This week, Aaron Norris is joined by Kristi Cirtwill. Kristi is president of Cirtwill Investments, a real estate investment company. Twelve years ago, she moved from Toronto, Canada to Long Beach to start her business, and she discovered she had a niche working with sellers with hoarding disorder. Currently, 80 percent of the houses that she ends up buying are hoarder houses. Over the last couple of years, Kristi has also been on the front end of accessory dwelling units here in California. She currently lives in Los Angeles. When she’s not looking at buying her next hoarder house or building an ADU, she enjoys the outdoors, playing guitar, and driving her 1979 Volkswagen bus.
Aaron began by asking her why she moved from a great city like Toronto to Long Beach. What made her move to California in the first place? She said she was very naive, and she closed her eyes and pointed on the map, and California was where her finger was. She chose Long Beach because it looked like it was in the center of everything. She ended up falling in love with the city and really liked it. She currently lived in Los Angeles, but she hopes to be back down there by next year. Right now, she is in Highland Park, but she moves every two years to take advantage of the state tax-free gain, which she has been doing for the last 12 years.
Aaron next asked her how she got into real estate and if she did this in Canada. She said not really. She had a couple of rental properties up there, but she just had jobs that she didn’t really like anymore and didn’t want to do anymore. She realized she needed to find another way to get ahead faster in life. She read the book Rich Dad, Poor Dad and took a few real estate courses, and she realized this is what she wanted to do.
Aaron asked what she did before real estate, which was she managed vacation scheduling and labor scheduling for 600 unionized plant employees. This was her day job. Her night job was a musician in a bar. On the weekends, she worked in a real estate office doing the switchboard. When she arrived in California, that’s when she decided to dig into it. What’s interesting about this business is that it makes room for everybody. You can bring the talents that you have from other jobs, skill sets, and locations. You just bring it here, and as long as you’re willing to hustle, you can make it work.
This was exactly her attitude. At first she was just going to try it. Then, she realized it was actually being done as a business. Fix and flip was not just some TV show. It was a real business, and she found people doing it. She went to the real estate clubs and realized this is what she wanted to do. She owned some rentals up in Canada, so she started fairly young. She bought her first home when I was twenty-two. However, in Canada, she only paid $95,000 for it. She had bought a couple of rental properties just by working and saving her money for a down payment, and she wanted to get ahead faster than that. She thought if she fix and flipped, that would bring in the chunks of money for more downpayment. That was the thought going through her head back then.
Now, she works with hoarder houses and ADUs. Aaron thought she probably has a decent mix of flipping and holding a little bit more. Flipping houses was just a high paying job. You stil have to go out and hustle for that next deal, and you’re trading time for dollars. It doesn’t give you any passive income. That’s where the rentals and the notes come int. You need to get that eventually, or you will never be able to retire. This is why she still does both. She still needs to put food on the table, so she flips houses and still makes sure she keeps some along the way.
Aaron asked her how she discovered that hoarder houses were a niche that she enjoyed. She said she just fell into it. She realized she had a knack to talk to these people. At the end of the day, there are still people and there are human beings, and they realize they know they’re not in a great place, especially when their home gets red-tagged or they have to go into assisted living because they fell or they broke a hip. They can’t move around their house anymore because there’s too much stuff. The thought of treating those people with respect and dignity and confidentiality was what got her ahead with that niche.
Aaron asked if she ever gets referrals when she goes through that process or if it is isolated and they are finding you online? She said she has never had much luck with online advertising, but 100 percent of the leads she gets these days all comes through referral. People know her as the gal who buys hoarder houses. This is her brand and definitely a specialty. Aaron likes to compare himself to his brother. Aaron’s the extrovert, and he’s the introvert. Aaron doesn’t like the idea of door knocking, but he knows the thought of working with people doesn’t excite his brother. He would rather buy at a trustee sale and REO or build houses. Aaron is more willing to go on the people’s side, and where Kristi works is a really people-intensive side of the business. If you have got the niche, it’s pretty recession-proof.
Kristi said all investors have to consider what to do for the next couple of years. There’s always going to be seniors that need to sell their home. There’s always going to be hoarders. Apparently, up to 5 percent of the population of people hoard stuff, and that means beyond just collecting. The word you could use is intense collecting.
Some of the houses Aaron first remembered rehabbing were definitely hoarder houses that involved a lot of bugs. You get your fair share of some very interesting houses, and to be able to treat people with dignity is definitely a special skill that’s not meant for everybody. Aaron asked if she has to deal with interesting probate issues? It’s not just the person who is the hoarder, it’s also family members. She said she does, especially if the homeowner has passed away and she is dealing with the heirs. They walk into this situation looking for a will or a trust, and they can’t find it. Sometimes they do, surprisingly, but sometimes they don’t. This is a probate situation. She has one right now where she has been in escrow for about four or five months so far, but she gets all different types of situations.
