Bruce Norris is joined again this week by The Norris Group’s very own Craig Hill. Bruce has known Craig for over 20 years. He has been running the loan business, getting people invested in trust deeds, and dealing with the borrowers.
Episode Highlights
- What is a trust deed?
- How did Craig get started in the business of trust deeds?
- How do they determine who would be safe to loan to?
- What are Fannie Mae’s ideas when it comes to loaning to investors?
- Has a number of people loaning directly to borrowers increased or decreased in the last years?
- What is a broker’s biggest job?
- What are the main ways of investing money The Norris Group will not use?
Episode Notes
In this session, they discuss the money side of their business with trust deed investing. What is interesting is Bruce thought if he talked about this to twenty people they would be confused. It is not like stocks or bonds. It is not even close to being mainstream yet, which Bruce said is interesting to him. Craig said when you talk about a trust deed investment, fifteen of the people you talk to have bought a house.
The process of buying a house is you find a house you want, put some money down, and get a loan for the rest of the amount. This is what is known as a trust deed. The Norris Group’s business is to deal with investors who are buying a property for a business purpose and need to borrow a trust deed for some portion of that investment. The concept could not be simpler.
Craig had a client call him who wanted to borrow money to purchase rentals. That was how it started. He was a little out of the area and Craig couldn’t help him, but the conversation went on for quite some time because he had a lot of questions. He said they dealt with a lot of retirement accounts, but they tend to lend money. He asked how risky trust deeds are, and this was coming from somebody who was going to buy a rental. You use the word “mainstream,” but if he were to buy a rental for $200,000, he would have to deal with all the issues like someone moving out. It is all his.
There are benefits, but with a trust deed this customer would not only not have $200,000 in it, but somebody else can handle the problems. Craig thought it was a very unique perspective because the word “risk” came up with trust deed but not with purchasing a rental. Bruce has been on the rental and trust deed side, and there was a windstorm once that took out a fence on a home he owned as a rental. He remembered thinking if he had a trust deed on the property, he might have heard about the fence but it would not have entered his life. All that is behind the scenes; and if you do it correctly you should not hear about any of it.
What is also interesting is the Norris Group can completely understand an investment like the one aforementioned. Yet a lot of times you will have people ask others what they invest in, and you wonder how they even know about it. How could they comprehend about where their money is invested? They have been on the borrowing side, and now they are on the lending side. They can stand in front of the asset and make an intelligent decision. If they end up with a particular thing that ends up being the worst case scenario and happens so rarely.
One of the people Craig knew for a long time had a money manager who kept warning her over a period of a long time how they did not understand how a yield was happening. Eventually he gave in after a while. Craig had done trust deeds with this person along with her father and daughter, and this was over years. Every year when she got her taxes done, they looked at it and said it was really risky. It was probably ten plus years ongoing where her manager finally told her he did not know what she was doing but to keep doing it.
This particular client is now retired, and part of this was because of trust deeds and her being able to manage her parents’ estate well enough where interest paid expenses. This allowed the principal to stay there and allowed her to retire. Conversely, none of the money and stocks really made her money over time. It is a very good way to go, and Craig and his long-time client have a lot of funds because they believe in it so much.
Bruce said it may be a good match for his personality. He has a computer on his desk, and none of his trust deeds are on it telling him what they are worth every second. If he had a stock or gold, he would naturally want to look at how it is doing. This absorbs his brain somehow; and when he has a rental or trust deed he does not do this. It is a good match for him as well as for Craig. He said it is the version of the tv infomercial “set it and forget it.” You really don’t have to think about it. Going back to the first example of the man wanting to buy the rentals, if you really look at it in those terms the worst case of a trust deed is his rental at a discount. This is the worst case of a trust deed.
Craig said over time they have seen this. From 2006-2008, he felt they got through this period better than any hard money lender. There were some issues where there was some decrease in value, but over time as a rental all of those have solved themselves. There is not many investments where you have this kind of track record. Going back into this era, it was really ridiculous and prices were dropping in some areas by 3% a month. One of the borrowers the Norris Group had was very cooperative in getting to solutions.
