This week Bruce Norris is joined by Tony Alvarez. Tony is known as the REOMentor and has been a friend of theirs for a long time.
Episode Highlights
- Where and how does Tony spend most of his time since he has places in both California and Oregon?
- What are the two states with the biggest positive net migration?
- What group of people is driving the fluctuating rental prices in the housing markets in these states?
- What journey has Lancaster seen, and when did Tony become interested in their market?
- What was Tony’s own journey like in regards to him buying and selling properties, and what goals did he set for himself?
- Why did he hold onto specific properties he ended up selling in 2006?
- What was it about Bruce Norris that made Tony want to do business with him?
Episode Notes
Bruce asked Tony how he spends his time. He has a place in both Oregon and small apartment in Lancaster. However, most of his time is spent in Oregon in Grands Pass. He also still has a larger house in Smith River, which is out on the ocean in California. He is in Oregon 80% of the time but still comes down here since he is still liquidating. He looks at it as trading dollars or transferring his wealth to Oregon. He heard of Oregon as an investment from Bruce; he was already living up there and had been for 20 years. However, he never really looked at it as an investment place or to analyze their market.
In one of Bruce’s presentations on market timing in 2004/2005, he mentioned two states that had a positive net migration. One of them was Florida, and the other was Oregon. Tony couldn’t believe he wasn’t even aware of this considering how long he had been living there. It took Bruce saying that to get him interested in the market as an investment place.
Tony also visited Florida and saw what Bruce was doing, and he got a lot of ideas from this. He considered going to the Florida market, but he didn’t feel like getting on a plane and moving there. If he is going to invest in a market, he has to see and touch the buildings and be involved. Oregon was a natural fit for him, although he struggled with this at first. However, he went to check it, and the same dynamics that were affecting the Florida market were affecting the market in Southern Oregon. He immediately started selling some things that he did not want to own anymore in the Antelope Valley market. He would then 1031 Exchange to his local market in Grands Pass.
When he first started this, he passed on some great deals because he was thinking with his California brain and was upset the numbers didn’t work. What he didn’t realize when he first started buying up there is that a 2-bedroom, 1-2 bathroom apartment that is about 800-1,000 square feet was renting for $700. This was top rent. Two years later, this rent was $1,000. This is happening in the marketplace up there. They were asking $270 for a duplex or for 1200 square foot units. He was thinking this was absurd since you are getting $1,500 a month rent. It’s similar in Orange County. In a year’s time it was $900, then $1,000 again. Now, rents have gone as high as $1,200.
What is driving this is folks over 50 and the medical community/caretakers supporting them. Bruce said this was an accidental benefit for him. In Leesburg, he thought the senior would be his renter. When you are 65, you have two caretakers. When you are 85, it grows to 7. This group of people coming by the thousands gets multiplied by 2 to 7 during their 20-year journey. Those renters are always nurses or people connected to the medical field.
Tony said there are specific nurses who come through for a contract time, whether it is 6 months or up to two years. Doctors are doing the same thing because they have these medical groups who hire doctors. The person Tony is renting his house from in Smith River is a doctor himself who is in the Crescent City hospital. He works in California, but he likes to fish in Oregon and Tony’s house is right in the middle. In fact, his entire family is doctors. Tony rented his house to him, and every room was occupied by his family members studying. Tony thought he was going to have to raise the rent or start charging per room.
When Tony bought a fourplex, the very first month he paid $325 and thought this was a lot. You cannot touch this now for less than $450-$475, and the rents are average of $1,000 each. Bruce asked Tony if he was concentrating more on getting the right inventory than buying it at a big discount. He quickly found out that he was coming there with free money. When he tried to explain this, he realized he couldn’t explain this to somebody too well and didn’t worry about it when dealing with the agents. The biggest hurdle was finding the right management company since he had managed his own things for so many years and it was difficult for him to trust someone else with it.
