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larrywww

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Reply with quote  #1 

I didn't necessarily have high expectations about this interview, but it turned out to be an overview of Bruce's investments in the last several decades (that Greg Norris managed).

Bruce Interviews Greg Norris (for 2 sessions), who was in charge of Florida buying and also bought Texas Houses in 2004 and 2005:

Greg Norris was an electrician for over 12 years and also in charge of overseeing operations for the Norris Group, including:
1. The 93 Rosamund lots.
2. The Texas purchase of rentals in 2004 and 2005.
3. Buying at trustee sales during the downturn(s)---not sure which timeframes this covers, but at least covers the most recent downturn.
4. The Florida construction of rentals during this cycle during the last few years.

So, reviewing his history actually gives a historic view of the kind of investments the Norris Group.

At the start of the construction, homes in nearby Palmdale were selling within 2 or 3 days---a hot market.  That was when Bruce met Tony Alvarez and convinced him not to sell his rentals at that point. 

Initially, Bruce did the Rosamund lots with manufactured homes, about 30 of them, which didn't really cost much less than doing a stick built house.  And the quality of the construction crews constructing the manufactured houses turned out to be far less professional than the crew of the average homebuilder.

After that doing 30 manufactured homes, Greg Norris oversaw the remainder of the 93 lots with stick built houses (which surprisingly didn't cost much more than manufactured homes).   16 homes normally took 4 to 4.5 months at Rosamund to complete.   The very highest one sold for 300K, with alot of them selling them for 280K.  At some point, the houses in Rosamund were so hot that buyers were camping out overnight to get a good place in line.  Greg sold the last 2 houses just as the market was tanking, both fell out, and they had to auction them off for 70 grand less.

Bruce wanted to start an auction company during the downturn and eventually he only sold one house and he abandoned the effort.  This was another mistake---although one that didn't really cost him all that much.

Greg had more success with trustee sale purchases.  Greg bought 95 to 96% of his purchases at trustee sales without even seeing the interior (though someone saw the exterior and neighborhood).  He has bought at 650 plus trustee sales in the last 6 or 7 years.  The trustee sales business was harder than the development---very hard to coordinate to do the title, appraisals and to have someone view the exterior of the house.   Although he bought at 83% minus repairs initially---and this worked out.  It was as high as 89% for pristine inventory.   Sometimes they didn't make more than 3% on a trustee sale purchase, but this was 3% of half a million---so arguably it came out OK.

Before hedge funds ruined the market, Greg initially bought at 86% of FMV----after hedge funds (who paid 100% FMV)----it was hard to buy anything.   And hedge funds were buy and hold type buyers, they typically weren't flipping---and they were also making high offers on the MLS.  So it became hard to buy anything anywhere---whether at the trustee sale or on the MLS.

In dealing with contractors:
1. In the beginning, Greg would buy the materials and drop ship them to the worksite because they were nervous just to give the contractor money upfront.  Eventually, there was a comfort level with a particular contractor and this no longer proved necessary---and also because the builder could sometimes get volume discounts, etc.
2. About 75% of the time, the contract would specify using certain subcontractors whose work he trusted.

In California, 80% of the trustee sale houses were occupied----it proved far better to deal with the renter there because owners had a clear sense of entitlement about the situation and were more likely to make unreasonable demands, etc.   Cash for keys worked 75% of the time during the time he did the trustee sales.