They had another borrower who was consistently on time; but when one time he was 30 days late for a few months before eventually making the payment. Bruce made a call to him asking if he was looking for a profit motive or if he just wanted to get out of it. He told Bruce it was the latter, and Bruce told him to hold an auction. This was the spirit of the borrower most of the time where they tried to cooperate with the Norris Group to get to the finish line. Because of that they had a cross-cooperation from the lending side.
There were still solutions for what was literally a crisis in the real estate industry. There were still solutions, and a lot of investors agreed to take lower interest rates so the client could write it out. There were all kinds of solutions that were engineered to where you did not have to go into the worst case where it was adversarial. You are working together, and that is something that can happen in this investment. Bruce does not think in our lifetime we will face that stretch of years again, and this is a once-in-a-lifetime thing.
When you are on the lending side, there are misconceptions about who would be safe to give a loan. Bruce told Craig about if he were to talk to somebody who knew nothing about it and told them he was going to loan to investors and could loan to an occupant, he would probably land on the occupant space thinking he was safer. This is a good reason why it is hard to do it on your own. Craig said he could almost guarantee if he put two deals in front of an investor they would take the wrong one. There is a lot less to it in a way than people make it out to be. Craig would want to take a look at their finances, and this goes back to the bank scenario. The banks have proven to not be that good at picking certain times anyway. Craig said what he would do is put the track record up against the banks, especially in terms of defaults.
Bruce got to speak in front of Fannie Mae in Washington D.C., and he talked about the loans they have and the percent that are current. Theirs actually beat Fannie’s; but what was interesting was there were 60 top people there discussing the concept of lending investors mordo. It came up that they should cross-collateralize with other things. Bruce said this sounded like a good idea but they would not loan to the right person. Each deal has to stand on itself, or it is not a deal. If you have to throw something else in, then why are you even doing the original one in the first place? You will loan to a client who has to say yes to your proposition, and you are passing on another client who 99% of the time will be told they cannot be loaned to because of a specific thing they will not do. This does not make any sense.
With the Norris Group, they look at the property, conforming properties, their track record they may have, and their liquid cash. Not much goes beyond that. When Craig talks with investors about credit reports, you could have someone with $400,000 in the bank and a low credit score. He has been through his scenario and probably had a $780 credit score at one time before having an event. For the person with the 800 credit score and $9,000 in the bank, they are a $15,000 problem away from having a 580 credit score. He would rather lend to someone who is already through that problem.
Bruce hears Craig talk on the phone all the time, and one of the people he talked to had a marginal deal. Craig told the person he was basically making everyone else money and was going to break even on the deal. You try to talk them out of it, but interestingly enough the client had been looking for a loan for a while. They felt they committed to the seller and gave them their word, and by the time the call was finished they were doing it for a reason of feeling like they wanted their word to be good. There is nothing wrong with this.
When you have somebody willing to break even in order to keep their word and you finally have a deal that works for them, you know they will be good for it. They are almost proving that right then and there. When you call somebody with a trust deed opportunity, they do not see the process to get a yes answer at the Norris Group and it is not easy. Craig has to say no a lot, and people are really surprised on the other side of the phone. They think it is a hard money loan and they do not need any money. They would have to ask themselves if they were in the other room with the money, would you lend to yourself. Some of them were completely shocked by a no answer, yet they would be asking for a home they were buying for $700 grand and $100 grand for repair. They would need a loan of $850 to have a deal.
Craig had another one similar to this where the numbers looked good, but he had no money. Even if you lend somebody everything but they have zero money, what if they have a problem? Craig remembered one who had borrowed money who went to go fix up their home, and a 6-month period went by and all of a sudden they did not sell the property and stopped making payments. Their answer was that this was exactly what they had. This was way back in the process and when you begin to learn that a money cushion is more important than just about anything. You need to have the ability and would not want somebody to have to sell a truck or other asset to get out of the situation. They should just be able to make payments.
Craig said when people have cash, they are a lot more logical about what they have remaining. The longer they are in it, the worse it is. If they have to take a $10 grand loss or break even, this is a smart business decision. For the person who has no cash and wants to sell it for $350 when it is worth $330, the cost will go up the longer they wait. When somebody does not have cash, they do not act as rationally when they get up against that wall. They feel like they have to come up with a solution that is not there.
