Aaron and Bruce Norris Join Mike and Randy Grigg on the Norris Group Real Estate Radio Show #545

Norris Bruce

Bruce Norris is an active investor, hard money lender, and real estate educator with over 30 years experience. Bruce has been involved in over 2,000 real estate transactions as a buyer, seller, builder and money partner.

Norris Bruce
June 30, 2017

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Aaron and Bruce Norris are joined this week by Randy Grigg and Mike Grigg. Randy has been involved in real estate since 1977. He discovered the benefits of using the real estate auction method of marketing real estate after completing a single-family house rehab project that had three failed escrows. Being a control freak, he designed his auction company Elite Auctions to cater to the desire of clients to sell properties quickly and in as-is condition with no loan appraisal or property contingencies. His best client was himself as a real estate investor, which is cool. Mike Grigg, his son, is a graduate from the prestigious World Champion College of Auctioneers. He is a published author of the book Maximizing Your Charity Events Bottom-Line. He began his auction career in 2002 and has participated in several charity, benefit, and fundraising auctions. He has also served as the past president of the California State Auctioneers Association. He is a current member of the Western States Auction Association and the National Auctioneers Association.

Episode Highlights

- - When did Mike and Randy start working in the field of real estate investing?
  - When did they start working with auctions in their business?
  - What does it take these days to be an auctioneer?
  - How important of a role does the marketplace play in the auction process?
  - What are the different kinds of auctions?
  - Was technology changing at the time they started their auction business?
  - Where were other realtors in terms of being for them or against them?

The Norris Group is continuing with renovating their Buying Systems. Back in 2006 they recorded the “California Only Investor Series” that really focused on California specific strategies for real estate investors. When is just as important, if not more so, than how. Buying strategies in California change drastically, so they turned the 1200 pages into a digital online subscription. This summer they are renovating, going one by one through all the strategies and talking about how these strategies change depending on where we are at in the cycle.

Aaron started by asking Randy how he got into the real estate investing field. He said he started in 1977 after he and his wife had moved to Bakersfield. He had been to several real estate seminars where they explained how to buy, finance, and buy houses in which to invest. Once he received a little bit of knowledge, he went out there and bought his first house in 1977. He had the seller finance the deal for him. It was a $25,000 house on which he put down $5,000. It was financed at around 8-9%, and that was how he bought many of his houses. They were owner-financed with a low down payment. Over time he bought 1-3 houses a year, but he did it for 25 years. After 25 years, he said enough was enough and did not need any more.

Aaron asked when auctions kicked in, to which Randy said it was in 2002. The interest came from an auction he attended in their neighborhood. What was strange was whenever he drove through his neighborhood he would always see For Sale signs but not auction signs. One day while driving through his neighborhood he saw an auction sign in a nice house and wondered about it. He thought it must be somebody in distress. He attended the auction and was going to bid thinking he would get it for cheap. When he got there, he could not find a parking space since there were so many cars there.

When he finally parked, he went into a back yard where they had food and a band. There were about 20 bidders there who had $10,000, and Randy was one of them. The auctioneer started the chant, and after the second to third chant he was already out. He wanted to buy it at a fairly deep discount and kept going. It finaled at 5% over what he felt was comp value. He was starting to flip houses during that time and not having much luck. He said he needed to figure out how to become an auction company for what he flips. This is how he started his own company.

Aaron asked what it takes these days to be an auctioneer. It is different state by state since each state has its own laws or lack of laws. In California, for example, you do not have to be licensed to be an auctioneer. However, you do have to have a surety bond. He believes it is smart to attend auction school, where you just learn to do the chant and the business itself. It takes a lot of practice, and you definitely have to have overcome or not have a fear of being in front of people since you are basically a public speaker. Aaron just imagined taking a test on this and it being a speed test, which they actually do. Different auction schools have different ways they teach, but they will give you tongue twisters and get you used to saying them really fast and clear. You relearn how to count and are almost singing when you do it. It is amazing how fast you forget to count to three when you are doing all the filler things.

Aaron asked Randy and Mike if they came in at the same time, which Mike said he actually did come in at the same time. Randy actually came to him with the idea, and it sparked his interest. He had never been to a live auction before, he had only seen them occasionally on television or at the fair. California has a lack of an auction culture compared to when you go visit the South or Midwest. In these areas this is the common way to sell different things, and you do not see this out here in California.

