Bruce Norris is joined this week by Craig Hill. Craig is the hard money loan underwriter for the Norris Group’s loan business (as of 2018, they now lend in Florida and California). He has been in the hard money loan business for over twenty years. Bruce himself has been a private money loan customer of his since 1993.
Bruce and Craig began by discussing trust deed investing. This is not really an understood thing by most people, yet it probably should be on top of their list. Bruce asked Craig why he thinks it’s become a secret. Craig said if you want to call it this, it is probably not in the mainstream media. You never really hear about this, but you will hear about things like stocks or gold. Sometimes trust deed investing can have a little bit of a mystique to it, but it is really quite simple. Most people have bought a home, and instead of being the person borrowing the money in a trust deed scenario, they are simply the person lending the money. It is a very easy concept to understand. For Craig personally, he does not know much of anything about the stock market. However, understanding that somebody is buying a house, are borrowing money on it, and you are secured by the house, then that is a pretty easy concept.
One of the things you have discovered by experience as well as by a transition of the entire business model is that loaning to an owner-occupant did not turn out to be the best loan. When Craig and Bruce first met, the trust deed business or the hard money business would have been exclusively lending to homeowners who lived in their home and who had some type of need or problem. Typically, that is not what the hard money business was. Once they met, they were lending on the same house but to an investor who was going to buy the house, fix it up, and resell it. They had the same house for security that, instead of being in second position, they were in first position. Instead of lending to somebody who has had financial problems their whole life, they were lending to somebody who was financially strong. When you add everything up, it is a much safer way to go.
In a way, the day the hard money loan business went from lender of last resort to business lender was a huge step in improvement for who the clientele was, and one of them became obvious fairly quickly. When somebody had a problem home, they were going to do one loan. When you have somebody who is an investor that does it for a living, they will be calling you many times a year. Craig was talking with a client the other day who was discussing a similar thing, and they talked about when you lend to somebody going back to the owner-occupant, it is really hit or miss. As soon as they borrow the money, you really don’t know if their intention is to pay you back. This could be the last liquidity they needed to do whatever they needed to do, and that was it. It could even be as easy as packing up and leaving town.
When you are lending to an investor, it is a business partner. Therefore, their intention was to complete something that is going to have a positive outcome for them. In other words, there is not any positive outcome for them unless there is a positive outcome for everybody. Secondly, if that business person received ten loans with you and has been your client for five years, they are counting on you quite a bit for their business. If they have a problem, they are going to be pretty motivated to solve that problem. They really don’t want to lose the connection to say that the company or the hard money lender is a business. It would have far greater repercussions than just on that one house.
One of the nicest things for the Norris Group is they usually have a track record with the borrower. They can go to a new trust deed investor and say they have lent to them for seven years. This is becoming a common question for some of the new people as they really just want to know if they have lent to the person prior to this. They are starting to get a good reputation as someone who has been doing it for a long time, so it definitely gives the new investor a whole new level of comfort when they know this is somebody to whom you have been lending. Earlier this week Craig sent out an appraisal on a deal with a client that had done a lot of work with both sides. He actually got a call back from the investor who said the property looked rough and they were going to fix it up and resell it. When they went through the process, he forwarded them a bunch of completed examples of the work they had done. In the meantime they did their own research, and they actually had a couple deals with the same borrower. This really makes it easier to tie it together than if this is just a one-time deal. Maybe the property needs a lot of work, and they are not familiar with it. However, when you tie all the pieces together it really gives everybody a sense of comfort.
Bruce said when you drive around the car and open the web or newspaper, you are faced with an interest rate range that says 3-4, so the question would come up from people who are not experienced as to why people are borrowing at these rates. That is a pretty common question; and they just do not understand the concept since most people are only used to borrowing from an owner-occupant dealing with the bank. This particular client is generally buying something that is either in really bad shape or they may have more properties than with what the banks are comfortable. They do not have options beyond doing a little higher loan interest rate unless they are going to pay all cash. Then they lose the benefit of leverage. There are a lot of reasons why really good qualified clients would borrow hard money. Going back twenty years ago, it made sense and after that another client with whom they did a lot of business. It seems to make sense that they can use this, even with the higher interest rates.
