This week Bruce is joined once again 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 hard money money for their flip, rental and construction deals and with note investors who want to get a very safe yield on their private money with trust deeds and mortgages. 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.
Today’s radio show focuses on the borrower side of hard money loans. Craig deals with calls all the time and goes through the terms of the loan, and there will be some callers who are connected to the advertisements of 4% and are completely shocked when Craig tells them it will be 12.5%. They do not understand this side of the world at all. However, Craig said these calls usually come from people who have never done it before, so usually whenever Craig gets into a situation like this he tries to ask them how they funded the last deal they did. You really have to establish that this is a different world, and if somebody has been a property buyer for a long period of time, they have a better understanding. Sometimes if you get that person who feels they can do it, it might be best for them to pursue a loan at their bank under a non-owner occupied program. Craig tells them they might be able to get it if they have perfect credit and other things. There are a lot of different ways to handle it, but Craig said The Norris Group usually deals with investors who do this for a living and have an understanding of what the costs are going to be.
The real education is to go ahead and try whatever you think is easier or less expensive because the lending world is really not working very well right now. Bruce worked with a major bank where the manager told him the frustration they have right now where they cannot fund owner-occupied loans inside of 75 days. In the investor world, if you do not have speed, you don’t find deals. They have to be able to close their loans quickly, and they have to rely on the fact that the deal will close. People are always asking how they can save money, so they either try to list the house themselves or find their own money source. People even hold seminars about how people can find their own money, but it is really not that easy. It is not that easy to get trusted with money. You always have to ask yourself whether it is really cheaper or not because there is always something attached to it, including a no answer when you thought you already had a yes. The Norris Group gets a lot of these kinds of calls where someone calls at the last minute and only has three or four days or less and they need to close it. Someone had told them something didn’t perform. It is so competitive out there now, so you have one loan that does not perform then you can forget about doing business with your agent again or anybody that agent knows. You have to see that this was really the cost of not getting a loan as it exceeded far the cost of getting one. It is not easy to watch over the years people going through a process of trust. As a person, to start from scratch is just not a reliable source.
Bruce came through the hard money business first as a borrower of considerable amount of money on a regular basis. He really did not consider the cost as onerous at all; he just needed access to it. With reliability comes the ability to grow. It’s the same way with The Norris Group business as a whole and just like how it is with an investor. If an investor has either his own money, such as a limited amount like $200, they really are working under constraints. Once they have access to somebody who might have, for example $1 million, they can start and tailor their business knowing they have access to $1 million. There is a cost to this, but you also have to look at the benefits of this. The benefits are you can up your marketing and do many more types of projects. It’s like being a construction lender without having a lender. A construction worker has to have some leverage, or he is only going to build ten homes. This has been the same way with The Norris Group; the borrower side has always grown along with the money side because the money side is there and the borrowers need the funds. This is what a hard money lender is.
When Bruce and Craig met, their meeting came about because Bruce was seeing more opportunities than he could personally handle. He had a fair amount of cash and a credit line, and all these were active on free and clear things. He had a chance to go to HUD auctions that were tossing out $.50 deals a half a dozen times per auction. He also had the chance to buy a track of homes at the same number. He looked around and saw how he could not take advantage of it, and this was the start of their meeting. When Bruce and Craig met, this was not the typical loan for a hard money loan business. It almost did not exist, and this was in about 1992 or 1993 when for hard money lenders the rule of thumb was a house was worth what you paid for it. If one next door sold for $100 that was fixed up, then you bought one that was exactly a model-match right next door for $50 or less, then you could borrow $30 or $40 on that one. At the same time, The Norris Group could lend somebody who had never made a payment $60 grand on the other one. When Bruce first came to Craig, he had to fight very hard to get the first few deals through because it was not done that way. Now, in a lot of ways hard money is synonymous with that exact function for investors. Back then, however, it did not even exist.