Mike’s background is in marketing, and he was interested in real estate because he grew up with his dad working with it. He actually worked in the farming industry as well, so these were his two things he did. It wasn’t really Mike’s thing since he does not really like the heat. He said with real estate there seemed to be less heat involve than being out in the field. He decided to take more interest in that side of the business. Randy brought the auctioneer idea to him, and he decided he wanted to go to auction school, learn how they do it, and go get his real estate license. When you are doing real estate transactions by auction, you have to be licensed like a regular brokerage. You do not have to have this in order to do the chanting and bid calling at the auction, but you do in order to sit down with the contract and talk about pricing.

Aaron and Bruce learned the hard way how the marketplace plays such an important role in the auction process. When you are looking at listing with the realtor versus an auction company, marketing plays a huge role before the process happens. How much money are we talking about with just a typical property being given up for auction? If you were to auction versus list and sell traditionally, times have really changed since 2002. When Randy and Mike first started, they did a lot of print advertising display and classified ads. They also did a lot of mailers, include postcard mailings that would advertise the auctions to targeted areas. With a residential property they would take a radius and send out 5-10,000 postcards to that radius around the property. Sometimes you would have more unique properties that you needed to target.

Now with the way they internet has taken off, you can almost get away with not doing any of that print or mailing marketing. This is the expensive part of the marketing, while the internet is the cheap or free part. Randy said when they first started, the average marketing cost that was necessary to be successful was about $8,000 per house. This was why it was nice to have more than one house. During their last auction in 2012, $2,500 was the marketing cost. Aaron asked how many houses were in that auction, which Randy said was only one. It was extremely successful as it was a very nice house in Los Angeles that had been completely remodeled and in a decent area. However, it was still a tough market.

Randy said they had about 7 or 8 bidders, and two really wanted it. If you were to comp it that day on the auction, it went for the exact amount. It was amazing how accurate that auction went, and the seller was happy. At an auction company, this is all they care about since the price does not really mean anything if the seller is not happy. If you get to the end of the auction and have a reserve of $100,000 and the seller is not happy, there is nothing you can do no matter how well you thought the auction went.

Aaron asked about the different kinds of auctions. Randy said there are three basic types. For the first three he did, he used the absolute auction. This is basically selling regardless of price with no reserve or minimum bid. He did this to see if the auction process worked, which it did not very well on the first two. He thinks it is because the comp was around 30% below what it should have been. You have to sell regardless of the price, so he lost the money. He learned how to do it better, and he did not want to give up since he saw enough positive things to where he thought they could still make it work.

The third one turned out really well. They had 13-14 bidders, and a lot of the tweaking had to do with marketing. It came down to what words drove bidders and what did not. Bruce said you have to make minute changes. It is not like you did everything wrong. You could have done everything right and it still not work. Randy said the second one was minimum bid auction where they have a price. If you hit this price, you get the property. If the property starts at $100,000 at a minimum bid auction and you get $100,000 or above, it sells. You do not have to confirm anything; that number is published. Kennedy Wilson does an excellent job working with minimum bid auctions.

The other type of auction they use is the seller confirmation where there is a reserve that is not published or available to the public. This was the one they used for both their own properties and for the people to whom they sold. In show bidding, the seller gives somebody permission in the audience or could be driving up the price themselves. It is illegal to do at the absolute auction level, but it is legal at the other two levels. At the minimum bid you do not even need to do it because you are starting the auction at that published price. If you did it after that, it is illegal. Once you have accepted the minimum bid of $100,000, you have a sale at that or higher. You are not allowed to run the bid.

With a reserve auction where nobody but the auction company and the seller know the actual price that needs to be reached, the auctioneer can run the bid up to the reserve but not above the reserve. This is how car auctions work. In order to create that bidding craziness vibe, the auctioneer might start off at $100 on a house. You would not even need a bid on this; the auctioneer can technically go lightning fast and get it up to $100,000. Then they have to start taking bids. Randy said at their reserve auctions, they never had fake bids. They had some auctions that did not reach the reserve, but they never had a bad auction.