She won’t be able to go to the iBuyers have them snap it up. That’s not what they want to do at all. They definitely want to have somebody they trust and can put a face to a name. That is definitely some competition she has these days with these iBuyers, but that doesn’t apply to the hoarding purchasers. There’s a few of them that have taken on some larger rehabs. But for the most part, the vast majority of things Aaron sees them taking down are just light paint, carpet, maybe some rehab, but nothing super crazy. It’s just the velocity of their money has to happen faster. If we hit a recession, we’ll see if they’re here to stay or if they’ll get as aggressive. California has great ups, but it also has deep lows. We’ll see as they duke it out and all these realtor groups decide to throw their name in the hat, like Keller Williams and Realogy, who threw their name in the hat over the last couple months. It seems like everybody wants to be an iBuyer all of a sudden. They could have always been an iBuyer if they had a real estate investor in their back pocket or decided to be one. It seems like every six months we have to reinvent ourselves just to stay current and understand what’s going on there. There’s low inventory and lots of buyers right now.
Aaron said as he was researching Turmoil, the event the Norris Group is doing February 1st, he just realized that it wasn’t going to be all timing. Many of the conversations they were having were just people leaving because they were tired of the politics. There really is a sense that if we have a recession, that might not be devastating, but it could force you to change your strategies. He feels for the most part that 2020 is really going to be the investor creating value instead of necessarily finding it. Aaron asked Kristi if she was getting this same sense, which she said she was. She has been doing this business for ten years, and all this time that has been the case to some degree. Long gone are the days where you could just throw paint and carpet and you call it a fixed-up house. It really had to be something more than that, but even more so now.
HGTV is what has ruined it. Even though the numbers don’t make sense, this and the food channel are the only two channels he watches. He won’t be sitting there the whole time, but he will triple-screen. He will be watching TV while also talking on his phone and playing a game on his iPad. Even though you will never have his undivided attention, he will still watch those channels.
Aaron next asked her how she decided to get into the ADU space. She heard about it a year and a half ago and was confused why they were allowing two houses on a single-family R1 zoned lot. She thought it sounded neat and decided since she had never built a house before, it couldn’t be that hard. She had some steep learning curves along the way, but she thought it made sense from a value add and a cash fold perspective. A year ago, The Norris Group did an entire chapter on ADUs and tried to get people warmed up to the concept as the market was changing a little bit, and then it looked like the state was gonna get serious. Looking back, Aaron wishes he had known a year ago along with Kristi and the other guys that were on the panel that they were going to pass all these bills in October. This is just the state saying “enough.” Unfortunately, she didn’t get the benefit of any of those bills.
Aaron asked if she saw any of these bills and was sad she did not wait or if she even still likes the concept of ADUs. She said she doesn’t regret anything she has done. You can’t live with regrets. You have to do what you do with the resources, time, and knowledge you have, and this is what she did. Looking back, there are some cities she wishes she had never done them, and then there were other cities where it was pretty straightforward. At the end of the day, the ones she built on her existing rentals to have as a second unit have given her great cash flow, and they make holding single-family houses in California almost make sense. What we can build them for and get in rents make up for what you can’t get off the main house in terms of cash flow.
Aaron asked her what cities she has built in, to which she said her rentals are in Garden Grove, Long Beach, Bellflower, Stanton, and she even converted an existing space to an ADU in Lake Arrowhead. She now has two units on a property in Lake Arrowhead. Aaron asked why she advised against Bellflower and why it was so onerous to work for them? As of January, they can’t force non-owner-occupied. That’s been a big sticking point, but he knows some of the setbacks. People need to hear where we ran into problems in the process because it doesn’t it’s going to stop just because the bills happened. Going back to Bellflower, they had a lot of fees. The fees were outrageous, and they even forgot to charge her fees when she pulled the permit, and they sent her a bill for around $16,000 about four months in. She was already halfway through building this thing, and they don’t sign your final permit. The city won’t plan the final permit until you go in and you pay these additional fees.
They also had a separate water meter. She was able to tie in the water meter with every other city except for Bellflower. They wanted it separate. That’s almost six thousand dollars just to pay the water company. She doesn’t even know if she really would have known if she had done more research because it’s not like they’re forthcoming when you go into the city and they ask you what all you considered. It’s really something you figure out as you go, so that was a bit frustrating. In addition to that, the Bellflower property was actually in liquefaction zone, which means that you basically have to dig up the soil and compact it before you can build on top of it. She did this when all the rains were happening last year, and one point she had a swimming pool in her backyard.
Aaron asked how long it was taking her to get through an ADU build since they were all stick-built. She said she is doing a handful in Los Angeles that will be used for flip properties, so she has experience with the city of L.A. It’s basically just a house, and all you do is you tie in with the existing sewer and water lines with the main tunnel. Aaron asked her if she had a hard time finding contractors who could get it done for you. She said no, and fortunately, she has always had luck with the contracting portion of her business. It wasn’t as easy for Aaron, who had to call in favors the last few times I had to do anything.
