Bruce met Craig over 25 years ago during a time he was up to his eyeballs in great deals, but he ran out of credit. He had literally hired a guy who he told to doorknock lenders one day. Craig was the only person that wanted to see Bruce. At that time, the hard money loan business wasn’t what it is now. Now, it is synonymous to a lot of people with investors. 70-0 percent of the hard money companies only deal with investors. Loans they cannot do today could be somebody with 90 percent equity in a home in which they live. it is completely flip-flopped from what Craig calls situational. It went from somebody having a situation to an investor that really has a business opportunity.
In one scenario, Craig took the deal to the owner of the company he worked for at the time, and at the time Bruce wasn’t an owner occupant. They had two deals in Moreno Valley, and the price was around $90,000 sales price, while the purchase price was in the low $30s. At the time, Bruce asked if the loan amount bothered him. They really had to work it because back then, interestingly enough, an owner-occupant that had a house in Moreno Valley worth $90,000 that was in foreclosure on their house and owed $40,000 could get a loan for $20,000. That was a typical loan at that time, which is so funny to people now because they think this is crazy. Craig reduced the loan amount on a loan Bruce had, but they still covered the deal. Bruce knew it was going to be really good for both of them, so he made six payments on each of the loans. That is when it dawned on everybody that this was a different kind of client.
Craig shared a funny story about one of his only other clients who made that many payments back when it was truly hard money was a guy who made payments in advance, and then he was arrested by the FBI. This wasn’t exactly the same feeling as they are betting 50% now. Bruce was a welcome relief for him, and it was funny around the office because he had this client that was able to give him multiple and repetitive things. Hard money back then felt like people smoking cigars in a back room. Everyone kept telling Craig it wasn’t going to work. You would be sending in three deals at a time and then six deals at a time. In that first year, nobody believed it.
On top of that, a lot of people that listen to The Norris Group might be familiar with Mike Cantu. He started working with hard money loans. Robyn, who is still with the Norris Group and has been from the very beginning, met Mike because he was interested in a foreclosure they had. She introduced Mike to Craig, and they along with Bruce kept working away with the hard money despite people telling them it wouldn’t last. Now, 25 years later that’s almost all there is. Their relationship has been a really interesting ride because the business has changed completely in the time they have known each other. Now, people that are new to it or 10 years into it don’t really understand that it wasn’t always the same. At one point, Bruce was borrowing at 12 1/2%, 5 points. The transformation that happened is amazing.
Something else that has to happen is when you are working with the money side, you sometimes get people who don’t even live in the house. That’s an interesting first conversation because they are probably thinking that’s not safe. You could lay out all the common sense facts, and that’s when it interesting with people sometimes. They don’t really look at the facts. It’s just different and a lot of change, which we all need. Everybody at the office knows Craig is not big on change either, but a lot of people feel that way. It’s like it’s different or it’s new. But here we have somebody who’s successful, has money to spend as a business person, and never missed a payment who will buy the property as an investment and resell it. His motivation is profit. This was the scenario in the first loans that they did. In the other scenario, you have somebody that’s delinquent in their payments or struggling, but because they live in the property, somehow that was a better deal. That money only solved yesterday’s problem. It was a Band-Aid.
This was a very typical scenario. Unfortunately, in that business, you would have people where you could just see the transition of bandaids until you had a wound that wasn’t curable. This was why Craig was glad to meet Bruce because he was much more suited to this. He enjoyed the other in some ways because he did get to help some people. However, he is more suited for this where it’s a win win all the way around for everybody.
Bruce next transitioned to discuss a new concept that The Norris Group created. To begin, he said homes need a fair amount of repairs. Typically, those repairs are retained either by them and doled out as repairs, but on occasion they will do a construction loan. On the construction loan and even on repairs, anything that’s over $100 grand goes to fund control. When they first got into the fixer-upper business, if there were heavy repairs and they retained that, then it got into a construction loan. These are a transition as the loan business grew and did different things, they just had different products.
