JF982: When to Be AGGRESSIVE from an Investor of Over 2,000 DEALS
When is it time to buy and when is it time to sell? That is the question, and the answer…not so simple! Our guest is about to enlighten you, but more importantly, inform you about a strategy that works well in his market when determining a good time to purchase in the market cycle. Take many notes!
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Bruce Norris Real Estate Background:
– Founder of Norris Group, an award winning hard money lending company
– Active investor, hard money lender, and real estate educator with over 30 years experience
– Host of the award-winning Norris Group Real Estate Radio Show and Podcast
– Been involved in more than 2,000 real estate transactions as a buyer, seller, builder, and money partner – Best known for calling California market trends
– Host award-winning series, I Survived Real Estate (isurvivedrealestate.com), which raised $700k for charity
– Based in Riverside, California
– Say hi to him at http://www.thenorrisgroup.com/
– Best Ever Book: Think and Grow Rich
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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluffy stuff.
With us today, Bruce Norris. How are you doing, Bruce?
Bruce Norris: I’m great, Joe. Thanks for having me.
Joe Fairless: Nice to have you on the show, and looking forward to getting to know you more. Bruce is the founder of Norris Group, which is a hard money lending company. He’s an active investor, an active hard money lender and real estate educator. He’s been doing it for over 30 years. He’s the host of the Norris Group Real Estate radio show and podcast, and been involved in over 2,000 real estate transactions as a buyer, seller, builder and money partner.
He also hosts an award-winning series called “I Survived Real Estate”, which raised $700,000 for charity, which is really cool. Based in Riverside, California… With that being said, Bruce, do you wanna give the Best Ever listeners a little bit more about your background and your focus?
Bruce Norris: Sure, Joe. We started flipping houses in about 1981. I went to work for a company for three months, and decided I didn’t like how they did business, but I did get my feet wet on what the business was like, so I just started doing it on my own. I think what happened for me was about 15 years into doing this – I was doing well until 1989, when I got really aggressive at the end of a cycle, and we built a bunch of custom homes that didn’t sell. It was at the end of a cycle in California… I got stuck with them, and a bunch of $3,000 payments, and what that forced me to do was realize it wasn’t good enough to just know how to do something, it was really important to add the “When to…” part of it.
Ever since then, we’ve paid attention to looking at cycles, and I guess that’s what we’ve probably added to the industry – the ability in California to look at a cycle and say it’s over, or it’s a time to get in
We’ve written reports in (let’s say) ’97 why California will double in the next 8 years, and then in 2005 we wrote the California crash, why foreclosures are gonna go up and prices could go down by half. That’s basically our background – we flip properties, which lead us into the education space, which lead us into a clientele that was knowledgeable enough to borrow money, so we started the hard money loan business.
The biggest asset that we have is a business I think is we know when to stop being aggressive and when to get aggressive, when other people don’t feel it’s time.
Joe Fairless: Which one are you doing right now?
Bruce Norris: Actually, we’ve just finished a report. What I like about reports – sometimes the ending surprises me, so I never go into a report with the idea that I have a conclusion that I have to reach, so I let the evidence speak to me. I’m not afraid of this market.
The title of the report is “Two percent interest rates and 40 trillion in debt and other surprise endings”. Having done this for over 20 years, looking at statistics and coming to conclusions, the basis of why I’m doing it is I’m trying to protect my own assets, and not have a replication of 1989. We are in charge of a lot of people’s private funds and investments as far as trustees, and I’d really like not to hard anybody in those by saying we can be aggressive when we can’t.
I’m not afraid of 2017, I don’t see a big downturn anytime soon for that. There’s a couple of elements that you have to have for a downturn, and in my way of thinking we really don’t have them.
Joe Fairless: What are the elements?
Bruce Norris: Two elements that we have – still plenty of room on affordability. California has a cycle of affordability that usually when you’re at the end of a cycle – 1980, 17% affordability; 1989 – 17%; 2005 – 17%… We’re at 31%. What happens when you get down below 20% to 17% is, if you’re in a legitimate lending market, a lot of lenders have to say no to the buyer that wants the next house, and it creates a domino effect of increased inventory, and it changes the mix of inventory into a very dangerous mix, depending on how many REOs are in the mix… That will tell you how bad your price damage is going to be.
