This week Bruce is joined by Craig Hill of The Norris Group. Craig has worked with The Norris Group since the company opened in 1997. Craig has worked with the real estate investors, helping them access private money for their real estate investment. He also helps private money lenders connect with high-yield mortgages and trust deeds in California and Florida. Prior to working with The Norris Group, Craig was in the hard money loan business for years prior to that; and the expertise he brought with him has proved him valuable to the success of the company. (Note: The Norris Group is now offering Florida hard money loans. Investors in 1031 exchanges, please call the office or start a loan application).
Bruce said it never ceases to amaze him that their client base keeps on finding deals that keep giving them record years. Craig said it seems that regardless of what you hear out there about there not being any deals, The Norris Group is very fortunate because they have wide enough base of clients that they seem to find enough properties to keep The Norris Group hitting record levels every year. They have an expert base of clients that finds things when most people don’t. Bruce has a feeling next year might be a blockbuster year and that there will be inventory in excess of what they had this year. Craig said for most of his clients, the perception ranges from no deals to a blockbuster year. Their base of clients, both buyers and trust deed investors, will be ready for whichever one it is.
The mood has definitely shifted, but at least now there is a safety in what people think has happened to prices. Craig thinks there is definitely not a huge issue with a large price drop, especially in the inventory with which The Norris Group is dealing. They are dealing in the starter homes, whether it is L.A., Orange County, Riverside, or San Bernardino. It is the lower priced homes. But Craig said people definitely do not see a sharp drop in the prices. This would be hard to imagine because when they deal with one of the long-term loans, it is not uncommon that the rents are 2x the interest payment. This is a 9.9% interest payment, not 4%. You would have to think there would be an interested buyer at some level. It is almost like with the investment side and the trust deed side, it is hard to imagine a real worst case. Craig had talked to a gentleman earlier who talked about how the only real issue is it would go from passive to a little less passive if you ever had a situation you had to deal with, but not something where you have a major loss of funds or would not have 2 or 3 solutions.
Back in 2007 and 2008 was not normal, it was really a Great Depression for real estate. It was hard to not get damaged somewhat in that, but for the ten years prior there are so many solutions, including the client base that deals with the inventory. When The Norris Group has one client that might have an individual problem, it seems to be easily resolved by multiple sources. Since a lot of the buyers concentrate in the same areas, Craig cannot imagine that if somebody were to get a house back or if a borrower was to have a problem that he would have any trouble finding somebody who would either take over the mortgage or take a similar mortgage on a house where it cash flows by twice of what the payment is. The Norris Group has had very few problems, but when they have they have had cooperation from the borrower. It seems like most of the time they are interested in a solution that does not force them to take it into foreclosure. The cooperation The Norris Group has had has been very fantastic.
The easiest case here would be if somebody wants to do a deed in lieu of foreclosure, this makes the process very simple. There have been a couple cases where someone has allocated a sale to another investor that then put the trust deed investor back on track receiving payments. A lot of things really come with the base of the clients that they have. The Norris Group has really grown to become the company it is today, and there are not a lot of people who want to burn that bridge. It is a lot of fun when you are associated with a company that has that reputation. Both Bruce and Craig receive the calls where people tell them they have heard of The Norris Group from so many different directions and want to know what they do. This is a fun phone call for them. The calls are definitely warm if not red-hot depending on how many times they have heard of Bruce Norris and The Norris Group. It is an advantage to take those calls. What is nice is there is no other place you can go to where they are treated the same way.
The concept of loaning money out to someone seems fairly simple. You find someone with a unique situation where normal lenders would not loan on it, so you step in, put up money, and get a higher interest yield. It sounds simple except for when people try to do it themselves. This is when the failure rate is astronomical. This is why they do loans and not situations because the situations are the dangerous ones. Their focus has always been on investors buying properties, so they really focus on doing loans. The people who only lend to people who have a situation, such as someone in foreclosure, currently do not have the ability to pay, or they would be paying. Therefore, somebody steps in and thinks they are protected by the equity and if they give a certain amount, such as $30 grand, then everything will be okay. However, what happens is that $30 grand has a home probably 5 minutes after you give it to them. Now you are dealing with the only security you have, which is the property. You really cannot rely on the borrower to make you good because he really could not make payments before you met him, and now he has all the payments plus The Norris Group’s payment, and the $30 grand did not really solve the problem the way the customer thought it would. If you are protected by the property, then this is a situation where you can be tied up by the borrower with litigation; and this has never been something The Norris Group wanted to do.