Bruce said he remembered for one of the properties he bought at a HUD auction that was appraised, they had not discussed what he had paid for it. He asked for it to go ahead and be appraised and would be able to borrow X-amount of percentage on the value. When Craig told Bruce the value, he asked Craig if it bothered him that he would be giving him money back more than he paid. The first thing Bruce thought of was they had a really unique opportunity there and Craig was probably dealing with his type of the world for the first time, and Bruce had access to a lot of dough for the first time. Bruce told Craig he could rest assured and made six payments on the first loans, and all of a sudden it dawned on the owner of the company that they had never had anybody do that prior, so they either understood that Bruce understood it or he was capable more than their other clients had been. This was an important transition for the hard money loan industry because it followed with Craig hoping there were more people like Bruce. Craig spent three or more years until he had all the other loan officers ask him when he thought it was going to be done. Some of them never transitioned into doing that and Craig strictly transitioned into doing only that because he got used to the facts from Bruce and others thinking the process was very efficient. They knew how to make the most happen with the least effort.
Bruce has always been surprised because he remembered thinking when 1995-97 passed and it was the end of the REO world, they were really thinking from where all the deals were going to come from, and they did. The private party purchasing and construction started, and all of a sudden The Norris Group was even busier. Craig said this has been the one important thing that there has always been a niche for good borrowers and private money. If good people are out there doing something and making a profit at it, whether it be buying off private parties or lots when the time is right, there is always an opportunity and a surprise that no matter what the real estate market is like, there is always a space for hard money loans. Bruce is so convinced about this now that he has had the chance to go back and rub shoulders with the people who make decisions in the normal world and see how they view investors. He came back with a self-assurance knowing there will always exist a need for a private loan business because we just make decisions that are common sense, yet the infrastructure prevents this. For example, The Norris Group is not afraid of a home that does not have a kitchen because they have dealt with 1,000 of them and have not been damaged by any of them because they know a kitchen can reemerge for a certain amount of money. In the loan process, they retain the money that would cause a kitchen to show up if the borrower stopped paying. You start putting the pieces of the safety together and think you can make the loan, but it does take private money to fund it quickly and accurately. Bruce does not think we are ever going to have a lot of competition from the other side.
Craig is amazed how much conventional lending will not do. There are so many hoops to go through, and the borrowers The Norris Group is loaning to have wealth and credit. They have everything where you think you can walk in and get any amount of loans you want, and they can’t even get loan #1. Craig received a call from a borrower not too long ago who owned about 4 houses free and clear for about $120-$140,000 each. This is his money he put into them, but the bank will not work with this because they consider it cash out. Craig wondered if he would be a stronger borrower if he leveraged at 100%. Here is somebody with perfect credit with four free and clear houses and the bank will not work with him because they see this as cash out. It does not make sense to him. Somehow this puts him in less of a safe position that he owes, for example, $200 grand at 50% and has $200 grand of liquidity to make sure it gets paid. This is a decision-maker you’re competing with and you think you will be okay. With The Norris Group on the other hand, their response is how quickly they can get their appraiser out there.
Some people are disappointed that there are more hoops than they thought. They attend a seminar and get told that hard money only looks at one thing, and then they go elsewhere like The Norris Group and see that this is not the case. They were not really told what was really going on. Because of the nature of loans and more recent history, Craig said one thing that is very difficult for people to understand is if you are brand new, it is very hard to delicate the whole process and think you are going to have a good result. You don’t even know how to protect yourself. This is the most frustrating thing Craig sees from some of the national seminars because it is almost like they are a part of a group and are dealing with a mentor, while The Norris Group takes a look at the deals and sees they are not deals. The number one thing The Norris Group wants is to make sure people have a deal, or they are going to talk them out of it. Bruce said this is an important thing for people to know that there are companies that are built that way and companies that are not. It has to go through some filters. If The Norris Group is going to make a loan on it, then there is probably a very high success rate for the investor.
There are several filters. For one, you might look at the sheer numbers and say it is not a deal, and then you have an appraiser who goes out with a lot of experience in investing and says that the numbers make sense but it is really a dangerous property for specific reasons. The filter The Norris Group has for people who borrow money from them is second to none. Bruce trusted himself and said he would actually have cause himself if he had found a deal. If someone like Rick Solis had gone out there and told him he really needed to take a second look, then he would. You really cannot put a value on this type of filter, and sometimes The Norris Group will get calls from people who are thinking of buying all cash, and Craig tells them to call him when they have their numbers. If they have something in escrow that they are thinking of doing, then they need to take a quick look at it because it is very easy to see where somebody can make a mistake.
