This week Aaron Norris is interviewing Bruce Norris in-studio. They are continuing their journey on adding to their Investor series online. One of the things they did not do with the Buying Systems when they recorded it back in 2006 was talk about how buying strategies change depending on what Quadrant we are in. If you are not familiar with quadrants, there are four of them.
Episode Highlights
- Why is right now a good time to stay put in your real estate property?
- What kinds of markets describe the four Quadrants?
- What years did they take place in?
- Where did Bruce move to in particular Quadrants?
- How does Bruce decide when and where to go in different cycles?
- What are Bruce’s goals for doing business in Florida?
- What was one of the best things he did for both the loan business and his clients?
Episode Notes
Aaron said one of his favorite chats of all time that Bruce did was the “Stay Put, Cash Out, or Change Seats” talk. Aaron started with this to frame everything that was going to be discussed here. Aaron said this was his first full cycle, and it has been interesting to watch different people at different times and at different levels. Everybody strategizes differently. Bruce is in a very different place from Aaron, who is more aggressive while Bruce does not want to mess up what he has been able to create over time.
Aaron asked why right now is a good time to stay put. Bruce said at the peak of the market in 2006, Mike Cantu had made the decision not to sell anything after hearing a report with the word “crash” in it. When prices went down by 40%, where he really owned most of his things, he did not lose a night’s sleep and could care less. It was because this was not the reason he owned it. He stayed put because he still got his rental check. To this day, if he sold any of that he probably improved the location since he is doing some in the beach areas. His strategy, however, was different.
Tony Alvarez was going to sell them early. He kept them for about three years more, then exited all of his holdings. He did not want those long-term rentals. The difference here was where the inventory was. Lancaster was not an exciting place to have rentals since it had challenges. This included challenging tenants with a lot of movement and a poor income and wealth. A Rancho Cucamonga renter, on the other hand, is probably much more stable and more of a joy to own. It was like an A location property. Bruce gave an example of someone wanting to stay put and intentionally build rentals that are a prototype of what he had learned from Mike Cantu. You own pretty boring things like single-story brick houses built like a bunker and under 2,000 square feet.
Bruce created his own little area of these. A lot of it has to do with many different things. Part of it is your cycle of life, while another part is the inventory you have. Rick Solis just sold everything he owned, and he is happy as a clam. It is what he wanted to do. He had 50 rentals that made him wealthy, and for the time being he is having a ball. You have to go through a hard phase first, which he, Tony, Mike, and Bruce were all willing to do. You go through hard things, and then you get somewhere which a lot of people do not really know how to wrap up and make permanent.
Staying put means you have probably paid off that debt. Bruce has had those people sit in front of him before with a list of properties, and there were $3 million, and you would be minus this amount if you did not sell it in the next three months. This was not the same position as Mike Cantu. He said he did not owe anything, so who cares. What was fun about Bruce’s presentation was that it was not like there was just one answer. Aaron wanted Bruce to bring it back since a lot of the questions people have are more of a personal decision.
Bruce said the hardest thing at the end of a talk is when people go up to him and give a personal sound bite. In these cases, you can’t really make a decision for them unless you have a broader scope of what they want to accomplish and how they got to their current state. Rick Solis wanted a calm cycle, while Tony Alvarez did not want this. He and Mike Cantu like real estate, but Tony just does it in a different way. Rick and Bruce were very similar in their thinking of it being a means to an end. For Tony and Mike, it is an ongoing business and way of life and a fix. Bruce’s fix is what he does now with the education side of real estate, including figuring out the charts the cycles.
Bruce has decided to do this for Florida. He wants to take a look at Florida and see if he can figure it out since The Norris Group business will be there as a lender. He wants to do this for the safety of those who put up trust deeds and for the people he talks to in front of the audience. They can find out about the cycles here too.
Aaron had an interesting conversation with his friend Alex following the hurricane in Puerto Rico. They have had a huge influx in Central Florida and maxing out the school and housing system. Bruce gave another talk entitled “Stay Put, Cash Out, or Change Seats.” When people hear the “change seats,” they think it means 1031 Exchange. However, this was covered more under the “cash out” whereas the “change seats” referred to changing inventory.
Bruce said in the building he is currently in, he went from cashing out in California to some of it going to a 1031 Exchange in Texas and Arkansas. The seat change came from when he decided he wanted a commercial building and sold some houses in Texas. He did not necessarily care about a profit motive, which was here and went from $950 grand to $318. The profit motive was where to get the money to buy it at 1/3 of the price. That is the changing seat. He changed from residential rental to commercial occupancy. This is part of what can be done along with the location change. He went from California out to Texas and back to California. Before, he had rented for four years, so it was a four-year journey. However, it was a worthwhile one.
Aaron wanted to frame all this before talking about the Quadrants since we are all in different spots. Taxwise, the industry means different things for different people. It is a way of life for some, and they get really excited about the game of real estate. Aaron is working for people right now who are taking a three-year sabbatical and touring the world because real estate has done what it is that they wanted it to be.
