This week Bruce Norris is joined by his oldest son Greg Norris. Greg has built, bought, renovated, listed, and sold hundreds of homes in both California and Florida over the last twelve years. He is currently retired from the flipping business and going to college full-time.
Bruce asked Greg to explain what he did before coming to work with The Norris Group in 2004. He said he started off as a fire alarm equipment sales person for a couple years. He learned how to build a house from the bottom up and built a couple. This turned into an electrical apprenticeship, and he worked his way up from an apprentice to a journeyman and then to a foreman and finally project manager and estimator. This was about the time he came to work for Bruce.
He remembered a comment Greg made while working on homes in Rosamond that dealing with them was like being on vacation compared to what he had experienced. Greg talked about commercial construction projects where he was dealing with 50-60 people, and all the other trades and plans were 50 pages thick. Spec books could be 500 pages thick, and it is a whole different level of stress. You also have to consider the penalty for not having something finished on the exact day. However, Bruce was glad Greg showed up because while Bruce was overwhelmed, Greg was underwhelmed and could help him out.
Bruce asked how many homes he has flipped both in California and Florida in the last 12 years. Greg said he flipped around 600 in California and 60 in Florida. He next asked how the price range varies in California and Florida. Greg said in Florida the properties that moved best were between $200,000 and $400,000. If you get outside that range, the cheapest homes have too much competition while the more expensive homes don’t move fast enough. When it came to California, things changed. When Greg first started in California, it was really depressed and he was buying properties for under $100,000. In the trustee sale business, they typically liked being in the $250,000-$500,000 range. This was where they had the most success.
Bruce asked if Florida’s numbers have gone down, and Greg said yes. He has gone back to it occasionally over the last two years since he stopped, and the numbers are going down. The competition is still ridiculously stiff while the prices are so tight that he does not understand how anyone is making sense of them. Bruce had a conversation with a guy who flipped about 1,000 homes in an 8-year period in California. At the end of the conversation, he said the thing that was most interesting was that they did not make a dime. People were keeping money busy, and this is about the only thing you can say sometimes. They were likely servicing money, which is the nature of capitalism. Any time there is an opportunity, the margins are good at first. Eventually, as everyone catches on, the margins shrink to where you can basically make a living.
Buying foreclosure properties at trustee sales or mortgage sales requires knowing exactly what is owed against the title. Bruce asked if this process differed in Florida versus California. Greg said it did, and extremely. He really had to understand title more. In California, he had a good relationship with the title company who gave him a review and told him he was bidding on the first. If there were any liens, he would be shown them. They would do all the necessary checks for Greg, and he relied on their expertise to do something right. Only a couple times they got things wrong, but he with his knowledge he was able to discern when something was off. You could still make a mistake, even with having a title company. In Florida, they hand you a document that is about 80 pages long and tell you good luck. It is significantly different; and in addition, you have to deal with potential HOA liens that are far past due and may not have recorded the fact the HOA had not been paid in five-seven years. Sometimes foreclosures have gone on for a very long time. You had estimate what the fees would be, and it was a much more complicated and dangerous waters to be swimming in Florida.
Greg did not have the luxury of knowing which property he was going to win, so Bruce wondered how many of the 80-page documents he had to review. He was bidding on 20 properties in a day, and Bruce wondered how this was possible. Greg simply said you have to get good at it and start figuring out what it is you’re looking for in the process. Greg had the help of an attorney. He paid a high price for a short while and caught on quickly. Fortunately, he already knew a lot about title since he had attended Ward Hannigan’s class. He helped Greg understand what he was trying to find.
With an 80-page document, you are basically sorting through and looking for the most significant ones. When they give you a 20-page promissory note, you do not need to read every page of it. There are certain things you are looking for, such as the number and the date it was recorded. He would then look for this same information in the foreclosure information and make sure you bid on what is actually the first. You also want to make sure there is no second in place that becomes a first. You also have to look for a lien that may have been recorded second and subordination clauses. You really have to be capable of looking at the title documents and knowing exactly what it is you are looking for in the document. It definitely took a while, and he paid a few thousand to get an attorney’s opinion on certain ones before he caught the gist of it. However, it is not a beginner’s game.
