Norris Bruce
Dec 21, 2018

California Real Estate On Borrowed Time With Bruce Norris #622

Bruce Norris radio

Aaron Norris is joined this week by his dad and president of The Norris Group, Bruce Norris. These next two weeks will be a little different in that they are covering the webinar from December 18 that discusses their latest TNG Economic Update Newsletter and upcoming event California Real Estate: On Borrowed Time.  It is typically only a part of their VIP subscription.  But, to celebrate this upcoming market timing report, they decided to open it up to their entire network.  You can watch and listen to the entire thing uncut at www.thenorrisgroup.com/ticktock.  Here, you will also find information about the event coming up on January 26.

Episode Highlights

  • How many calls would Bruce get a day for offers in Grand Junction, Colorado, and why?
  • What were some important lessons he learned during his time in Grand Junction, Colorado?
  • What did Grand Junction renters do differently than California renters?
  • What did he experience in Miami that was also a turning point?
  • What is the current median price in California?
  • What will his market timing report in January take a look at?
  • What are the numbers in counties like Orange County, Riverside, Sacramento, and San Bernardino?

Episode Notes

Bruce Norris has been a real estate investor or homeowner during three boom markets in California, and we are about to wind down another one. The first one he got to enjoy was when he owned his own home in Mira Loma. It went up like a rocket, and he bought three other homes that all doubled. He thought he was a real estate genius. He had the same experience between 1985 and 1989 and then again between 1997 and 2006, which was ridiculous. We are coming to the end of another one in 2018. Prices just came out from CAR, and the median price is at $554 right now. That is about a full 7% decline from the peak of where we were about 5 months ago.

Bruce has been getting a lot of calls from investors who are concerned. One of the things he wanted to talk about in the newsletter was investing out of state since there is serious consideration about exiting some of the properties people have. It should be considered. Bruce has met with a couple people with major inventories, and he would say they should not own half of it for the duration of a flatter down market. The locations are bad, and the inventory is lousy. They are not going to win any tie breakers during that cycle at all. That is really the reasoning behind what he wanted to write.

As an investor, he left California 4 or 5 times, each time for a different reason. Sometimes it was to take advantage of opportunity. Another time, it was just to land safely in a different place to hold inventory. His desire had changed from what it was to what he now wanted to do.

In his first experience in Grand Junction, Colorado, he was 32 years old and did not think he had any business going out of state to buy properties. It just seemed like a lot of good opportunities. His friend Marty’s dad was a realtor who moved to Grand Junction, and this was how Bruce heard about it. Every once in a while, he would ask Marty how his dad was doing, and he would tell him he was doing great and that the real estate there was doing great. A couple years later, Bruce asked him again and he said he should go there because it got devastated and prices are way down. He did not really pay attention; but a year later he asked him about his dad, and it was even worse.

Bruce put his buying hat on and went to Grand Junction, Colorado. He ran an ad that he bought houses. This would have gotten 50 calls a month in California. Here, he got about 50 calls a day. It scared him to death since it was a very tough area to buy and prices were descending. He told the realtor he was going back home and not buying anything on that trip. He had to figure out where they were, so he waited. He told him he was not done going down and would wait to buy something after he calculated where bottom was. In about a year, they made an offer to HUD. They negotiated over seven months and ended up with a $40,000 purchase price of something that had once sold for $200,000. The files he had were about 3 inches thick. One stack of files was very tall as he started to sign; and at this moment it dawned on him his life wasn’t going to be the same. For the next five years, it was not the same.

Bruce learned several lessons when he went to Grand Junction, Colorado. One of the most important things was to leave your California brain at home. He was looking at 4-year old condos that he bought for $10 grand. It sounds like the steal of a lifetime, but it depends. One of the things he thought for sure was he would be able to rent them, even if he could not sell them right away. He thought this because renting was so easy in California. However, this was flawed thinking since this was Grand Junction, Colorado where the whole town was 50% vacant. He did not own a single-family home that would win any tie-breakers. He owned a fourplex in a remote area. They stayed 50% vacant for two years, and he realized half the people would not even have come to the area based on the inventory and location. Bruce had miscalculated how easy it would be to rent. If you are buying out of state, make sure you have inventory that wins the tie breaker. This is lesson number one.

Lesson number two is to make sure you have a team in place or adopt an established team of someone you trust. Before he bought anything in Grand Junction, he made seven trips. He door knocked every property manager and realtor and interviewed them. He picked the team before buying anything, and this was a lifesaver. He needed them, and it was a big deal. Mary Simpson bailed him out a few times because she was good enough at what she did and stayed in the business the whole time.

