This week, Aaron Norris is joined by Kymberly Nelson and Derek Harms with Sonoca. They were very helpful back in September with Cashing In On A Boom. They renovated one chapter and added three brand new chapters to the portal. Adding Square Footage was the chapter they helped with since they had been doing beautiful work in the space for close to a decade. Aaron and Bruce decided when they were not experts at something, they wanted to bring somebody in who was actually doing the strategy in California so they could get the latest and greatest.
Continuing from their previous discussion, one of the things that was missing from their questions at Bruce’s last speaking engagement was they did not focus enough on price point. In Orange County, Aaron has seen the breakdown by price point. When you are under the FHA limit, the time on market is typically under 30 days. If you are over the $3 million, you are talking a fully year. It is drastically different depending on the price point. Aaron asked them what price point they like to stay under in San Diego. Derek said the price point is huge and the median price is around $600,000. That or under is where they are comfortable, at least until they see how the dust settles. Depending on if there is another interest rate hike (which there was) will be another factor. The question is who gets priced out with all these interest rate hikes.
You see price points effected when people have a little bit more purchasing power, but people are feeling the squeeze. He feels they have assets that are a little more appropriately priced in desirable areas. It’s a tale of two markets in San Diego. When you look at the higher end at $10 million and up and the lower end at $600,000 and below, it is drastically different.
Aaron said this is important for people to realize when looking at certain price points. Sometimes median price can be very misleading until you really start digging into the number, sales volume, and the number of months of inventory based on the price ban. It is so different in each market. Aaron warns people if they are buying rentals assuming you will have a vacation rental, this is a mistake. It is so dangerous right now, and we have already been warned by the Senator pushing all this regulation. He let them know he is not done yet. It seems there is a lot of anticipation and uncertainty in the market. In California, we are at a Democratic majority and they are trying to make money. Real estate could be on the chopping block, so maybe it is time to rethink everything.
Derek said just the title alone of Bruce’s report in January is ominous. Since he has gotten older, Bruce has gotten more of a conservative bone. He feels we are at the end of the 8th inning, and his passion is to help people both make and save money. This could be just as important. If they are in weird inventory with flaws; even in markets like in the 90s when we did not go down a lot, if you are in the wrong inventory you get smoked. He wants people to be thoughtful as they approach. Aaron said they will still be lending in California on the right projects if it makes sense. When Aaron came on to the Norris Group in 2005, he was helping his dad write The California Crash. He feels this has come full circle, and it is time to put on that conservative hat.
One of the myths Aaron wanted to cover regarding square footage is whether it only makes sense on the high dollar amount, or would it make sense on the smaller side too. Kymberly said you can do it on either the large or small side. It depends on what you are picking up the property for. Derek said if you are in a 3-bedroom house and able to find a two-bedroom, you could add a third room and force some equity there. A one-bedroom addition can usually be pushed through the city a lot quicker since you don’t have as many hiccups as you would have with other things. You start getting the engineering involved and utilities. There is a great business model to be had in the smaller editions.
Kymberly said they just had an agent who had a two-bedroom, one bathroom in an area with predominately 3Qs and 4Qs with the potential to add another bathroom. That is something they would definitely look at, even in today’s market. At the right price, it would make sense. For them to even consider spinning their wheels on it, it would need to be 25-30% lower. Kymberly said this is the situation where the agent listed the price they thought the seller was pushing for and thought they could get. The agent will let it run its course, and the seller is the one who makes the price. At the end of the day, it comes down to the numbers, which Derek said are telling them it is a lot lower than was originally thought. You have to be careful because if you get caught by holding onto something like this, it goes back to your underwriting. You would need to factor in enough margin of safety.
Kymberly said if they could pick the property up at the right price, they would add a bathroom right now. It is a hot little pocket, and the property is in a very desirable area. The market price would still be within a safe margin and range. She said she would do it, but all the variables would have to line up, which they do not at the moment. Derek said the worst case scenario is the market takes a turn for the worse and you would have to rent it out or Airbnb it. If that property was 15 miles inland without any other options, then they wouldn’t even consider it.
Aaron asked why the realtor threw out the property to them, whether it was because of a previous relationship or because the seller was dreaming and the realtor needed to do something. Kymberly said they have a relationship with the agent. He actually brought them a buyer on one of the flips that they did a few months back. They developed a relationship with him, and he knows what they are looking for and what they do. He would love to put this deal together with them, and he also has a relationship with the seller. The seller sets the price, so the agent is realistic in letting them know whether it will go for what it is listed. She thinks they will probably have a conversation somewhere down the road.
Even if they are working on a little more reasonable rehabs in the median price, which is still high in San Diego, Aaron asked if their level of design element is still a factor and if they still find ways to make things special. Kymberly said they definitely go out of the box with every one of their properties. There are creative ways to accomplish aesthetically pleasing properties without spending a fortune. It takes a little more leg work, but it can definitely be accomplished. Derek and Kymberly have always had the mindset that they do not want their properties to just be another flipped house. They just had a little condo in North Park that sold for $400,000 within 3 days. It took about two weeks of internet shopping and making sure everything fit the budget. It still had a combiner deal to it, and it was a home run.