Bruce asked if Greg took special training for this. Greg said when he went to Ward Hanigan’s class, he took a lot of time to help him understand title. Greg grew in this knowledge through all of the foreclosure sales he did. Bruce thought there was something specific he had taken in Florida at one point for title, which Greg said he did take a class on title insurance. He thought he would get the answers here, although he really did not get too many answers there. It was more of a precursor class to becoming your own title company to sell title insurance. It did not really give him the answers he wanted, however.
Bruce asked Greg about when he is buying a trustee sale in California versus Florida and how often the property was vacant in either state. In Florida, the properties were vacant 50% plus of the time. In California, it changed in the beginning and there were a few more vacant properties in the beginning compared to the end when there were none. In Florida, the process is so long that they had very few evictions with which to deal. In Florida, the foreclosure process makes an allowance for an eviction process, although at the same time they still had one person who fought for several months before they were able to get them out of the property. It may be provided for, but it does not mean it is necessarily going to happen. However, it may make the process easier. In California when they fought some of the evictions for 6-8 months, the worst they had in Florida was 3-4. However, it was rare and was not anywhere near the trouble they experienced in California.
With the Florida homes, due to the length of foreclosure you either had an owner who lived there and didn’t care or could have had a vacant home for four years. Bruce asked if the condition of the Florida home was different than California. Greg said no. At first, he heard about there possibly being mold in the ducting and other types of worries. However, in general the condition of the homes was the same as in California. It was just the repair bills that were a bit of a surprise since there were certain things in California they would have never guessed were on the verge of needing to be replaced in a market that is not red hot. You have buyers coming into the purchases who are wanting more. When the market is hot, they are willing to overlook certain things simply because they want a deal. When the market is not hot, they get pickier.
Bruce asked what some of the issues were and if they ever came from the lender side of the world where Greg thought he had a good roof and the lender said it needed replacing. Greg said he did not remember it being the lender. It was usually the home inspection that caused the issue. With home inspections, they would typically let the owner know how old the home was and how much time was left before it was needing to be replaced. However, with certain roofs, even if they were 30-year roofs, would only last about 15-years in Florida. The lifespan of a roof there has decreased significantly from the sun and moisture. This was also true with air conditioners. Ones that were only 15 years old in California would typically be serviced. In Florida, they get used so heavily and are pretty much toast after 15 years. Those were really the two major expenses that were the biggest surprise and most consistent issues.
Bruce asked Greg about when he is bidding on trustee sale properties and not knowing which one he is going to get. He is appraising dozens of homes inside a pretty tight timeframe, and Bruce wondered how this process differed in Florida versus California as far as availability of data and the accuracy of the number. Greg said it was different in that it was something he could do on his own because of the fact that a lot of the sales were held online. If sales began at 10 am, you could wake up at 5 in the morning and look at which homes were still for sale. In some ways it was unfortunate, but in other ways it was fortunate because at the beginning of the day there may be 125 piles the day before the sale. The day of the sale, four hours before the sale it suddenly went from 125 potential sales to 10 or 15.
The workload dropped significantly on what you actually had to concentrate on, and this helped Greg learn to weed out the properties he thought were the best risk. This included older homes with the higher repairs on which they never seemed to make money. He always regretted getting into the heavy repairs because it sucked too much contractor resources and never seemed to work well. They usually regretted anything above a $30,000 repair job.
