Bruce met Craig many years ago, and it was interesting how things transitioned. When he went to talk to Craig, he did not know if there was a lender who would do what he wanted. At the time Bruce talked to him, Craig was not working with any other clients. When they first met close to 25 years ago, hard money was basically all situation and occupied-owner. It was based on unique situation and not investor-driven. When they met, it was almost a new concept to the industry since nobody really came to them with a concept like Bruce did. The concept was they were dealing with two houses in Moreno Valley around $100,000. Typically, lenders would lend someone in financial trouble or foreclosure, or whatever the case may be, a first, second, or third, and they could go up to 70%. The Norris Group was not doing this at the time. This would be $70,000 in total liens against the property.
Bruce came to Craig with two scenarios to make the numbers easy. He paid about 40% for the Moreno Valley properties, or $40,000, and he had a pretty simple request. He just wanted to borrow the $40,000. Craig went back to the owner since he did not know what the policy was going to be, then he went to Craig and told him he loaned him 65%. Bruce asked Craig if he was comfortable with it being more than he paid for, and he said no. It was a whole new concept and harder to convince investors to put up money for a trust deed to Bruce at a lesser amount than to somebody to whom they had never made payments.
Here was somebody who had a lot of history, cash, and whatever you would want to see in a borrower. The concept was foreign to them because there was this unwritten rule that it was worth what you paid for it. There was also an unofficial rule that if you live in it, somehow you are going to pay better. The only person who would get that loan received it because of what Craig said which was they would refi. Back in those day, it was common for somebody, whether from inheriting the house or receiving insurance from a relative dying, to pay off their mortgage this way. They may start off with a $300 grand house that had no mortgage on it. They would want an $80,0000 first, and unfortunately it was to solve somebody else’s problem and not the homeowner’s.
The thing that initially bothered Craig the most about the business was you could see the situations where the person was never going to pay the money back. They would take out an $80 grand first, then they would come back about year later and want to take out a $40 grand second. Somebody would ask why they could not just make it a new first. Ultimately, they tried to do something twice since after that point you are not really helping the homeowner.
What was interesting about the beginning was Bruce sensed the unease of dealing with somebody with repetitive loans. He made six payments on the first two loans in advance. Craig had talked to the owner, and he was shocked. It was something that was easy to build going forward. You would have to get past the initial concept that just because two houses next to each other look exactly the same that they are worth the same amount. This was the biggest concept to overcome. Once you overcame that, it was common sense. Once you know the security is identical and what your scenarios were, then you would just need to decide to whom you would lend.
Similar to a business owner, you are the business lender. Hard money really exploded the ability for investors to buy things. There has been a new wave the last five years that has really changed things. Going back to the history of it, there was such a common bond between the two. Now, when you people say hard money the majority with a real estate background would see it as synonymous with investor. It was not this way when Bruce and Craig met; it was the opposite and unheard of then. People in the investing world have finally woken up and understood that the investor, not the speculator, is a very reliable payer. They grew over the years, especially having started out with wondering what loans were in what markets and how the clients evolved.
This was the education they developed with the Quadrants. Every time a quadrant changed, you needed a different skillset. What they learned over time was about investors versus speculators and how they are able to buy in every market and make it make sense. This is why the relationship is so good and why Craig is so happy the Norris Group has kept their tradition of being exactly as they were. They still deal very one-on-one with investors who are borrowers or buyers of the property and with the investors who put up the money. In this market, it really is unique that we are still functioning this way, and it gives such an advantage since they have all the pieces of the puzzle. Somebody who is a Wall Street type will not have the Norris Group’s knowledge of the entire business they have developed over 22 years. Craig and Bruce also learned a lot the first two years they worked together before there even was a Norris Group. There is a lot of history and information there.
Aaron came up with the term that the Norris Group has been around Main Street for a long time. This is really true. It has been a progression of investors having access to more money and being able to expand their business. They have talked to other hard money lenders, and they think they are nuts by doing the whole note investing. Either they attract the control freaks, or it might go back the other way. People want to have a little more control and insight in this market and might be a little uncomfortable writing a check into a blind pool and hoping the decisions being made are good.