1. After buying 60 or so houses, Bruce is shutting down the Florida operation.  They did profit, but found some challenges (compared to California).
2. Greg found that roofs and HVAC systems didn't have nearly the useful life in humid Florida as compared to California.  While in escrow, Greg found it far better to pay for a roof allowance than to pay for a roof.
3. Interior Florida where Bruce built and bought (not on the coasts) turned out to be alot like Texas where it was difficult to convince someone to be a homeowner.  The ethos in interior Florida is that renting is just fine and there was a genuine disinterest in homeownership among alot of potential buyers.  So, even if a house had sufficient comparable sales and values doesn't mean much if the house is likely to sit on the market for a very long time---which often proved the case.  Not quite like selling in California (during most markets).
4. Title is alot more difficult in Florida because it's not like California where a title lender makes representations as to marketable title.  Instead, you get a 100 page document and you have to decide if there is marketable title or not----just a long title report.  Not good, unless you have an ambition to become a title expert.  (Isn't that why you hire a title company?)
5.  Foundation damage is far more common since (at least where Greg bought) there is no limestone or solid rock to build upon in interior California, usually just sand, sand and more sand---they would just auger it 75 to 80 feet.  In California having seen over 600 houses Greg believes that foundation damage was way more common in Florida, no comparison.
6. Chinese Drywall.  Greg needed to do alot of preliminary investigation to insure he wasn't purchasing a home with Chinese drywall---it's apparently a danger in Florida moreso than California.
7. In Texas Greg bought in 2004 and 2005, but this proved to be a mistake.  First, rents were flat for the next 11 years.  After he bought, his houses went down in value something like 5% so he didn't buy at the absolute bottom.  There was finally some appreciation in rents in his 12th year---the year before he is selling.  After 13 years, when he is selling them, the Texas rentals appreciated something like 25%, but his overall conclusion is that he is never going to buy a rental in Texas again.  The appreciation was "incredibly disappointing".  Not a loss, but overall not worth it for more than a dozen years of being a landlord---he didn't exactly make out like a bandit.  (I always wondered about the Texas buying trips and how that ended up---this is the first report I've heard.)
8.  In Texas, appreciation cycles don't really occur----this 25% increase was an historical anomaly---maybe never to be repeated (who knows?).
9. Condo market in California: If no FHA certification, you need 20% down and won't reach its FMV value.  Even a conventional loan if too many condos were owned by any owner, even the builder, not even conventional loans will touch it. 
10. Greg is keeping one small subclass of rental property in Florida---Condos with garages (not carports).  Greg found one condo complex where each individual owner has their own pool and enclosed yard.  He is keeping rentals in that complex.  He is buying these for 120 range with a 15 to 20K rehab and at peak they sold for 250K, so there is an appreciation play too.  And the rents are very strong for this complex with rents in the 1400 to 1500 range. 

Overall, what I am hearing (music to my ears, BTW) is don't necessarily be lured by the sirens of cheap houses out of state unless you know the market very very well.

It sounds as if Texas was a mistake and interior Florida, although not a mistake, had serious potential downsides that weren't apparent when the initial investment was made in the lots---and made it more difficult than originally anticipated. 

Greg indicates that he is retiring from flipping and going to become a lawyer and also get a degree in political science.  Further sayeth naught.

If Greg is retiring, then can Bruce's retirement (except for maybe the trustee deed operation and his predictions) be far behind?  I am speculating here, BTW, I haven't asked anyone.

I really liked the interview because it fills in some missing pieces in terms of Bruce's (and Greg's) buying history.



Greg

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Reply with quote  #2 
Thanks for the nice review.

Refresh my memory. Why did Bruce go to FL in the first place ?
larrywww

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Reply with quote  #3 

Bruce was interviewing Doug Duncan. the economist for Fannie Mae, on his radio show, and to prepare for the interview he read the annual report for Fannie Mae.  It turned out that a very large percentage of the foreclosures occurred in Florida (I think this might have been the first quarter for 2012, if my recollection is correct).

So Bruce called his best friend Alex (who, as it happens, lived in Florida) and told him: I think there should be some building lots on sale for a very cheap price, see if you can find anything really cheap and then put the deal into escrow.

And this is how he ended up building 60 units in interior Florida. 

And it sounds like those units have sold.

But based upon these interviews, I get the feeling that he isn't going to return to interior Florida anytime soon.  (Maybe coastal Florida---but only when there are deals to be had---not true in the current market).

I found the interviews very interesting because it fills in the blanks in terms of Bruce's investments---which include his Florida investments---and how the Texas investments never really worked out according to plan.

When some investors heard that Bruce was investing in Florida they felt like they missed an opportunity.  But in retrospect unless (1) You bought the lots really cheap and (2) you had someone you trusted to oversee the operation, it wouldn't necessarily have turned out well.

And in light of some of the unforeseen difficulties, it wasn't an easy and simple investment---although Bruce did make money.  

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