The word Craig uses more than anything because it applies to how he feels as an investor is passive. Their group of investors really gets spoiled by the passive nature. When they first started, the investors at the beginning felt like the company was a big warehouse filled with loans. People were asking for loans that were, for example, $200,000 more than what they originally asked. For a long time this may have worked because they were growing as the money base was growing, but then when the market got a little more difficult, they really backed off on the number of loans they did. Unfortunately, this was when clients found out it was not a warehouse, but rather a process. The clients went elsewhere thinking the process would be the same and they were drawing the loans from the same warehouse, but unfortunately this was where a lot of people got hurt. They have had so many people who want to invest, and Craig has had to tell people they will never change their criteria, no matter how many people want to lend money through The Norris Group. It is better for them to be a little disappointed than for The Norris Group to change their process.
What people have to understand is The Norris Group spends no time on negative situations in relationship to a lot of other companies. A lot of companies have foreclosure divisions, and Bruce said he just cannot imagine the stress of this. Earlier in the year, they did have a house that went all the way through foreclosure that was 600-700 loans in the past. This is something Craig can deal with; but when you are dealing with loans from 2 or 3 years ago and you have only had one, then it makes things a little more difficult. As a business model it is very good because they are spending all of their energy on positive things, such as new programs and ways to service people better and fund deals more quickly. It really helps the Norris Group do a better job too because when everyone is making their payments on time, the base of investors who have trust deed investments feel safer to make more quick decisions saying that what they have is just like the one they had originally. Craig said he sometimes wishes he were like the Ghost of Christmas Present when dealing with the new investor and show them how a deal had worked out originally and what they could do this time. Unfortunately you can’t, so it is understandable for new people. Everybody is new at something at some point, but usually with the success and consistency of things, everybody wants to get in and they’re only frustrated by the fact that maybe The Norris Group does not have enough loans for everybody.
Sometimes we get into situations where there are multiple decision-makers, a lawyer, and there was even one incident they dealt with where it was trumped by somebody who had a bad sense about the investment, and the investment they put in has not worked out. You can go a year out and look back to see how you really liked the decision you made. This is one thing that is a hard decision for people because sometimes they just have the wrong perception because hard money for years has been tied to people lending to people in situations Craig had talked about earlier, and it is not real easy for them to separate that somebody may actually have a different process. On the surface, with interest rates are 4% and the Norris Group is loaning at 12.5%, the borrower has to be risky; and his is not. It almost does not make sense. Interestingly enough, you have two groups of people, some who think they can do better with their own money and can get a 15-20% yield, and others who are completely the opposite and are earning under a percent in a CD and when they look at a yield of 9% think the money is being taken to Vegas. Whenever somebody comes into the office, he always shows them a list of all the 9% loans they have. He shows them how they have not had to foreclose on any and only might occasionally have a couple that are 30 days late. It is real comforting to know that on any given day he can have somebody in the office he can show his computer to and not be embarrassed.
Bruce also discussed the time he had the opportunity to speak in front of Fannie Mae and Freddie Mac about the safety of loaning to investors. At that time we had a pool of $15 million loans with absolutely no late payments, and he said you could see the look of shock on their faces that there could be a 9.9% interest rate and no late payments. It was so out of the box of their thinking because they were looking at the investor as the risky borrower as opposed to the owner-occupant, and The Norris Group has found just the opposite to be true. This is why they have always pushed the envelope on the yield vs. risk side. They have never been the highest in yield to an investor, but they have always been by far the less risky. Sometimes people ask Craig if he could lend a little less or try to custom-fit the program, and Craig always responds that what they have to realize is this is a very given and take situation because if we want to continue to have the absolute best clients, we have to be on the cutting edge. It has to make sense for both sides, but The Norris Group cannot make it to where it absolutely does not make sense because what happens is instead of getting the A quality borrowers that they are filled with, they have to start fighting for lower than this. They always have to keep the clients they have because this is what makes them successful.