Logically, when you have a reserve auction, you cannot sell that house unless you hit that reserve. If you run the bid up to that reserve amount, you can now sell the house. When the bidding starts taking place, it should not be run up from there since that is illegal to do. He is not saying no auctioneer has ever done it; but with seller confirmation, nobody knows except the auctioneer and the seller. Technically, they could do it and nobody would know the difference. This is why Mike is not saying it has never been done, but legally it is how it is supposed to work.

When you start running the bids on an absolute auction with no minimum and no reserve, this is completely illegal. You have to let the buyers tell you where they are willing to go. With a good auctioneer, they can steer them in the right direction with the increments. You cannot have a plant out there, and you would be in big trouble if you were caught doing that. Aaron said with online auctions, everything is going online, so you wonder who is really watching. Aaron asked if eBay changed the game and made people a little more comfortable with the process, which Mike said they did.

Aaron worked for a business that bought a lot of their inventory online, and it was fascinating to watch. He was buying high-end furniture from all over the world, and it was like a game. At the end of the day, you had to have your best and final one in because the price went sky high when the auction ended. However, nobody was going to purposely start driving up the price until it was absolutely time. This is how online auctions work. You only need about 3 minutes to have a successful online auction. Eventually a lot of these minimum bids might be entered in automatically, so the technology company is going to know beforehand if things will go well.

Getting into the Quadrant, if we are talking about a market turn from 2006 and 2007 when we are coming off a peak, Aaron wondered where they were in terms of an auction company. He asked about the conversations they were having and whether they were preparing for a crash. Randy said he relied on Bruce telling them where they were at since as an investor he never really thought about markets. You just think about cash flow. Randy said back in the day he was an investor and really didn’t track the market like Bruce did. He really got him on track as far as knowing where they were at in their business. He knew it was coming to a halt soon.

They got into the market in Bakersfield in 2007 when the market was still going up just a little bit. They said they are always way behind, and even now they are low. However, he does not know if they really changed or had any discussions about what was going on in the market. They did not really change what they were doing, but the conversations on the phone started to change with the sellers. This was how Mike felt. Instead of a seller calling and saying they have a house and the market is hot, it was a case where they knew they needed to hold an auction right away since the market was going to be less hot in 30 days rather than more hot. They needed 30 days to market it before they actually held the auction event at the house. What might be worth this today will likely be a little bit less demand in 30 days.

Bruce remembered selling a home through the MLS in 2005, and he listed it one day and had 70 showings. When you put 70 people together eyeball to eyeball on the lawn, this was how the auctions worked. This was especially true during a boom cycle. Usually you have the owner-lagging reality, especially during this cycle. If you wrote $360, and three years later they get $80, it is hard to get ahead of that curve. We may not see another decline like this, but even in the 90s when builders had a lot of inventory, these were fun to attend as a buyer because Kennedy Wilson usually had reasonable starting bids. There were occasions where you got it for this.

Aaron asked if technology was changing at this time and making it easier with online auction software. Mike said it definitely was and they saw a change year-to-year. When they started, online bidding was not really a thing. Pretty quickly into they realized people were doing hybrids and bidding against the live bidders online. You have somebody representing the online bidders at the actual live event. They found their method that would likely hold true today. They were dealing with the retail end-user buyer and not the savvy investor who only saw real estate as a business. They were dealing with somebody who was ultimately going to live in that property, and people like that want to be there and be around the house in which they might be living. They want someone to hold their hand because they are nervous. It is not every day you go to an auction, let alone buy the biggest investment of your life at one. They found there was not much of a need for online bidding the hybrid way, but for the rest of the auction business it was really transitioning.

Aaron asked where realtors were, whether they were for them or against them. Aaron remembered hearing about realtors stealing signs and flyers. Randy thought they were against them in general because they wanted it their way. However, Randy and Mike didn’t have a problem with it since they knew it was really competition and they never stole any of their signs as far as they knew. However, they want to keep their thing together and do not want competition from elsewhere. Randy and Mike did not really give them any competition since they were not really a volume type auction company. They never had enough business to where it was going to affect their business ultimately. Mike said with the auction method, they were able to go outside their market of Bakersfield because it worked everywhere and utilized the same licensing requirements. The realtors viewed them more as disruptors and similar to the dollar shaving club trying to fight Gillette. They saw how it could get big, but it was not and they were not going too crazy.

Tune in next week as we continue our discussion with Mike and Randy Grigg of Elite Auctions.