Aaron is moderating a panel down in San Diego again on February 22nd. Senator Wieckowski, who is behind Senate Bill 13, was one of the senators that was really pushing it in California. He and Gregg Nicholas are going to come down for a half-day event. Some of the things to know are fees are limited if it’s under 750 square feet according to these new bills that passed in October. Some really interesting pieces that were in there included the city having to allow at least one. There’s a site out there on triplex sizing a single-family residence with the JADU and then a detached ADU. Aaron asked her if she worries this will lower the value if done incorrectly or sloppy. She said she takes a look around L.A. in her own neighborhood of Highland Park, and you can just imagine what could happen if this isn’t done right. There are tiny homes allowed in Los Angeles now, so just imagine you have all these trailers parked everywhere and people are carving off a piece of their house for their so-called junior ADU. It has to be done right, and she will do hers right. She doesn’t want rental properties that don’t make any sense.
So far when it came to ADUs when they were part of flips, they haven’t had a problem with the appraisal. They’ve only had a problem with the lenders. They were looking at it as a duplex and the person who wanted the financing wanted something with 3 percent down. They wanted to trigger a 25 percent down kind of loan. Kristi is holding the vast majority of hers, so Aaron wondere if she had loans on them or had private money or were able to get regular loans or a second?
This was another challenge she had last year. It was with refinancing, although not a big deal. At the end of the day, she just had more capital tied up, which she didn’t really want to have. The problem was, at least on the ones that she refinanced, she just couldn’t get all her money back out. It was because they looking for a single-family house plus an ADU, which don’t really exist yet. They weren’t really looking for two on the lot to use for comp.
Aaron contacted the Appraisal Institute early on to ask them if this was on their radar and how they were doing this. Aaron asked the appraiser in their office, and it’s still a relatively new thing. You look at cities like Los Angeles that will have the tiny homes, which are not real estate, so you can’t count those. It could look messy. Aaron is working on a story right now for Forbes about 2020 being the year of ADUs and why. He thinks California is gonna lead the way, and then it’s time perfectly with some of the technology and prefab and 3D printed that’s coming along. With 3D printing, he thinks we’re still a few years away, but there’s two in particular that he thinks we’re gonna see more on this year. With the modular stuff, there’s some interesting things happening out there. When it comes to all the prefab and the modular things that he has seen that would look good, the least he has seen is ninety-nine grand. That has nothing to do with the install or the pad or those utilities.
Aaron asked her if she had worked in the prefab space, which she said she didn’t. Initially, when she was starting to build them for her rental properties, she decided she wanted stick-built. Her goal was to hold it for a long time. For a slightly more cost, it’s worth it to her. Her construction costs were at 180 a square, which wasn’t too unreasonable. It wasn’t the cheapest, but she knows homeowners building ADUs on their properties and paying 250 a square. $170 to $180 squares was what she was paying for construction, but that’s worth it to her. She can turn that around and have it built within four months or so. Other than this she hasn’t looked into any other modulators or anything yet.
The fact that she was able to get that up in four months is amazing considering some people don’t realize she is building at least two of the most expensive rooms into very small square footage, including a kitchen and a bathroom. Of course, the price per square foot is going to be a little bit higher than an entire home. But on average, it was taking about four months. It also varies city to city based on how easy the inspectors are to work with. Aaron asked what the longest amount of time was any of them took, which she said about six months. Not too bad.
One of Aaron’s concerns is that the development departments now have 60 days to put these permits through, where under the previous bill, they had 120 days. They have 60 days, but the state isn’t giving any of these development departments money to hire more people. Kristi is finding this with a project she has in LA right now. She couldn’t even get a planner sign for a month and a half. There wasn’t anybody. There were two vacancies, and the supervisors said they had everything but nobody to whom to give it. She doesn’t know what they are going to do about that.
That’s a big problem. When you’re dealing with an ADU, you do your best to come in, and you don’t want to spray and pray, you go in thinking you’re going to be able to build something. If you’re asking somebody who’s not experienced and doesn’t know any better, that’s rough, because then you end up with these sixteen thousand dollar bills. It’s not their fault, they’re just not trained. One of Aaron’s biggest concerns is that we’re just not ready. Kristi said on January 2nd, she wants to run right into the cities and ask for their new ADU and junior ADU, and nobody will even know what she’s talking about. She might be better off just waiting a month until they sort out what the city rules are going to be.
Aaron spoke to the Long Beach Property Management Association when he taught an hour course on ADUs, and the vast majority of them didn’t even know what it was. Aaron had to tell them it was an opportunity. He wondered if we’re going to convert homeowners to be real estate investor friendly because all of a sudden we might have more. Just getting the money for them to build them will be a challenge for homeowners unless there’s some way to finance these.
Fannie and Freddie supposedly have both rolled out loan programs, but Aaron hasn’t seen that on the streets. Mercury News just had something out this last week on it. Aaron had only heard of them from one person at Loan Depot who is helping him put on the ADU talk at SDICIA for the owner-occupancy side. It has to be owner-occupied, and they have specific rules. In addition, depending on how big this gets, it could become harder to find contractors. There are just so many things.
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.