There has always been a common sense progression with the loan business, which Craig really likes. You have to be flexible to some degree because things will change. They’re never going to stay the same. If you’re staying the same, you’re losing ground. They have always tried to make the programs flexible. For people that know their product and investors that have worked with them know, they are always trying to find a product that works for the best client. That’s really been the backbone of the entire business from the loan side.
There has been a lot of competition introduced to the loan business. A lot of times with the money that they are trusted with, they have not been able to keep busy as much as they wanted. Craig said this is probably the most frustrating thing about what he does. He loves what he does because of the satisfaction he gets with the rate all the clients that call him and want to invest with them. However, one of the reasons they want to is that because they know no matter how much money they have, there are only so many good deals. A deal isn’t better just because they have more money to lend. That doesn’t make a deal better.
Going back to the history of hard money, a lot of people would hold onto their deals because if there was more money at a company, the deal might get better because they had more money to lend. Craig never understood their thinking. That is the danger with pools. The Norris Group has always done the one on one concept. A lot of companies have gone away from that and gone into other pools and other types of scenarios to fund. However, the Norris Group has found their niche here, and people really like having an investment in a trust deed in one property. That’s just been very successful for them.
Early on, hard money loans and loan documents might been signed, but there were floating it out there trying to sell it. They didn’t have a buyer, they just hoped somebody would want it. That was more the rule than the exception, and certainly in the situational hard money.
What they will be discussing today has been in transition for several years. Bruce has invested in Florida since 1992 with his buddy Alex. That was Hurricane Andrew. They found some really interesting things, which is what makes him very comfortable about dealing with hurricanes. He saw the reaction by the insurance companies and the local people that inspect them. He saw how overwhelmed they are, and it creates mistakes. It wasn’t a bad experience being on the right side of that. They tend to write rather large checks for those things. He has been there since 1992, and he has gone through building new homes there. About three years ago, he bought part of a tract. That’s when he decided he would transition away from California with some of the assets and build Florida rentals. That was a good experience, and it was there he realized there was some potential there.
In the last year, he has made contact with Dalton Enterprises. Right now, the process is they are building around 60 houses at any one time. They have already had some come through the pipeline, and other investors are coming through doing some estate planning. Aaron often gets calls from people who are interested in the turnkey rental program, and he has to tell them that it is not what they do. Their goal is to train people up. They get access to a 200-page book and about eight hours of information that they spent a lot of time building over the last year and a half. They will beat you up on everything from global warming to the real estate data. Hopefully by that time you go with them to the live event, you’re picking what you want to build where. Currently, they are building four different models and one duplex in three different areas. It’s like saying they are building in the Inland Empire. That can mean a lot of different cities. It depends on the demographics and what you’re interested in building for lifestyle and who you’re trying to attract as a tenant. It’s been great, and it gives a lot of flexibility. There’s a big piece of estate planning with this, so people are having to really think about what they want in California and what they want to get rid of. Timing is really critical, so they’re helping investors. They quarterback the transactions, so they’re helping them with very complex 1031 exchanges, sometimes exiting multiple properties in California and going into even more in Florida.
When they started doing business with Dalton, Bruce did half a dozen houses on his own. In addition to that, Alex Serrato is a builder in California that they’ve done business on it for a long time. He had done several in California for quite a long time. When Bruce decided not to build anymore in California, he asked Alex if he would you be interested in taking Florida. He and his wife went there, and Bruce paid them for about four or five months to just scope the area out and understand it. He wanted everyone to understand the differences between the places. At the moment, he and Bruce are building about a half dozen properties, and they have another group to work on their new concept. For this new concept, they began thinking about how they could keep the trust deed investors’ money busier than it is. They then began thinking about a product they could create where the yield actually is better.