It was not your standard white cabinet, gray toned place. This worked a lot in the past; but even as the market gets tighter, fewer buyers are seeing their sales numbers decreasing. You have to go that little extra mile to differentiate your product a little more and really aspire. Kymberly said it is not that much extra money, just extra work and time. If you put together the right tile combinations with the right color palettes, it makes a lot of sense. Aaron said it is nice that it is not so cookie cutter. Since they were having the conversation about the iBuyers, Zillow just came out that they are going to start selling and buying in Riverside County. When this was recorded, they announced they were bringing their business to Dallas. The OpenDoors and Zillows of the world will not go after heavy fixers, and it does not appear they will have this design eye. What will help investors to stick out is by being a little bit special.
Aaron imagined from talking to them that it was going to be turn and burn. It is like a lot of trustee sale buyer strategies: get in there, clean it up, and get it out the door. It is all about speed. You can still accomplish that, but make it look a little special like it was designed for the house and was meant to be. People will remember your product this way. It takes a little extra effort, but it has proven to work. They feel good about it, it helps the properties sell faster, and everybody wins.
Since they do a little higher design, Aaron wondered if they are focused on smart home technology. Aaron said he is very flexible and does not want to make decisions for people who don’t want to work with it. He wants people to be able to put in whatever they want. Aaron asked them if this is a trend in San Diego or other higher end markets. Derek said it absolutely is in the higher end market. Since they had backtracked in the price point, they were not really as focused in technology or in-home technology people can link up to their phones. The thermostat is as far as they go on some of the lower price point things.
Derek said he looks at a lot of the real estate that is higher-priced, and it all has it. It is where the movement is going. For any spec builders, it would be foolish not to incorporate the technology. When you start seeing the baby boomer generation taking a step back to what will be the largest demographic in 2019, which will be millennial buyers. He does not know if they will be in the higher or lower price points, but every millennial is so connected to their phone and the internet and controlling everything in their life. It might start to make sense to incorporate some of these smart technologies because of who the buyers will be.
When you look at John Burns’ book Big Shifts Ahead, you start to look at demographics in a new light. He thinks people who ignore that shift will end up not profiting as much as people who take it into account and incorporate it into their model. Aaron responded to a reporter who asked about smart technology. The article was going to be about hardwood lookalike. Aaron really likes the tile that looks like wood in rentals or the vinyl hardwood. He likes something that is so durable that if he has a turnover, he will not have to touch it. He knows it is more expensive upfront, but he likes going more long-term. He also likes to point out that it is smart technology friendlier. If people are doing the smart vacuums, those are easier on hardwood floors. There are even robots for seniors. They have already started marketing one that is easier on hardwood floors. Aaron likes this because it is more flexible.
Aaron asked if there is any particular feature, whether technology-focused or not, that helps their properties stand out that surprised them. Derek said each property has its own vibe, so the surprises would involve the non-negotiables. This would include the kitchens and bathrooms having a wow factor. Kymberly said she and Derek will read the neighborhood and house, and they will customize and tailor it to the audience. They are doing a property in Rancho Bernardo in a fluent neighborhood, and everything was designed with the specific buyer in mind. They try to make each property a unique experience in some way. She wants them to walk in and see things they have never seen before in their life. Since they started stepping out of their box of the more neutral pallet, they want it to be non-offensive to anyone who has paid. It is really hard to pin it on one specific non-negotiable; but sometimes a realtor might make it difficult by telling you what color to paint it so people can envision their stuff in there.
In some ways, they are designing it to highlight the house. They are not steering away from color, but they are going all in and making a design choice. Aaron asked if they make it neutral enough to where it is flexible or if they go all in depending on the design of the house. Kymberly said it is neutral enough to where it will not be offensive to anybody, whether it is the walls or laminate or wood flooring. They are neutral enough to speak to the majority. The lighting fixtures and tiles are sometimes a bit bolder, but they complement or work so well with the style of the house that it works.
Aaron asked if there are any predictions for 2019 they think they will see happen. Derek jokingly said his crystal ball was as muddy as Aaron’s. He said this is why he is actually attending Bruce’s January event himself. From everything he has seen, if he had to make a prediction he would say that they will see a more stagnant type of market in 2019. He does not think we will see the price appreciation that we saw or the sales volume. We have already seen the shift from a seller’s market to a buyer’s market. It is hard to discuss the San Diego market as one entity since it is made up of several markets. Different areas will likely have different movements; but from a business standpoint, Derek said they are factoring in longer hold times, lower resale values, and an overall sense of caution and being careful about the inventory they are willing to acquire. They have to see if it is real, here to stay, and if they have a longer-term systemic issue. If he had to sum it up in one word, he would say caution.
Aaron watched his brother chase the market down and actually make money as the market was falling during the Crash. There is always an opportunity to make money, you just have to go in like you’re talking about it with some options and be smart and conservative. If you want to see Derek and Kymberly’s work, you can go to their website at www.sonoca.co.
The Norris Group has a few speaking engagements in January. They were in Glendale, California on January 9 at the 2019 Los Angeles Real Estate Summit. This was in conjunction with Robert Hall & Associates. Bruce presented his 10 Decisions to Make Before The Next Downturn. On January 17, he will be doing that same talk in Costa Mesa with OCREIA. On January 26 is our big market timing event California Real Estate: On Borrowed Time. This is Bruce’s prediction for the next few years that he expects to happen in the California market. Sometimes it is not about the ultimate destination, but the journey and trajectory along the way. You can find out more about that at www.thenorrisgroup.com/ticktock or on our website under training.