Joe Fairless: So real quick… You said 31%, right?
Bruce Norris: We’re at 31%. Affordability means what percent of your households could get a yes answer from a lender in California, based on the payment that emerges with 20% down and getting a fixed rate loan. That’s always been the formula.
Joe Fairless: Okay, that makes sense. And real quick, is this what we’re talking about…? You were about to go into the second, and I apologize for interrupting, but just so I’m clear – what you’re talking about, is this California-specific, the whole state, and nothing else?
Bruce Norris: Yes. What’s interesting about that… I look for systemic events. Let’s say if you went to San Francisco, you probably have close to its closest low of affordability. So you could have a slowdown in San Francisco, but you’d be missing a systemic event where it takes out all of the pieces, almost everywhere at the same time. Usually, that starts to occur when affordability for the state hits that magic number.
I don’t invent this stuff, I just look at a combination of charts and go “Huh, how about that?” After you hit 17%, within 18 months your inventory explodes from 3-4 months to 15 months, and your ratio of REOs participating in the market goes from almost nothing to sometimes 25%, 50% or 70%, depending on the downturn.
Joe Fairless: What source do you use for checking affordability?
Bruce Norris: That’s CAR, that’s easy.
Joe Fairless: What’s CAR?
Bruce Norris: California Association of Realtors.
Joe Fairless: Okay, got it.
Bruce Norris: And the reason being, it’s got the longest history of what that was, all the way back to 1980. In the original study, that was the hardest thing I had to do. We didn’t have the internet like we do today. As a matter of fact, I would have known how to get on it if it was there. So when I did the research, I literally went to libraries, handwrote every number that I was taking down…
At the time, I was looking at a 25-year chart I was creating from 1970 to 1995 to do my predicting. I created charts for everything I thought might impact real estate prices, and when I got all the charts in one place – it took me 18 months to do that – I literally printed out the charts and then laid them on the ground so I could play with them and look for sequences that replicated during each boom and each bust cycle. When I found out I had figured it out, that’s when I decided I would write the first report.
Joe Fairless: So one aspect is affordability… What was the second one?
Bruce Norris: Well, the affordability just kicks off a chain of other events, and it happens every time. When you get dangerously low on affordability in California, all of a sudden sales will stop. When sales stop, prices stop increasing. Foreclosures, which are usually handled because of an equity or a market that’s really aggressive – all of a sudden that changes, and now trustee sales actually revert to the lender and become REOs. When the mix of REOs becomes too big of a percentage of the market, like they did in 2008 and 2009, we were buying properties at 20% of what the lender was owed.
You can see that coming, so that’s what I like about the model that we figured out – I can get out of harm’s way. I sold over 100 houses that I owned in 2005, and became liquid and waited.
Joe Fairless: So affordability is really the one that kicks everything off, and then there’s bullet points underneath affordability that you need to look out for.
Bruce Norris: Well, yeah… It’s inevitable, honestly. If you’re at 17% affordability, but — okay, we’re at 31%. So now you go back and say okay, at 31% affordability — first of all we’ve never had a crash or a downturn at that affordability, so let’s say we just stop going up… What’s the damage path? Well, you probably won’t have one, because what it’s saying is everybody’s got a payment that’s pretty comfortable.
Also, over the last five years, who’s gotten an adjustable loan with a time-bomb of a change? Not very many people. You have a fixed payment that starts with a 3% interest rate (or 4%), so you’re missing the element that will create a lot of REOs in the event of a recession or a slowdown in price. You just don’t have one of the elements that you really need.
We didn’t have a lending world or environment that would let people in with nothing down, [unintelligible [00:10:48].14]. The other piece of the puzzle that you don’t have is builders usually build their inventory in ever increasing amounts, all the way to the peak. If you look at construction in California, you’ll see massive years in ’87, ’88, ’89, 2004, 2005, 2006 etc. When things turn, all of a sudden they become a big part of the problem. What they have for sale is literally about 15% of the mix of inventory. Unsold homes become 15%, builder inventory that goes on sale really quickly – that’s damaging.