This is a product where you have three participants. You have the Norris Group, a builder, either Dalton or Serrato, and a money partner. The money partner has a trust deed on the property, and it’s funding the entirety of the project. This is like a straight note, no monthly payments. At the end of the sale, that’s how the profits are divided with a priority return to the money side for 9 percent. It’s been received well because Craig and the Norris Group are trusted. At one time for this concept, they were looking at doing this in a large pool form in Florida. From the money side of it, there was a lot of lot of people that were really interested in it. Howeer, the more that Bruce and Aaron did the data and they discussed it, it just seemed like the projects were fantastic. This includes the building in Florida. The whole concept was good. It also goes back to that scenario where they’ve always enjoyed the one-on-one investment. They stopped going forward on the larger partnership scenario, and they started to do the individual deals. It is a scenario where there’s three people. The Norris Group will always be the owner or builder. Then, you’re going to have a contractor, which will either be Dalton or Serrano. Then, you will have an investor. It’s technically like a trust deed, but in Florida, they will have a mortgage on the property. The way it has been received is actually very good because people like the concept of the one on one. They have a scenario and know what all the possibilities are and all the possible outcomes in that situation.
Bruce said one of the reasons he wants the ownership to be in the Norris Group is because he will look out for the best interest. If it doesn’t sell, it’s in the Norris Group’s name, and they would have two scenarios for exiting the property. The trust deed investor may keep it as a rental, and in this case the Norris Group would deed it to them. This would mean no more fees to the Norris Group or to the builder. There is a small fee charged upfront, 3 percent apiece. However, no builder is going to build a home thinking that’s always gonna make. These projects are you have profit in there, and Bruce is already doing some of these himself with both of them.
Some of the concepts that are really good from the investor’s point of view include the fact that you’re buying the lot. You’re getting it plans and permits. The concept is the investor will do one, roll it into another one, and keep going. By the way it’s set it up, by owning the land and having the permits, they don’t even bring in funds until they’re actually ready to go with the construction. You’re reducing the turnaround time by several months in most cases. Their money is tied up with a lot cost. That can vary depending on the project, but that’s not out of pocket from the investor or the time being used. Before they do that, they appraise the end product, so it’s very much like a hard money.
One thing they really like with this concept is you’re dealing with a very common scenario. You don’t have to get creative in what you’re doing. Everything is very similar. It’s like you’re doing the same thing over and over again. Part of their success with the loan business over the twenty three years has been they do the same box over and over. Granted, it’s a little different, but you’re not really trying to create something that’s completely different. It’s just going to be a very similar product every time.
One of the things that they did with Melanie and Alex was to go there and see why something sold in that marketplace. Melanie is very good at figuring things like this out, so she looked at all the nuances and figured out if something needed to go out to the back or have a screen patio. All these things are incorporated in the plans that they’re creating for flipping because that’s what sells. Craig said that’s a really great point that a lot of people overlook. A lot of people that are flip investors here in California either have the eye, their wife has the eye for it, or there’s someone that is able to look at a property and really be able to see that it will sell. Occasionally somebody might make a mistake because they’re just looking at whether they’re new. They’re looking at data, but they’re really not looking at it visually with their eyes. Melanie is able to see what she needs to sell the house, and that is an important aspect, whether it be new construction or a flip. You have to be able to see the end result and know that it is going to be sellable.
What is really nice is, first of all, you are dealing with new homes, which is the most acceptable inventory. Florida has a very unique situation. It’s number one in migration from other states. If you take a look at a map, right. Florida gets the most other people moving to it, but it’s second in immigration. You have two drivers that are new families constantly coming there. If Bruce looks at charts and says that is a predecessor to the growth of an economy and ultimately price, that would be the chart he would look for. Oddly enough, there was a time from 1975 to 1990 when California averaged 300,000 migration gain. From 1990 to now, the average per year is 36. That’s twelve percent of what it was.
Aaron said there was just a report that came out this week about the top cities that are upside down. The average taxpayer in New York City is around $63,000 that if they had to pay off what they owe to their local firemen; out of the Florida cities, Orlando made it after falling behind, but Tampa was in good shape. You just have a lot of people leaving those states, and this will continue. They’re also taking their retirements and headed into the state because it’s a bump and a lower cost of living. It’s like getting a double bump.
