Bruce Norris is joined again this week by Tony Alvarez. Tony is very familiar with the Norris Group’s audience and has been a friend since he and Bruce first met in 2003. He mostly buys properties to hold with an occasional flip in the mix. He now does this in a couple different states.
Episode Highlights
- What is most people’s attitude at the peak of a boom, and how can this be dangerous?
- What was Tony’s experience hearing from a young developer who started his own company?
- Which market was Tony inspired to work in after listening to Bruce’s advice?
- Why did Tony choose to work with residential real estate as opposed to commercial?
- As the population ages, what else do we see increase?
- What is the Lancaster market like now compared to the last peak?
- What are rents like today compared to 2005?
Episode Notes
Bruce and Tony had just begun discussing how at the very peak of a boom, we feel a lot more excited because of all we own. It is so much fun that it is so hard to exit this. Tony had talked about sitting up in his house and how he had escaped with a large net worth. There were other people in very different circumstances. This is what is at stake when we have that type of market where we have this ridiculous boom. It is the hardest thing to exit, but it is the smartest thing to exit it early as opposed to just at the last minute.
Tony used the example of two homes he had built in Rosamond. We had built these phases out somewhere in 2004-2005, and the last phase was 5 houses. Three of the houses closed, and the peak price was around $280. They had two that lingered, and they lingered for a long time even with open houses and models of the homes made. They went for $80 grand less inside of three months, down to $200 from $280. It was the oddest thing to be able to pick up a brand new home at a good price, although Tony said they make great rentals. Tony loved that market, and his heart went out to the people who could not afford it. This was why he helped people by telling them when it was not a good time to buy. Unfortunately, they insisted on buying when Tony told them to sell and ended up losing every single house he bought from him.
Tony felt like one of the animals on Noah’s ark, inside safe while everything around him was flooding. Bruce said there is a calendar on his desk with a picture of 2 alligators (although, I think he meant dinosaurs) on the shoreline and Noah’s ark already took off, and they realized they missed the boat. This is what it felt like with a lot of people in the market, and Tony has realized over the years that you need to listen to your intuition along with your business sense. But the most important thing was that he listened to Bruce, who told him to stay longer, and he ended up with $7.2 million. Bruce had already proven himself to be somebody whose opinion he should listen to and whose advice he should pay attention to more than his own.
Tony knew how to work the business, to buy low and sell high, hold and rent, and he did all these things better than anyone else in his market. Tony knew of one person with 300 houses who he helped to do Section 8, and he was asking Tony what to do. Tony did not understand this. Then, he started to argue with Tony, and he finally told him to just do what he wanted. However, the guy kept insisting the market was not going to crash and will continue to improve. He wanted Tony to confirm what he already believed.
Tony once had the opportunity to meet a young developer who went from being a sales agent to creating a company in Arizona that became the number one development company, all in 2 years. Tony was awarded the contract to redo all of downtown Phoenix, and he got the chance to listen to this developer’s presentations. When he was done, Tony talked with him about how he went from being a leasing agent to living hand-to-mouth. He created the company by partnering up with the best commercial and leasing agents out there. He made this partnership, and Tony asked him what the one thing was he did that he could credit with having the biggest impact in changing the way he does things. He said he stopped listening to his own “bad advice.” The people in the room laughed, and Tony did not really respond with a lot of seriousness.
Afterwards, Tony talked with one of his friends in the elevator who had just sold his company for $80 million. However, he came across as rude and Tony did not understand. However, on the plane ride back Tony realized that developer had given him some of the best advice ever because he realized how many poor decisions are made because we think we know everything. We do not respect other people’s knowledge. Bruce does not stand in front of an audience and give out information without knowing in his heart that he is doing the best he can because he has dissected every bit of information. This does not mean something out of your control could not change. However, when you go to somebody for new advice, listen to them and don’t argue with them.
Bruce said what has been really interesting is running across people who have pure intent. Every time he stands in front of an audience and says something, he has done everything he can. When someone like this ends up on the other side of the equation, this can be confusing. However, Bruce said if he trusts the person’s process and intent, he will take a second look at it because he would want to know how they landed in a place completely opposite from where he landed. He will do the best he can to do the honorable thing and say “This is it.” When people with this same process end on the opposite side, you really wonder what their story is. He does not see how the destination is possible, but he is willing to listen.
This has been the challenge sometimes. Bruce said what was at stake for him was his own money. It is a pretty honorable cause knowing where to put his money and in the safest place possible. Bruce did not want to pretend that he brought something there since he already knew that when interest rates go up the prices are affected a certain way. He did not allow himself to do this, and this was a big favor to himself. If he decided to take on Florida the way he did California, he would have to erase everything he knew in California and let Florida speak to him like an appraiser. This means taking a look at the comps for Florida’s charts and seeing what matters.
Tony went to Florida, and he fell in love with the market here. However, Bruce woke him up to the method by which he was attacking the market. One of the strategies was he found some land another person did not want and built on it. Tony went down here himself to look over everything and seeing how he was designing everything. The only downside was that he is involved in management all the time, so he has to decide what he wants to deal with and which companies to pick. He wanted to retire to Oregon and asked himself if he could do the same thing there. He went to Oregon to try to duplicate Bruce’s efforts, and he did a 1031 exchange on some existing properties and came up with some single-family homes on multi-zone lots. He paid a fixer-upper price for one property, and he could build another five houses.