The scariest thing about anybody who has a pool is you are really dependent on the honor of their process and intention. It could be great, not great, or they do not know what they need to know. Sometimes there is a transition coming, and whatever they have been doing for six years has been perfectly safe. If you made hard money loans with $3 million specs. That works okay until it doesn’t. You could pick product types that hurt really bad, and the Norris Group has avoided these areas completely. They do not do industrial loans because they do not understand the product or know how they would exit it if there was a problem. They stuck with a pretty boring product line because they understand it, and so does everybody who put up the money. They understand the single-family or a 2 or 4 unit.
Aaron said they also know Bruce does a lot of nerdiness when it comes to the market research, specifically the timing report. When Aaron first started in 2005, they were working on The California Crash. It was a hard to do a lot of crazy lending when the CEO wrote a report like this. Recently Bruce just released his newest report On Borrowed Time. Some concern they have had recently is if you have a mild slowdown and you are returning money to investors. They wrote the California Crash to tell people they would be getting their money back for a while. The thought between Craig talking to them was they would set it on the sideline to be cautious. However, what happened was they mistakenly thought all trust deeds were created equal, and sometimes they would put their money in trust deeds that ended up losing half of the principal. The Norris Group always makes sure to put their investors before their checks. They have always been more careful about their money, and this is how their decision process goes.
This does set the Norris Group apart. Some of the system technology they have in place is because they have a timed horizon with clients that could be more than 20 years. Craig has some investors who have been with him that long. Now that they are going with people into Florida, they have seen them through their very first cycle. They have become millionaires, and now they are helping them diversify and upgrade. This is a fun process to see, but hopefully in the next ten years they will become lenders long-term and will be around twenty years. The Norris Group is not just a broker, but they have been with these clients a long time.
The Norris Group is making some transitions doing business in Florida and having other people join them. This has all been vetted with everyone’s own money, and it made perfect sense. In talking to investors, people have looked at properties in other states, one in Ohio. His first question was how old the properties were, and it turned out they were 50 years old and in a terrible area. They are historic, and the person they talked to said he cannot wait to 1031 exchange them. The suggestion to buy the property was probably not very altruistic. It was commission-based, and this was a bad thing. This is why The Norris Group always tries to think about the benefits being for everybody.
What was interesting was the transition of cost. When Bruce first started borrowing, it was five points at 12 ½, and he did not bat an eye because he had access to dough. It was not long after that it went to 3 ½ points. When interest rates declined, they declined with it. At one point, around 2013, they were two points. Four years before this in 2009, people thought they were nuts when they rolled out the 8-year, 9.9% program. At the time, nobody had a serious hard money loan product under 10%. A few years later, they did 5 years because of the timing research. Now, that same program is 6.9% for three years. It has changed as the market has shifted. It became a competitive marketplace, so you always have to react and ask yourself what you should do to retain your client base and make sure you stay competitive.
The three went on to discuss their new programs, both in California and Florida. On a flip program in California, there are a couple options. Craig said on their flip programs they have changed things. If you take out a loan where you put money down based on the purchase price and do your own repairs, the interest rate on that is 8.9%. They went down one point on that for the experience of the investors. If you are looking to do something more on the ARV where they are holding repairs, they are riding this at 9.9% and 1 point. The cost is very competitive. They are competitive with the money, although they do not feel anyone is as competitive with them as far as the background and the knowledge. They are very excited to mix these two and offer it to experienced clients.
What is great about The Norris Group team is Bruce could not remember how many times Craig came out of his office saying he blew another loan but made a client for life. The client was about to make a mistake, and Craig told them he could do the loan but did not understand why they were buying it. You have to have that in mind when considering a loan. One story Craig found amusing involved someone trying to procure a piece of land, and the price kept going down. Finally, the offer $5,000, and the broker said it was not going to work with the seller. However, it did work with the seller as long as the guy was willing to pay the broker a full commission. This was a clear-cut case of who has your best interest in mind. With the new rates and knowledge, they bring to everybody, it is a good combination.
When dealing with appraisers, they will sometimes get feedback that tells them they do not want to make a particular loan. Bruce said as a buyer, he would want somebody experienced telling him to walk away from a deposit if necessary in order to not make a mistake on which he took a six-month journey that would only lose him money. Craig tried to tell people if they do a deal, the people making money are the agents and your house. The Norris Group will put together the loan that is safe for you, but you as the customer are the one taking all the risk in what they will make out of it.
The Norris Group challenged one of their agents with this scenario. When she came out, she said she was practicing on this one. She was not even going to tell her client and was okay with them just going through this “class” by themselves. Craig’s response is hold onto your commission check until you can split it equally.