We’ve started 2017 with unsold inventory of new homes at 2%, so you couldn’t have that event in 2017. There’s not enough standing inventory to cause the damage.
Joe Fairless: Have you looked if it applies to other states? You get that question a lot, obviously…
Bruce Norris: Of course, and the honest answer is I haven’t got a clue. I have a lot of respect for how long it’s taking to feel comfortable with the formulas that we have in California. Do I suspect there are some states that would mimic it? It’s possible. But am I gonna say I know what they are until I did the research? I wouldn’t.
Honestly, what I would have to do – and I might take on another state; I’m investing in Florida, and I’d like to understand Florida – I would take absolutely none of what I’m sure of in California and make that a starting point in Florida. I just wouldn’t do it.
I literally would take the longest price sheet that I could get, and then I would look for all the categories that I think matter, and there you could have it be very different. I would look at the charts completely new again.
What’s always interesting is that you can get rid of your assumptions pretty quickly by just taking the chart and the price chart. One of the questions I ask in front of an audience – interest rates are going up; if you speak in front of a group of realtors, investors… Is it usually true that you have price damage when interest rates go up? And it’s almost a unanimous comment “Of course. That just makes perfect sense”, except for that’s not what happens.
When you look at the two charts together, you go “Okay, that’s completely a ridiculous conclusion, because that isn’t how it works.” But that’s why I like charts, because you can go, “Okay, that defies logic, but that’s exactly what happens.” It’s like affordability going down, which means less people can afford real estate, except for volume almost always explodes in reverse proportion.
In other words, as affordability declines and tells you less and less people can get one, more and more people manage to get one, and get more than one. That’s exactly what the charts do, except in the flat cycle.
Joe Fairless: Is that because the lending guidelines are stricter?
Bruce Norris: Well, that’s a very intelligent conclusion. If you put 100 accountants into a room, which they did, asking what’s wrong with sales volume, their conclusion unanimously was that because affordability was going down, you naturally are gonna sell less real estate, and the only way they could come up with that statement is not to look beyond this cycle. If they had looked at the ’80s and the ’90s and any other time before, they would go “That’s not consistent.” So whatever we’re doing different this time is the cause… And then they could have lended — they did this research for Congress. So they would have done the Congress a big favor by saying, “You know what, guys? Why you’re not selling homes in an environment with 3% mortgage rates is you’re not letting anybody in that isn’t perfectly qualified, which is a huge mistake.” That’s what they should have been able to say, but they didn’t.
Joe Fairless: You mentioned earlier that you have investors, and you’re the trustee of people’s finances… In what capacity, first off?
Bruce Norris: Well, that’s a great question.
Joe Fairless: We do trustee investments, and not with people, not in a pool… We have people that trust us with their money, in the sense that we can call them up and say “We have a $300,000 trustee”, and they will send a check and invest in it. But we don’t pool the money, and we don’t partner with people in that sense.
And there are reasons for that, by the way. When you poll money, it gives a lot of power to the person in charge or the pool. I wouldn’t probably put my own money in a pool, so therefore we don’t request anybody else to do that.
Joe Fairless: It makes sense. So 2017 – you said you don’t see a big downturn, and we’re talking about California in particular. What do you see?
Bruce Norris: I see a replication of 2016. I think we’ll have some slow growth. I don’t think building will explode. I think it will do a little better than it did in 2016. I think what’s gonna be interesting is the title of this report says 2% interest rates, and here we are with rising interest rates. That seems like that’s gotta be wrong at this point, but we talk about — we’re probably gonna have interest rate hikes in 2017, but in 2018 my guess is we’ll have a recession.
Historically what happens – and again, you can tell by looking at the charts… You go to the Fed funds rate chart and say “What happens when we have a recession?” Well, what happens is the Fed funds rate typically goes down 4% to help the economy. What’s the Fed funds rate today? 0,75% or 0,5%. They’ve had raises, but we’re not even up to 1% yet. So I think what’s gonna happen is that we’re gonna have interest rate hikes that probably don’t even get us to 2% before all of a sudden they have to take it back and more. I think sometime late in 2018 we’re gonna have a negative interest rate. We’ll probably end up with a [unintelligible [00:16:44].11]
Joe Fairless: Just to transition a little bit, how does your company make money by doing this research?