Bruce next asked Greg about appraising the property in Florida and if it was as comfortable a process as far as access to data and being as accurate as California. Greg said in a lot of ways it was very similar. The part that was different was really understanding the two seemingly identical homes across a major street from each other do not necessarily mean they are a comp. This one took a little while to sink in for Greg. Even the tract’s name was the same, for example, Ridgewood Phase 1 and Ridgewood Phase 2. The problem was if there were comps within a year of the property that was being sold in the exact same phase, they considered those superior over newer comps that were across the street. You had to be very cautious about what you were doing with appraisals since the appraisers were definitely looking for something inside that particular tract, even the same phase. This was something Greg did find more challenging.
Sometimes Greg would only have one comp, but it sometimes it seemed like he had model-matched comps. It was a strong comp, and there appeared to be nothing wrong with it. Greg had to realize that a lack of plentiful resales was also problematic. He held onto certain houses for over a year and a half before being able to finally sell them. The market did not necessarily drop in value, but there just were not any buyers to show up for certain product types out in the middle of the cities that seemed like they should attract buyers. He had to learn that if he did not have at least three comparable sales within the same phase in the last year, he was taking a risk of a buyer not showing up in the amount of time he needed.
Interestingly enough, he went back to California. Once he understood the dilemma he was having in Florida, when he looked at some of the most problematic houses in California he also found them to be consistent as well. If he could not find three comps within the last year in the same tract, it was usually a poor bet.
Bruce said they were introduced to some new words in Florida. One was Chinese drywall. Bruce asked what some of the things were that surprised him with Chinese drywall and foundation issues where he needed to be careful in the loan business. Bruce asked Greg his experiences with this and how to avoid them. Greg said the Chinese drywall issue is complicated. The best you can do is get more educated on where it is more likely to show up. Greg had to learn that if the house was between a certain period of years, between 2002-2007, he would go back as far as he could to find listings in the MLS and read through them to see if there was anything to give him indication that this was a potential Chinese drywall home. Unfortunately, if cities do not keep track of which tracts have this, there is nothing to help you. You have to get good at searching through the MLS data and do your best to mitigate the potential of that being a problem.
Bruce asked what the cost of that problem was, which Greg said they got lucky since only half the houses had Chinese drywall. They used the correct drywall on the second floor and the incorrect drywall on the first floor. It was probably about a $40,000 problem for tearing apart the bottom half of the house and putting it back together again. You have to tear it all out, wear multiple suits, and vacuum up every speck of dust and copper corrosion. You have to have a special engineer come out and tell you where you have it. Greg does not know if you can buy the house cheap enough, even with knowledge since there is always somebody who thinks they can do it cheaper. He would not want a Chinese drywall house and would be fishing for easier fish.
Bruce next asked Greg if he dealt with sinkholes, which he said was actually a bad term out in Florida. There’s settling issues, then there’s sinkholes where you literally have the whole underside of your house being undermined by the sand falling into some underwater stream. They did not deal with sinkholes, but they did deal with the settling issues. Bruce asked if sinkhole areas are usually known or if they can pop up anywhere. Greg said there are certain cities that have a tendency toward sinkholes, so you can get maps and see where most of the sinkholes are. However, he has never actually dealt with a sinkhole house; he has dealt more with settling. There are certain things you can do to get an idea where those sinkhole areas are, but in general it is not generally something with which you would be dealing.
Bruce and Greg ended by discussing his rentals in both California and Florida. Bruce asked about the price point in verses rent in Florida and California in regards to condos. Greg said it is 60% of the price for almost identical rent right now. The cash flow for dollars spent is significantly higher in Florida. This is changing, and the available inventory for that is definitely going down. Bruce asked if he thinks the rent has peaked out in Florida, which Greg said it has not. It is still climbing, although not fast. He sees nowhere right now for the rent to decrease. He only sees one way, and it is up. It basically comes down to too many renters and not enough product.
Bruce asked Greg about building in Florida and if he sees a lot of tracts. In California, we are catching up a little bit, although nothing like what we have been prior. Bruce asked if there are tracts all over the place in Florida. Greg said he does not see tons of tracts, although what he does see is multifamily housing.