Bruce said when they fund trust deeds, they always have monthly payments. However, some of their competitors do no, so Bruce wondered why they go with the payment. Craig said the reason is it is very important for them to understand they have a debt. When you are making payments every month and writing checks on that many trust deeds, you are aware that you have a payment. When you are not making payments, it is a little easier let things slide. They can accumulate on you, and you are not paying as close to detail as you should.
Years ago Craig borrowed some money on his baseball cards from a friend of his brother’s to put into a silly investment. The best thing that happened was it didn’t work and he wrote his brother’s friend a check for five years with no hope of ever getting that money back. Craig said a monthly payment is a very good reminder of what you are doing. For five years and probably twenty-five years after he has had no desire to go back into something ridiculous. He had to write payments he did not think he would have to write, so it was a very good eye-opener and good reminders of what you are involved.
There are times people come to the Norris Group who have money, and the trust deed is not a suitable investment for them. One of those cases could be they just cannot comprehend what it is. For example, someone may have received an inheritance or money from a settlement and come in wanting to give them all their money. It really has to be something that they are comfortable with and understand it to some degree. They can then realize there can be some flexibility on it.
For Craig, the reverse example would be somebody who has less than that, maybe $500,000 or $1 million, and looking to invest this to cover expenses. That would the bigger concern for Craig because you never want somebody depending on that exclusively to live on. It is really a hands-off investments. If somebody does not have the personality where they can be hands off, then they may be better off having a rental since it may be more suited for them. This would be an example of somebody it does not work for because you have to be okay with just receiving checks every month and not really playing an active role.
In the last few years there have been more people who have money and made attempts to loan directly to the borrowers. Bruce said almost 100% of the time if he gets involved he will see what the other party has done. Sometimes they have done things the Norris Group would not do and have actually broken rules. One thing they do not realize is there are things called usury laws where you can only charge a certain amount. Interest rates are low enough where this may not be an issue now. The Norris Group wants the trust deed investor to have very little risk and the borrower to have assumed the risk.
Sometimes trying to get a client or make sure their money is used, they may put themselves in a situation where they as the lender assume all the risk. This is not a good position to be in because when you are in an all-risk position, it is okay as long as everything goes okay. However, if you have a problem and are in the all-risk situation, this may be a time you wished you were not in that situation. You have become a partner, not a lender, and are in business with someone you do not know. Craig said he has one investor who has done a fair amount in the past, and every once in a while he will call him with a trust deed. The investor says he is looking for something with a higher yield and will tell Craig some of the deals he is doing. It would be like if he was getting 40%, Craig would not do it. It is amazing how much risk somebody will assume to get a higher yield.
Bruce said this is the biggest part of what a broker does. They are a buffer when it comes to approaching someone with money. There are all these barriers that you have that these people go through before a trust deed emerges and they can say it is available. He does not know how many people actually appreciate that filter because if they had their money out there, there would only be opportunity. They could then plug in their money.
This is one of the bigger dangers for the two concepts they do not use: crowdfunding and pools. Those barriers are really not there and you are not having a trust deed run by you at all. It is just funded, and you get a monthly statement saying how the Norris Group is involved. Craig said when you are doing an individual trust deed, that is the simplest way to do this investment. You are looking at one thing, you see what your money is in, and you are very comfortable with it. When you are doing a pool, you are always getting some kind of return but do not know what is happening with the bottom of the pool. That became very apparent back in 2006-2008 when those pools were filled with land deals that made no sense. You do not know exactly what you are getting into if the investment is pooled, and you do not have any control over it.
Bruce and Craig have been in the business for a long time, but he would not put his money into a pool because he does not have any option on what is being lent. You cannot solve it without a collective cooperation somehow. This really goes back to the personality and temperament question. For Craig, personally, the lower yield is fantastic with virtually no risk, and he will take this every time. When he talks to someone on the phone, he lets them know that. The yield with the Norris Group will be near the lower end of the spectrum because they have tried to take all the risk out of it. You can try to chase yield, but that does not guarantee you success. Unfortunately, sometimes when somebody has a track record with the Norris Group and they do not have many trust deeds and search elsewhere, they assume every trust deed is equal. But this is not true.
This has been our interview with Craig Hill of the Norris Group. If you would like more information about investing in trust deeds, call 951-7800-5856.
For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 550 podcasts in our free investor radio archive.