Bruce next asked what designates experience. Craig said they look at somebody who did three deals in the last year. A lot of times you can sense when somebody has experience. For someone who has done three deals, even if not with The Norris Group, they are happy to put them into the program as long as they show proof of the deals. They want to help as many new people as they can. They also do not want to discourage new people since a lot of companies won’t even help them. They absolutely will still work with first-time people since a lot of their biggest clients over the last ten years were first-time people. They have become mega successful, and from a new client perspective there is not a better place to start.
The added bonus to doing a long with the Norris Group is you have access to the TNG Academy which has over 60 hours of education where they cover everything from accessory dwelling units to mobile home park investing and newsletters. It is really valuable, and new investors really appreciate this. They can call and ask questions if need be.
Aaron does a lot of one-on-one calls. He took a call the other day from somebody who was semi-experienced and whose background was in senior care. He and his wife wanted to get into it full-time, so for the first time he got to have a good conversation with them regarding where they were financially, personality, and skillset. It is easier to get into the business when you are leveraging what you already know and the talents you already possess instead of getting overwhelmed with all the different strategies. Bruce just met with someone who asked if they knew anything about ADUs. Ironically, Aaron knew a lot about them since they had just done a whole chapter on them and put them into their study course they taught.
They still have their rental program, which is also their most popular. It is a three-year loan, 6.9%, interest-only for three years, and prepay for the first year only. It is still two points since they found it to be very competitive. Looking at it, to have access to the money for three years the two points is very fair. There is a lot of bait and switch going on in the market, and a lot of lenders promised a teaser rate and at the last minute said they did not have an 8 at the end of their credit score or two at the end of their Social Security. Therefore, you are only getting 15% of the deal. This is irritating because if you did this to a consumer in an owner-occupied home, you are completely illegal. So why would it be ok to do this to investors? A lot of these Wall Street and hard money lenders need deals, and the entire lending community is struggling right now. However, you also have inexperienced people who don’t know and newer brokers who have not been real estate investors or in the industry very long. But the people at the top have that formula where they suck them in, and this is irritating. Hopefully the investor community rewards them with no more business.
They next went on to talk about Florida. It carries over pretty neatly. The new construction is the same for California and Florida. The flip program is also the same, and you get the discount and experience. The difference is it is a judicial foreclosure state, so the ARVs and LTVs are adjusted a little differently. They are dealing with slightly different things like insurance. The big difference is the hold program that is five years with a two-year prepay since they are in a different market. This is unique to the Norris Group, who is tailoring their programs to terms directly to the market. Bruce is confident the Florida market has no downside coming, which is a nice position. A lot of people moving from California are going there with long-term holding in mind.
It is two points for the hold and new construction for both states. When it comes to the lower point for the experienced people, it is in the flip program. For the long-term, the rate in Florida is 8.9%, interest only, five years-two-year pre-pay. Construction will probably be one of their biggest things, so Bruce asked about the rates and points. Aaron said it is a one-year program, no pre-pay, and a 10.9% interest only. California is heavily regulated; and since the Norris Group is here, they are regulating Florida just as heavily for consistency with the two different audits that they do. They use funds control and BuildZig, which protects the lender and borrower against the builder.
When Bruce was building the Leesburg houses, they had a $60,000 issue. He was not protecting himself against the builder as much as the builder had protection against his subs. If you have dealt with a sub for ten years and then relax and think they will pay your bill, when $60 grand of concrete didn’t get paid it became a lien on the house. You also have great rates on it, so it is not very expensive now. It has come a long way, so it is very reasonable and protects everyone involved. The lender conversation is very easy since they just want to know whether it is the new construction or very expensive ARV program where they are holding back repairs. They want to see it further down the line before releases happen. At the end of the project, it is all done.
It is the same with new construction. The builder does not have the funds, but as a borrower the funds are locked up and you know you will get through that project. You will get people complaining who only want $50 grand at a time. This is cute until the lender decides to go elsewhere and it’s no longer there for the rest of your project. It really does protect everybody.
When they have their bootcamp, they will really be nailing their process of 1031 Exchange combination with a construction loan. Aaron learned this the hard way. If his lender did not come through, he would have messed up a cool 1031 Exchange for himself. He was going from one rental in California to three brand new homes in in Florida. The 1031 Exchange was amazing since Exeter was awesome. The lender really dragged the ball to where if they had failed and could not end, he would have lost it all. Hard money will be way easier.
The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669. For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.