Right now, Bruce owns things in Florida. One of the questions he asks the person managing the homes he has in Leesburg is why he is property managing. He is young, and Bruce thought maybe it was a stop gap until things worked. He said he was very interested in property management because he was very interested in owning a pile of rentals himself. This made Bruce think of Mike O’Neil, who he works out with all the time. This was exactly why he did it. He wanted to manage his own inventory and start a business on the side. Make sure you take the time to build a team with whom you are comfortable. Everything from a distance is more difficult, including repairs and vacancies. It is imperative you have people you trust.

Lesson three was to be careful of an area dominated by one employer. Grand Junction, Colorado’s grew because it was dominated by oil shale. All of the fourplexes built were housing people who were all going to the shale mines. When oil shale closed, there was no reason for those to be occupied, and it became vacant. The fourplexes went downy by 80%, and thousands of people left. The mood of the area was depression. Imagine owning a $200,000 fourplex next door and only getting $40 grand for it.

This is why there was 50 calls a day. People were offering him $10 grand to take over their loans. This was the first time he ever heard of anything like this since he was used to California calls. Colorado had deficiency judgements, so they could chase the people and stick them with the bill. This was an interesting lesson.

The other thing Bruce had to realize was that there was a difference in what Grand Junction renters would do compared to California. If you have to drive ten miles in California, you would not think this was a big deal. Bruce was ten miles from a major college and thought it was a piece of cake. He thought he could rent to college students. However, he remembered Mary Simpson looking at him and asking him why he expected college students to ride their bike ten miles in the snow. Bruce did not think of it this way since he figured they had cars. He missed out on this one and did not rent to college students or many other people.

Bruce was still pretty cocky about filling those homes and thought he picked the wrong person. He literally went there, ran a big block ad that was six inches by eight inches in the paper, and he asked Mary Simpson to give him a lot of applications. She asked how many he thought he would need, and Bruce told her two dozen. He went to Hilton Hotel and waited to respond to phone calls that never happened. His phone never rang with an ad in the Saturday or Sunday paper. He went home Sunday night shocked and told Mary she did a great job keeping them even. After two years, the economy started to recover and got filled. Bruce thinks about all the lessons he learned in Grand Junction whenever he goes somewhere he does not know.

Bruce had another experience ten years later in Miami. Alex Navarro, his best buddy, moved there from California. He lived in Miami when Hurricane Andrew hit. Thirty days after the Hurricane hit, his phone was ringing off the hook. Prior to this, he had been running an ad that he was buying houses for cash. People had gotten their insurance check settlements for about 80% of the value of the property, and they wanted to come and get cashed out by him at 20% of value.

They went to see some of the homes, and visually they looked really bad. What happens in a hurricane is everybody is overworked. Every insurance adjuster in the state is slammed, and lots of inexperienced people are looking at properties they shouldn’t be. Building apartments are slammed; and for safety reasons they red tagged everything in sight to make sure they don’t get sued and keep it safe for everybody. That was basically what happened in the 30-day period prior to him getting a call from Alex. He called him up saying he was getting some really strange phone calls from people who wanted to sell him their home for $40 grand that was worth $200,000. They had their insurance check; but when Bruce looked at the properties, he did not think it was structural damage. He thought it was just a mess.

Bruce concluded Alex as correct. He started thinking about everything going on that was repetitive. The number one thing is that insurance companies completely overpay for hurricane damage. They are pushed to the limit timewise and are dealing with things they do not always see with inexperienced people looking at it. He is not afraid to be an investor in a hurricane state like Florida. It creates opportunity, and it is a profitable event if an insurance company is involved.

The second thing he learned was to make sure you have your own crew available to repair the property should that event occur. This was critical. Around 60,000 homes were destroyed in Miami and the surrounding area, and around 100,000 were damaged. There was no way you had sufficient contractors. If you asked for a roof estimate, it was through the roof and not going to get done in a timely manner. A crew was flown in from California to get the work done because he was already repairing things in California on a regular basis.

Whenever he is involved in an area, a lot of times it is through the property management company where you have a priority. They have already had the discussion to have a priority should an event occur. They had just made an arrangement to deal with a regional builder, and this was one of the conversations. They discussed what their procedure would be in the event of a hurricane. You want to make sure you have access to people who can repair your properties and not have to stand in line and wait for something to occur.

The third thing he realized was there was a very big difference in the damage of certain types of homes. He would drive around and pass by a neighborhood that seemed pretty untouched. He would go a mile away, and even newer homes were pretty torn up. The difference was one was blocked and one was framed. He drove a little farther and passed by what looked like systematic piles of trash. When he got to the corner, it was what used to be a mobile-home park. They were probably built in the 1960s and not to HUD standard, and they were completely destroyed. It is really important that if you own rentals somewhere and face a hurricane, make sure you have the kind of inventory that stands up to one. Make sure it is block.

They just came out with newer standards, so brand new homes have to get built to a different standard. The homes currently being built in Florida have the ability to withstand 160 mph winds. When Leesburg got a hurricane, that was unusual. It was in the middle of the state, and a hurricane went right over the 20 houses Bruce had at the time. The total damage was $5 grand. That made him feel safe in a way.