This led Tony to another deal where he could build 22 units. This deal involved another street-to-street lot that came with the ability to build 22 actual lots plus 3 lots that were backed into another development that nobody ever finished. This is something he would have never observed. Suddenly, he hired an architect and engineer and was doing what he thought he wouldn’t. He did a reverse 1031 exchange where he got to tie up the property with another person and still have time to develop them and 1031 exchange them. He still works in residential and actually questions some people who work in commercial. When Bruce gave a talk the previous month, he questioned why Tony was wanting to work with commercial properties.
After hearing this, Tony decided to stick with residential since this was where he always worked well. He did not want to listen to his own nonsense and get involved in other things when we all know the commercial properties take a dive if, God forbid, the market takes a hit. It just would not protect him as well as the residential. He is still learning all kinds of things from Bruce he never thought he would be doing since he is not a developer or doing any huge projects. He bought a single-family home that he would buy as a fixer, but it has all this other land as well. Both lots had a single family on there that he was keeping as a rental, and he gets the lots for free.
He looked at his agent, who is the same guy who does his management. He was able to find a manager in the Oregon market, and it all came together. He remembered sitting with him and wondering how nobody had caught anything. He remembered looking around and thinking it could not be that easy and was too good to be true. This was quite an experience.
Bruce said what was interesting was the person he thought he would rent to in Florida is not that person. He did not build homes that had an age restriction; he just thought with the nature of the population that he would likely be renting to retired people. He ended up renting to people who cared for retired people, which included doctors and nurses. Tony said he did this as well and that one of his houses is presently rented to a husband and wife doctor. This is a huge market that he has accidentally tapped into as well. It is funny how things work out sometimes, especially when it is something you did not foresee happening.
Bruce learned that as people age from 65-85, the amount of caretakers grows from 2-7. This are will have growth with the caretakers. In Southern Oregon, the only thing working faster than the number of retirees moving into the area is the number of medical staff. Tony bought another house on the river which he has targeted for short-term rentals for doctors and nurses in the area who are on short-term contracts and get really prime money for that.
Bruce asked about Lancaster in 2017 versus the last peak. Tony said we are not quite there yet. Some of the houses he sold for $280,000 are anywhere from being in the really undesirable neighborhoods and are around $180-$225. This is where we are right now, although Bruce said this is actually higher than he thought. Bruce asked how the prices differed in this downturn when he returned to buying in 2008 to 2010. He wondered how the price here was compared to the time before that when he was buying in the late 90s-early 2000. Tony said they were about the same, although he probably had more houses that sat on the market and did not do anything. Anything that came up in the 30s range was getting a lot of attention this time around, but Tony started buying when a house that went all the way down to the 30s was actually selling during the height and he wanted to be first in line.
The rents made sense, so he thought that even if he bought the houses and paid $60,000 for them he would still pay another $10 grand to have them fixed up. A lot of them were not major disasters, but the HUD properties could be rented out for $900 and he would still be under market rent. Bruce asked about the rent in 2005 compared to 2017. Tony said the rents today are higher in some parts. For example, the market rents in some neighborhoods see Tony being able to get $1300-$1350 for a house that would have been below $1200 prior. Tony said he was very happy with this, and some houses were even being rented in the $900 range.
He had just recently gone through a rental increase across the board. The downside of having too much money is sometimes get distracted by things like wondering if you could raise your rents. He does not really raise rents much because he knows he is only going to hold them for a certain period of time. This is why he looks for tenants who will want to stay in the house. He tries to get it to rent for $11-$1200, even as low as $990.
Tony is not really aggressive about raising rents in the sense that he is more concerned about stability and seeing if somebody can stay in their home for the duration. Rehabbing a property after people move out eats up a fair amount of dough. Tony is the least expensive person to rent for a home that is in great condition to rent, especially in the Antelope Valley. He does not care about that additional $100. When you are talking about over 100 houses it matters, but not as much as the nonsense he would have to put up with if he did not have the right tenant and they moved out after a year. Now he would have to rehab the house 2 or 3 times just to get an additional $100, and this never really pays out well.
This would be the case for somebody who is only looking at the gross numbers and comparing apples to apples. This is what the person working with the 300 houses would do with Tony. However, if you look at his turnovers and follow his evictions, it is sheer stupidity. From 2008 to 2017, we have had a roller coaster ride of rents. It has been so up and down and over and out that Tony feels like he has been singing an opera song. He has seen rents capitulate, and at the lowest point they were 20% below where they were. They then saw them go up, and they have been going up consistently.
In the Oregon market, they are on fire. When he started buying up there, a 2-bedroom, 1-bathroom fourplex was rented for $800 at the max. Now they are near $1,000 with no end in sight because of the number of people moving into the area. There is just not enough housing. Bruce asked about the fouplex that rented for $2800 total and what the price tag on it was. Tony said the regular market price tag was $300,000. For every little difference between some nicer ones and older ones, you might be able to get the lower quality ones for $280. For the nicer ones, people will have owned these for a while. They were not raising the rents on these and were happy to have a good tenant and owned by mom and pop.
Tony said when he first started analyzing them he wanted to buy in A and B neighborhoods and sell to A and B tenants. In this case, he started changing what he had because when he bought in places like Antelope Valley, he started off with nothing. He started buying in different markets and listened to Mike Cantu talk about getting your keeper properties up to A and B levels. He did adhere to this rule; and when he was over there buying he went for that. Now he is buying fixtures and is trying to do these along with flips. These have become a little more lucrative because the market is in such demand.
Thank you for joining us these weeks for Tony Alvarez. He is planning on doing some more speaking this year on what he sees in some of the things necessary for somebody to succeed and hold onto that success. The title of his first talk will be Trumping the Real Estate Market in 2017.
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