Bruce Norris is joined again this week by Craig Hill. Craig has been an expert in the hard money loan business for many years. He joined the Norris Group when the company began in 1996 and is now going on 18 years.
When Craig first came over, they thought they would need a certain amount of dollars of money base to do a hard money loan business. At last check, it was over $70 million. This was not anywhere near the number they were thinking, and they did not have five digits attached to what they thought would work. What is interesting is that this is a lot of trust, and that trust comes slowly with the right people. It is really a process, and you don’t really sell the trust deeds but rather let them sell themselves. Craig has found over the years that you have to listen to the people, and they will give you an idea about what they are interested. Craig made it a point where if they did not have anything that fit their interest level at that time, then they could not start there. He has always avoided trying to show them something that they have already made known it is not what they are looking for at the moment.
Bruce knew a gentleman who asked what their trust deeds paid. He told him it was 12%, to which he responded that he could get 16% by using his money directly. Bruce asked him what kind of trust deed this was, to which the man replied that it was a second. He then asked him what percentage of his money is active, and he told him around 20%. Bruce thought this was a really interesting way to look at yields. If he gets 16% on his investment, 80% is doing nothing while he waits for activity. Craig’s thought on yields is that he always wants to know how much he made at the end of the year in terms of a real dollar figure.
If Craig could find somebody who wanted the money bad enough to pay 16%, both he and Bruce know that if you made five of those private money loans then you would have a problem somewhere. You are only going to get the 16% as long as they are paying you, and if they are going to pay 16% then it means they have been everywhere else. Craig did not get a client, the loan found him. This person has probably been trying to sell this loan for a long time, then somebody comes along and is strictly looking at the yield rather than what they are getting for it. This is something that would happen if you had the wrong clientele investing in trust deeds.
The stock market had a really banner year last year. Bruce does not recall them losing any dollars to that world. Nobody pulled up stakes and said they were going back to stocks. Craig said they are very fortunate with the clientele they have coddled out, and it is almost unfortunate because they actually had more people calling ahead than they could actually accommodate. They get very comfortable with the yields and both the simplicity and consistency of it. Over the years there are some people who have been with the Norris Group the full 17 years, some who even predate that. They get a track record and get very comfortable with it. Craig is not that familiar with stocks, but he thinks that anybody can understand there is a house and will be a first mortgage on it. Therefore, these are the people who will be making payments.
The concept, once people get used to it, is one most people are aware of since it is the same for people who have bought a house in years prior. They feel like they have the security of the house, so it really has a lot of common sense to most people. These people have been on the other side of it since they have also borrowed loans and made payments. Now they are on the flip side of it and someone is making a payment to them. It’s so simple in that you can just go visit the asset, which oddly enough you wonder how many of the homes funded will be seen by the trust deed investor. Craig said he would be surprised if it is even one or two since most of the time it would be zero out of thirty.
There is a process of trust to where somebody get introduced to the Norris Group by referral or word-of-mouth, and they really encourage them to get a toe in the water before going all in. Somebody may say they have a million to invest, and in a case like this the typical loan size for the rehab or flip would be $200,000. If Craig decides to do one trust deed for $200,000, he will tell them to get familiar with the process, see if they like it, and go from here. The trust aspect goes hand in hand with performance. Craig knows if he could take a snapshot, if people could see after a year how it went and how simple it was then this is where you really begin to develop the trust. Even though only a few people even look at the properties anymore, it is always a part of the process that Craig will send them a copy of the appraisal as a first step in the deal.
Bruce Norris said one of best referral letters came when his appraiser came to him and said they had done 13,000+ appraisals in their life and the Norris Group was the only company that has never tried to dictate value. When people know this is how you are doing business, the trust aspect at this point should be easier than for somebody who has only been doing it for a year. You just have a 17 year history of doing the same thing over and over, and with word of mouth and referrals it has built up a tremendous amount of trust. When you have an appraiser, it does not hurt that they have had experience buying hundreds of homes themselves.
Anytime you are doing this business, you are always relying on certain third parties. The appraisers the Norris Group has are experienced and usually buy houses themselves. The one who does the most business for them is the most experienced you can get in the aspect of property-buying. This only further helps the case because he could look at a house and help them identify a mistake. There will be times when Craig will get an email from the appraiser telling him about a deal he does not like, and Craig respects this. Even if they are not right 100% of the time, they still try to take the extra step to make sure they are not missing anything that should be obvious to them.
Bruce asked what is harder to come by: a million dollar borrower or a million dollar investor who is potential in trust deeds. Bruce said it seems it is harder to get the money to trust someone to put it into a trust deed than it would be for somebody to borrow it. This aspect does come slowly, but on the other hand the way we whittled it down to get a good $200 grand loan has such a value that it almost attracts the other part. There are a lot of $200 grand loans, but there are not a lot of $200 grand Norris Group loans. Craig said they have been doing this for so long that the reputation is there. Once you have everything in place, then when you have the $200,000 loan you probably have 20 people who would take it at any given time just because of the value they know it has because of the track record.
There is a filter in place, and this leads to another topic of people who get approached by borrowers directly to fund their deals. In the real estate world, a broker does not cost the person with money a dime. In terms of the flip program, you can actually charge more going through a broker because of the usury law. You have so many people looking at the transaction when you are going through a broker. When you are dealing directly with somebody, most people who have $1 million to invest would not think they have the years of experience to look at it or the time to do it. This is all the Norris Group does. Even if somehow they could make a little bit more, Craig’s concern would always be whether or not the risk would be worth the extra half a percent after whatever they may be able to get if they were trying to do it direct. This is generally not a good situation.
