Bruce Norris is joined this week by his oldest son Greg Norris. Greg has really taken over the buy/sell business for the last twelve years.
Bruce started by asking him some of the warning signs that you have a bad contractor. He said prior to hiring them, they always go through the bid process. This usually weeds out everyone who is bad. If they cannot take a look at their contract, which is intimidating for most residential contractors, then they are probably not the right one for the job. They are very inclusive and detailed, so if you miss something it could really hurt. Most of the time the contracts weed out the bad ones. If they did not submit a bid like they were supposed to or provide the paperwork showing proof of workman’s comp, then they will not do business with them.
Bruce asked what percentage of the industry that buys and sells houses has that kind of contract. Greg said it is none since most are doing it by hiring guys who are working for cash under the table. Too often this is how the business is done. In a way, this is a competitive advantage since they have much lower costs than if they did it all. At the same time, Greg does not think it is as competitive as you may think. A lot of times the people you are hiring are not very organized; and with the inefficiencies that occur in there, you may be surprised what the bottom number is. This is especially true when you consider the quality of work they will get out of someone who is not a general contractor. They would have to come back and pay someone else to come and do it 2-3 times to get it right, and this is not cheap.
Bruce asked Greg if he was paying contractors up front for anything. He said no, and he would not recommend it. If a general contractor is incapable of funding your project, that is usually a big warning sign that they are a weak contractor and you are going to have problems. Greg is good with giving installment payments every week if they want it after the work is done. In short order, they found out the best contractors have no problem bankrolling it for a month. Most of the time their contractors were billing them at the end of a job, even if it was a large job.
Bruce asked Greg what recommendations he would make for somebody wanting to be in this business for years. He wondered what they could do on behalf of the contractor to make it attractive to say they always want to do somebody else’s work. Greg said you just have to be very organized. You have to know exactly what you want so the contractor is not wasting a lot of time asking you what kind of plug or paint you want. If you can streamline the process so that they have a predictable set of guidelines they are going by, it becomes repetitive and allows them to get very familiar with the process. This will result in much better prices for you and much happier contractors.
Bruce asked about paying them on time. Greg said this is a big deal. If they are stretched out a week, this is a long time. But, if consistently show them you are there for them and you will pay them when the bill is due, this is an unusual customer. Greg said they have had customers go out into the real world after doing business with them, and it was a rude awakening. Sometimes they do not get paid at all. Bruce always found this to be the best thing. He did not want to be the cheapest customer, but he wanted to be the one who would drop everything for them.
Bruce asked Greg when he gives latitude to somebody on the job site. If they open something that is worse than they thought, Bruce wondered if he would always want to physically be involved in this. Would he rather do this, or at some point does he have confidence in the contractor to make it right. Greg said it would depend on the contractor. He said if he had a lot of experience with them and knew he could trust what they were telling him, he would not think twice about it. The beauty of the technology is that you can just have them take a picture and send it to him so he can see what they are seeing. It is important to know the business. The fact that he had such a strong construction background coming into it meant he could see baloney from a mile away. When he had a line of baloneys attempted to be sold to him, he knew better than that. It definitely helps to know construction, and this was a big advantage.
Bruce remembered some of the projects where he would go into the house during one of his boot camps, and he would see red paint on the floor. He knew this meant he was moving walls again. Bruce asked where he got the gift to be able to look at a structure and know right away how they could make it work. Bruce said he was not gifted with this. Greg said he would look at something, and most of the time it was structures that had already been altered. A lot of times what you were dealing with was a former owner messing up a good layout. Most of the time you were restoring it to something that made sense. Most of the time this occurred when they were moving walls.
After having gone through 650 homes, Bruce wondered what the desirable house was he wanted to have as well as the one he decided was not worth doing. Greg said by a longshot, the easiest ones are 1995 and newer. Once you start going past 20 years, you have a wholly different construction issue and will be dealing with a lot more. It is much more predictable, especially if you are new to the business. Then you need to stay in light rehabs. The heavy rehab is going to eat you alive. You need to stay on something light until you can get your feet underneath you. If you want to go for heavier rehab, start small and tread in lightly. It is tougher than you may realize.
Bruce asked if there is a type of home he would rather not do and whether or not it has to do with the extensive rehab. Greg said at trustee sales he found it exceedingly difficult to receive a discount that was big enough for heavy rehab. Most of the time, if they had a rehab that was over $40,000, he almost always regretted buying it. In the private world where you are not buying at a trustee sale, you can get a bigger discount. It would then make sense in this case rather than what they were buying it at 87-88% minus repairs. If you can get it down to 75-80, you have a lot more breathing room. If you are wrong on your repair estimate, which is easy to do on a heavy rehab, you have some wiggle room. Sometimes the California market is forgiving because it goes up while you have this project. Sometimes you get bonuses, like $25 grand of money you did not expect.