He was blessed after interviewing every management company in Grands Pass. He landed on one guy who argued with him the first time he talked with him. They still meet for lunch every week and may argue some, but now he has equity and can basically buy at a discount. When Tony first met with him, he asked if he wanted to lower the price. Tony just wanted him to understand why he did not have any problem. He wanted A and B tenants in A and B neighborhoods, and he did not want anything that could come close to problematic for him or the other party. Bruce asked Tony if he owned this type of inventory in Lancaster, which he said he didn’t. He didn’t even want to own the best inventory in Lancaster.
Bruce and Tony next talked about Lancaster’s journey. He asked Tony when he became interested in Lancaster, which he said was 1994. He did some research for himself this year since he was writing a book on it. However, it was 1996-1997 that he started actually looking at the inventory there. This was right after REOs had depleted. Bruce thought he had gotten the contacts for REOs during that timeframe. Tony said the first property he bought was on Robina Street, and this was how he figured out the date of when he started. This was a HUD property, and he bought it from an agent who could put their sign up.
However, after this deal the agent did not want to represent him anymore because he was too crazy. He was on fire after he realized he could do this, and it even showed. His first deal took him six months, and he didn’t even have a car at that time. He had gone through bankruptcy and was working at Shakey’s. However, he found this house the very first day he drove out to that place and made an offer that day. He didn’t even have the money. He made an offer that day, she represented him, they get the deal, and he had to borrow $6 grand from his dad. He turned around and sold it for $69,000. Six months later, he finally found someone to fix it.
A lot of times the first people he meets are not even real contractor guys; they lie about it. However, they are so hilarious that he falls in love with them. One guy who told him he was a painter showed up to paint the house, and he was in dress clothes. When Tony came back, he was soaked in paint and had wasted 5 gallons of semi-gloss paint with a roller on acoustical ceiling, which is all over his head and face. It was a disaster, but Tony still ended up making a profit. He thought it was too good to be true that he could buy a house for $37,000 which he can then rent for $800-$900.
This was in 1996, which was the bottom of the market. At this point, he was also not dealing with REO agents. Rather, he immediately went the HUD direction. He had not attended auctions yet, although HUD was just starting to come out with them. He was making pizzas when he read that the foreclosure capital of the world was Antelope Valley. He was driving distance away and had only done one appraisal. He drove there and wondered why anyone would want to live out there. However, he was locked and loaded in that market. It took one house to prove to him that it was real.
Once that happened and he had the evidence in front of him, he went nuts trying to buy. He locked in a hard money lender at the time, Barry Cooper. What bothered him was that he did not like to waste his time, and he found himself putting a lot of energy into driving HUD’s. He had to drive and see everything. He had never been good before at buying things while absent and not really seeing it. He does not really do internet buying too well. Suddenly, someone else makes $1 more on the offer or $1 less on commission, and you are out. What could be worse is the agent representing you drops the ball and does not cross a T or dot an I and kicks everything back. This really upset him.
He sat down one day after losing so many deals and saying to himself that it did not matter how good he was at it. It is like a luck of the draw. There were a lot of agents involved who were not taking the commission, and you had no way of guessing even if they were the same price. He zeroed in on Fannie Mae and Freddie Mac properties and built relationships with the people who controlled them. The first agent he talked to was a single mom who didn’t want to work with him after that since she thought he was crazy. He called her at 11:30 wanting her to make an offer on a house before HUD shut down.
Fast forward, she introduced Tony to one of the top REO brokers in town, Don Anderson. He and Tony went on to become close friends in business and in life. They go nuts buying properties. The first time he goes to his business, his partner gets up from the meeting, pats Tony on the head, and tells him good luck. However, he went on to do exactly what he said he was going to do, and Don helped him accomplish this.
Tony held most of his properties and made the majority of his money on this. As he was buying and selling, he was watching the market appreciate. Because he had been an appraiser and understood values, he at least understood that when the market gets beyond a 20% return for developing something new it’s good. He would always look at what it would cost him to build that house today. On the day he bought his very first rental out there, he paid $37,000. He figured out what the rental rate was in case he got stuck with it. He figured out if he had 100% financing at hard money rates and actually had to hold on to the property and make the mortgage payment on it, there wasn’t any reason for him not to buy it.
