Buying with cash at a judicial sale, do my numbers make sense?

Question

Hey everyone, I posted this in the general forum but wanted some local expertise as well. I've been in an analysis paralysis for over a year, but I'm finally ready to make my first investment. The first of two questions I have is how does my investment strategy sounds to more experienced investors? Here's the lowdown on my situation:

I've acquired a private loan for 200k cash at 1% interest for 30 years. I don't think I could even qualify for any traditional financing, as I'm 23 years old and got my real estate license about seven months ago, and I've yet to generate a steady income, but on the plus side I do have an immaculate credit score...Anyway, I plan on buying a specific condo at a judicial sale for under market value in Chicago this month. Without going into too much detail, I hope to get at least $20k in equity because I won't bid any higher than that margin and that leaves some wiggle room for rehab costs (which appear to be minimal because I've seen interior photos). The market rent is about $1800 and all of this is based on my extensive analysis of similar units in the same building in the past year. HOA is around $200/mo and taxes around $3500/yr, not sure about other expenses though so I factored in 1% of the EMV. In my mind it's a good investment since I have no money down, and a gross annual ROI of $21600, with yearly expenses estimated around $8000 for a net profit of $13600. Do you agree?

The second question I have is more hypothetical and involves an explanation on leverage. Let's say I saved up $200k from a job and could qualify for traditional lending. Would my initial strategy still be a good idea to invest all $200k cash in one condo, or would it be better to allocate the $200k among several properties with 10-20% down leveraging "other people's money?" I keep seeing scenarios on leveraging money, but they don't always factor in expenses like PITI. Thanks for the advice in advance!

Eric M. · Answer

First of all, definitely go to the auction and check it out. But what I think you will find is that the Chicago Judicial auctions are EXTREMELY competitive and bargains are not found there. The guys there know what they are doing more than any other county I have been to and they are very protective of their turf. They do not like newbies coming in and buying properties in their area so they will bid higher and take losses just to keep new people out.I have purchased more than 20 properties at auction. My first was in Cook. It was my only loser and it was a big loser. I was ecstatic to win, I thought it was a sure thing, but it wasn't. I got all my deals at suburban county auctions where the competition is a fraction of Cook.The good news is you are not shooting for too much equity so it is possible. They bad news is that since you can't see the inside (photos can be staged, old and deceiving....no one takes pictures of the mold damage or cracks or warped floors for a listing) and since you are shooting for so little equity your margin for error is VERY small. If there is a problem inside, your 20K equity is gone. Sometimes people do damage after their home is auctioned. Sometimes it takes months after auction to get them out. Be prepared for hiccups.Check the financials of the HOA also. Check taxes, do all the deed searching. Crazy stuff can happen. I guarantee the people you are bidding against will know more about the property than you do. Also since you are targeting one single property don't get your hopes up. I generally went targeting at least 5 properties or maybe 10 at a single auction in hopes of getting 1. Mostly I got zero. Auctions get cancelled or postponed all the time...and you get outbid or the bank starts the opening bid too high and they just take it back.So go and get the experience, but to be very honest the odds of achieving your goal are not great.

Brian Ploszay · Answer

I have done judicial sales deals before all over Chicago. Keep in mind that you do not get a tax proration. And you should check the title. Also, consult an attorney if the back condo association fees are wiped out at the foreclosure.

Nikki Kofkin · Answer

Hey everyone! The judicial sale was this morning and I wanted to give a progress update in case anyone is curious. First of all, it was one of the most terrifying and exciting things I've ever done. The room was nearly full and there was a list of about 30 properties up for auction in our time slot. From what I could tell, most people were veterans and bidding on behalf of someone else. I was so nervous, but I put on my best poker face and just observed how others handled themselves when bidding. My property of interest was number five on the list. The starting bid was around $160k. Bids were made in increments of at least $100. I made the first bid, and one other experienced bidder who was bidding on many properties went for it as well. We went back and fourth a few times, and I won the property for $167k. I couldn't believe I actually won. When I walked up to hand in my cashier's check, my legs were shaking! There were so many emotions, but mostly success and excitement. I currently have a certificate of sale, and it could be months until it is motioned in court. Hoping and praying I will get the deed and the property doesn't need much work. Thankfully I got it for around $65-70k under market value based on my analysis, so that gives me a good cushion in case of any issues. I really appreciate all of your support, I couldn't have done it without this community. If anyone would like to hear more details about the experience or how I selected the property, I would be happy to discuss. I'll post an update when I (hopefully) get possession and do a walkthrough!

Damian S. · Answer

@Nicole Kofkin You are essentially getting free money and I like that you are putting the money to work. In the mean time you will be receiving some free cash flow and by the time you have steady income you can refinance the condo and put the money in another property. All this while you will be saving additional cash. I say go for the deal with the highest cash flow and chance of appreciation.

Nikki Kofkin · Answer

Ted Kuhlmann thank you for your vote of confidence, I'm definitely getting nervous since the auction is next week so I appreciate the encouragement. I'd never heard the 2% rule before to be honest, but I agree. As for the loan, I'm thankful to have someone who wants to kickstart my investing career! It's definitely the best loan I'll ever get. Hopefully I'll have a good update in the next coming weeks!

Ted Kuhlmann · Answer

Over $1000 a month with an investment property is golden in chicago. If those numbers are true, then definitely do it. The 2% rule we hear on the podcast doesn't pertain to our market since at $100,000, no one is paying 2k on a rental of that size, so don't sweat that. Your numbers seem solid so trust them I'm a real estate broker of 13 years and a real estate investor so like your thinking at your age. That private loan is absolutely amazing as well

Nikki Kofkin · Answer

@Brian Ploszay Thanks for the advice! I am definitely meeting with my attorney in the next week or two.

Nikki Kofkin · Answer

@Caleb Heimsoth Yes, the lender is family!

Caleb Heimsoth · Answer

Nicole Kofkin how do you get a 200k loan at one percent? The lender will be losing money to inflation. Do you have a personal relationship with the lender ?

Nikki Kofkin · Answer

Damian S. thanks for your comment, that's exactly what I think too!