Aaron began by talking about Buying System 23: Buying Out of State. It sounds really sexy, and in the chapter itself it talks about the how to piece and how to not get yourself in trouble. One of the good questions that came up during the recent newsletter interview was where Bruce gets his data. Bruce said he starts with the migration. He would want an area that is going to grow at a faster rate than other places. The government data has that, but it is typically not very current. Typically you have a lag on anything having to do with migration. In the short-term you can play with the UHaul idea and see where the higher price is.
Bruce said when he used it, it was such a stark difference that it was crazy. If you have a listing you have never tried before, you just go to a moving site and price a truck to and from the same city, such as from Riverside to Texas, then back. If it is higher going one way, it means you have more migration coming into that city, and they are having to pay somebody to drive the truck out to the city that is less slow so they can come back in. Bruce said at the time when he was really interested in building out Rosamond, Lancaster was the number one destination city in the whole country. A UHaul from Lancaster to Texas was $200, and the reverse trip was $2 grand. It is weird how it’s that much more when it is the same distance.
Aaron and Bruce went on to talk about the Quadrants. There’s four quadrants, and Quadrant 1 is moving from a hot market to a flat market. Quadrant 4 pushed itself into late 2006. It shouldn’t have, but it did. In 2007 you started to see cracks in the foundation, and Quadrant 1 is short. You went from Quadrant 4 to Quadrant 2 in six months. Depending on what kind of project you have, you have a very short timeframe and better know that Quadrant 1 is coming.
This was why they created the selling system. They type of inventory you should not be approaching the end of Quadrant 4 is land, studio condos, $2 million spec homes, and condo hotels. You’re taking too big a risk. Quadrant 2 is when it will get not good like the 80s, 90s, or 2008-2010. In Quadrant 1 when you are about to hit the down cycle, you probably want to be out unless you are testing your luck. Aaron asked Bruce about his version of Quadrant 1. Last time he was in Rosamond, it looped back around to Quadrant 4. These were when he was working with the lead auctions and auctioning off his final houses of the Rosamond project. This was back in 2005, so hopefully this time he is almost out if not out entirely.
Bruce said they were 88 out of 93 out. He had already researched a lot of markets. One of the exciting things about his talk “California Crash” was that it was two full days and a huge book. He identified markets that were counter-cyclical to California. The goal was not necessarily thinking it would go up, but you were moving into markets where you could hide. The whole goal for going to Texas was not for Texas to go up, but for us to be able to hide and leave with approximately the same amount of money. The value was going to come from going back to your home state and buying at a discount. This is where it hurt.
Quadrant 2 was a flat market to a bust market. Aaron asked Bruce what years he would say it covered, which he said was 1991 to 1996, then 2007-2009. It got past that too since you did not really have any big upside, but rather a flat market, even beyond 2011 and 2012. When he wrote “All In Or Fold,” that was really when the bottom had stabilized and they were done with the bonus chips for $8 grand. The bottom was real at that point and took off after that. In California, that was the ugliest downside ever seen. He saw a worse one in Grand Junction.
Quadrant 2 can sometimes be made up of an economic problem that is local. This was the 90s in California when we had the basis close and a lot of migration out. This was a different reason that 2009 going forward. This was national and systemic. In Grand Junction, the oil shale business left. There can be all kinds of reasons for those opportunities, such as an isolated Quadrant 2 event in an area. These are neat because you did not get hit by it as you were not there if you were in a different state.
Quadrant 2 can be really painful. The leverage you have multiplies all of a sudden. If you were in Riverside and owed 50% on something, by 2009 you may have owed 100% and not have any exit strategies since there aren’t much. Hopefully you have already exited into other states and are just waiting at this point. From the California investor’s perspective, Quadrant 2 is really just letting the market settle for you to find your way back into it. Strategies change too in a down market. You have REO agents who became a thing for the first time in a decade.
Bruce said some of the people he deals with would have already retired because they were around in the 90s. When the crisis happened in the 90s and then again in 2008, those same people were calling Bruce up asking if he was still a buyer. California has pretty profound cycles. If you go to Texas and see a chart, it will be different. This is why you have to go to every state and look at the charts, a pre-conceived notion is they know how it works in California and must work the same in other states. This is not true.
Bruce said in all honesty that he does not know much about Florida and would need to look at a 30-year price chart to get 30 years of migration, affordability, and construction. The Florida charts will tell him a very different story, which may be that there is no story at all. This is the oddest thing. You may say the only reason you ever had a big downturn was a systemic event for financing. Prior to that, you did nothing. You were like Texas on a little steroid. You went up and up, but you have so much land. Maybe he will determine by looking at Florida that your ability to still have cheap prices is connected to your ability to have another 100 acres of ground.