The type of people who always want to chase the higher yield is interesting because Bruce has had the same conversation with them where you finally figure out that they are in fact getting a higher yield and are foreclosing on 50% of their properties while they have 20% of their money active. The active part is really the key because Craig has had conversations with people year by year, and they just cannot pull the trigger. One instance might be the 9% program because it is an 8 year program. They think they are going to be looking at a higher interest rate and more nervous about committing their money. They will call Craig a year later, and he will finally tell them that for two years they have not been getting any yield, so going forward it would really have to obtain a yield. You really can’t take riskier investments or wait for some kind of better yield, especially someone who has wealth already. Sometimes it may not be a good fit for somebody that has to create wealth.
Craig was having dinner with a client recently who had been with them a long time, and she had somebody she knew who came up to Craig and asked him how they could make $1 million. He said he could not tell her how to do it, but if you try to do it you might lose $1 million. Sometimes not everybody is a fit for everybody, so they have really found a nice niche for people who have some wealth and want to consistently build it with very low risk. With the price points we are at right now, we are making loans based on 1990’s prices. Common sense tells all of us that that was before it even went up this last time. If we feel that 1995 was a realistic value, these loans are being made at 60-65% of 1995 prices. All that tells us is historically we would not know what would have to happen for this to make sense and it also does in a second way because the rents are already covering the payment by double. It is one of those situations where the smart money is actually on both sides of the table because the investor, or the person buying the property, is a skillful investor buying something below market by today’s value. However, if you look at the whole picture the investor is buying it with a starting point of half of what it was worth four years ago, and he is receiving a discount and a cash flow. He is making money monthly and buying something below replacement cost where the history says we will probably accelerate in the future. He cannot borrow money through standard lenders because they are not interested in that loan. On the other side, he has the choice of receiving a ten year t-bill that is at 1.9% today, the stock market that goes down or up 300 points every other day based on what happens in Greece, or a 9% trust deed. ]
The Norris Group has some very large commitments from people, who have money managers and overseers, and from talking to these people one year apart Bruce has seen that they are astonished that their yield had performed perfectly. They were warning their client that there is no way that the yield could be so riskless, and then it turned out to be so. The best and most satisfying thing about what The Norris Group does is what they see happen in the long-term. Before going to The Norris Group, Craig was working with a friend and was funding deals with hers and her father’s funds. She told him a story about how she went to her account year after year for 6-8 years in a row. Craig told her he did not know what her investment was but she needed to get out of it because it was too risky. Meanwhile, with her father’s insistence she has also diversified into some stocks, which had netted a 0 yield over the last 18 years. However, by the ninth or tenth year she was told to keep doing what she was doing. It was very rewarding. The Norris Group has a process in place that is second-to-none in picking clients that are worthy of borrowing money.
Bruce and Craig talked about the process and why it was different from other people. The main thing you have to do is rule out people to make sure they are qualified when you get a call from a borrower. The first thing you do is try to establish right away whether or not it is a situation. If it is a situation, then you have to rule that out. Secondly, you always try to find out if it is owner occupied. Most hard money companies will not do owner-occupied loans any longer, so you also look at this. You also have to get an idea and see if they have any experience. The Norris Group really relies heavily on liquid cash because one thing they have found in the business is you really need to have liquid cash because you cannot have a situation where a $10,000 or $20,000 problem throws your whole world upside down. This is probably the most frustrating thing when somebody calls in to borrow, they might have $800 credit but only $10,000 in the bank. You can usually tell by their credit report and what they state their income is to see that it would not take much to flip the whole thing over. This is compared with someone who is a business person who went through a situation 4-5 years ago where he had a bankruptcy and so his credit is not as good. However, he currently has about $200,000 in the bank to back him up. People with better credit don’t like to hear this, but in our world this is a safer bet.
When we make loans, we are actually using common sense and asking ourselves what are the odds that we are going to be paid monthly and get paid back. We are really not guided by any 1,2,3,4 rules. The bottom line is if it really makes sense and it is a good loan, then it can be done. Bruce said that Craig also has kind of a sixth sense in that there are times when he has come to Bruce showing him something that looked good on paper, but he knew there was something about it that he felt uncomfortable with, and he was right. This was probably one of the things that he has always appreciated from the very start, whether it was from a trust deed investor or a borrower. There will be times when he will come to Bruce, and he can just feel that there is something not right. Craig has learned that he if gets that feeling to try to catch somebody in a little bit of a situation where he can tell they are not being up front with him.
Tune in next week for the second part of Bruce’s interview with Craig Hill on The Norris Group Radio Show.
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