Bruce Norris: By staying out of harm’s way more than anything. We just had an event – we’ve probably sold 500 reports at $500. You could say, “Okay, that’s why he does it”, and that’s not really why I do it.
Joe Fairless: I wouldn’t think so… [laughs]
Bruce Norris: No. Honestly, if I got paid per hour for what I have on these reports – and I guess there would be some advantages; I’m the only one that knows this, this is great. We just have a following; we have a clientele, we’ve gotten well known for doing this, and I get a big kick out of helping them make correct decisions, so that’s why we do it.
Our revenue? We buy and sell houses. I personally have rentals. The company does hard money loans, services a big portfolio of loans, so that’s basically… We have several pipelines of revenue.
Joe Fairless: Are there any markets within California – since we are talking about California… And fortunately, the largest representation of Best Ever listeners in one state is actually California, so we’ve got the most number of listeners in California out of all the states. New York and Texas – close second and third. So are there are markets within California that stand out good or bad?
Bruce Norris: Areas like Riverside County, San Bernardino County, Kern County – those areas have had the least price progression. Sacramento is another one from the bottom. They’ve come up quite a bit, but they’re nowhere close to their last peak. Part of the reason is that building has not kicked in in any of those areas significantly.
We’re building homes at a pace that’s equal to about 1981, which is way below any other year since then, and interest rates for construction loans were about 20,5%. So we have a great interest rate environment, but we have a builder in these areas/counties that still literally can’t pencil a new project.
If they’d have to take a hill and turn it into building lots and pay for all of that infrastructure, the permit cost, the price per square foot isn’t profitable, so they’re not taking it on. We subscribe to a report that talks about how many projects are getting started and are going to turn into [unintelligible [00:19:09].02] the next couple years, and that’s down something like 70% in these counties. So the builder doesn’t seem to be optimistic that he’s gonna soon be able to build in these areas, and the progression, the time it takes to get to the finish line is not six months, it’s a couple years.
So those counties I feel have upside. We do build new homes. Every six months we have another six projects that we’re building just one house at a time… Basically that’s what we do.
We would have bought a track of lots, we’ve done that before… Now, I did buy a track of lots in Florida, so I’m building a track of homes in Florida, but that’s a whole different thing.
On the other end of the spectrum, what I would be concerned about is picking up a million and a half dollar purchase in an Orange County or a San Francisco… A project that’s gonna take me a long time to add square footage and come up with a three-million-dollar price tag or so. When I look at how much of that inventory is for sale, in Orange County on average there’s four months of inventory, but in that price range of over two million there’s three years already. I would call that speculation, instead of investing.
Joe Fairless: Bruce, based on your experience as a real estate investor and thought leader, what is your best real estate investing advice ever?
Bruce Norris: Understand when to do something, along with how to.
Joe Fairless: I saw that coming.
Bruce Norris: [laughs] Well, I know a lot of people that went broke in 2007 that knew exactly what they were doing… I’ll give you one quick example. I don’t mean [unintelligible [00:20:49].01] but the ability to do something — I don’t know how to develop building lots. I don’t know how to look at a hill and say, “Gosh, we could carve that up”, but there’s a project that I bought in 2002, close to Lancaster, somebody had paid three million dollars to create the lots; I paid $270,000 at 90% discount. They knew how to create the lots, I knew when to buy them. I would rather know when to, than how to, any day.
Joe Fairless: Powerful example. What did you do with the lots on your investment.
Bruce Norris: We built them. We waited until 2004 to start the 93-house track. We were in kind of a remote area called Rosemont. At the end of our project, our land cost was 1% of our sale price. We sold them for 280k.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Bruce Norris: Sure!
Joe Fairless: Alright, cool. First, a quick word from our Best Ever partners.
Joe Fairless: Bruce, what’s the best ever book you’ve read?
Bruce Norris: Think and Grow Rich, early on.