When you are on the other side of this equation as the borrower, then there is a facilitation cost. You know what it is, you plug it into the formula, and without access to the money you would not have made a deal. It becomes easy to absorb once you understand that without it, Bruce said he does not buy houses. Either this, or without it somebody works on one at a time. With it they may work on two at a time, but granted they are going to make a little bit less. You add this up over time, and those extra homes you are able to buy is leverage you are able to do and really makes a difference in how successful somebody can be.
When Bruce and Craig met each other in the early ‘90s, he was maxed out at about eight properties. After meeting Craig, he was doing 24 properties. He never missed a payment and was able to go to an auction and not stop bidding. Instead of just buying two deals that day that were really good deals, he got to buy five. It became a great business model, and it has really transformed the business. The majority of hard money companies now follow that line where they primarily deal with real estate investors.
Bruce asked if somebody was going to invest in one of their trust deeds, what type of property they will be loaning on and its condition range. Craig said they are primarily going to be lending on single-family homes, maybe up to four units. Occasionally they do something a little larger, but they really do not do too much like this. They do not lend anything on raw land, nor do they do commercial. The loan range is going to be between 50 on the low end and 700-800,000 maximum. They tend not to get into the million dollar properties since they are mostly in the starter home and mid-range price area. Those are probably the main criteria they are going to see when they send something. They type of inventory is either something they have lived in or, if they have ever had a rental, they have owned. Maybe they know the difference too. A rental home does not have to be in the same exact condition or location to work.
The Norris Group does two programs. One is the buy and flip program, which is basically where investors will go in, fix up the property, fix it up in good condition, and resell it. These houses can range anywhere from poor condition, fair or average, and does not need too much work. With some properties there is even square footage added on, so there is a wide range of things they are looking for when they are looking at buying a property to fix and flip. How loans of that nature are structured, they are going to base the loan on what the property is worth after it is repaired and in good condition. Conversely, they are going to hold the money for that work to be done, so that is the trade-off. It is a lot like a construction loan in that you are never ahead of the curve. The borrowers are always going to have some of their own cash in the deal, and that is important. This has been a big question with all clients on the lender side since 2007-2008. The borrower is always going to have cash in the deal, and they are generally sitting around 65% of the after-repaired value. However, they are always going to have cash into the deal.
Bruce said they often say no to a borrower, and a lot are surprised at this. They have been told it was hard money, but this does not turn out to be true since there were no requirements. Bruce asked why people would be told no. Craig said one reason may be that the person just really lacks the financial ability to do it. They have done 4,000 loans together and have been able to narrow it down. The main things they are going to analyze are they are going to look at the property, the experience of the borrower, and the primary other criteria will be the amount of liquid cash or liquidity the borrower has. This is because they learned over the years that this is the one thing that will guarantee a successful outcome, even if everything does not go as planned. This kind of a project never goes exactly as planned. There is always going to be something there, so they are really turning them down because they just don’t really have the ability and should not be doing the business. This is probably the number one reason they would say no. Another reason would be that once you get to the fact where the person may be qualified, then they review the property.
Craig said for some reason the property does not make sense. With newer people, a lot of times people are not looking at numbers realistically and are trying to buy something that does not make sense, their numbers are not right, or they have noticed something in terms of them looking at it differently. They could be pulling comps from the wrong area, or structurally there is something wrong. Even though the comps may support something, sometimes there are a lot of differences in how a property is constructed. Usually there is just something that the newer person is missing in terms of when they are analyzing the numbers on the deal. Between those two reasons, that is probably responsible for 80-90% of the no answers.
Bruce asked Craig how he would rate the sophistication level of the Norris Group borrowers. Craig said the sophistication level of the borrowers who are consistently doing it is beyond any that any company has. Their business model has always been to cater to those clients. Because of this, they are so busy that while a lot of people will call him and tell him there are no REOs out there, Craig will tell them there are not any REOs because that part of the cycle is over. However, their clients are sophisticated enough to know how to buy all the different ways, and they are absolutely knocking it out of the park when it comes to all those different ways to buy. This is a protection in keeping people’s money busy, but it is also a protection knowing who was touching the property and who they have said yes to have either dealt with the situation before or have niches and have done it repetitively.