It was not about whether he should do it, but rather it was like discovering gold and no one else knew. He would naturally talk to other people and was convincing other brokers that they needed to get into the game. They would tell Tony they can’t buy their own inventory, and he would tell them to buy someone else’s.
Bruce and Tony next went on to talk about the journey of a price. Tony was buying these things for $35-$40 grand in the mid-90s. He and Bruce met in 2003, and that point they had gone to over $200. Tony was at roughly $7.2 million in net leaving town. When he started, he had a goal of when he knew he would be financially independent. At that time, it was a very bold goal in his mind because he really thought it was unrealistic. His goal was $1 million with ten houses. He was going to buy them at around $30-$40 grand with a hard money lender and try to work out a deal where 100% of the money would whack down on that debt. Over time, those ten houses would get to be $100,000 each.
Tony gave himself a ten-year goal. If he could have ten houses paid off, he could be worth $1 million and could have $10,000 a month income. If he managed them himself, this would net out to $7 grand a month. This was all he wanted, and he has never paid himself a dime more. Nowadays he would take $100,00 a year because he has a 401K, and about 25% of the money goes into that. Other than that, he has never lived on more than $1,500 a week. Nothing he owns has any debt on it. When he goes to lunch, it is his company that pays for that lunch as opposed to it coming from his own pocket.
Bruce asked Tony what made him decide to hold those properties that he ended up selling in 2006. He said the only reason he hung on that long was because when he met Bruce, he had already failed in real estate. He had succeeded before, made a lot of money, then lost it all when the market changed because he kept doing more of what was not working anymore. He knew he had a glitch in his model; and he made the decision to come back into the market based on numbers. Buy low, sell high. He knew this worked, and he knew how to do it.
Somewhere along the line as prices were appreciating, they start getting into inflationary numbers. He had already felt the sting of when the market changes. Intrinsic value always gets beat up a little bit, but the equilibrium always come back to some reasonableness. Anything above that reasonableness needs to be given away pretty quickly. That’s a haircut coming, and it doesn’t matter what you think about it. This was the thing that got Tony to search for Bruce. He was looking for somebody who did this kind of research since he did not even know where to start. The first time he heard Bruce speak, he came across as somebody who was honest and wouldn’t take any nonsense.
One person from the Apartment Owners Association asked Bruce what his talk had to do with them, and Bruce could have said anything. Instead, he told him he really didn’t know and went on with his presentation. This impressed Tony because he knew Bruce would tell the truth to somebody if asked a question directly. Of anything he could have said, he went straight to the truth of just not being sure. Bruce got Tony to follow him right away and stay in the market. What is interesting is he had it all wired. He had about 50 properties on the sheets and all this cashflow. He was really ready to exit.
It just so happened Bruce was 9 miles away with a project that he was not even wanting to start yet. They were each 9 miles apart and each deciding two different avenues were the best. The days on the market in Lancaster and Rosamond were less than 5. You would think that Tony, being in that market and experiencing success, would have known all that. Rather, he had no clue. Bruce was looking at the migration numbers, and Lancaster was the number one destination in the country. Bruce wondered if someone would drive 9 miles to own a house than rent in Lancaster. He waited until the rents went up, and the prices exceeded the prices in Rosamond. This was why he started when he did. Tony did not have a $200 grand house in Lancaster when Bruce had a $200 grand house in Rosamond. They had just built the little 12-1300 square foot houses since no one wanted to build that. Tony owned several, but he wasn’t paying $250.
These prices escalated to multiples that were unfathomable, over $300 grand per house. Tony had decided to exit at this time. Part of what is interesting in Bruce’s position as he talks to several investors is the philosophy is very different about what he will do with the pile of properties. Tony is not replicating this time what he did the first time. He sold everything, and this time he is selling to exchange.
Tune in next week as Bruce continues his discussion with Tony Alvarez.
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