For people who don’t have experience, they really don’t realize how expensive the journey will be, so there are surprises and repairs. All these things start taking away, whether it is a percentage here or there, and all of a sudden a deal at, for example, $.82 on the dollar that seems like it is going to make you a lot of money actually costs you a lot of money. If you get over 75% of what the house is worth in repairs and the purchase price, you are really starting to deal with a very thin margin. Craig will back out everything and start at 100%. He will ask them if they are going to sell it themselves or if they are going to have a commission, because now more people are paying incentives such as 2 or 3% of the closing cost. If you have something and then you have the cost of the loan, pretty soon they can see that what something is costing and being sold for is not leaving anything in the middle. You are going on a 6 month journey, and this is where the experience comes in. You are going to hire a construction crew you have never dealt with, and the odds of this not working out are higher than dealing with one you have dealt with twenty times. Everything that potentially goes wrong in the business is especially likely to occur to the first-time person. For that individual, having a deal is critical. The first step is the person needs to have a deal.
The second most frustrating thing for people is they really are told that they don’t need to have any money or need only a very little money. We are looking at things in terms of the borrower needs to have survivability and a successful outcome. Years ago Craig had a client who had a house and made payments like clockwork, then all of a sudden he stopped making payments. He called in and said he had a specific amount allocated for that, and Craig said it was quite a surprise. This was years ago; so more and more The Norris Group has had the philosophy that the really liquid cash is very important because it gives them survivability to only to protect The Norris Group and their investor, but it really protects their down payment and what they put into the property. It gives them the ability to get out of a situation instead of lose a situation. It is also really a benefit for them to make a monthly payment.
Craig has always been asked if the payments can be included in the loan, and he learned years ago from making an unwise transaction with his baseball cards that once the money was long gone he made payments on it every month. Every time he wrote the check it was a lesson to not do it again. In the same way, if you are making a payment on a property you realize that it is costing you money. Just because you might have payments for six months, you cannot just sit around and wait. You have to take action since the problem is not going to solve itself. The payments are either not a high priority or the borrower has a tendency to not think about making payments. The Norris Group used to do seconds for people so they would not have as much in, although this is something they do not do anymore. They realized that not everyone is disciplined. The Norris Group not only looks at the deals, but they also try to help people be disciplined so they have successful outcomes. You cannot try to do three if your limit really should be one. Stick with the one because you are really going to have a successful result on that one. One of Bruce’s favorite statements Craig has made is, “Lost another hard money loan; made another client for life.” In this case, the client was told the truth they actually needed to hear to see that they now have confidence that they have a backup system they can trust and will not get hurt by their loan officer.
There is almost as many people out there who would thank The Norris Group for not doing deals, talking them out of a deal, or explaining how it works. It is very satisfying because what Craig tells people when he is talking to them is he can tell by their voice when they are a little disappointed, but he tells them he can deal with that. Being a little disappointed right now with Craig telling you no or what is the real deal is much better than the client having a deal three weeks from now where they are going to lose the deposit or having a deal nine months from now where you lost $20 grand. This is going to be a lot more disappointing. The philosophy at The Norris Group is to deal with it as it comes, and people are usually very appreciative of the fact that TNG tries to give them good advice.
Bruce mentioned the home shows and how one of the things he noticed was how frustrating they were because some of the reality was missing. On the show, you are shown property in the beginning that needs a lot of repair. It’s a perfect opportunity for two investors, but then you come back four months later and they look like they want to get a divorce. Then, the realtor comes back in and tells them what they left out. Going from A to B is an expensive process, and it just shows there are deals that do not fit the level of experience of certain buyers. Craig always tells them when they get their first deal; he tells them they did not find the deal, it found them. There were several people who passed on that deal who were experienced investors, and the newer people need to stick with what they know and what is the simplest process. You have to leave the other things for the other people, and conversely in their group of clients they have a lot of clients who are experienced. They have one right now out in Orange County who is buying a property for $220,000 and are putting about $125 grand into it. This is a very experienced investor, but it is also a niche because not a lot of people are going to be able to accomplish what he is going to accomplish. You have two sides of the scale; one that can tackle these kinds of things, and the newer group that needs to stay away from this. Most often these are the deals that the new people find that other people had passed on originally.
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