Joe Fairless: What’s the best ever deal you’ve done?
Bruce Norris: That Rosemont deal I’ve just mentioned.
Joe Fairless: Best ever way you like to give back?
Bruce Norris: I like our charity event, where we give back every year to the Children’s Hospital and [unintelligible [00:22:45].00]
Joe Fairless: How did you raise $700,000?
Bruce Norris: Well, that’s over a period of nine years, approximately, so $70,000 a time. We have a radio show, like you mentioned, and during the time we’ve had that, we’ve earned the right to have interviews like you have. On a panel, once a year, we have the top people in the industry. Maybe the president of the mortgage bankers association, the appraisal institute, the chief economist at Fannie Mae etc. on the panel. We pay for the event. Everybody that comes has to donate $200 to the cause. We pay for all of the event though, so all of the money that they pay goes to the charity. We usually have a crowd of 400, so about $800,000 a year gets raised. That’s how we do it.
Joe Fairless: Thinking back on a particular deal that you’ve done, what’s a mistake you’ve made on a deal?
Bruce Norris: In 1989 I bought seven custom home lots, because everything I touched at that time was working really well, and I still own those homes about two and a half years later, at a cost of $2,100/month. I made the payments, got myself out of it, but it taught me to understand that the “When to…” part of it was really important.
The last house I closed in that cycle was I wrote a personal check for 62k to close the last one. [laughter]
Joe Fairless: How long after you bought them did that last check go out?
Bruce Norris: About two and a half years. They gradually dissipated from seven, to five, to three etc. But it took a while.
Joe Fairless: Went out with a bang!
Bruce Norris: [laughs] I was very happy to see that go. Here’s the good news about that – a lot of people had downturns in the last cycle… I stuck with it; I had a partner who left the country, so I had to finish the houses out of pocket. A lot of the partners couldn’t come up with any money at all, so I paid it all, even though the loans were in their name. What was great about that experience is that I had a $21,000/month extra overhead literally hit me in a 30-day period and went on for a long time… But because I decided to solve it, I had to learn to make 21k extra a month. In our industry you can do that. But after everybody was paid off, I still had the skill level to earn the money. That was actually the biggest reward.
Joe Fairless: Great point. One other question, and this might be a larger one, but I’m curious… Why wouldn’t other states follow the same affordability path that California is…? You’ve identified affordability is the number one thing. What is so unique about California that it wouldn’t apply to other states (your same philosophy)?
Bruce Norris: Well, I can tell you one that doesn’t, and you said you have a lot of listeners there. Texas – it doesn’t apply.
Joe Fairless: Why?
Bruce Norris: I’m not sure why, but I’d have to figure out chart-wise. But I can tell you that if you look at the history of affordability, you will not be able to detect when to get in and when to get out. You just won’t. It’s too mild. Texas hasn’t had radical price increases that push the number to anything that’s exaggerated, and Florida is a little bit similar to that, if you can go back as far as you can. Now, they got hurt in the last downturn…
What is kind of funny – one of the things that we did in some of the studies is we realized that when it’s time to get out of California, there’s other places that are safe havens. If we did 1031 exchanges in 2005 and 2006, we went to Dallas, Fort-Worth, because they did not go up during that cycle, when everything else did, and it was the safest thing that we could do. A place like that was a safe haven, so California went from a medium price of 600k to 240k, and Texas probably went in that area from 120k to 110k.
Joe Fairless: Where can the Best Ever listeners get in touch with you?
Bruce Norris: TheNorrisGroup.com is the best thing to do. Tons of free education… Get to know our company on the website.
Joe Fairless: Alright. Every person in California or interested in California – you’re welcome. This has been a wonderful conversation for Californians, as well as just real estate nerds who are interested in the dynamics of a particular market (or in this case state) and then also it is certainly applicable to everyone who’s listening… Understand when to do something in addition to how to do it, and your 270k purchase versus a three million dollars purchase is a shining example of that.
Thanks so much for being on the show, Bruce. I hope you have a best ever day, and we’ll talk to you soon.
Bruce Norris: Alright, Joe. Thanks for having me!
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