Greg said he thought they had a good process of appraising the house. He would be shocked if they were not hitting their expected number to sell it 99% of the time from the very beginning. They saw the movement, and competitors are noticing this too. Everyone is looking at it and wondering if it is going up or down. They ask themselves where they have to appraise it at in order to have a shot at really buying it. The trustee sale business is brutal and coat throat, and you are dealing with highly skilled people who know how to turn a house. It makes you grow.
Bruce asked how many properties he would appraise a day when going full tilt. Greg said it was not uncommon for him to do 75 on some days. He would have to be accurate since he would have just spent a chunk of money and there is very little wiggle room. There is a lot of pressure here. Appraising is one of the most important parts of any process for flipping a home. Whether you are doing it for trustee sales or otherwise, you have to be able to know what that number is as well as when you are stepping into something that could be problematic. He learned a lot about staying away from certain inventory that he knew would be more challenging.
What he learned the most was what resells well and what does not. If it does not resell well, what is the factor you need to put in there for something that is odd? A while ago, Bruce and Greg went to Florida based on some of the charts he studied. He thought it would be a good opportunity, and they probably bought 60 homes in the 2 years they were there. By large it was profitable. Bruce asked Greg what was different about Florida inventory as opposed to California. Greg said in Florida it is a strange mixture of California and Texas. When you go into the main cities, things will sell quickly and you will get competition for buying it. If you get outside the main cities and tract houses look like the type of inventory you would want, it is more like a Texas mentality where renting is just fine and people are not big buyers.
It was a big learning curve in Florida. Just because you find a house you can appraise and have a comp for does not mean you were going to sell it in the next year. Just because the comps look stable and you look like there is not much competition on the market, it just sits there when you try to sell it and nobody wants it. It shows that maybe there is just one buyer a year who shows up to that tract. The other thing Bruce did not account for but took advantage of in another was he noticed how they would have a 4-year foreclosure process and would have lots of REOs. He knew foreclosures would still be an active participant, but when they bought the houses no one took care of them for four years. Greg said sometimes they were vacant for a long time, but for the most part, this did not hurt them too badly. That part was not as bad as he feared it might be, especially since he had heard how you can get mold growing in your ducting systems with the Florida humidity.
Their problems were not too bad; the only worst was roofs and air conditioning systems that went bad rather rapidly in Florida. Greg thinks it is because of the wear and tear as a result of the humidity. Air conditioners will run 24/7, and after 12-13 years they are done. In California, you get 25 years out of the system. With the sun and all the rain that the roofs take, you are only going to get 15 years out of a roof in Florida that would normally last 30-40 years in California. Bruce said it seemed when people were inspecting the properties if they were requiring a roof Greg would look at it and say it was not a big deal. It was more of a buyer’s market at that point rather than a seller’s market. They had a little bit more power in the market to say the roof only had a few more years left on it and were not interested in getting a $7,000 bill two years after moving in to replace the whole roof. They would want something for it now.
When he first arrived in Florida, Greg had not really factored in that mentality that was difficult to overcome. They found some strategies that would work and would give a credit towards a new roof. He would do anything to keep from replacing it, especially if it would pass inspection. It was challenging and definitely a different mentality.
Bruce said there were a couple things he ran into that he had not experienced prior. One of them was Chinese drywall. Bruce asked what this entailed, how they ended up solving it, and how you know you even have it. Greg said you can know you have it in two ways: either your house will have a funny smell, or when you pull the electrical wires out of the wall you will see tarnishing on the copper wire. The chemical in the Chinese drywall discolors the exterior of the copper. You have to hire an engineer that specializes in it. He has a special gun which he goes around with and tests every piece of drywall. You have to find out where that drywall is since it is very much like treating hazardous material where you have to plastic everything off and everything has to be vacuumed a specific way. It was quite an ordeal and like dealing with asbestos. Taking all the drywall off a house is a pretty big deal. It could also be part Chinese drywall and part regular. With one particular house they had a deal on, they decided to put normal drywall on all the upstairs. Only downstairs had the issue, so they had to tear everything off. Most of the drywall they put on the ceilings did not have the Chinese drywall in it. This is why you pay the people to come out and tell you exactly where you have it and don’t have it. You have to tear everything out and meticulously get rid of all the dust. Nothing can be left behind.