The biggest example happened when they began to slow down in 2006 and 2007 when they knew what was happening. There were a lot of investors in that situation where they were on automatic pilot, and unfortunately they had gotten into the habit of not really looking at what they were lending. It was more or less just a write the check scenario. It was really bad for a lot of investors who just tried to keep money working and not really know what they were lending on. They thought all hard money loan companies were equal and all loans were equal. This also brings up the point that all product types are equal or all loan positions are equal. The thing about having experience over the course of two decades is you can go through all your things.
The Norris Group has not had many problems, but when they do have one they analyze it and find out whether it is a repetitive problem. If it is, they are not going to put anything into a second position or loan on that product type. This is inherently where the problems are and where they get worse if things get bad. One example of this that did not turn out too bad was an idea that went back about 12-15 years. For a couple clients they thought they would do some seconds for them, and this way they could do a little bit more. This did not turn out bad, but it allowed them to do a little bit too much more than they should have been doing. Another question that comes up every once in a while is if they could either make payments at the end and include them in the deal. Very rarely do they like to do this because if somebody is making a $2 grand a month payment on something, they realize that they have a debt there. It means they are not going to do five loans and have $10,000 a month going out unless they are more than well-equipped to handle that $10,000 a month payment.
In the first segment, Bruce and Craig talked about the surprise nature of the business. When they started doing hard money loans, Bruce was the main borrower for years. He remembers having 24 hard money loans in 24 payments. You are supposed to have five closings, and you would have one. You really put the kibosh on the buying side, meaning if you purchase something it is going to be such a killer deal that it is a no-brainer. You really realize that there is a point at which one more is not so hot. It almost gets to a point where if people start to borrow that much where every time you make your monthly payments you are losing the profit on one deal. Craig has always been a big fan of doing the twenty best deals rather than forty. This is where the monthly payment finally makes you humble and causes you to say no to it. It is like being a contractor where you want to get busy, and you get busy on marginal margins. All of a sudden, you say you are going to stretch your margins. Unfortunately, sometimes you get this job too.
Bruce said they deal with both sides, both the borrower and the investor who wants a trust deed type of investment. Bruce asked Craig how they are different in makeup, what each are chasing and why it is a good fit to them to do what they do. Craig said passive versus aggressive would be the first thing that comes to mind. Personality-wise, the borrowers are a little more aggressive. Most who come through will be on the younger side and will probably be doing the business to accumulate wealth or build a portfolio. Most the investors already made their money, whether it be over years of saving, retirement accounts, or selling businesses. They are looking for a little bit more passive situation where they want a monthly income coming in and do not really want to be too involved with the process. A lot of times it does not work out, and if somebody on the investor side has a little bit more of that aggressive side and want to control everything then it is not a good fit. Most of the investors on the other side appreciate the passive nature, which does not mean they are not involved at all. However, over time they get more comfortable with just receiving checks. Then it is not a job anymore.
For most of these people, they either currently have or have retired from a job. They don’t really want another job, but rather they just want to earn a good rate of return on what they have been able to accumulate. On the other side is the exact opposite of this. They are trying to be totally involved, create wealth, and go from here. You can have a transition occur with the same person who goes from an aggressive phase to a more passive phase. In the aggressive phase, even though the yield is greater, you are spending an enormous amount more time since you do have a job. When you get to the passive stage, your money is busy and you are not.
Craig said sometimes clients do not see the value of what the Norris Group does and try to find that piece for themselves. It is not that it cannot be done, but essentially what they have done now is created another job for themselves. That job gets in the way of what should be their primary job, which is finding properties. Years ago when Bruce and Craig first met, this was something with which he never bothered. He really realized that he had just struck a pot of gold and had access to virtually unlimited funds that he did not have to spend his time chasing. That scenario works for a lot of people and works for them right away since they have already been through it.
There are really three pieces to the puzzle. First, you find the house. Next, you finance the house, then you fix it up and sell it. The puzzle is on automatic pilot, so this gives you a lot more time to do the other two pieces. Bruce remembered back in the day when he would attend a HUD auction. On Monday he would get faxed over six deals, which was a lot of fun. At that point Craig started looking for people like Bruce, and a few years later they ended up with the start of the Norris Group. What is interesting and has surprised both of them over the years is early on they were always wondering what would happen next. They can both attest to the fact that there has never really been a time when hard money hasn’t made sense for a large portion of people.
The time when the crash occurred was the time to not be lending. With the exception of this, during the entire 17 years there has always been a niche for hard money and it will continue to be this way. Bruce remembered in the first two years the Norris Group existed and did loans that they were just in a growing cycle coming out of the REO boom of the early 90s. As this dissipated, he remembered thinking he did not know how they would find product to lend on. He tried to create different programs they never needed to implement because the product they wanted to loan on kept on showing up in quantities sufficient to not only sustain them but to grow. This has always been part of their business model.
If you are trying to do all the loans and still trying to deal with the best clients, they will find a way to buy. What has really been the key to their success is really having really great clients for 17 years who always seem to buy properties. They have a large investor base now on the money side that understands what the Norris Group does, and it has been very accommodating. The funds they have now was almost another 60% higher than when they started the year. The investor base really stepped up and improved.
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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