Aaron wondered if claims and the Clue reports are the same nationwide, which Bruce said they are. You will have a lot of houses that have that blemish.

There was a homeless guy in Florida who survived by collecting aluminum cans. Unfortunately, in Florida you have bug problems, so every house almost has an aluminum room. When Andrew came, it took out about 100,000 aluminum rooms. This man went from picking up cans to renting a truck and picking up aluminum rooms. From this, he was licensed to replace the rooms and turned into a multi-millionaire in a year by picking up and replacing aluminum rooms.

Aaron asked Bruce about when he makes the phone calls to look for opportunities and whether he looks for banks, realtors, or the seller directly. Bruce said it is the seller directly. The impetus was that they just got their check and cannot really go anywhere. Back home, they live in a red tagged house and living out of their car because there are no hotel rooms or anything in which to stay. Their motivation is they want to go. You are not hurting them. You have an insurance company who says they will write a check and a building or apartment that is damaged so much that it is red-tagged. Then you come back and take everything out and they say it is not red-tagged. This is where your margin is. You have more knowledge than they had.

When you give the owners their check, they are 100% free to go somewhere else. They do not own it anymore and are free to go. It is a cool niche. Aaron asked Bruce if there is any specific discount he is looking for to take the risk. It sounds like it is not a three-month fix and flip, but rather a year-long journey. You are 100% whole, all-cash, no closing cost. This is the number.

Florida is still in foreclosure mode and still dealing with their own little Quadrant. They have an interesting blend of the Quadrants, including the way it was handled. They have a lot of foreclosures that were loss mitigated, and it is a four-year foreclosure process. This prolonged their Quadrant 2, and they have been moving up in price now and builders are very busy. They are in their own Quadrant 4 now.

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For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

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