Craig referred to the earlier example where he sent the appraisal out, it was a rough property but they were going to fix it up. Not only was he able to send examples, but they had been lent to prior to the appraisal. In the Norris Group business, things are very repetitive and you are almost making the same loan over and over again, but with a few variations. If they were door-to-door salesmen, they would just have one little file and sell one product. They will not be dragging a suitcase behind them with several different things. He has focused over the years on really concentrating on what they know the best. This is one reason that even the times they thought it would be nice to expand the business a little further into Northern California, it became harder since they could not offer that same service since they know Southern California so well.
Bruce was going to ask who the typical trust deed investor is, but a better question is what the makeup is of a typical trust deed investor. What are they looking for, and what makes them tick? Craig said there are a few things they are looking for, some who are looking for a higher yield than they are getting. So many people are frustrated with what they are earning in interest, and this has been a very common thread. He will get a call, and somebody will come into the office and tell him they have a certain amount of money sitting in the bank. They will tell him they cannot live any longer on only $10 a month. This is pretty common, but there are also a lot of people who want to take advantage of retirement types of accounts, such as self-directed IRAs. With these they are able to have a good return on that money, and it goes right back into the retirement account.
From the other side, they have quite a few successful people who are looking to slow down a little. It may be time for their life to get a little more passive, so it might be somebody who owns or runs a business. They even have a lot of people who have been involved heavily in real estate before, and they do not want to be day-to-day anymore. They decided this is a good passive way for them to handle it since they understand real estate. Instead of doing it themselves, they are going to land and make the return before somebody else does it. Bruce asked if any of them are looking for any excitement in their investing. Craig said not at all, and this is one reason they are so popular since they try to make it as boring as possible.
If Craig were to ask if he could have another trust deed or rental property, his answer would be trust deed all the way. This was because when they first got together to form the company seventeen years prior, property buying sounded really exciting. Craig learned that the idea of the trust deeds just fits his personality because there are a lot of people with a lot of different skill sets. Not everybody is a property investor or a landlord, but there are a lot of people who are cut out to be a little more passive. Craig said he is one of these people, and it is a perfect fit for somebody like that who wants to be involved on the fringe and get a really good return. Being passive is really key in what they do. Bruce said it does not have to be all of one size. He has definitely dealt with his share of properties, but he really enjoys the trust deeds. On that part of his life, it is such a non-exciting event. It is passive to the point that you don’t even think about it since almost everything is automated now.
There definitely has been some rule changes in who can participate in the trust deed investing. One thing the Norris Group business model has always been is they do not pool money, and they always put one investor into each trust deed. Whether it be 50 or 500,000, they are just putting one investor into each trust deed. They do have the long-term program, the rental program, and the average trust deed is usually around $100,000. With the new requirements, somebody who invests in a $100,000 trust deed would have to have a net worth of $1 million minus the value of their home. This is kind of a starting point, and if just happened in January of this year. With regards to the fix and flip, the majority of those properties are around $3 million. For somebody to invest in the short-term flip and do a $300,000 trust deed on their own, they would need to have a net worth minus their home of about $3 million.
They have been very fortunate that their business model was almost set up with that type of client investing in their trust deeds. However, there are a lot of companies who changed their whole model and even eliminated them from the business. Craig said this has always been their business model, and instead of wanting one person or three people to fund a $100,000 loan combined, their goal was always to have one person who could fund three on their own.
Bruce asked what the process and reaction time is that is necessary for them to be one of the people who gets to invest in the trust deeds. Craig said first of all they would need to show some interest, whether it is a through a phone call or email. They would then do the initial process with the required investor questionnaire to show the net worth and what the possibilities are. For somebody to invest in the long-term, there are not as many really timing requirements since those go a little slower. When you come to be involved in the buy and flip program, these clients can get these deals since they say they are going to close them quickly. Ultimately, the person who invests in the buy and flip trust deeds is definitely going to have to be someone that can react quickly and also make a decision quickly. They can sign documents through DoucSign via email, which is what most investors do now. They have to be very reactive and are probably going to need to have the ability to work within a three-day period once they set an appraisal and approve it. They definitely will need to be very reactive.
Check us out on our website at www.thenorrisgroup.com and be sure to tune in next week as Bruce continues his interview with Craig Hill.
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