That isn’t usually true in California. In Orange County, you’re blocked in and it will either go up or not happen. A big part of Bruce’s motivation is that he is fascinated at the answer himself. It doesn’t mean you cannot invest in Quadrant 2. Greg Norris did a great job of buying a trustee sale and really chasing the market down. The fast pace at which the market was moving was very impressive. Greg knew it was going down 3% a month. If he knew he had a 6-month hold, he was lowering the retail by 20% and then starting a formula. On the appraisal side, the only ones in Moreno Valley that were comps were REOs that were in rough shape and didn’t care if you had granite counter tops.
Bruce said one of the best things they did for both their loan business and their clients was the ability to hold instead of flip. Creating a loan program that lasted five years made a lot of their clients wealthy. Bruce said he didn’t care if it was vacant at the time; and as a hard money lender, having the money side say they would loan it for 8 years was a big deal. This is why Bruce is excited about those types of loan programs in Florida since he doesn’t think it is an unsafe loan. They launched the long-term program at the end of Quadrant 2, and at the time it was an 8-year program. He knew they had a long ways to go from where they were and did not think there would be any risk at all in having an 8-year loan at that point. This allowed everyone to get to the upside, and it has accomplished this.
In Quadrant 2, you are working through a bust and formulating your way back in, and then you land in Quadrant 3. This is the bust to the flat market. From 2009 to 2011/2012, we flattened but did not crash during this time. There was a 2-3 year timeframe, which is unusual since normally that flat period is not so long. However, this time it was. What was interesting about this was there are certain types of ownership, and it gets very hard. One of them is dirt. If you were in 2006 and still cocky about what you had, you did not sell it. In 2012, you were not feeling this way. You have just written six years of property taxes, cleared the land debris, and you are sick of it. If you get an offer and an option, you are going to pay attention to it since it was the only soul that showed up. Bruce said when he interviewed Doug Duncan in the first quarter of 2015, he saw foreclosure charts in Florida were off the charts. He knew they could find land that was nothing.
Although we are talking from a California perspective, Bruce never stopped investing in Florida. He has been investing there since Hurricane Andrew back in 1992. He and his friend Alex would spec new homes the whole time, but that was another unique opportunity. You had an isolated event where it was a massive hurricane, and you could get tremendous deals without hurting a soul.
In Quadrant 3, when you are investing out of state, at this point the prices had stabilized and the price drop had stopped. Bruce had actually brought back a lot of his chips. He started doing 1031 Exchanges back into California, which was always his game plan. He wanted to sell at the peak, part of the reason being because he did not own the Mike Cantu inventory. He still didn’t own it at the end of this cycle, which was why he 1031 exchanged into what he now owns. He owns very boring, brand new properties. Brand new is really the only game in town for rentals.
Aaron only did this once in his lifetime in New York City involving the basement of an apartment, and he did not know at the time it was illegal. It was an illegal basement space, and they did not tell him the entire phone system for the building was in the basement. This was his only experience living in something new and renting it.
Buying out of state, you are more prone to come back. However, maybe you won’t this time. However, Bruce said he is very happy because the reasoning behind where he is would be demographics. Florida in general has lots of retired people, When these people go from 65 to 85, the caretakers go from 2-7. Your renter is the nurse; and as you get older, you will have more nurses to whom you have to rent.
Right now we are in Quadrant 4. Bruce is clearly doing this. He has changed inventory, even if he has not gotten rid of everything in California. He is repositioning his C stuff to B or A, or even completely out of state. Big Shifts Ahead was a great book that made Aaron feel more comfortable investing out of state. In the chapter, Bruce talks a lot about building a team. Aaron asked him how he feels about the turnkey rental community. He asked Bruce if he would utilize the services since he has never seen him do this, but rather do his own homework. Part of it is Bruce wants to deal with people he knows he can trust, and he feels comfortable with his ability to ask the questions that prove character to him.
If he is going to be 3,000 miles away from his property manager in Florida, he wants to know that he is going to make an honorable decision. This does not just mean a right, one-side decision for Bruce Norris. He does not want this person. He wants someone who is going to say no and will treat the tenant fair. Grand Junction was his first shot, and he was there seven times and interviewed everybody who was a property manager. He met realtors, including a lady named Mary Simpson who did a great job and never changed. It was a long way from Grand Junction and the most challenging market you could have. It was 50% vacant for three years and had nothing to do with her mismanagement. The whole city was gone, and she held her own until Bruce got to it at a different rental market.
More on Hard Money Loans
- Florida hard money loans or call (407) 706-9700
- California hard money loans or call (951) 780-5856
Information on Note Investing
- Florida mortgage investing or call (407) 706-9700
- California trust deed investing call (951) 780-5856
Real Estate Investor Education & Resources
- Upcoming real estate investor speaking engagements and training
- Real Estate radio show and podcast
- Weekly news and videos
- Free Investor Roadmap – How to get started in real estate investing
- Free access to our web portal for real estate investors