Bruce said when he does the calculations for California, your house payments take around 40% of what you make. In Florida, it’s 20%. It’s almost rent. However, this is why Bruce puts his money here. He is happy with all the stats. One of the nice things that everybody knows about the Norris Group is all the data and research he has done on Florida. It’s really good having that flexibility and knowing a market as well as he has researched it. As long as it’s good, you can just continue to do it. If anybody senses anything, Bruce will know ahead of everybody else with all the research he does.
Historically, when it comes to Florida, every area went down after 2007, but Florida has never had another patch where it’s gone down because it constantly has this growth. He expects anything to happen to be a gradual thing, which Bruce said is good for him. It’s also great for the investor since a lot of people have made their chips. Aaron said from the marketing side of the Norris Group, they have three very distinct funnels. They have the people that they train hopefully so well, they start using them for hard money. Hopefully, they become so successful in the flipping business, they turn to them to do trust deeds and mortgages. This feels like it’s in between the last two funnels. It’s a new funnel where they’re ushering people into their final stage of physical property ownership. So far, people have really loved the area. One of the investors that went is thinking about moving. Aaron has also had quite a few conversations with investors that are talking about doing the six months in a day and leaving the state of California just for the tax break. They will be covering more on this at the Turmoil event tomorrow.
There’s a lot of discussions on Facebook between some pretty good-sized investors who are saying they think they sell everything they have because they are concerned. It’s not just a recession concern. It’s just the political side. They’re just done. One of the things that excites Aaron about Turmoil is that they’ve blown up the chapter on the wild cards, politics being one of the big ones, and having representation from the builders, the realtors, as well as the apartment industry hearing what they’re worried about. You really have to worry about a lot of things from utilities to the taxes for schools at the state and the local level.
Here in Riverside, we just instituted a 1 percent sales tax to fund our $500 million deficit in our pension fund liabilities. Aaron said he doesn’t know how you catch up on that. If you get state adding on taxes as well as locals trying to raise money, it all starts adding up. It’s like if you stay someplace at your room rates, and then you get six other charges. It’s very murky and frustrating, and you really have to get at the local level to know what you’re about to get hit with.
Bruce said when he does interviews, he really wants to understand the process of how laws get enacted. He wants to know which ones we can and cannot vote on as wells as which ones can just be proclimated. Even the legislators don’t get to vote on them. That’s it’s really important to know right now because there’s a lot of big decisions that are about to be made for California on housing. If you take a look at those charges, you wonder why that happened. Part of it was Prop 13. When our prices were zooming, all the sudden you couldn’t go up and tax outrageously anymore. That was a big deal. You ultimately changed that. That chart will reverse, and that will not be pleasant. You would want to know that in advance. That’s the idea of turmoil if you read the definition. Basically, you’re unable to prepare because you don’t really know the rules of engagement. They are changing without your permission. That’s why he picked that ugly title Turmoil.
Another reason a lot of people are looking at Florida is it is a little bit more business-friendly, and there are not so many budgetary issues. If you start asking the questions regarding who is the friendliest of business, Florida is fourth. California is either 49th or 50th. That’s a repetitive thing. Ultimately, that’s why we’re 12 percent of our migration that we used to be. People are stopping liking here. It will also be interested to talk to the people who are familiar with business. Robert Kleinhenz, for example, used to be the CEO of the L.A. Economic Development Corporation. The migration of businesses are those that are likely to say they would rather go somewhere else.
If they are relying on low-dollar labor, they can’t live in cities like L.A. affordably. You’re basically asking them to live in the Inland Empire and make a two-hour commute each way, each day. We don’t have a great mass transit system, so the quality of life is terrible. The cities are having to look to other cities that are going to be more affordable and where people can have a lifestyle outside of work.
One thing that is good about Florida is it’s a new opportunity. Also, there’s a certain number that are probably going to be built. After that’s completed, it will be built and most people will probably get back into it. For people that want to be aware of it’s a great opportunity to get started in something. They hope to do a live webinar, a Q and A, in the next couple months showing them the numbers and walking it through for the people. They will have people sell too. With the ones Bruce started right away, there’s one that’s pretty much done. They to finish up a pool. But, as that sells, they will have have the numbers for it.
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.