Bruce asked how you know the problem exists before you buy the house at a trustee sale. Greg discovered there is no list to determine this after he checked with the counties. He found out he had to check through old listings. Anytime he was not familiar with a tract, he would have to go through old listings and see if there was any mention of Chinese drywall. It was basically an extra step in the appraisal process, which is time-consuming. You are not talking about the property you just bought or know you are going to buy, but rather 50 and may have to do it on at least one of them.
Florida was a whole new level of detail because he had to do the title work as well. Bruce asked why the service was different in California. He was dealing with a title company that was sending him things that weren’t being analyzed. First American, who they worked with in California, would look at the title, analyze it, and give him any warning problems. In Florida, no one was willing to touch it nor wanted the liability to have to interpret the data. Instead, he got 100 page documents he had to look through and find out from if he had any potential title issues. It was a much different process.
Bruce asked about sinkholes. In Texas, he remembered the type of soil they had causing foundation problems and wondered if this was the case in some parts of Florida. Greg said sinkhole is a misused term in Florida since they use the term “settling issues.” However, actual sinkholes is the same thing, so in a sense everything is a sinkhole. However, this is not true since sometimes it is a settling issue. They are very vague in their wording, and this can cause confusion. Greg bought a couple houses that had foundation issues that were both settling issues and not sinkholes. Sinkhole issues is when you have the ground under your house being undermined by an underground river or spring that eats away the soil until your house disappears. He never had to deal with a sinkhole house for real, but they did have to deal with foundation damage.
Bruce asked if this was more common in Florida than California. Greg said he never had to deal with a foundation damage like he did in Florida, although he has run across them only occasionally. When dealing with the foundation issues, Bruce asked if they had to go down to the bedrock. However, Greg said there is no bedrock in Florida. Even the jacks they used to support the foundation is completely different. They literally come in with augers and auger them down 70-80 feet through sand. Florida is a big sandbar; that’s all they have.
Bruce and Greg went on to discuss the rental market. Greg had experienced Texas and owned property there for 12 years. Bruce asked about the ability to raise rents there during those years. Greg said until the last year, the rents stayed flat for all those years. It was terrible. Bruce also asked about prices, which Greg said he thought he was buying at a good time back in 2004 and 2005, but prices actually dropped further than when he bought it prior. They are only up now about 25-30% over what he purchased for them 13 years ago. The appreciation in Texas was incredibly disappointing, and the rent did not go anywhere either. He had no plans to step into Texas to buy rentals anytime soon.
He learned a lot about understanding a market better. If he had checked out a couple things sooner that he now knows about, he would be able to identify the type of rental market. He would want to go into a new state again. It is like analyzing Florida where there were certain areas with real cycles where you can see prices rise significantly and then fall. In Texas, they do not do much of anything ever. 25% in two years is a big rise for them and has never happened since the oil fields were started.
Bruce asked how the rental value on condos in California has changed over time and if it has been aggressive recently. Greg said the retail value is definitely strong for the condos. They are being held back on their value due to the lack of financing. This is a problem since if they cannot get the FHA certification, they have to have 20% or more down depending on the percentage of ownership in the complex in order to get a loan. If FHA does not say it is a certain percent owner-occupied property, you cannot get an FHA loan.
Even with a conventional loan, if at some point too many condos in the complex are owned by one investor and the builder still owns 40% of the inventory, you cannot get a conventional loan on the property. It has to be cash. Bruce next asked about rent raises there, which Greg said it has been crazy strong. He thinks his two-bedroom condo is up for rent right now at $1575. When he first rented it out, it was $1200. There was one property on Foxhole that rented for $1895. Bruce was shocked when Mike O’Neil told him this number.
Greg is involved in holding some properties in Florida right now, and he is particularly after condos. He said he has gone after condos of a very specific type since he did not want the type without garages or car ports. He specifically wanted the ones that had garages. He found a unique community where each individual condo has its own pool and enclosed yard, so it is a very odd inventory. At the last peak, it went for $250, and he bought them for the low $100s. He got a really good upside, and the rents are very strong there. He was buying them for, on average, $120 and putting $10-$15 into them. The rents are about $1400-$1500 a month for these places. The rents are very strong and the HOA is not that bad at $350.
Bruce asked how old these units are, which Greg said the particular ones he is in were built in 1980. When asked what is next for him going forward, Greg said he is going to retire from flipping real estate for a while. He plans to go back to school to receive a degree in political science and become a lawyer. He feels blessed to be able to have this choice. He feels he is the character in Robert Kiyosaki rat race in that he has finished the race. He is out of it, on the other side of it, and has some choices.
Greg helped the Norris Group out so much. Solving the issue with Rosamond was a big deal for Bruce, and they have both always taken care of people’s money really well. They have had their challenges, but they have gotten on the other side of them every time.
Thank you for joining us for the radio show with Greg Norris.