The one example he wanted to use about the Florida investment in Leesburg was he had to think about where he was in California a couple years prior. What he owned was not something he wanted to own forever. He knew a transition to something else would take time. The year was 2016, and he was fortunate. During the downturn, he paid $64-$80 grand for inventory that was now worth $275 in a marginal area. He was always trying to never have a vacancy there. He fixed the property really well. He put granite in the bathrooms and kitchens and fixed them just as he wanted to have fixed a flip. He never chased rents because he did not want to have a vacancy there. He probably missed out on money there, but he certainly had the same tenant for years. He did not have much of a repair bill on the homes he sold.

These sold for about $275, and he had a chance to have Alex build him some homes in Leesburg, Florida. He went from two houses in Moreno Valley for $275 a piece and ended up with three homes in Leesburg that were worth about $190. The numbers went from two houses to three houses, and the rents went from $2,400 to $4,000. He went from inventory where 80% of the people in Moreno Valley would have passed on it to a home that was very desirable where no one would pass on it. This is what he is most excited about along with the transition occurring for him. He loves the fact that he has this inventory, and he is looking forward to having more of it. They just made a deal with a regional builders to build homes for them, so he is excited about this opportunity. In January, he is going to share that opportunity with the people who come to the timing event, and others can possibly get involved with their own inventory as well.

The median price number just came out, which stands at $554 in California. This is a significant hit compared to where we were before at $600,000. We are minus 7%, and there is a lot of concern. He just spoke in San Diego, and the audience was basically saying it was over since their flips were not making money. Bruce plans on talking about specifics at the January event. He decided to look at very specific numbers for certain areas. He bought a newsletter in Orange County so he could take a look at the inventory available. One of the things he noticed was when you use overall numbers when drilling them down, it is very hard to talk about counties accurately. Yet, he found systemic and state numbers are more important than local numbers as far as saying what will be a bad time or a great time. However, he can understand if you own the wrong inventory.

In Orange County, the Gentleman’s Letter he looked at was good at breaking down the amounts of inventory that was available and the time on the market for certain price ranges. If you have an Orange County home at under $600 grand, you have a good marketing time. If it is over $3 million, it was a year and a half. You have to know these things. It is one thing to say the median time for Orange County is four months and it actually depending on the inventory.

This is what is going on in San Diego. Bruce met with concerned investors, and he just looked at one of the CAR reports that had information specific to that area. You had maybe a 70% growth in the inventory for sale and a price range of between $500 and $600 grand. If this is where your flipping inventory is, this is why you may be feeling the impact. If you’re wondering why your things are not selling, it may be because you just had a 70% increase in the inventory for sale in that particular price range. This is unusual.

In the January report, Bruce said he will mention some of these things. The report will take a look at the overall picture and tell you whether he thinks we are in for a different ride than he thought and deal with price damage before heading in the other direction. What will be interesting about this is it will facilitate opportunity to exit at very near a peak and maybe move your money somewhere else.

When Bruce met with the investors who had pretty good size inventories, he thought if he were sitting in their seat he would be selling half of it and moving the equity somewhere else. This would be a safer ride and better inventory. Having inventory that is marginal, like Bruce did in Moreno Valley, during a downturn is not pleasant. If it gets vacant, it can get hammered. A lot of people own that type of inventory.

When you look at the numbers of different counties, the median price in Orange County right now is $810,000 as far as October. This was paired with an interest rate of 5%. The payment is $3,479. If you go to a 5% and compare it to the peak of last time, he thinks there is still an 11.9% upside at a 5% interest rate. Interest rates are real important to the future of California right now as far as having the math work and how far we can go either up or down.

In Riverside, we are now at $400,000 median. What is interesting about that is you have an FHA loan limit that just went from $405 to something like $430 and change. This will help Riverside, especially the lower prices to go up a while. If we have a 5% interest rate and get to the same monthly payment ratio, we still have a 24% upside if everything is being equal. We have a lot more room than Orange County.

Sacramento is very similar to Riverside. Right now they are at $360,000 with a capacity to go to $477 at the 32% spread. Bruce said he has not spoken anywhere in the last 6 months that has not been concerned. One of the things this report will deal with is whether these numbers are similar in pattern. What Bruce just did was he looked at peaks and valleys in each year, and they are very similar. Now he has to go back to the 90s when we had a downturn between 1990 and 1997 and see how that differentiated. We always have fluctuations inside of a year. He wants to see how this changes when we actually have a downturn and see if this is actually the beginning of one or business as usual. This is an important consideration.

San Bernardino has a $280,000 median price right now. They have potentially a lot of upside at 37.9%. What is interesting about all of these areas is they do not have a lot of new building happening. Even with this upside that is supposed to be locked and loaded in place numerically, you still don’t have builders really excited about building product there.

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